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Starwood Hotels & Resorts Worldwide (NYSE:HOT)

Q1 2012 Earnings Call

April 26, 2012 10:30 am ET

Executives

Stephen Pettibone - Vice President of Investor Relations

Frits van Paasschen - Chief Executive Officer, President and Director

Vasant M. Prabhu - Vice Chairman, Chief Financial Officer, Executive Vice President, Chief Financial Officer of Starwood Hotels & Resorts and Vice President of Starwood Hotels & Resorts

Analysts

Joshua Attie - Citigroup Inc, Research Division

Joseph Greff - JP Morgan Chase & Co, Research Division

Steven E. Kent - Goldman Sachs Group Inc., Research Division

William A. Crow - Raymond James & Associates, Inc., Research Division

Robin M. Farley - UBS Investment Bank, Research Division

Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division

Harry C. Curtis - Nomura Securities Co. Ltd., Research Division

Shaun C. Kelley - BofA Merrill Lynch, Research Division

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

Felicia R. Hendrix - Barclays Capital, Research Division

Ian C. Weissman - ISI Group Inc., Research Division

Carlo Santarelli - Deutsche Bank AG, Research Division

Christopher Agnew - MKM Partners LLC, Research Division

Operator

Good morning, and welcome to Starwood Hotels & Resorts First Quarter 2012 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mr. Stephen Pettibone, Vice President of Investor Relations. Sir, you may begin.

Stephen Pettibone

Thank you, Sylvia, and thanks to all of you for dialing in to Starwood's First Quarter 2012 Earnings Call. Joining me today are Frits van Paasschen, our CEO; and Vasant Prabhu, our Vice Chairman and CFO.

We will be making statements on this call related to company plans, prospects and expectations that constitute forward-looking statements under the Safe Harbor provision of the Securities Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as Starwood or its management believes, expects, anticipates, foresees, 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 on as representing our expectations as of any subsequent date. Actual results might differ from our discussion today. I point you to our 10-K 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 van Paasschen

Thanks to all for joining us today. Before I get started, please join me in congratulating Stephen Pettibone on his new role. I'm sure that Stephen's 5 years with Starwood and his knowledge of what drives our business will be a great resource for all of you.

On today's call, I'll follow a format that will be familiar to those of you who've been listening in before. I'll start by sharing some thoughts on the global business climate and on demand for high-end travel. I'll then discuss our Q1 business results and our outlook for 2012. That will lead me to a quick recap of our cash position and philosophy on returning cash to shareholders. I'll finish my business discussion by delving into a strategic topic, an in-depth look at how we stand to benefit from the growth in global travel. Before wrapping up, I'll comment on some executive retirements that we recently announced.

I'll now turn to my first topic, the business climate. You might recall that, last quarter, we suggested that 2012 had more potential to surprise to the upside than to the downside. We still believe this, and it's worth a moment to explain why. To start with, our corporate clients and our leisure guests tell us that their appetite for travel is quite robust. I still have yet to hear from a customer that plans to travel less in 2012 than in 2011.

In short, corporate travel plans reflect confidence in their business and in the global recovery. Contrast that with the financial markets. High gold, oil and treasury prices, for example, suggest a great deal of uncertainty. It seems that the financial markets are pricing in a few low probability, but nonetheless high impact, events like a eurozone crisis, a Chinese hard landing or Middle East conflict. If these events don't come to pass, then 2012 will likely do better than some expect.

So from our vantage point, the global lodging recovery is forging forward in a turbulent world. North America, Europe and Japan have unusually tight supply this early in the business cycle, thanks to a decade of below-trend hotel construction. The result is sustained REVPAR growth, and we expect the law of supply and demand will push rates upward for some time to come. Even if developers were building hotels tomorrow, it would be at least 3 years before that supply would hit the market. But in all likelihood, construction won't start tomorrow.

It's worth exploring why we believe that. First of all, hotels have been selling at prices below replacement costs. So if you want to own a hotel, you're better off buying an existing one than selling a new one. Compounding this are REIT share prices, which are trading at a significant discount to the value of the hotels they own. So until reprices rally, REITs are going to be selective in buying hotels.

At the same time, in the wake of the crisis, banks are still paring back their real estate exposure. That explains why commercial real estate loans in general, and especially construction loans, continue to decline. So supply is tight and looks set to stay that way for a while. But demand in North America, Europe and Japan has continued to build. Companies are profitable and in great financial shape, and they're in search of growth outside of their home markets.

The U.S. economic picture is steadily improving. Europe is stable with some indications that the back half of 2012 may be better than the first. Europe remains a global travel destination from source markets around the world. In Japan, occupancies have already bounced back ahead of last year's disaster and, for the first time, China will be Japan's #1 field of market and a bright prospect for future growth. In contrast to the mature markets, the fast-growing and resource-rich economies are pressing ahead with their epic development and buildout in infrastructure. The locomotive behind this today is China, but development activity is widespread around the world.

And this brings me to my second topic, how the global environment is translating into our business results. The upshot is this: despite the headlines and uncertainty, our business is better than some might think. In fact, we're as sanguine about the near term as we've been since before the crisis, and we're as bullish as ever about the long term. In fact, we believe we're on the cusp of a Golden Age of global travel.

So in that context, here's a high-level look at the first quarter. Excluding currency effects, worldwide REVPAR was up 6.4%. Latin America once again led the way with REVPAR of 14.4%, followed by North America at 7.2% and Asia-Pacific at 6.2%. Africa and the Middle East showed modest growth at 3.8%, although, as you'd imagine, those results vary widely within the region. And Europe posted a modest gain of 1.8%.

For our core business, REVPAR growth in new hotel openings drove management and franchise fees up 14.3%, with incentive fees growing 30%. Thanks to our brand strength and investments in top line growth, we outpaced the market in the quarter. In fact, first quarter 2012 marks the 11th consecutive quarter of REVPAR index growth.

Around the world and across our system, our revenue management has never been stronger than today. We also expect best-ever performance in rooms growth in 2012. In North America, our brand strength is creating conversions from other brands, which now accounts for 70% of our total hotel deals there in the first quarter.

We also see widespread growth across the fast-growing and resource-rich economies. Looking back over just the past few months, we've signed new hotel deals in places like Baku, Colombo, Erbil, Kaluga and Dhaka, or take another example, Malaysia. We expect to grow our footprint there by 40% over the next 2 years. And in Thailand, over a 9-year period ending in 2014, we're on track to add 20 new hotels.

Next week, we'll take our top 100 leaders to Dubai, which, after New York, has more Starwood Hotels than any other city in the world.

Outside of our core fee business, results are also on track. Owned hotel REVPAR grew 4.5%, with margins up 160 basis points. This is a testament to our continued focus on controlling costs across our owned and managed hotels. Demand for Timeshare held steady with higher overall tour flows and sales volume, especially in Hawaii.

Overall, EBITDA came in at $219 million which was ahead of expectations. This doesn't include Bal Harbour because as we've said, Bal Harbour represents a one-time-only activity. But I should mention that the first quarter saw 102 closings for Bal Harbour residences, and that represents $70 million in EBITDA and cash proceeds of $263 million. Through the end of the first quarter, we've sold over 50% of the residential units, momentum remains strong. In fact, sales today continue at per-square-foot prices above pre-crisis levels.

Overall, based on the strength of the first quarter on booking trends, we're raising our guidance for the second quarter and the full year, bumping REVPAR growth up 100 basis points to 6% to 8% in local currency. We expect management and franchise fees to be up 9% to 11%.

This brings me to my third topic, our philosophy around leverage and returning cash to shareholders. As you saw during the first quarter, all 3 rating agencies moved Starwood up to investment grade. That puts us well on our way to our target BBB rating. A stronger balance sheet and lower cost of debt gives us flexibility to make acquisitions or to invest in our core operations. It also protects us in the event of another major disruption like 9/11 or the financial crisis. Our goal will be to retain our investment grade rating even under the worst circumstances.

As we make bigger steps towards an asset-light model and as our cash position improves, we plan to return excess cash to our shareholders. We've done that in the past and we can be relied on to do that again. Vasant will add more color to our thinking on this in a few minutes.

I'll now turn to my fourth topic, the outlook for the luxury travel. As I mentioned a few minutes ago, we feel we're on the cusp of a Golden Age in luxury travel, thanks to rising wealth around the world. Consider this: by some estimates, the global ranks of middle class doubled over the last 20 years, making for a total of 2 billion people. According to the OECD, in the next 20 years, another 3 billion people will be added to the middle class. And it was recently reported that the number of ultra-high net worth households around the world increased by almost 30% since 2006, despite the financial crisis.

The growth is also not just in leisure travel. Companies are seeking growth around the world, building supply chains that cut across regions and adding headcount in new markets. And today's Global Road Warrior is looking for great accommodations.

As demand grows, we're also seeing a change in luxury consumption as travelers become more connected, more diverse and more sophisticated. Luxury is no longer a one-size-fits-all proposition. What once was prescribed is now personalized, with less formality and more fun. New experiences and discovery matter more than extravagance and status.

The hallmark of the baby boomer generation, for example, has been self-definition. So as affluent boomers retire and turn their attention toward leisure, they're looking for high-quality, authentic experiences. And Gen X and Gen Y travelers, they're wealthy and had their taste shaped in a world where luxury consumption is a matter of individual taste and customization. They have little interest in protocol. They're also the most well-traveled generations in human history. In a world made smaller by technology, they expect luxury wherever they go.

At Starwood, we feel uniquely suited to benefit from these major shifts. There's about 150 luxury hotels operating under our St. Regis Luxury Collection and W brands. We're the leader in share footprint. And if you add to our 150 hotel count those properties with AAA's 4 and 5 diamond ratings, you get a total of 263, which is a wide lead over any other hotel company. But remember, AAA doesn't rate outside of the U.S., so that total doesn't count market-leading hotels like the Le Méridiens in Taipei and in Delhi, the Westins in Beijing and Mumbai or the Sheratons in Sydney or Addis. And yet these are exactly the markets that are growing. Many of the best in luxury hotels are in places like Abu Dhabi, Cusco, Doha, Bangkok, Bangalore, Santiago, Shanghai and Shenzhen.

Of particular note are resort locations in Asia where the limited supply of great destinations is quickly being outstripped by the growing numbers of luxury travelers. That's in part why we're looking forward to opening the Westin and Sheraton Changbaishan as part of a first-of-its-kind ski resort in China.

Our portfolio of distinct brands also allows us to play at multiple sites in resort destinations like Bali, leveraging collective local scale without cannibalizing business. So we get more than our share of new construction. This explains why, by the end of next year, we'll have more hotels on Hainan island than in the Hawaiian Islands.

Luxury travelers don't just want exotic destinations either. They want hotels with individual personality. So each of our luxury hotels is tailor-made to match their individual location. And as I mentioned a moment ago, our 3 luxury brands are distinct from each other. St. Regis gives a nod to tradition while reinterpreting it for today. W gives tradition a wink and then goes its own way altogether. And the Luxury Collection is just that, a collection of luxury hotels held together by a belief that travelers want authentic, indigenous experiences.

We've worked to make sure that each of these brands is poised to ride the seismic growth of luxury travel demand. St. Regis, for example, is grounded in 108 years of tradition. But until 1999, St. Regis was a single iconic hotel in New York, not a global brand. We took that heritage in short order, made St. Regis the new global gold standard for luxury. Just 4 years ago, we had 14 hotels, but now we have 28, on our way to 31 in the next 12 months. You could say that St. Regis grew thanks to some unfair advantages over traditional luxury brands. St. Regis uniquely benefits from Starwood's scale, local smart teams around the world and high-income global SPG member base. We've been able to make sure that each new St. Regis is designed to delight the new luxury traveler from rooms to tech to spas. Even the hallmark St. Regis Butler is not caught in the past. To be sure, guests will always have their suits pressed and shoes shined. But today's butler is more like a personal assistant, ready to take a request by SMS, social media or simple face-to-face.

How do we know this is working? St. Regis' REVPAR index has grown by 310 basis points since 2007, and we're on our way to a threefold growth in footprint. And the brand is ready for tomorrow. By our estimates, over 85% of our guests are Gen X or Gen Y.

Luxury Collection has caught the luxury wave in a slightly different way. Each property clears the bars of luxury hotel. But beyond that, they bring something unique. They offer guest experience that's both local and distinct. The Collection spans 79 hotels in 29 countries, including an old jail in Boston, a desert camp in Dubai, a historic monastery in Portugal and 2 former palaces in Venice.

The philosophy of the Luxury Collection enables our partners to benefit from iconic properties and Starwood's scale and support. Luxury Collection is ideal for bringing truly luxury hotels into our system. This luxury standard sets the brand apart, and it explains why we're investing over $100 million to restore our owned Luxury Collection hotels, including story properties like the Gritti Palace in Venice, the Prince de Galles in Paris, not to mention the Maria Cristina and the Alfonso XIII in Spain.

The Luxury Collection is a favorite among boomer leisure travelers. In 5 years, the footprint has grown by 40% and gained 270 points in REVPAR index.

Which brings me to W, a veritable global powerhouse. The brand's roots in design, fashion, pop culture and lifestyle resonate with Gen X and Gen Y. And from its beginnings, W has done something that's actually quite rare among brands in any product category. It's been pulled up into the luxury space, which proves to us that there was, and still is, unmet demand for a hotel that combines the luxury, comfort and convenience with a whole new attitude.

So we've been driving hard to meet that unmet demand, having grown from one hotel in 1998 to 42 properties in 17 countries today. We ensure that each W has its own identity and doesn't disappoint. Walk into a W living room anywhere in the world, and by the programming, the music, the associates -- or in W speak, the talent -- and you know you're in a W. And at the same time, each W is true to its surroundings, whether it be South Beach, Hong Kong or Doha. That sense of place is bolstered by what's new, what's next. W's twist on the age-old concierge, placing our guests as insiders on the local scene.

W stands alone. Here's a look at the last 5 years. REVPAR index up 460 basis points since 2007 and more than double the footprint.

So I'll conclude the luxury discussion with a few comments on what our luxury advantage does for us. First, it adds to our lead and allows us to benefit from rising global wealth. Over 90% of our luxury pipeline lies outside of North America.

Second, high room rates mean higher fees. Our luxury brands account for about 10% of rooms, but close to 20% of our fees. So it means our pipeline is much more valuable on that basis.

Third, our Upper Upscale brands benefit from our close collection -- connections to luxury travelers. When their travelers take them away from a luxury hotel, they're much more likely to choose Westins, Le Méridiens or Sheratons.

Before I wrap up, I want to comment on 3 high-level retirements that we recently announced. Each of these leaders has made a real difference for our company. Matt Avril, President of our Hotel Group; Denise Coll, President of North America; and Miguel Ko, President of Asia-Pacific. Were it not for these 3 leaders, Starwood might not find itself in the strong position we are today.

Their departures also point to the health of our culture and the stability of our leadership team. These are planned retirements with ample time built in to enable smooth handoffs to enable internal successors, and these transitions are taking place at a time when our company is doing so well. Advanced planning also means we've been able to make some changes to our structure so we're better aligned against our priorities and our areas of growth.

I know I speak for many here at Starwood when I say that we'll miss Matt, Denise and Miguel as friends and as colleagues. But at the same time, I'm quite sure we won't miss a beat in meeting our goals.

So let me close my remarks today by giving you a recap of what I hope are your key takeaways. First, our strong momentum continued in the first quarter with 11 straight quarters of REVPAR index growth; second, despite an uncertain world, 2012, so far, is on track to surprise to the upside; three, our commanding lead in Luxury looks to be a long-term tailwind; and four, our leadership team has never been more engaged, aligned and able.

So with that, I'd like to turn the call over to Vasant.

Vasant M. Prabhu

Thank you, Frits, and good morning, everyone. As we enter the second quarter of 2012, it is becoming increasingly apparent that a strong cyclical recovery in lodging continues around the globe. In every region, we're seeing an acceleration in business momentum, allowing us to raise our REVPAR growth outlook for the year to 6% to 8% in local currencies.

I'll start with a quick review of business trends, provide some more color on our outlook and finish with a perspective on cash deployment.

In North America, we've had an unprecedented decade of low supply growth. In fact, supply growth has been under 0.5% for the past year, with no signs of turning up. As a result, our system is almost at 2007 levels of occupancies, only 2 years into the cyclical upturn. As we move into seasonally higher occupancy quarters, this should help drive rate, which has been and remains a major focus for us.

Negotiated corporate rates are up over 6%. Transient rates continue to climb as momentum remains robust and we remix business to higher rated corporate segments which grew revenues 14% in Q1. Group pace is up approximately 5% on top of significant gains in Group business last year. Realized group rates are improving as the mix of business continues to shift away from lower rated '08, '09 bookings.

Primarily driven by rate, we expect REVPAR growth momentum to be sequentially stronger from Q1 to Q2. We have remained focused on costs, driving good flow-through and industry-leading margin expansion. Gross operating profit margins were up 170 basis points in Q1. Our revenue management programs continue to drive market share gain of another 100 basis points, our 11th consecutive quarter of share gain.

All in all, our data suggests that a normal cyclical recovery will continue through 2012 in North America.

Despite continuing concerns around the outcome of the French election or Spain's refinancing needs, we are seeing improving business trends in our key European markets. These trends would suggest that REVPAR growth in Q2 should approach 4% in local currencies from under 2% in Q1. We are currently tracking at a 4% level in April. We see strong booking confidence across Germany, the U.K. and early signs of a pickup in Italy.

Booking windows are also returning back to normal. Based on what we are seeing, we would expect the European recession to be shallow as some economic forecasters are now predicting. As such, we are more confident today that the second half in Europe will be better than the first half, helped along by easier comparisons.

Like North America, our business in Europe benefits from the almost complete absence of new supply. Despite a slow recovery, occupancies at Company Operated Hotels in Europe are only 100 basis points below peak 2008 levels, excluding Greek which is an -- Greece, which is an outlier. As a reminder, the eurozone itself accounts for less than 9% of our net profit, and we have hedged about 1/2 our exposure to the euro at $1.44.

In Asia, we finished the quarter with 220 operating hotels, including 100 in China. With 69,000 rooms, Asia accounts for over 20% of our rooms and 60% of our pipeline. 10 hotels opened in the first quarter, with at least another 20 to open later this year. Despite the rapid pace of hotel openings, REVPAR growth remains robust in Asia. Q1 REVPAR growth of 6.2% was impacted by comparisons with a strong growth quarter last year and the geographic mix of Q1 business. We gained share all through 2011 and gained significant share again in the first quarter.

As in other regions, we expect a sequential acceleration in Q2, with REVPAR growth returning to a double-digit pace. Although there have been concerns about the real estate sector in China, the pace of hotel signings and openings remains steady and strong, especially in Tier 2 and Tier 3 markets where we have been focused for the past few years.

In India, political paralysis has resulted in a soft spot and some slowdown, but we expect things will pick up as the Central Bank is entering an easing cycle. Indonesia and Korea are booming, up 15% in Q1. Japan continues on its recovery track, with double-digit growth as we lap last year's earthquake/tsunami impact. We expect Asia to finish 2012 as our second largest division, accounting for 20% of profits.

In the Middle East and Africa, we saw big jumps in REVPAR in March as North Africa started to lap the start of Arab Spring events of last year. However, in absolute terms, business is still weak in countries like Egypt where the situation remains unsettled for travel. Saudi and the Gulf, on the other hand, are on a strong cyclical recovery track, and Sub-Saharan Africa is delivering solid double-digit growth. As a result, we expect REVPAR growth to accelerate in this region in Q2.

Latin America continues to be our fastest-growing region, with REVPAR up 14% in Q1. Brazil and Chile were both up over 20%, with double-digit rate growth. Business and leisure travelers are returning to Mexico, where REVPAR grew 17%. Occupancies at our resorts were up almost 1,000 basis points. U.S. groups are once again looking at Mexico as an attractive destination. Argentina lags, and we are monitoring the situation closely. At this point, all indications are that Latin America will remain our fastest-growing region.

As expected, owned REVPAR lagged System-wide REVPAR since 28% of our owned rooms are in Europe and Canada. In North America, Canada dragged reported REVPAR down by almost 200 basis points. The strong Canadian dollar has hurt U.S. group travel to our large owned hotels in Toronto and Montréal. Cost control remained effective, with healthy flow-through of 58% and margins up 160 basis points globally.

Significant renovation reduced Q1 owned EBITDA by approximately $5 million, and we expect a similar impact in Q2. The Gritti Palace and the Maria Cristina are shut down for gut renovations. The Clarion at San Francisco Airport and the Four Points Tucson have also been shut down for conversion to Alofts. We have major room renovations underway at the Westin Peachtree. Mitigating the impact of these renovations is the completion of work at the St. Regis in Florence and the Sheraton Kauai.

Our Vacation Ownership business remains stable with interval sales and revenues up. The cash profile of the business continues to improve as we see more cash sales and more prepayment of loans. Default rates continue to drop with Q1 defaults at 4.2%, levels not seen since early 2007. We remain on track to deliver over $100 million in cash from this business in 2012. Since 2009, our Vacation Ownership business will have delivered $800 million in cash to Starwood.

Q1 was a critical quarter at Bal Harbour as we work through the remaining closings on contracts signed in previous -- in prior years. We exceeded our expectations. To date, we have closed on 138 condo units, 102 this year and 36 last year. 32 units have been sold but not yet closed. As such, the project will be over 50% sold and closed by the end of this quarter.

In Q1, we received over $260 million in cash from closings. As we look ahead, sales momentum is looking good. In the quarter, we had over 20 new sales at great square foot rates. Sales pace was 2x last year's levels. A new positive trend is that we're seeing a sharp increase in interest from North American buyers, who accounted for 50% of sales in Q1.

The South American season starts in another 45 days as their winter begins. We expect a very good selling season. Condo sales are clearly being helped by their association with the hotel that is increasingly being described as setting a new global standard for luxury.

Finally, our SG&A in the quarter was impacted by some nonrecurring items and unfavorable comparisons to last year which we had told you about. We remain steadfastly focused on holding costs in line. Run rate costs are only increasing in Asia and Africa, where we continue to invest in infrastructure to support our growth. For the year, we are still targeting a 4% to 5% increase.

Based on all these trends, we're raising our full year REVPAR growth outlook to 6% to 8% in local currencies, 4% to 6% as reported in dollars. Fee growth also ticks up by 100 basis points to 9% to 11%. X Bal Harbour, our new full year EBITDA outlook range is $1.07 billion to $1.1 billion. Bal Harbour EBITDA is now expected to be at least $100 million, up $20 million.

Our EPS outlook range is raised by $0.13 to $2.35 to $2.46, primarily due to Bal Harbour and small changes in D&A and interest expense. For Q2, REVPAR growth is projected at 6% to 8% in local currencies, which drives an EBITDA outlook range of $275 million to $285 million. Bal Harbour will add at least another $15 million to EBITDA, for total EBITDA of $290 million to $300 million. Our EPS outlook range for Q2 is $0.58 to $0.62, which includes Bal Harbour.

Through March, we have opened 18 hotels with 4,500 rooms. For the year, we are still targeting 75 to 80 hotel openings and expect the net rooms growth will approach 5%. Our pipeline of 95,000 rooms remains 80% non-U.S., with 80% in the high fee-generating Upper Upscale and Luxury segments.

We finished the quarter with over $800 million in cash, almost $700 million in excess of working capital needs. Our net debt, not including Vacation Ownership receivables, was $1.38 billion, $150 million lower than we ended 2011. As our debt declines and our EBITDA climbs, we have been upgraded by all 3 rating agencies to investment grade.

Over the past few years, we have been executing a disciplined plan for cash generation and deployment, which we had outlined for you at our Investor Day in late 2010. In terms of cash generation, we expected significant cash from operations, Bal Harbour condo sales and sales of owned hotels as we continue our journey to asset-light. We now forecast Bal Harbour will deliver $300 million in cash in 2012.

In terms of asset sales, we are always exploring opportunities to sell our owned hotels at attractive prices to high-quality, long-term owners. We have several conversations currently underway. We expect some or all these transactions to close later this year. There continues to be a market for individual hotel sales, but it is not yet deep enough for a large portfolio sale like the one we executed in 2006. As has been our practice, we do not forecast or announce asset sales until they have closed.

In terms of cash deployment, our priorities remain unchanged. Our first priority is to invest in our core business to drive growth. Our capital plan for the year remains unchanged. We're investing in renovating owned hotels, where we see a clear ROI, and in building our pipeline and our IT infrastructure. We continue to evaluate acquisition opportunities that will help us enhance our brands, build scale and ramp up growth. We know what we would like to buy, but this requires a willing seller and the right price.

Our second priority is to pay down debt to the level needed to achieve a solid BBB rating. A BBB rating is a notch higher than where we are today. We believe that this represents the optimal long-term capital structure for us, given the current profile of our business and our objective of retaining an investment grade rating through the ups and downs of the lodging cycle. Our leverage ratio target is 2 to 2.5x as the rating agencies calculate it. We are almost there.

We remain committed to returning cash to shareholders that is in excess of our reinvestment opportunities and debt reduction needs. Between 2005 and 2008, we returned $7.4 billion to shareholders through stock buybacks, special dividends and the distribution of whole stock. We've outlined our dividend policy of paying out 25% to 40% of EPS each year. We've raised our dividend aggressively as EPS has recovered and will continue to do so.

In terms of buybacks, we have a $250-million authorization. As has been our practice in the past, buybacks are driven by the availability of cash to return to shareholders and our board's assessment of intrinsic value. Reinvestment in our business is at a healthy level. Our debt reduction objectives will soon be achieved. With Bal Harbour turning cash flow positive and cash from our ongoing asset sales program, we anticipate another cycle of returning significant cash to shareholders.

In summary, a strong recovery continues on lodging around the globe. Business momentum is accelerating. We've raised our outlook for 2012 and remain as bullish as we've ever been about the long-term secular global growth opportunity in our business.

With that, I will turn this back to Stephen.

Stephen Pettibone

Thank you, Vasant. We'd now like to open up the call to your questions. In the interest of time and fairness, please limit yourselves to one question at a time, then we'll take any follow-up question you might have as time permits. Sylvia, can we have the first question, please.

Question-and-Answer Session

Operator

Your first question comes from Josh Attie from Citi.

Joshua Attie - Citigroup Inc, Research Division

You mentioned acquisitions a few times in the prepared remarks. Can you talk about what the acquisition pipeline looks like today? And also what the characteristics of what you'd like to buy is? Do you want to buy real estate? Or when you look at brands, do you want full-service brands or limited service brands and also maybe by geography?

Frits van Paasschen

Yes. Josh, this is Frits, and as long as my throat holds up, I'll try to answer the question. I think, still to this day, the Le Méridien transaction represents the perfect example of what we would ideally like to do, which is to find global high-end brands that have a footprint that either matches or complements ours, that's asset-light and can create value for our shareholders. And I think that's as specific clearly as I would want to get to until we would have something more to report, but we continue to look at the marketplace and see whether there are opportunities like that and want to be at the ready should those come to pass.

Operator

Your next question comes from Joe Greff from JPMorgan.

Joseph Greff - JP Morgan Chase & Co, Research Division

Frits, I don't want to ask a question and have you speak since it sounds like you have some challenges there, but when you look at the occupancy levels that you're at right now in the U.S., how does the rate mix versus -- within the components of REVPAR grade, how does that translate? Is that the overwhelming majority of that 6% to 8% -- the 6% to 8% North America, is that largely grade? Or how much of that is occupancy at this point?

Frits van Paasschen

So Joe, I'm going to spare my throat and let Vasant handle that one, if you're okay with that.

Vasant M. Prabhu

So Joe, rate in the first quarter was roughly 50-50, and we're heading towards more like a 60-plus percent rate to occupancy mix as we head into the latter part of the year. Our view is that we're very close to an inflection point in rate. Occupancies are getting to the point where rates should begin to move more than it has to date. It's clearly helped by the fact that the business we're now booking on the group side is clearly at a much higher rate. Recent group bookings have been at rate increases that are in the range of 7%, 8%, 9%. The corporate negotiated rate business that we're getting this year is 6%-plus more than last year. And then of course, our higher-rated business, for example, in Q1 on the leisure side grew almost 14% in terms of revenue. So you can see the remixing is happening, the Group business is dropping off that was keeping rates low, and frankly, the absolute levels of occupancy are at a point where you should be seeing an inflection point much like you saw in the second quarter of '04, for example.

Frits van Paasschen

Yes, I might just add to that, too. I don't think that we've ever been in a place where occupancies have been this high this early in the cycle with no prospect of meaningful supply growth in the mature markets. So I think that again, alluding to the supply-demand dynamic here, this could be a very benign rate environment for some time to come.

Operator

Your next question comes from Steven Kent from Goldman Sachs.

Steven E. Kent - Goldman Sachs Group Inc., Research Division

Just on -- I think I caught that you mentioned that hotel sales, that you're moving -- you're further along -- or you're at least having conversations on it. I don't recall that you ever have said that before. So does that mean you're closer to selling some of these bigger hotels or selling some of these hotels than in the past? Because I don't recall that you've ever even talked about that you were in conversations. And then just on incentive fee performance, I asked somebody earlier about this, the reworking of -- because you really showed some strong improvement there. Is it reworking of unfavorable contracts? Is there something specifically happening at the property level? I did note that your expenses really haven't increased very much and I think that's part of the reason, but I just wanted some more detail on incentive fees.

Vasant M. Prabhu

So I'll talk about -- the acquisition side, well, there are conversations really, no question, and we just wanted you to know that there is a market out there for asset sales, and it is not the kind of market where you would do a large portfolio sale but it's more like the kinds of 1 and 2 hotel sales that you saw us do last year. We do think there will be sales closing this year, and we just wanted to let you know that, that is something you could anticipate. In terms of incentive fees, clearly, what's helping us is 2 things: one, the fact that the bulk of our incentive fees are non-U.S. fees. Our incentive fees are derived largely from outside the U.S., if not 90% are outside the U.S. And those are, as you know, based on percentages of GOP. We've had some nice growth in many of these markets. We've had some nice margin improvements, and so the sort of 1:2 ratio between revenues and incentive fees is holding up nicely. So we're very happy with how margins have moved and costs have been controlled in this environment.

Operator

Your next question comes from Bill Crow from Raymond James.

William A. Crow - Raymond James & Associates, Inc., Research Division

One follow-up to the sales commentary, if I could, and then my question. But Vasant, can you quantify at all the sort of volume you're in discussions with, recognizing that not all of it will close, but is this $100 million, is this $1 billion? What sort of potential volume are we looking at from asset sales? And then my other question is what is the total EBITDA we're looking at from Bal Harbour above and beyond this year as you sell out that project?

Vasant M. Prabhu

Yes, I think on Bal Harbour, we'll wait to sort of give you any update on the future. We did give you some sense of this at our Investor Day. We're pretty much on track with what we told you then in terms of cash use -- I mean, cash generation. As far as EBITDA from Bal Harbour, it tapers off. Q1 was clearly the big one. As you can see in Q2, it's already tapered off quite a bit. And we'll give you a better sense of what the future might hold as we go further into this year. The sales pace is very good so we would like to see sort of how much will get sold this year, and that will give us a better idea of sort of what EBITDA might be in future years. And your other question was the volume of asset sales. I think we'd rather not talk about volume of asset sales other than to say that we do have some meaningful discussions under way and the amounts are nontrivial, let's say.

Frits van Paasschen

Yes, and I just -- because Steve asked the same question, Bill, I might just chime a little on this. As you listen to Vasant's comments, he was also quite clear that this is not an environment where there's an opportunity to do a major portfolio sale. So the discussions that Vasant alluded to have to do with individual properties, not something bigger. So we're not trying to signal a more substantial portfolio sale transaction. And if you look at what Vasant said, he was pretty clear about that. I just want to make sure that we haven't left people with an impression that's other than that.

Operator

Your next question comes from Robin Farley from UBS.

Robin M. Farley - UBS Investment Bank, Research Division

I'd just wanted to get a little more clarification on your incentive fees. Can you -- I don't think that you said what percent of properties are paying incentive fees, and I'd be curious what that is total and U.S.? And then just also, I think that the way you reported management fees, that maybe there was impact in there from having converted some franchise agreements to management contracts in Germany. Can you tell us what the incentive fee growth would have been without -- if that was impacted by adding those contracts in?

Vasant M. Prabhu

Yes, I don't know we have the number here on, if you adjust for Germany, how much of the incentive fee number would have changed. We'll try to look it up before the end of the call, if we can get it. It was an impact, but I think the total fee growth probably was impacted by about a couple of hundred basis points by Germany moving from franchise to managed, so the managed fees may have -- growth may have been a couple of hundred basis points lower, if I remember right. And your other question was what percent of our hotels. Typically, on the international side, that number is always in the 70%, 80% range. On the U.S. side, I think we're probably still in the 30% to 40% range. Anything, Steven, you would add to that.

Stephen Pettibone

Let's double check and confirm them.

Operator

Your next question comes from Smedes Rose from KBW.

Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division

I just wanted to understand a little more in Bal Harbour. You raised your expectations for this year. Is it because you're just sort of pulling forward future profits that you think will come in this year? Or is that actual like pricing moving up ahead of what you initially thought?

Frits van Paasschen

Most of that would be a function of sales pace that's ahead of where it was. I would say, though, also, by and large, we're getting prices that are to the upside of what we've been hoping for. And so that would be a part of it, but the pace would be the bigger driver overall.

Operator

Your next question comes from Harry Curtis from Nomura.

Harry C. Curtis - Nomura Securities Co. Ltd., Research Division

Question related to the use of your cash, it's really a 2-part question. First, Vasant, related to the incremental debt paydown, can you give us some sense of what the extent of that is going to be? Is it closer to $200 million, $300 million, $400 million? And then the second part of the question is, with the hotels that you're renovating this year, you're planning to spend $300 million to $400 million. And I'm guessing that most of that CapEx goes into the Luxury Collection European assets. Are there more assets that you think are likely to be renovated in 2013 so that you can tee those up for more successful sales going forward?

Vasant M. Prabhu

Yes, I think in terms of debt paydown, the rating agencies have a somewhat different way in which they do these ratios than a simple net debt-to-EBITDA that some of you might look at. So the ratio they would get to when they throw in some other things would generally tend to be about a turn higher than the way you would calculate them on a net debt-to-EBITDA basis. So if you say that we want to target 2 to 2.5x, it gives you sense that there's a modest amount of additional debt paydown that gets us very much into those ratios. So the numbers you threw out are close.

And in terms of the renovation, it's a comprehensive set of renovations. It's the Luxury Collection. As I said, it's about $100 million out of that, but then we have other big hotels like the Sheraton Rio coming up for renovation later this year, the Westin Peachtree which is 1,000 rooms in Atlanta under renovation, so those are pretty sizable underway. We do have some more coming up in the next year, so the St. Regis in New York is up for a pretty major renovation potentially next year and a few other hotels. So we do have another year of renovations coming. And you should know that, in every case, we've done enough work to understand what we might get in terms of value post-renovation versus pre-. In many cases, the pool of buyers is significantly larger. And also timing-wise, we think these renovations will position us very well for some real ramps in performance at these hotels.

Operator

Your next question comes from Shaun Kelley from Bank of America Merrill Lynch.

Shaun C. Kelley - BofA Merrill Lynch, Research Division

Little bit of a bigger picture question but since, Frits, you talked about Luxury to kind of start off the call, we've kind of noticed both in the Star Reports and also even in your -- some of your own hotel data, really the St. Regis brand, the gap between kind of high and low hotels has narrowed quite a bit. Usually at historical cycles, Luxury has outperformed for a big chunk of the cycle, and we were just kind of wondering, is there anything you guys are seeing in terms of trade down and/or kind of is it the return of Group business? Or what do you think is narrowing that gap a little bit more? And do you expect it to rewind now as you finish some of these renovations? That would be helpful.

Frits van Paasschen

Yes. Shaun, this is Frits. I'm slightly surprised by that, actually, because what we've seen is pretty steady growth at the higher-end brands ahead of the rest of the market for a while. And the fact of the matter is, in '09, we saw a significant degree of compression, and we continue to believe that, that will sort itself out. It may be that what you're looking at is a weighted average of the total brand, which would reflect Luxury hotels that we're opening in emerging markets where rates on average would be lower. But I don't think you could conclude at least over the time period that we're seeing a continuing tendency towards compression. Vasant or Stephen, am I missing a...

Vasant M. Prabhu

No. I think it depends on what you were referring to. If you were referring to our numbers, remember that in dollar terms, there's a ForEx impact, and our Luxury footprint is very heavily non-U.S. And the non-U.S. business has grown very nicely in local currency terms. But in dollar terms, as you know, there was at least a 200 basis point impact. So that -- our Upper Upscale footprint is more balanced, whether the Luxury footprint is far more non-U.S. If you're looking at our numbers, that would explain some of that. If you're talking about Smith Travel numbers in North America, some of that is, I think, perhaps a little bit of a catch-up of the lower price points which were lagging to date versus the high end. If you look at what Smith Travel puts out in terms of the supply-demand imbalances, Luxury looks very good. There's little or no supply. If anything, I think Luxury supply has been declining and demand growth in Luxury is very good. As Frits said, it positions us very well for future rate growth.

Operator

Your next question comes from David Loeb from Baird.

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

I have a bigger picture question about Bal Harbour. If you could just, Vasant, maybe give us a little bit of color about how much of the sales that you closed were stuff that was in presale and kind of what the sales pace is in terms of units going under contract or going into closing per quarter just so we have an idea about what that pace would be going forward. Also, Frits, I hope you feel better. And if you could just give a little detail on the G&A change. You mentioned in the release that there was nonrecurring professional expenses, and last year, there was a favorable reserve adjustment. If you could quantify those, that would be very helpful.

Vasant M. Prabhu

Yes, I think on Bal Harbour, the number I had in my comments earlier was we sold about 20 units in the first quarter. There's some seasonality here, so the first quarter was more about -- we said 50-50 in North American versus foreign buyers. As we now get into the next quarter -- this quarter, we will begin to see more Latin American buyers because this is their winter season now. Most of the closings to date, as you might expect, have been from sales that were done in prior years. We did say that there were 32 sold, but not closed units at this point. In terms of the pace of sales, we would expect in the summer the selling pace would drop because that's the off-season and then start to pick up again towards the end of the year. We'll let you know as these things go along because this is a very unique thing, so we'll give you updates as we know more each quarter.

On SG&A, I think it was $3 million or $4 million last year that was a reversal of some cash payments we received on some reserve receivables. It was about $3 million or $4 million in some nonrecurring expenses this year. None of it is what we would call run rate kind of costs, and so we still are targeting the 4% or 5% increase for the full year. I don't know, Frits, if anything...

Frits van Paasschen

No, I think those are the key messages. If anything, I would have just added on the Bal Harbour pace comment. To a certain degree, we set that pace. So as demand looks strong, and particularly if there's demand for certain types of Bal Harbour inventory, we have the opportunity to get more aggressive on price. And so we're in the process constantly of looking at the right balance there between pace and price.

Operator

Your next question comes from Felicia Hendrix from Barclays.

Felicia R. Hendrix - Barclays Capital, Research Division

I had a question on your pipeline, and I realize that a majority of it is international. But on the domestic portion, I'm just wondering, are you seeing any slower growth relating to your pipeline than expected perhaps because of the tough financing environment that persists or anything else? And then also just on the St. Regis branch, just to go back to Luxury, I'm just wondering if you could talk about market share there relative to the other large luxury brands.

Frits van Paasschen

Yes, so Felicia, on the first part of your question, for some time now, I think it's been fair to say that there hasn't been new construction activity, in general, in the North American market nor has it been a big part of our overall pipeline. We focused fairly heavily on conversion. And as I think we mentioned in some of the prepared remarks, something like 70% of the deal volume for hotels in the pipeline for North America had been conversions. And the other dynamic which I'm sure you're aware of that relates to that is that conversions by their nature tend to happen more quickly so the pipeline itself is less meaningful in a way because you typically agree to convert a hotel, and it may, in that case, be a matter of months before a hotel then changes brand as opposed to the 3 years or so that it might take to build the hotel.

In terms of St. Regis' market share, I mean, you have to go market-by-market. We continue to see REVPAR improvements of the St. Regis brand where it's competing, and because so many of the properties are relatively new, they're also ramping up, which gives a bump both in absolute as well as relative REVPAR.

Stephen Pettibone

Yes, it's always been a very successful REVPAR index performer and in the double-digits above their share.

Operator

Your next question comes from Ian Weissman from ISI Group.

Ian C. Weissman - ISI Group Inc., Research Division

I was wondering if you could provide a little more specific color on Europe. You raised guidance 100 basis points, yet Europe slid into negative territory for the first time this quarter. What are your specific REVPAR expectations for the year in Europe?

Vasant M. Prabhu

Well, Europe slipped into negative territory only as reported in dollars. If you look at our press release, in local currency terms, Europe was actually up a little under 2%. And what we said in our comments was we are seeing the pace actually get better and think that we'll be in the 3.5% to 4% range in the second quarter in local currency terms. So the momentum is improving. And what we see is there's good business confidence, booking confidence, in some of the key markets like Germany, the U.K. and even some signs of improvement in Southern Europe. So at this stage, all the indications are that the second half will look better than the first half, and then the comparisons, of course, get a lot easier as you get into the fourth quarter when last year's downturn started.

Frits van Paasschen

The other thing that we've noted a number of times related to the Europe business is the first quarter is a very light quarter in terms of profitability and volume and doesn't indicate much about the overall performance of the year. So what we're seeing in Europe at the moment and calling it like we see it now, I think, is the more important dynamic. And as Vasant pointed out, we were, in the constant currency terms, just under 2% for the first quarter positive.

Operator

Your next question comes from Carlo Santarelli from Deutsche Bank.

Carlo Santarelli - Deutsche Bank AG, Research Division

I just had a question looking at your incentive fees. On a year-over-year basis, obviously, the growth was fairly strong. I was wondering if you could try and maybe segment that between incremental properties garnering fees or properties garnering higher fees and maybe what the split was between those 2?

Vasant M. Prabhu

Unfortunately, we don't have that broken out that way.

Frits van Paasschen

But I do think it's fair to say that given the large base that we have, just arithmetically would be difficult for that jump to be related to some new properties versus the existing base so -- but we don't typically split that out, Carlo.

Operator

Your next question comes from Chris Agnew from MKM Partners.

Christopher Agnew - MKM Partners LLC, Research Division

Given the success of the Marriott Vacation spinoff and also the success of Wyndham's asset-light model, I just wonder if you could update us on your thoughts for your own Vacation Ownership business longer term?

Frits van Paasschen

Our continuing philosophy with Vacation Ownership is we'll look at ways that are high IRR, high return opportunities to sustain the sales volume for the business, but not focus on growing the absolute size. We like being able to control and manage our Vacation Ownership business and having it be part of our portfolio at the size as it is. And, as Vasant mentioned over the course of some of his remarks, at the end of this year, we will have gotten to $800 million in positive cash out of our Vacation Ownership business. And the trends of the business right now are very healthy. So while, clearly, others have pursued a different strategy, we feel very good about where we stand right now. And if there's an asset-light model for growing our Vacation Ownership business, clearly in the philosophy of higher return ways of adding inventory, that's something we would look at. But again, we need to make sure that we have product that we can control, that fits with our brands and that works with the owner base that we've developed over time.

Vasant M. Prabhu

Yes, I think you referred to the success of Marriott Vacations and the success of Wyndham. I think we'd want to point to the success of our own Vacation Ownership program where, as Frits said, we've delivered $800 million in cash and still have a growing business that delivers as much EBITDA as Marriott Vacations is going to do this year. So we think what we've done has been quite successful.

Stephen Pettibone

Just to follow up on Robin's question from before. We don't break things out quite in the same way you're looking for, but to give you a little flavor, Same-Store incentive fees were up 19%. So you can sort of factor that in as you look at the overall growth of that number.

So I want to thank Frits and Vasant and for everyone for joining us today on our first quarter earnings call. We appreciate your interest in Starwood Hotels & Resorts, and if you have any other questions, feel free to reach out to us. Take care.

Operator

Ladies and gentlemen, this concludes today's Starwood Hotels & Resorts First Quarter 2012 Earnings Conference Call. You may now disconnect.

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