Starwood Hotels & Resorts Worldwide Q3 2007 Earnings Call Transcript

Starwood Hotels & Resorts Worldwide Inc. (HOT)

Q3 2007 Earnings Call

October 25, 2007 10:30 a.m. ET

Executives

Jay Koval - VP of IR

Frits van Paasschen - Chairman of the Board & Interim CEO

Vasant Prabhu - CFO

Analysts

Celeste Brown - Morgan Stanley

David Katz – CIBC World Markets

Felicia Hendrix - Lehman Brothers

Joseph Greff - Bear Stearns

Harry Curtis - J.P. Morgan

William Truelove - UBS

William Marks - JMP Securities

Celeste Brown - Morgan Stanley FU

Steven Kent - Goldman Sachs

William Crow - Raymond James

Presentation

Operator

Ladies and gentlemen, please stand by. We are about to begin. Good day everyone, and welcome to the Starwood Hotels and Resorts third quarter 2007 results conference call. Today’s call is being recorded. At this time, for opening remarks and introduction, I would like to turn the call over to the Vice-President of Investor Relations, Mr. Jay T. Koval. Mr. Koval, please go ahead, Sir.

Jay Koval

Thank you, Rufus, and good morning, everyone. I’d like to thank all of you for joining us for Starwood’s third quarter 2007 earnings call. Joining me today I have Frits van Paasschen, our CEO, and Vasant Prabhu, our CFO.

We will be making statements on this call related to company plans, prospects and expectations that constitute forward-looking statements under the Safe Harbour Provision of the Securities Reform Act of 1995. These forward-looking statements can generally be identified by phrases such as start towards management, believes, expects, anticipates, perceives, forecasts, estimates, or other words or phrases of similar import. All such statements are based on our expectations as of today and should not be relied upon as representing our expectations as of any subsequent date. Actual results might differ from our discussion today. I point you to our 10K and other SEC filings available from the SEC or through our offices here and on our website at starwoodhotels.com for some of the factors that could cause results to differ.

With that, I’m pleased to turn the call over to Frits for his comments. Frits.

Frits van Paasschen

Thank you, Jay, and good morning. I’m delighted to be here today for my first call as Starwood’s CEO. Yet again, Starwood reported strong quarterly results delivering EPS of 68 cents and generating $348 million in EBIDTA. After adjusting for some of the one-time items for the quarter, we beat both consensus and our own guidance. This is thanks to continued strength across the globe in our core hotel operations.

Our own properties delivered strong results and I’m happy to report that worldwide business fundamentals remain robust. But before I dig into the quarter I want to share four preliminary observations based on my first five weeks on the job. The first observation will take a couple of minutes, so bear with me.

It’s quite simply that Starwood has some of the best brands in the hotel industry. These brands are unique and highly differentiated. They give Starwood a leading position in the upper upscale and luxury segments, segments that have powerful demographic and economic tailwinds that I believe will allow them to outperform over the long run. These brands also have global reach. This in turn drives developer interest for the brands and has resulted in a pipeline that’s now reached 115,000 rooms. Remember, this pipeline is skewed towards the upper upscale and luxury hotels and is diversified around the world. So with our comparatively smaller base of hotels, Starwood is well positioned to grow its managed and franchised business at above-industry growth rates for years to come.

To stay on this observation further, I’d like to elaborate on our brand. Starwood is known as an innovator in the lodging industry and I’m focused on making sure that our brand teams continue with their excellent work. Our brands need to remain unique and differentiated. Our service delivery must continue not just to meet, but exceed our guests needs. This will drive revpar (sic) premiums that will fuel developer demands for our brands and returns to our shareholders. Let’s take Sheraton, for example. It has a leading position in Asia, Europe, and the Middle East, but is underpenetrated relative to Marriott and Hilton in North America. So I believe we have an enormous opportunity to increase our footprint and improve the quality and consistency of the guest experience for our North American hotels.

Our two other upscale brands, Westin and Le Meridien, also are powerful draws for consumers and developers. In fact, Westin is one of the most sought after brands in the category. Le Meridien continues to seek great revpar gains from its successful integration in to Starwood and is generating substantial value for our shareholders.

Our three luxury brands are also unique and complimentary to one another. The St. Regent and luxury collection assets have received numerous awards in the luxury category. To this end, we’re implementing a global set of brand standards specifically designed to meet Triple-A and mobile guidelines. Our aim is to increase the number of Five-Diamond and Five-Star hotels in our system. Meanwhile, W’s track record has convinced the development world that this brand is not just for real, but is redefining the face of luxury around the world.

And finally, we have a small but growing offering of brands in the Select Serve category. Four Points has been completely re-invented and the increases in GSI scores and pipeline are impressive. Aloft and Element have enormous potential as these brands have sparked strong developer interest. That is, even before the first hotels open in the summer of 2008. These brands have a wide open playing field to grow through a unique positioning that in my view redefines what consumers can expect from Select Serve hotels.

So that concludes my take on Starwood’s brand. Let me turn now to my second observation coming into Starwood. I believe we have a deep and talented group of associates. Over the last few weeks I’ve visited many of our offices and hotels, and including a trip to Japan and China just last week, and I’m truly impressed with the enormous amount of industry experience that our people bring to the table. Equally important, they’re motivated and focused on leading the industry in propelling Starwood’s growth.

My third observation, Starwood owns the highest quality portfolio of hotels that you can buy. These hotels are predominantly in the Five-Star category and are geographically dispersed around the world. They are valuable assets for our shareholders for two reasons: they generate substantial profits for the company and they’re highly valued by potential buyers.

My fourth observation, Starwood’s management team has a sincere focus on containing costs through productivity improvement and prioritizing our initiative. This will allow the company to enjoy increasing economies of scale as our room count grows substantially over the coming years. Remember, we have roughly half the rooms of Marriott and Hilton, so this cost focus can free up resources and fuel our growth.

So with that, let me turn to some of the details of our third quarter results. Worldwide system wide revpar increased 9.5% with double-digit gains across each of our international regions. Revpar increased 13.5% in Europe, 13.3% in Africa and the Middle East, 14.6% in Asia-Pacific, and 15.9% in Latin America. Our company operated international results were even better. Rising 14.9% in the quarter or about 9.5% excluding the impact of foreign exchange. Worldwide branded owned revpar gained 8.7% in the quarter, with our international owned revpar up 12.6% and our North American owned revpar up 6.4 percent.

As mentioned in the second quarter call, our own results were reduced by renovations at three major properties: The Phoenician, the W San Francisco, and the W Los Angeles. Excluding these properties, North American revpar would have increased by 8.2% and margins would have been expanded by 60 basis points.

Our fee business continued its impressive growth with management of franchise revenues climbing 16.7 percent. Base fees up 7.7 percent, antennae fees up 23.5 percent, and franchise fees up 25.8 percent.

We added 3500 rooms in the quarter and unit editions will continue to be an important driver of this business as our pipeline translates into an acceleration of openings over the coming year.

Our vacation ownership business reported good results in Q3, mostly from percentage completion accounting and strong sales at new projects. Originated sales, however, were down 1.1% in the quarter due in large part to the sell-out of projects such as the St. Regent Aspen and Westin Kearlen (sic) last year. We also experienced softness in our sales velocity in Hawaii as close rates were lower than we had expected when we gave guidance on our second quarter call. This issue is likely to persist through 2008, but should resolve itself as we move forward with the next phases of development in Hawaii. We believe that the long-term business fundamentals in vacation ownership remain sound.

So with that, let me focus on my comments for a preliminary look at 2008. In 2008 we expect our core lodging business to enjoy continued strong performances as industry supply growth is below historic averages. More specifically, group pace is up mid to high single digits and we expect corporate rates to increase in the high single-digit range. We’re forecasting company operated worldwide revpar growth of 6 to 8 percent. Our managed and franchised revenues should grow by about 13 to 15 percent. And we expect our own portfolio to deliver strong results with worldwide revpar up 6 to 8% and margin expansion of 50 to 100 basis points.

In the aggregate, this represents a strong year-over-year growth in our core hotel business. Our performance will be negatively affected by delays and slower sales velocity at our Hawaii vacation ownership projects. Companywide EBIDTA should be in the range of $1.3 to $1.34 billion and we expect 2008 EPS of between 247 and 260.

So to summarize, business fundamentals remain strong and we’re successfully executing on a strategy that’s beginning to deliver long-term growth that will create shareholder value for years to come. We’ve continued to be aggressive buyers of our stock, buying back 9.2 million shares for $554 million, as we believe that best is yet to come for our company’s growth story. With an underleveraged balance sheet, potential for additional asset sales, and strong free cash flows, we remain committed to returning cash to our shareholders through additional share repurchases.

So let me step back. As I reflect on our business I see five themes underpinning our business strategy that will create value in the future. The first theme is brand lead. Strong, differentiated brands lie at the heart of driving revpar growth and developer interest. The second theme is operations driven. Our brands depend largely on our ability to delivery superior and consistent guest experience while being cost efficient. The third theme is asset right. To me, asset right means finding the right balance of owning assets for strategic and opportunistic reasons. Fourth is growth. There are two great opportunities that will drive sustained growth for Starwood. First, there’s an unprecedented rise in global prosperity, and second, brand penetration – particularly in Europe – will continue to increase. The fifth and final theme is having prudent capital allocation. Starwood is well positioned to continue investing in future growth while at the same time returning significant capital to its shareholders.

So in summary, our brands, growth, and operational effectiveness will all depend on developing, retaining, and attracting talented associates around the world. I see it as my role to ensure that we continue to have the most talented team.

So that concludes my prepared remarks. With that, I would like to hand the call over to Vasant for some more details on our financials and our guidance.

Vasant Prabhu

Thank you, Frits, and good morning, everyone. We exceeded our expectations in the third quarter with strong hotel performance offsetting weakness in our vacation ownership business. Hotel revpar growth in North America picked up in August and has stayed strong through October. September, as you know, was affected by both Jewish holidays falling in the same month this year.

International revpar growth was in the mid-teens across all geographies, helped of course by a weakening dollar. We see no evidence at this point of a change in trend and are projecting some of the best growth rates we have seen so far this year for the fourth quarter. Nine to 11% revpar growth at company operated hotels worldwide and 8 to 10% revpar growth at owned hotels in North America. Revpar growth at international owned hotels will be even higher at 10 to 12 percent.

Europa’s revpar growth projected in the fourth quarter at North American owned hotels is a function of the improved trend we’ve experienced since August, with the benefit in October from comparisons to last year and the completion of renovations at key hotels. Margin improvement will be a healthy 150 to 200 basis points with North American owned EBIDTA growing 13 to 15 percent.

Strong fee growth will continue in the 13 to 15% range, helped by the underlying revpar trend, the global scope of our fee business, and the new hotels we have been adding to our system over the last two years. The 117 Meridien hotels we added last year continued their outstanding growth with revpar up 16% on top of the 13% revpar growth we achieved in the third quarter last year. This is hard evidence of the significant value we can bring to both new brands and new owners entering our system. And we remain well positioned to sustain industry leading fee growth well into the future, with a pipeline of 115,000 rooms. This is the largest pipeline in the industry relative to our size and also the highest quality, with 17% of the rooms in the upper upscale and luxury segments and 50% outside the US. So all in all, we expect a strong finish to the year in our hotel business.

In our vacation ownership business, as we indicated last quarter, we are experiencing delays in gaining necessary approval for our projects in Hawaii. As a result, we have limited inventory in Maui, which is our largest project in Hawaii, and this has begun to affect our sales space. In September we had a slowdown in sales at our Maui sales galleries as we are increasingly selling our Princeville project, which is on Kauai. Selling off site product is harder, of course, and close rate – in other words, the percentage of people who take our sales pitch and then agree to buy – have dropped. Close rates were lower than we expected when we guided the last time.

Our vacation ownership business fell short of expectations in the third quarter and we expect these trends will continue into the fourth quarter and next year until we are able to start selling the next phase of our Maui project, most likely in the fourth quarter of 2008.

Sales trends in Orlando and Cancun have remained strong and on track. Primarily due to these Hawaii related issues, we have lowered our vacation ownership profit expectation by approximately $25 million in the fourth quarter. In addition, we were scheduled, as you know, to complete our annual sale of vacation ownership receivables in the fourth quarter and expected to record a gain on the sale of $25 million. After recovering both the fed rate cut, ABS market deteriorated sharply in the last week. Spread has widened and demand is weak. The sale of receivables has always been optional for us as a low-cost source of financing. Column spreads are not attractive relative to other sources of financing available to us, and our liquidity position of course is very strong. So the best business decision at this time is to postpone the sale until market conditions improve. As such, we do not expect to record the $25 million gain in the fourth quarter this year and this has been incorporated into our guidance for next year.

So all in all, we expect our vacation ownership business will be off prior for your expectation by almost $55 million and this accounts for the reduction in our quarterly and full-year guidance.

Moving on to 2008. We are early in our process, but wanted to give you some indication of how we see 2008 shaping up. Our current view for revpar growth is 6 to 8% worldwide in both company operated and owned hotels. At our own hotels worldwide, we expect margin improvement of 50 to 100 basis points and only the dark road of 8 to 10 percent. While we have a couple of major renovations next year, one in North America and one in Asia, renovation impacts will be more modest than it was this year.

Fee growth will continue in the 13 to 15% range helped by revpar growth, our global scope, and new hotel openings. Our vacation ownership and residential profit will decline primarily due to the previously announced delays in Hawaii, offset to some extent by the shift in the receivables sales from Q4 this year most likely to the fourth quarter of next year.

In addition to the decline in our vacation ownership business, our EBIDTA growth next year is impacted by significant PNL investments we are making to drive long-term growth. We’re investing between $15 and $20 million to launch the Lofton Element across all aspects of the launch program. While the first of the Lofton Elements will open next year, fees from these brands will be negligible in 2008. As such, a sizeable pipeline – I’m sorry. As our sizeable pipeline is converted to open hotels over the next few years, these brands will create significant shareholder value and ensure that our fee growth can be sustained well into the future.

We have shut down the Sheraton Bell Harbour. In addition to losing the EBIDTA from this hotel we will incur $10 million or so in expenses associated with the project in 2008, with no revenues until we get closer to completion in 2010. The project continues to sell steadily. We expect to earn a great return from condo sales and add a spectacular St. Regis Hotel in a world class location.

We also continue to invest in capability to find and open new hotels. Our pipeline is as large as our competition, global in scope, and of higher quality. These expenses have to be incurred ahead of fees and are largely expensed as incurred even though the contracts we sign and the hotels we open will deliver fees for 20 years or longer and have significant MPV. These are all PNL investments that pressure short-term earning, but position us well for significant long-term growth and shareholder value creation.

One other item that hurts us in 2008, our owned hotels in New Orleans will earn $10 million less in 2008 than they did pre-Katrina. Like the last two years, we are no longer able to claim business interruption insurance and will have to absorb the entire shortfall in 2008.

But back to the good news. Overall, hotel business fundamentals remain strong. Despite the investments outlined, our hotel business will deliver healthy growth in 2008. While our vacation ownership business declines in 2008, we expect to bounce back in 2009 as we start sales of new projects in Hawaii, Mexico, Palm Springs, Colorado, and other location.

(Inaudible) guidance range for EBIDTA is $1.3 to $1.34 billion and EPS of 247 to 260. We will, as always, provide updated and more detailed guidance in January on our year-end call.

Finally, our fully diluted shares outstanding for guidance purposes, assuming no further buy backs than what we have already done, are 203 million. Our buy backs this year have reduced our fully diluted share count from 217 million at the end of 2006 to 203 million today, a 7% reduction. And as just indicated, we feel very good about the prospects for our business long term relative to where our stock price is currently. We think our stock offers great value, as evidenced by our record buy back in Q3.

With that, I’ll turn this back to Jay.

Jay Koval

Thanks, Vasant. In the interest of time and fairness, please limit yourselves to one question at a time and then we’ll take any follow up questions you might have as time permits. Rufus, we’re ready for the first question, please.

Question-and-Answer Session

Operator

Thank you, Sir. Ladies and gentlemen, our question and answer session will be conducted electronically. (Operator Instructions) For our first question we go to Celeste Brown with Morgan Stanley.

Celeste Brown – Morgan Stanley

Hi, guys. Good morning. Vasant, can you just talk about the time-share business a little bit more? I’m a little bit confused by some of your comments. Are you suggesting that with the lower close rate in Hawaii that you’re seeing some impacts to the consumer slow down we’ve seen in some of the other businesses out there?

Vasant Prabhu

Yeah, let me explain sort of what’s going on in Hawaii and tell you, sort of, what our perception of the situation is. Our biggest project in Hawaii is on the island of Maui. It’s the Kanapali (sp) Ocean Resort. We did phase one of that. It was a huge success. We are now in the process of finishing selling phase two, which is also been an outstanding success from both a margin and return standpoint.

For phase three, we own the land. We’ve owned it for a few years. We’re in the process of getting all the necessary entitlements and approvals. So what happened right now is we have delays. So we can’t sell phase three yet and we’re running out of inventory on phase two. So a couple of things are going on. As we run out of inventory on the island of Maui, which is our largest sales operation and we have a lot of tour flow there – both from our hotel and the fact that we have a lot of owners staying there – we have a lot of opportunity to sell things to people in Maui.

We don’t have a whole lot of inventory, so we’re increasingly selling inventory from Kauai. So we have Princeville, which is our project in Kauai. It’s a lot smaller than what we’ve done in Maui, but we do have that inventory to sell. So when people come in to take our pitch we’re selling them something which, unlike Maui where they can walk across and see the project, they can, you know, get a good feel for it, we’re essentially showing them pictures and telling them, look, we have this wonderful project in Hawaii, in Kauai, so what you really have is you’re trying to sell what we call off-island inventory, which of course is a harder sell.

It’s a little hard, it’s hard to predict what happens to close rates ahead of time when you start doing that. So as we got into the quarter increasingly our mixer shifted to selling people Kauai rather than Maui and as a result the close rate ended up being lower than we might have expected going in and we started to see more and more of it as the mix shifted more and more to trying to sell Kauai.

As it relates to Maui itself, we do have some inventory, but like all situations, you know, when you’re running out of inventory you can’t offer them the entire range of options. So we don’t have every week they might want. We don’t have every price point they might want because some of that stuff is sold out. So the other thing that you have is sort of a limited amount of options for people and that can affect your close rate because you’ll have more people saying, well, I really wanted that particular week or I’d rather have had something that was island view at a lower price, and we might not be able to sell them that because it’s sold out. The third aspect of it is, you know, the right business decision when you’re running out of inventory is to hold your head high, keep your prices high, because you’re going to make more money that way.

It’s highly prized inventory. So we’re doing that. We’re taking our prices up because while that may slow down our sales pace and lower our close rates a little bit, it’s the right business decision, it’s the right decision in terms of maximizing our return. Now, in that all, are a variety of reasons why our sales pace has slowed down and our close rates were lower, lower than we anticipated. Is there also a softness in demand dimension to that? It’s hard for us to separate, you know, all these aspects from a softness in demand.

Could there be some softening of demand? Maybe there could be, but there are sufficient other reasons to believe that these are the, you know, the other reasons I mentioned are maybe the primary causes. The other reason that argues against demand not softening is that demand is very strong on our eastern projects. Cancun and Orlando are selling extremely well. They’re exactly in line with what we expected. Unfortunately, doing well there has not been enough to offset, you know, our shortfalls in Hawaii. A little long answer, but I knew this was a question on lots of people’s minds. Hopefully that provides more colour on it, but we’re happy to answer more questions on it.

Jay Koval

Next question, please.

Operator

And we go next to David Katz with CIBC World Market.

David Katz – CIBC World Markets

Good morning. You know, Frits, you touched on the Sheraton brand a little bit. Just taking all this in and looking at where your capitalization is at this point, how would you feel about or what about the notion of perhaps getting a bit more aggressive in fixing that brand, stepping up that brand and using some of the available capital that you have to sort of push that brand forward right now? And clearly we would understand investing in the future and the new brands and all of that sort of thing, but the Sheraton fix has been on for a while and how about getting a bit more aggressive with that?

Frits van Paasschen

I love the question, David, and I think it’s a very interesting idea. It’s a little early for me to have a strong point of view on specifics around that. I will tell you, I think that we’ve made considerable progress on the Sheraton brand, which you can see reflected in the performance in some of the other measures that we have. Whether we should be more aggressive in the future is something I’m very keen to take a look at.

Operator

And we go next to Felicia Hendrix with Lehman Brothers.

Felicia Hendrix - Lehman Brothers

This will be a bit of a forward-looking question, but last year at your investor day, you provide a long-term REVPAR growth outlook of about 7% to 9%. I’m wondering if that’s changed at all, or if there is an opportunity for you to readdress this outlook in the near future.

And then, just a follow-up on the first question, just wondering -- do you have a sales office on Kauai for that Princeville property?

Vasant Prabhu

Sure, Felicia. Second question, do we have a sales office in Kauai? Yes, we do. We are selling Kauai from Princeville from Kauai too. We have a hotel right next to where this timeshare development is. But given that we don’t have a whole lot of inventory to sell on Maui, we are selling Kauai from Maui too. As you can see, it’s not an ideal situation. Our general approach is to sell inventory that is right next to where the sales office is, but given our shortage of inventory in Maui now, we are using our significant sales resources in Maui to also sell Kauai.

On your first question with regard to three-year guidance, I think we are thinking about another investor day some time in 2008. We haven’t obviously finalized when, but at which point we would intend to give you a longer term picture of our business.

Operator

And we go next to Joseph Greff with Bear Stearns.

Joseph Greff - Bear Stearns

Good morning, guys. For your ’08 timeshare profitability guidance range next year, how much do you have included for gains? Do you have basically two gains -- what you would have had in 4Q07 and what you would have in 4Q08? And then, could you just remind us what is contemplated for the remaining asset sales in your ’08 guidance as well?

Vasant Prabhu

In terms of the receivable gains, I think yes, you should assume that there was -- you know, we’ve been on an annual cycle, so you should assume that there was a receivable sales planned in Q4 of ’08. The size of that sale would have probably been a little smaller than this year because, given where we are in our cycle, we had completion of a major project in Hawaii this year, so we had somewhat more receivables this year than we would have had last year.

So you should assume probably that next year’s gain would have been somewhat smaller than this year, and so you add this year’s gain on to that and that gives you a rough idea of what next year’s gain might be.

To some degree, it depends on when in the year we do it. I think our inclination right now is just to do one financing, is the most efficient way to do, and to do as large a financing as we can, which would argue for pushing it out into the fourth quarter of next year.

But we’ll give you a little more decision on this on our next call as we get early in the year, in case we are going to do anything different and maybe do two securitizations. But I think you should assume it will probably be one and it will be late in the year next year.

Frits D. Van Paasschen

Just to build on that, I think as you reflect on this, you can see that we made the right call now to delay the receivable sales, and we’ll continue to do what’s in the best interest of the company from a financial perspective. I think our preliminary plans are as Vasant outlined, but as he also mentioned, those are subject to change based on our view on where the market is and what’s in the best interest of the company.

Operator

We go next to Harry Curtis with J.P. Morgan.

Harry Curtis - J.P. Morgan

Good morning. I’ve got a follow-up question on timeshare, but it’s in two parts. On your second quarter call, you talked about the $125 million I guess shortfall in ’08, and in your press release, you mention $30 million to $50 million. Can you parse the shortfall now that some of it is coming in ’07? The question we’ve been getting is some investors are confused that the shortfall won’t be as bad in ’08, and I’m just wondering if it’s just a function of the moving pieces.

And then the second part of the question is on the timeshare side, it seems like it, it seems like there is constant bleeding as a result of or reflected in the earnings per share number, and I’m wondering, are there any other clauses or reasons that the EPS number or guidance for ’08 is likely to bleed some more related to timeshare?

Vasant Prabhu

Your first question, Harry, on the reconciling the 125 to what the guidance range is right now, so you can start with originally we said we’d be 125 below what was then expected to be this year’s timeshare profit. Well, this year’s timeshare profit, as we indicated in our release, is down $55 million for the full year versus prior expectation. So you take 55 out of the 125, and the year-over-year decline would have dropped to 70. Then we move the receivable sales, which was a gain of about $25 million, so if you just assumed the $25 million moves from this year to next year, then the year-over-year decline actually drops to 45, so it is in that 30 to 50 range.

So by and large, we are still in the same range and that is still essentially our view and the bulk of the impact on next year is all driven by the delays that we told you about last quarter.

In addition to that, as far as EPS, as far as EPS goes, there is nothing else out there other than the translation of expected EBITDA into EPS. You’ve seen the assumptions on interest and depreciation in our press release, so there is nothing else, other than the fact that our earnings are going to be lower from the time share business.

Frits D. Van Paasschen

Just to add on to that, Harry, if you take a look at the business and, as you put it, parse it out, the effects really are the timing of the securitization and the Hawaii business, and that accounts for the vast majority of the performance there. And then that, as Vasant said, translates from there into EPS from earnings.

Operator

We go next to William Truelove with UBS.

William Truelove - UBS

Just to beat a dead horse here on timeshare, I was hoping we could parse out the different components of timeshare, because obviously it’s not just timeshare -- there’s condo sales. So when you are talking about timeshare performance, are you talking about just the timeshare portion excluding condos in the income statement? Or are you talking about the line items that are shown in the income statement when you are giving the guidance for ’08?

And then furthermore, given the volatility of this business, could you help us maybe think about timeshare operating income excluding the gains that you might take on the sale on a quarterly basis for ’08 at this point? Thanks.

Vasant Prabhu

There were quite a few questions in there. I am going to try and answer every one of them. When we talk about timeshare and residential, the line on the reported P&L, there are essentially three components in there. There is the timeshare interval business, where we sell weeks. It is the largest piece of the business. Then there is the fractional business, where we sell four weeks at a time, typically under our St. Regis brand, and there we are selling fractionals right now in the St. Regis New York and the [Panetian]. That’s a much smaller piece of the business, and then the last piece is the residential, sales of condos, which is the smallest piece of the business.

In our press release, we actually break out the residential piece, and it’s on page four of the release. And you can see that sale of condos was a minute part of the business. I think total revenue from sale of condos in the quarter were only $2 million, so that doesn’t -- that is not the explanation. It is very much all around the timeshare interval business and it is all around the timeshare interval business in Hawaii, which is in fact the largest piece of that timeshare interval business.

Hopefully that answers one of your questions.

The other question was can we give you quarterly forecasts yet for ’08 -- no, too early. We will do the best we can to give you -- we know you need some sense of how timeshare breaks out quarter by quarter, so we will do the best we can, obviously when we give you guidance again at the end of the year on our year-end call.

And then I think your last question was around the receivable gains. We’ve always been very explicit about what our receivable gain has been, so each year, you can always pull out what the receivable gain was and we also try to make it a little easier by doing it always in the fourth quarter, and that’s been our practice for the last couple of years. So people have come to expect a receivable gain in the fourth quarter and assuming we stay with those plans, it will happen again in the fourth quarter next year.

Operator

We go next to William Marks with JMP Securities.

William Marks - JMP Securities

Good morning. I just have a question on -- you mentioned international, franchise, and management fees are 50% of the model. Does the management fee include the incentive fee portion when you talked about that?

Vasant Prabhu

Yes.

William Marks - JMP Securities

Okay, and then, if we looked at the ownership side of revenues, how much of that is international versus North America or U.S.?

Vasant Prabhu

North America, 60%, international is 40%. If you consider Canada international, which I think most people would, especially with the Loonie at parity, it’s really more like 50-50 U.S. and non-U.S.

Operator

With a follow-up question, we return to Celeste Brown with Morgan Stanley.

Celeste Brown - Morgan Stanley

With the debt markets in turmoil, I know it’s been difficult to sell assets, which is reflected in your guidance, how do you think about some of the things you’ve talked about, selling the share to Manhattan and some of the other sort of non-core assets, how do you think about timing? And also, in relation to timing, do you think, given the outlook right now, you can actually use up that tax asset that you have that’s pretty valuable?

Frits D. Van Paasschen

In terms of the timing, clearly we want to make sure that we get the best value for these properties. Given the unique nature of some of them, the timing may be less important because this may be the one opportunity that buyers have. So I think the short answer is timing may affect our sales. It won’t affect our intent to sell over time, if that makes sense.

And then -- I’ll leave it there, actually.

Vasant Prabhu

And I just remembered, there was a question earlier I think that I didn’t address, which was what have you included in your guidance for next year in terms of asset sales -- all we’ve included in our guidance for next year is, or rather, excluded from our guidance for next year is the sales of assets that we had previously announced. We expect to complete all those by early next year. It was the $450 million or so in asset sales. It does not include -- our guidance does not include an expectation that the Sheraton Manhattan will be sold. It is on the market. We will make adjustments if and when that sale happens. But at this point, it just includes the hotels we’ve previously announced as being for sale.

Frits D. Van Paasschen

The other thing I think you mentioned, Celeste, was tax, and I think we have enough time that -- it’s our belief that the debt markets in demand, if they are not there today, will be back in time for us to take advantage of that. My recollection is we have until the middle of 2011, which I think gives us enough time for quite a few things to happen and hopefully among those things being a great demand for our asset.

Operator

We go next to Jeff Alexander with Citigroup.

Jeff Alexander - Citigroup

You had mentioned a couple of times that you felt that you’ve got an under-leveraged balance sheet. Have you guys thought about a target leverage going forward?

Vasant Prabhu

I think we’ve been fairly clear about our target leverage. It is around 3.5 to 4 times gross debt to EBITDA. It’s sort of what keeps us in the investment grade territory. We’ve also said that our focus is on value creation and we won’t let ratios get in the way of doing what’s right from a value creation standpoint. But over long periods of time, we expect our leverage to be in that range, which would keep us investment grade credit.

Operator

And with a follow-up question, we return to Felicia Hendrix with Lehman Brothers. Ms. Hendrix, your line is open.

Felicia Hendrix - Lehman Brothers

Fritz, I know it’s still early days for you, but I’m wondering, did you play any role in the decision to delay the asset sales until early ’08? I’m wondering if there’s delays, is there anything beyond just waiting for the right price?

And then also, I’m wondering in your 4Q and 2008 REVPAR guidance, how much of that is attributable to the benefit of the renovation?

Frits D. Van Paasschen

I’ll leave the renovation part to Vasant, and let me talk about my role in terms of [waiting around for securitization]. It became clear to us in the last couple of weeks that the market had changed significantly and the kinds of spreads that we were able to get were not favorable, and therefore didn’t really make it a source of financing that we thought was attractive.

So I played a role in the decision to the extent that we reviewed the situation and made a decision that we felt again, while somewhat disruptive to the even flow of delivering earnings, made absolute sense in terms of value creation and our shareholders interests.

And then, I think your 2008 question I’ll hand it over to Vasant.

Vasant Prabhu

Your question was how much is the fact that we don’t have renovations in the fourth quarter helping the fourth quarter? Well, it is helping it. I couldn’t give you a precise number. It is also helped by the fact that October is a stronger month for comparative purposes, and the business has ticked up. So I think all three factors are playing in.

I think your other question was how much is it helping next year. Again, I couldn’t give you a precise number on that, but I wouldn’t be surprised if it’s somewhere in that 50 to 100 basis point range, given that was sort of the impact we had this year.

Frits D. Van Paasschen

Right, so our renovation slate for next year is a little bit lighter than for this year, so we should benefit somewhat from that comparison. But I don’t think we’re ready to give you an exact breakout right now.

Operator

And we go next to Joseph Greff with Bear Stearns.

Joseph Greff - Bear Stearns

Vasant, earlier you mentioned that you have some investments that are hitting the P&L, the $15 million to $20 million investment in the aloft and Element, and then $10 million expenses at the Sheraton Bell Harbor. Are there any other big ticket items, or can you give us sort of an aggregate amount that’s maybe sort of a, kind of a one-time ’08 expense issue, without generating any incremental revenues?

Vasant Prabhu

Okay, let’s run through the list -- $15 million to $20 million on aloft and Element; add another $10 million from the fact that there were expenses at Bell Harbor that hit the P&L but no revenue to recognize; somewhere in the region of let’s say $5 million to $10 million for New Orleans, where there is no business interruption insurance. That gets you in the range of probably at the high end somewhere in the region of $35 million to $40 million.

Now, the other one that is a little harder to quantify is the fact that we made a -- we are -- we have a great pipeline. We are making significant investment to create that pipeline. We have development teams around the world signing up new owners. It costs us money to get hotels open. The fees from these hotels don’t come until future years. We’ve got an interesting situation where you are essentially signing up hotels that have 20-year fee streams or more and significant NPVs, but all your cost associated with bringing them into the system has to be expensed up front.

So what you have is a situation where your costs of signing and opening hotels in the year is quite a bit higher than the fees you are delivering from the new hotels. As we get into this over the next two or three years, those costs come back in line, so you don’t have a net investment in the year for the year, so to speak, on the development side.

You know, that’s a reasonable and decent-sized investment, which over time becomes smaller because your fee streams grow. So I don’t know if that helps you but that’s sort of a rough idea of some of what we are taking in the short-term to drive strong and we believe industry-leading fee growth.

Frits D. Van Paasschen

Just from my perspective, if you roll up the P&L right now for 2008, the aloft launch, Bell Harbor, Katrina, and general investment in the pipeline in my view would be the lion’s share of the big swings.

At the same time, and it is I think, Felicia, you mentioned earlier, it is early days for me to have a specific number for you, but we are going to continue to focus very specifically on managing our expenses so that the increases that you see are directly related to investments for future growth.

Operator

We go next to Steve Kent with Goldman Sachs.

Steven Kent - Goldman Sachs

Good morning. Could you just talk a little bit more about the delay in the securitization? And the reason why I’m asking is that Marriott is highly, highly confident that their timeshare securitization will close shortly, with only a slight decline in the gain they would have expected. Wyndham’s timeshare conduit looks like it is moving along very effectively, and their timeshare securitization for later this fall will be on track.

I guess I’m trying to understand -- is it because your balance sheet is relatively under-leveraged, or the benefit of keeping these timeshare loans on your income statement will be helpful into 2008? Is it more of a strategic decision rather than a capital markets decision?

Vasant Prabhu

Let me answer it by saying securitizations are done by different people for different reasons, and there are generally three reasons you can do a securitization for. Sometimes it is pure need for liquidity. If you are a smaller timeshare company, this is often one of the ways that they can get access to financing, so if you are a smaller timeshare company, you sort of do it because without it, you don’t have access to financing. That’s not our issue. We have plenty of liquidity. We have plenty of access to liquidity so we don’t need to do it for that reason.

The second reason people often do it is because it is a cheap source of financing. It often is because it is asset-backed, could be your cheapest source of financing. That is often the reason why we’ve done it.

Today, where the spreads are, it is not our cheapest source of financing. We have cheaper sources of financing available to us. In fact, the last time we did it, it was in fact our cheapest source of financing. So it didn’t meet that test, which has always been our major test.

The third reason you do it is because you want to book a gain in a particular quarter, purely an earnings-driven consideration, and for some that’s important. You know, if that was our primary consideration, then you would say okay, I’ll accept a spread that’s not so great, I’ll accept some deterioration in the economics because I really want to book this gain in this quarter.

And you know, we chose to go with the view that the spreads will get better and that this is, given our liquidity position and our cost of our other sources of financing, it was better to wait. So that was the reason.

Now, these markets change from week to week, so markets improved after the fed rate cut. We know one of our competitors was in the market. The market deteriorated just as they were in the market. They barely got the deal done. We were told the spreads were somewhat wider than they might have liked. The market has gotten worse since then. It changes from week to week. We had to make a decision. We decided that given our situation with the liquidity being great and where the spreads word, that it made a lot of sense to just take our time and do it when times were right.

Frits D. Van Paasschen

I am not going to comment specifically about either of our competitors, but I do want to assure you that this decision was not strategic in some sense, nor was it coincident with my arrival to the company. This decision was based on, pure and simple, the cost of financing for the company and secondly, it’s a question of timing. As Vasant alluded to, these are things that change week to week and this is a decision that we took flexibly, reading the situation as we saw it.

Operator

We go next to Bill Crow with Raymond James.

William Crow - Raymond James

Good morning, guys. A question for each of you -- Vasant, the $25 million reduction to timeshare in the fourth quarter on an operating income basis translates to what, $60 million or $70 million gross sales? I’m just curious what the original budget was for Hawaii for sales in the quarter.

And then Fritz, welcome aboard. The question for you is when do you anticipate going back to the board to get an increased authorization on the share repurchase program?

Vasant Prabhu

On Hawaii, I think your rough numbers are about right. That is sort of a rough sense of how it translates from revenue to profit. Hawaii is the largest chunk of our timeshare business and the fourth quarter happens to be one of the larger quarters for Hawaii, as you might guess from seasonality factors. So Hawaii being off as significantly as it is definitely affects you quite hard in the fourth quarter.

Frits D. Van Paasschen

Thanks for the welcome. We have every intention of continuing to buy back our shares, and so as we have our next board meeting, it will certainly be on the agenda for us to discuss how we can continue to do that.

Operator

We go next to William Truelove with UBS.

William Truelove - UBS

Just to follow up on that, in terms of your EPS expectation for 2008, I just want to clarify -- did that include any additional share repurchase or just assume that your base share count of 203 remains constant through 2008?

Frits D. Van Paasschen

William, as you know, what we do actually is we calculate that EPS guidance based on the current shares outstanding. We have to adjust that number over the course of time as we continue to repurchase.

William Truelove - UBS

Okay, thank you.

Operator

And we go next to Felicia Hendrix with Lehman Brothers.

Felicia Hendrix - Lehman Brothers

One of the questions I asked before was misinterpreted, so just wanted to hop back on. The question that I was asking was about asset sales, not about the securitization. So I was just trying to understand more why they were being delayed until next year. Is it just price or it is something else?

Vasant Prabhu

No, in general, some of the assets that are being delayed, they’ve not being delayed as much as the process is taking longer. These are some of the international assets we had in the portfolio. A couple of them happen to be in Venice. That process is inherently longer.

Things are going well. We still expect to meet what we told you as the cash proceeds from those sales. We said a couple of purchasing sale agreements were signed in Q3 and were going to close in Q4. One of them is actually closed, so deals are happening, people are closing. We definitely hold out for the best price but sometimes the process takes a little longer.

Other than that, there is no new news there. It’s just taking a little longer.

Frits D. Van Paasschen

I think underlying your question is probably a view on what my philosophy is here, and since I’m new, let me try to help you out a little bit. It is my view that our owning assets comes at some economic cost because of our own leverage situation and because of tax. As a result of that, I believe it is in our best interest to continue to look at which assets we have and whether they fit the long-term strategic interest of the company, or whether we and our shareholders are better served by our selling those assets. And that’s a process that we are going to continue to go through.

I don’t want to do that with any urgency that would compromise our ability to get the absolute best price for those assets, nor would I preclude that on that same basis, if we feel for strategic reasons there’s an asset we need to acquire, that we wouldn’t do that, not with the idea that we would hold that over the long-term or permanently, but that we would do that again for strategic interest.

I hope that helps a little bit in clarifying what we are doing and helping you not read the timing of those sales as to be anything other than the process of executing it.

Operator

Ladies and gentlemen, that does conclude our question-and-answer session. Therefore, Mr. Koval, I will turn the conference back over to you for any closing remarks.

Jason Koval

Thanks, Rufus. That wraps up today’s third quarter call. We appreciate your time and interest in Starwood Hotels and Resorts and please feel free to contact us to review any of this information or to follow-up with any additional questions you might have. Thanks again. Goodbye.

Operator

Ladies and gentlemen, that does conclude the Starwood Hotels and Resorts third quarter 2007 results conference call. We do appreciate your participation and you may disconnect at this time.

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