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Starwood Hotels & Resorts Worldwide (NYSE:HOT)

Q2 2012 Earnings Call

July 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

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

Carlo Santarelli - Deutsche Bank AG, Research Division

Robin M. Farley - UBS Investment Bank, Research Division

Charles Patrick Scholes - SunTrust Robinson Humphrey, Inc., Research Division

Joseph Greff - JP Morgan Chase & Co, Research Division

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

William C. Marks - JMP Securities LLC, Research Division

Shaun C. Kelley - BofA Merrill Lynch, Research Division

Ryan Meliker - McNicoll, Lewis & Vlak LLC, Research Division

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

Joshua Attie - Citigroup Inc, Research Division

Operator

Good morning, and welcome to Starwood Hotels & Resorts Second 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 into Starwood's Second Quarter 2012 Earnings Call. Joining me today from Europe is Frits Van Paasschen, our CEO. And with me here at our headquarters in Stamford is Vasant Prabhu, our Vice Chairman and CFO.

Before we begin, I'd like to remind you that 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

Thank you, Stephen. Hello, all, and thanks for joining us today. Those of you familiar with our past calls will note that I'll follow the similar format today. I'll start with some comments about the global business climate, high end travel, our Q2 results and our outlook for the rest of the year. And then I'll recap our long-term view and 3 key factors that will drive value for Starwood. This will lead me to a discussion of our overall strategy for managing through today's business landscape.

So I'll turn out to my first topic, the global business climate. We began this year amidst fears of a U.S. double-dip, a hard lending in China and major conflict in the Middle East. By the end of Q1, fears subsided and our near-term outlook was more upbeat than it had been for some time. Now here we are one quarter later and headlines are once again taking a more fearful turn. We read reports of slowdowns in China and India. Latin America seems to have lost momentum. Europe is in its third summer of discontent, leaving the U.S. as a safe haven despite its own slow recovery and fiscal questions. And yet, even then the face of these headlines, our business around the world has held up well. Worldwide REVPAR was up nearly 7% in local currencies. Occupancy was at a healthy level, over 71% and there is no talk among our corporate customers about cutting travel.

In other words, the climate for our business is not as bleak as the headlines would suggest. We live in a world where sentiment changes quickly. But we're convinced that long-term growth trends have not changed. Take Dubai as an example. It rebounded quickly after the crisis and has risen to become a leading global travel hub. It lies in the center of major new travel patterns, from China to Africa, and from Southeast Asia to Europe. And Europe itself is benefiting from more visitors, not just from the Middle East, but from Asia as well, not to mention Americans with their stronger dollars.

We still hear is some talk in the press of a hard lending in China. We have seen a deceleration, but nothing precipitous. It appears to us that the slower growth has to do with upcoming government transition and excess supply in a few cities.

You should also note that none of our 100 hotel projects has been put on hold, which, we believe, says a lot about local investor confidence in China and in our brands.

Meanwhile, in North America, as well as Europe and Japan, we're still benefiting from tight supply, especially at the high end. For over a decade now, few new hotels have been added to these markets. So despite recoveries that are tenuous at best, occupancies in big cities are in the high 70s, levels that should keep pushing rates up.

So in the context of this business climate, let's take a closer look at our Q2 business performance. Our momentum continued and we're on track to hit our 2012 baseline results. Worldwide REVPAR growth was led by Africa and the Middle East, up over 11%. Thanks, in part, to easier comparisons with last year's Arab Spring events. North American REVPAR rose more than 7%, driven mostly by higher rates. Latin America slowed to 6%, primarily a result of instability in Argentina. And Europe, despite its woes, saw REVPAR of 2% and occupancy at 70%, which is virtually unchanged from last year.

REVPAR at our own hotels, which now account for less than 6% of our total room count, grew 3% in local currencies. This lower growth reflects local market conditions where those hotels operate especially in Argentina, Canada and Europe.

In the second quarter, we opened 14 new properties, representing 2,700 rooms and we removed 5 properties for a total of 1,000 rooms. That puts us well on track to hit net rooms growth in excess of 4%. During the quarter, we signed 34 agreements for new hotels, representing over 8,300 rooms.

Overall, Q2 came in above the range we talked about in our last call with EBITDA at $288 million. That excludes Bal Harbour, which also beat expectations with $35 million in EBITDA, having now closed sales in over 60% of the units.

EPS from operations was $0.70. So I'll leave it to Vasant to talk -- to walk you through in more detail our financial results in just a few minutes.

These results are in line with our longer term view and our prospects for future growth, which is my next topic over the past 10 years, Starwood has performed well. And following the '09 crisis, we focused on our core business, cleaned up our balance sheet and positioned our company to take advantage of growth in global travel.

The crisis has taught us that we can't ignore risk. And our long view tells us that we can't be held back by fear either. The way we see it, our 2 biggest dangers lie in each end of the spectrum; being struck down by the next global crisis on the one end or missing once-in-a-lifetime growth on the other. So in a world of massive uncertainty and massive opportunity, we would describe our approach as being both smart and bold. Smart, in terms of having a resilient business model, balance sheet and cost structure, so we can weather any downturn; and bold in a marketplace, going hard after winning the loyalty of our guests and growing our footprint in the right way.

Our smart, bold approach has served shareholders especially well in the past 3 years. In fact, lately, as few investors have asked whether we can see our way to creating more value in the future. We believe we can, thanks to 3 key drivers: one, long-term secular growth in demand; two, greater expectations and leverage for global brands; and three, unlocking $4 billion to $5 billion in cash from selling real estate. I'll spend a few minutes on each of these 3 drivers.

So turning first to secular demand growth. The so-called emerging markets have a long way to grow before they come anywhere near living standards enjoyed in the developed world. Over the past 20 years, the number of people around the world who are middle-class doubled to 2 billion. And we've all seen that huge development that's gone along with that growth. Looking ahead for the next 2 decades, the OECD projects an astounding 3 billion more people joining the middle class. This is a transformation on a scale never seen before. Rising wealth as more and more people moving into cities, getting jobs and acquiring the means to travel.

Alongside that rising wealth, digital networks are also fueling demand for travel. We see technology as a catalyst for travel as it puts people in contact. But in the end, you can't text a handshake or download an app that replaces a thrill of a first-hand visit.

Tech is also creating greater expectations and leverage for global brands, which is our second value driver. Tech has brought so much to so many people in so short a period of time, so the more people are connected and better served in so many aspects of their lives. They can personalize their news, video chat from around the world, order any movie, tell the world what they see, look up any fact or use an app for whatever the need. So it only stands to reason that people would expect more from products, from companies and from brands. And that includes, of course, their favorite hotel brands.

Travelers will expect personalized attention, knowing what they want and when they want it. Seamless global service with a local and human touch and a quick resolution to any problem. Meeting these expectations will be hard enough for global hotel brands with the scale to invest. Those investments are simply out of reach for anyone without a global platform.

In fact, meeting travelers' expectations can create a virtuous cycle where strong brands with scale get even stronger and larger. As we invest in new services, we bring more guests and the need for more new hotels. The good news is those new guests and hotels should not add a lot of variable cost to our global platform. So new hotels mean not just new locations, but more funds to build new capabilities across all hotels. The virtuous cycle means not only stronger brands but more values for hotel owners and better returns for shareholders. And stronger brands are the best insurance against hard times. As the case in point, our SPG room nights in 2009, were up 2%, while non-SPG nights dropped 9%.

The third value driver is selling real estate. All told, we could generate $4 billion to $5 billion in cash from owned hotels, Ball Harbour residences and SVO cash flow. Our hotels, of course, would provide the bulk of that value, and is a measure of what we mean by an asset-light strategy, a few years ago, we set a goal to drive 80% of our earnings from fees. We've made steady progress towards that goal.

In the last 4 years, we put $800 million in cash from vacation ownership and another $1 billion from selling assets. We did this despite a fickle market for hotels but finding the right moments and buyers with sales, prices averaging a stellar 19x EBITDA or about a 75% premium to where Starwood stock is trading today. And we still have $300 million in owned EBITDA to go.

We'll continue to bring our own hotels to market, either one at a time or all at once, depending on demand. It's important also to note that after generating all that cash, we're left with a global high-end fee business, which is an investor's dream as the business model. The trends driving demand for our brands means this business is set up to grow to an expanding hotel footprint, rising REVPAR and more incentive fees. The fee business is built on long-term contracts, low variable costs, but absent the capital needs and volatility of owned real estate.

So to summarize, we're confident that we're set up to quit more value for shareholders, thanks to long-term growth and demand, the value of brands and selling real estate on our way to becoming a fee-driven company.

So let me return to this notion of our smart, bold approach and talk about how it shapes our options. As we said, being smart in today's world means having a secure financial foundation. We've reduced our debt, with now 2 rating agencies putting us 2 notches above investment grade. We've also contained our costs. In 2007, our core SG&A was $416 million, and we had fewer than 900 hotels. Today, our SG&A is $370 million and we have over 1,100 hotels.

So put another way, our SG&A is down 11% despite having almost 24% more hotels and despite cumulative inflation in costs of at least 12% over that time period. On property, we've also driven productivity increases since 2007 of over 15%, based on staffing per occupied room.

The result of all of this, of course, is more cash. And true to our word, we're investing in our hotels and our brands, and returning cash for our shareholders. During the past quarter, and that's as of yesterday's close, we've repurchased 2.8 million shares, returning $140 million to shareholders.

The bold part of our smart, bold approach is going hard after growth. At our recent Investor Day in Shanghai, we talked about how we've worked for years to become a leader in that region. We parlayed Sheraton's first-mover advantage into more growth by expanding on our relationships and track record to set the stage of growth for other brands. Now we're following the development as it spreads to second- and third-tier cities and the burgeoning resort destinations.

As a result, today, Asia accounts for 65% of our pipeline, with China representing 3/4 of that. Now some would argue that, that makes us vulnerable to the downturn in China. That might be true, but it misses the more important point. China has a long way to grow.

Look at it this way. China's economy is over 1/3 the size of the U.S., but there are less than 1/4 of the high-end hotels to serve that market. So unless you think China will stall permanently, it appears that there's much more risk in missing out on the growth than living through the fits and starts inevitable in an economy this large and growing this fast. And to be clear, our smart, bold approach means we have discipline about growing in the right places, with the right partners, for the long haul. In Asia, about 50% of our properties are with owners who already have a hotel with us. And behind all this success lies the same team in Asia that's built this business, one hotel at the time over 30 years.

Our bold approach means supporting our growing footprint with local sales teams in India and China and building business with local customers. Our China call center in Guangzhou is the largest of any hotel company, and we're building the same in India. The other key to our success is making global brands relevant to local markets.

In China, for example, 60% of our guests are Chinese nationals. In the rest of Asia as well, about 1/2 of our business is local. A local focus means providing slippers or tea instead of coffee, but it also means tweaking hotel design, creating Chinese language booking engines or extending SPG benefits for dining. And the result of all of this is a pipeline of 61,000 rooms in Asia and more hotel rooms open since 2010 than Marriott, Hilton and Hyatt combined. We're now 50% larger than our next largest U.S. competitor, and more concentrated on the lucrative high-end.

So in Asia and elsewhere, SPG has been the cornerstone of our global growth. We've seen an increase in active members outside of the U.S. of over 50%. So that, as of today, non-U.S. members account for 44% of the SPG active days. And around the world, SPG drives over 50% of our occupancy. SPG provides benefits to our guests but also to our business. SPG members spend more, give us business in tough times, and they're our best brand advocates.

During the last couple of quarters, we've talked about the investments we've made to meet the needs of our highest spending guests. The top 2% of our guests account for 30% of profits, and our most profitable SPG members give us something like 50x the business of our average guests, which is why nearly 6 months ago, we announced the SPG transformation, where we rolled out the learnings from our top customers to touch all of our SPG members. And the response has been fantastic. SPG share of occupancy rose nearly 2.5% and is reaching -- and has actually past record levels. SPG member nights grew 12% and Platinum members were up 17%.

The pinnacle of our SPG transformation is our Ambassador program. It was only recently announced but this program was years in the making, and it's unique in our industry in that it shows that we can do what we mean when we say we're focusing on recognition, not just rewards. It changes the game in a way that can't be easy to copy. Giving away rewards is expensive, but relatively easy to do. Building relationships takes time and delivering ambassador-level service means tight coordinations -- coordination between our customer contact centers and all of our properties. So for those of you are interested in our Ambassador program, it give guests who stay with us more than 100 nights, a single ongoing personal contact at Starwood. The relationship means we can provide personalized service beyond the cycle of a hotel stay.

As it turns out, the vast majority of the requests from our Ambassador members are straightforward. But when we fulfill them, we reinforce the bond. And the relationships also set us up for those exceptional moments that people never forget. Our ambassadors have helped members buy engagement rings, respond to family members after an accident, or help a friend that was locked out of his apartment.

The best marketing investments are ones that bring business from your best customers. And in an uncertain world, deep customer relationships remain the best safe harbor. When it comes to our smart, bold approach, investing in loyalty does both.

So let me close my remarks with a keen message from Q2. The world economy is becoming ever more travel-intensive, thanks to more wealth in more places, a smaller world as a result of technology, and increasingly global businesses. As a result, our momentum continued in Q2 despite troubling headlines in a stop-and-go global economy. We expect to deliver on 2012 expectations and continue creating significant value for shareholders.

Our smart, bold approach is paying off and our financial position is as strong as it's ever been. We're getting more than our fair share of global growth, thanks to our local smart teams, global brands and leading loyalty program.

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

Vasant M. Prabhu

Thank you, Frits, and good morning, everyone. In an uncertain and volatile macro environment, despite exchange rate headwinds, we're pleased to have exceeded our profit expectations for the second quarter. Worldwide REVPAR grew 6.9% in local currencies as we gained market share yet again. Fees increased over 10%, helped by 28% incentive-fee growth, despite an almost 300-basis-point adverse impact from exchange rate moves.

SG&A remains under control, even as we invest in growth markets like Asia. Year-to-date, we have opened 32 hotels and signed contracts for 66 future hotels. At our own hotels, we were able to grow margins by 140 basis points with very tight cost controls, even as REVPAR only grew 3% in local currencies and was down 0.4% in dollars.

Old hotel growth was impacted by Canada, down 6.5%. Our vacation ownership business remains stable with good tour flows and strong results. Delinquencies in our loan portfolio are back to precrisis level at 2.2%. FICO score averaged 738 with interest rates over 13%. Bal Harbour momentum remains strong with 45 closings in the second quarter for cash proceeds of almost $150 million. We have now closed on 183 condos, over 60% of the condo inventory.

On the balance sheet front, we redeemed our 2013 bonds and a mortgage on an owned hotel, finishing the quarter with net debt of $1.24 billion. Two credit rating agencies have now upgraded us to BBB, our target rating. During the quarter, and through yesterday's close, we also bought back 2.8 million shares for $140 million at an average price of $49.33.

In short, we continue to deliver on the commitment we made to you. We have continued to gain share, grow our global footprint, act to our global pipeline, maintain tight control of cost, generate significant cash from operations and asset sales. And we also achieved our capital structure goal and bought back some stock.

So what is our outlook for the rest of 2012? As we've done before, we'll take a quick trip around the globe, starting with the regions that seem to be the greatest source of anxiety, Europe, followed by China and the big emerging markets. We will finish with everybody's favorite safe haven nowadays, North America.

The crisis in Europe has gone from acute anxiety when we talked in February to optimism in April, post the ECB's LTRO programs, to acute anxiety yet again. In the meantime, our business on the ground in Europe has improved slowly but steadily. Local currency, company-operated REVPAR was flat in Q4 2011, up 1.7% in Q1 and up 3.4% in Q2. In fact, if you exclude Greece, which was down 20%, Europe was up 4.5% in the second quarter. Occupancy was 71%, essentially flat with last year and rate was up.

Why is our business holding up as well as it is? As we have said before, we operate primarily in the global cities, serving primarily global corporations and the global high-end leisure traveler. For example, in Spain and Italy, 15% to 20% of our business is local; 30% to 35% is European and about half originate outside Europe. As may be expected, our local business is down, but this was offset -- more than offset by the growth in regional and global business. As such, our hotels in Southern Europe grew roughly in line with our hotels in the North.

As we look ahead to Q3, we will be helped by the Olympics in London, normalizing group booking behavior, good backlog in some cities like Rome, and on the margin, the strong dollar is driving leisure business originating from the U.S. Also helping is the fact that new supply is nonexistent.

We expect REVPAR trends to remain stable in the near term, and perhaps improve as we get into Q4 as comparisons get easier. Of course, with dangerous game of chicken being paid in euro zone, there is always the risk of an accident.

Our baseline expectation remains what it was at the start of the year, that the Europeans and the rest of the world will continue to do just enough to avoid an unruly breakup of the euro.

Moving on to China, where economic growth has slowed and talk about a hard landing has picked up steam. It goes without saying that China is a large country, and we have a large business there with 100 operating hotels plus another 100 in the pipeline. As such, there are a variety of factors that play, depending on the local market, much as you would expect in the U.S.

In a centrally-directed economy dominated by state-owned enterprises, a once-in-a-decade leadership transition cannot happen without some impact on business activity. We are seeing that across our business in China, as government officials maintain a low profile, companies put decisions on hold and diplomatic activities curtailed, as everybody waits for the leadership change to ripple through.

Despite all this, our hotels in North China continue to grow in the double digits. Eastern and Central China are growing in the mid-single digits. The South has been hurt by the slowdown in exports. Selected cities like Tianjin, Guangzhou, Hainan, which have seen a lot of new capacity, have short-term supply demand imbalances. Tier 2 and Tier 3 cities, where we have the largest footprint among the major high-end hotel companies, are experiencing double-digit growth with very strong F&B momentum.

In fact, through the first half of the year, our total revenue in China is up over 25% in local currency. Our opening pace in new hotels is not slowing down. By the end of July, we expect to have opened 15 hotels, and the rest of our openings this year remain on track. Year-to-date, we have signed 30 hotels versus 27 at the same time last year.

Our development focus on the 170 cities in China with over 1 million people is paying off, along with the strength of our brands, our deep owner relationships, our sizable on-the-ground infrastructure and experienced locally smart teams.

We do not expect the trend in China to improve in the near term. The leadership transition will not happen till late September and there will then be changes at the next levels. Export markets are also unlikely to recover soon. As we saw in Shanghai and Beijing, it will take 6 to 9 months for supply and demand to get back into balance in the impacted markets.

Our baseline view for China remains what it was earlier this year, i.e. a hard lending is unlikely, given the levers that government controls and the capacity they possess to act. We have already seen 2 rate cuts by the central bank and efforts to drive domestic consumption. The investment in urban infrastructure continues, though not in the megacities which have already got the best infrastructure in the world. 7.5% growth in economy that is much larger than it was 5 years ago is almost as much absolute growth as 10% was then. With the world's second-largest economy and the second-largest travel market, with 120 as the number of hotel rooms as the U.S. has per capita, China will need to build hotel capacity for the long time to come.

Near-term slowdown, yes. Hard landing, unlikely. Long-term growth opportunity, unchanged. That is how we would sum up China.

Moving onto other major emerging, or as we like to call them, growth markets. In Asia, company-operated hotels in India were up 12%; in Indonesia, 25%; and Thailand was up 19%. In the Middle East, the UAE was up 9%, powered by Dubai; and Saudi was up 23%. Countries impacted by the Arab Spring grew 21%, helped by easy comparisons to last year's disruption. In sub-Saharan Africa, Nigeria was up 43% and South Africa, up 10%. In Latin America, Brazil grew 11%; Mexico, 13%; Chile, 21%. Argentina, with its unique problems was the only exception.

As you can see, there was no evidence in Q2 of a slowdown in emerging markets. As we look ahead to Q3, momentum remains good in Asia and Middle Eastern markets as well as sub-Saharan Africa. North Africa has tougher comparisons. We anticipate a slowdown in Latin America, driven by the worsening situation in Argentina, where we also benefited from the big soccer event last year.

This brings us to North America, which performed as a safe haven was supposed to. It was steady and reliable, except for Canada. We have 3 large owned hotels in Toronto and Montréal with a total of around 2,700 rooms between them. These hotels are very group dependent, as you may expect. The strong Canadian dollar has kept U.S. groups from going to Canada and made the U.S. a very attractive destination for Canadian groups. The Canadian Tourism Commission reports trips from the U.S. to Canada are down 3% versus 2008, while trips out of Canada are up 17%.

We have been taking steps to diversify our business in Canada, but this will take time. X Canada, U.S. systemwide hotels grew REVPAR 7.9%. We would echo what you have heard from other companies in our sector. Corporate transient momentum remains robust, group pace is tracking in the mid-single digits on top of high-single-digit growth last year. With occupancies reaching prior peaks, rate was up 4.8%, accounting for 60% of REVPAR growth.

As we look ahead to Q3, we expect current trends to continue. The unprecedented low supply growth has helped offset the impact of new normal 1% to 2% economic growth. High occupancies are helping us remix our transient business, raise group rates and we anticipate an even better outcome from 2013 corporate rate negotiations and the rate increases realized this year.

As we enter the back half of 2012, we expect the macro environment to remain uncertain and volatile. As we said before, the primary driver of demand growth for our business is a profitability of major global corporations. At this point, we have no indication that global companies are either restricting or cutting travel and meeting plans. As such, our best estimate is that recent trend lines will continue through the rest of the year. This underpins our unchanged outlook for 2012 REVPAR growth at company-operated hotels of 6% to 8% in local currencies.

Based on results to date, we're likely to finish somewhere in the middle of this range. Exchange rates have moved against us by at least 100 basis points on an annualized basis since we last talked. 6% to 8% local currency growth, now translates to 3% to 5% dollar growth. Despite these exchange rate headwinds, we're maintaining our fee growth expectation at 9% to 11%. We still expect 70 to 80 hotels to open this year.

Given the issues in Canada and Argentina, we're lowering our own hotel REVPAR growth range at the high end from 4% to 6% to 4% to 5% in local currencies and only 1% to 2% in dollars. Europe, Canada and Argentina account for over 33% of owned rooms and almost 40% of owned EBITDA.

Margin improvement expectations at owned hotels remain unchanged at 100 to 150 basis points. No change in SVO profit outlook, and we are still targeting 4% to 5% SG&A growth.

Lower owned hotel expectations and the move in exchange rates impact EBITDA for the year by approximately $10 million, about $5 million each quarter. Therefore, we're now narrowing our EBITDA outlook range to $1.07 billion to $1.09 billion, excluding Bal Harbour profits.

At Bal Harbour, we have now completed closings on all sales from prior periods. From this point on, Bal Harbour revenue and profits will begin to taper off and will depend on new sales that happen each quarter. For each of Q3 and Q4, we estimate approximately $5 million in profits from Bal Harbour. Sales momentum in pricing remained good and we now expect to complete sales at all Bal Harbour condos at the first quarter of 2014, if not earlier.

We remain committed to our asset sale program. As we indicated last quarter, we have several conversations underway, some at advanced stages. It is our practice to announce sales only when they close and when we have received the cash. We expect to close on several transactions before the end of the year. We had deployed cash from operations, Bal Harbour and asset sales, in line with the priorities we have outlined at our Investor Day in 2010. We are investing in our own hotels and in building our pipeline of future hotels. We continue to look for acquisition opportunities, like Le Mèridien, to expand our business, should they become available at acceptable prices. We have paid down debt to achieve ratios consistent with a solid investment grade BBB rating.

Our goal is to maintain ratios that would sustain an investment grade rating through the hotel cycle. Cash we cannot profitably deploy, will be returned to shareholders through a healthy dividend and stock buybacks, as opportunities present themselves.

In the past few weeks, as Europe, China anxieties hit our stock price, we resumed stock buybacks, using up $140 million of our $250 million authorization so far.

With that, I will turn this back to Steve.

Stephen Pettibone

Thank you, Vasant. We'd now like to open up the call to your questions. [Operator Instructions]

Question-and-Answer Session

Operator

Your first question comes from Bill Crow of Raymond James.

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

If you could, Vasant or Frits, just give us a little more detail on the magnitude of asset sales that are out there being marketed? And then on Canada, if you could just talk about the Canadian dollar and the influence that is having, but it seems like there's no oversupply issue in Toronto that could hurt results for an extended period of time. Any comment on that would be helpful.

Vasant M. Prabhu

On asset sales, as you know, we don't announce asset sales until they're done. We do have several conversations going on. We hope we can announce some closings later this year. Things are moving along in most of them...

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

Is it hundreds of millions of dollars or could you quantify kind of the magnitude that you're shopping or that you're in discussions with?

Vasant M. Prabhu

Well, I don't think we want to get into that specifically because these things, they're never done until they're done. So we'll just sort of do it as we go along. As Frits said, our goal is to sell most of our owned assets over time. And we have quite a few transactions in discussion at this point. And I'm going to see if Frits wants to add anything to that?

Frits van Paasschen

Yes, Vasant, I think what I would just add to that is that, if you look at most of our hotels today, any one of them is a fairly significant number. And we haven't gotten to a point where we see the hotel asset market is trading in multiple properties. So we're still very much in the one property at a time sale mode and, as Vasant has pointed out, and as I'm sure you can appreciate the logic behind it, we're not going to comment on any particular sale or even give a magnitude until these things come through. Obviously, as soon as we have something to report, we'll pass it along. But I think that we're acting in a way that's very much consistent with the behavior as we've described it and told you to anticipate for some time now. Vasant, do you want to get back to the Canadian dollar and Toronto supply question?

Vasant M. Prabhu

Yes. On Canada, clearly, as you saw in our numbers and from others who have hotels in Canada and transient [ph] travel too, the market is total down in the big cities. As you know, we have some very large hotels in Toronto, 2 big hotels, 3 hotels with about 2,700 rooms, so you can see the 1,000 room mega hotel. The issue is really -- I mean the Canadian economy is doing very well, so that's not the issue. The issue really is the health of the group business. And it used to be a great place for U.S. groups to go to when the Canadian dollar was at $0.70. There's a lot of other options today for U.S. groups. And then the Canadians are taking advantage of this. We are less concerned about the supply per se than we are about the mix of business. We are running reasonably high occupancies in Toronto. The problem is that the mix of business is not good, so the rate realization is not good. We don't have -- in the 1,000 room hotel, you need a lot of group business to build a baseload to be able to then push rates up, and that's really what our issue is.

Operator

Your next question comes from Carlo Santarelli from Deutsche Bank.

Carlo Santarelli - Deutsche Bank AG, Research Division

I just wanted to discuss for a second. Your Q2 occupancies, when you look back over time, obviously, just about all of your brands, with the exception of a few, are running within 10 basis points or at least these are peak occupancies for the seasonal quarter, yet the rates remain down anywhere from kind of 8% to 12%. I was hoping if you can guys can kind of talk about how we can think or frame the ADR acceleration as we go forward here, especially in the near term, over the next 6 to 18 months.

Frits van Paasschen

Yes, Carlos, this is Frits. I think that the way you have to look at this is, I would describe where we are as early mid-cycle. And let me explain what I'm saying by that. In the early part of the cycle, you're being held mostly by people coming back and traveling, and occupancy is going up. Then you get to the point where hotels are full and you start earning back on rate. It takes some time for that mid-cycle phase to continue, to get to the point where rates are where they were at the peak of the last cycle. And if anything, we're encouraged, in fact, that we're seeing these kinds of occupancies this early in the cycle, because it means we have a longer period of time for rates to go up. We clearly are pushing rate -- I think what you heard Vasant say was that we're confident that our corporate negotiations will be even better for us this coming year than they were last year. We'll continue to substitute out less high rate business, particularly from OCAs, for example. And then the other piece is, we continue to roll out our revenue management system. And when we do that, we see a significant boost in rate for those hotels as well. So I think that the observation is correct, rates are still below where they were at the peak, but that's actually something that's very consistent with the cycle overall.

Operator

The next question comes from Robin Farley from UBS.

Robin M. Farley - UBS Investment Bank, Research Division

I wonder if you could give a little bit more color on your Asian REVPAR outlook. Just in your comments about Europe, you talked about how it was consistent with your expectation at the start of the year. And Asia maybe has been looking forward to move back to kind of double-digit REVPAR growth after Q1. And so I just wonder if you can give a little bit more color around that.

Vasant M. Prabhu

As you saw, we got to somewhere in the region of mid-9% growth in local currencies in Q2, so we were pleased by that. And as we indicated, that was despite the fact that on a same-store basis, China has slowed. Now remember, in China, you've got the same-store basis may be slowing, but you've got an overall market that is still growing very fast. So because we have a lot of new hotels opening, our total business in China for the first half is actually up 25% as a whole. So same-store is just one dimension of growth in China. That's the overall growth just in terms of the new capacity that we're adding in China. What did help us in the second quarter, which won't help us as much in the third quarter, is the comparison in Japan. Japan was up quite a bit, because it was lapping the earthquake tsunami last year at this time, that added probably 100 basis points to REVPAR in Q2. It won't help as much in Q3. We're assuming the situation in China remains roughly where it is. You saw that some other parts of Asia, were doing pretty well. So we would say that Asia still is a region that will be at the high-end, if not somewhat higher than our overall 6% to 8% range, and that's our best view at this point.

Frits van Paasschen

I might just add to that, a couple things. First, in the fourth quarter, you'll see some more benefits to Thailand as we cycle past some of the events from last year. A market like Indonesia, for example, continues to be very strong, and that's in part driven by the fact that, as you look across Asia, there are relatively few quality resort destinations, and there's airlift and there's appetite increases, that's going to be an area were continue to drive REVPAR for some time looking ahead.

Robin M. Farley - UBS Investment Bank, Research Division

Just to clarify, you said maybe not more than the 6% to 8% range that you're looking for worldwide?

Vasant M. Prabhu

No, what I said was it will be at the high end of that range. As we've always said, we expect Asia to be at the high end or higher, and we still think that is where Asia is.

Operator

The next question comes from Patrick Scholes from SunTrust.

Charles Patrick Scholes - SunTrust Robinson Humphrey, Inc., Research Division

Just a question related to your hedging on foreign exchange. Looks like you have -- will be negatively impacted by $5 million in 3Q. Can you tell us what your expectation -- how much you'll be negatively impacted in 4Q and how much do you think your hedging activities saved you as far as foreign exchange? And then are you -- can you also disclose how much your -- the cost -- what it cost you to get that benefit?

Vasant M. Prabhu

Yes. As we've told you before, we have historically, each year, for the last few years, have been hedging only the euro, and about half our exposure to the euro on the profit side. So you won't see any hedging impact in our reported REVPARs and all that. So we were hedged coming into this year about half our exposure to the euro at about 144, so that has helped. That, of course, is baked into what we tell you our outlook is because we know where we are hedged. So effectively what happens is if the euro moves, about half our profits are exposed to the moves in the euro. And that is incorporated in what we now tell you as the impact of 4x. Now euro is not the only currency that has moved. Clearly, the dollar has strengthened across a variety of currencies, so what we gave you was the impact across all those currencies. The other thing I would clarify is, we said the impact was $5 million for the back half, not just the third quarter. The $5 million impact in the third quarter was both from the exchange rate moves, all exchange rates, not just the euro, and some of the reduction we have in the high end in owned hotel performance. So that's sort of the story as it relates to hedging.

Operator

The next question comes from Joe Greff from JPMorgan.

Joseph Greff - JP Morgan Chase & Co, Research Division

Frits, your earlier prepared comments, you mentioned that from a development perspective in China, I believe, you're referring to the running developments that are -- that have been put on hold. Can you talk about what you're seeing in terms of development pace slowing? And to what extent are you seeing that across different geographies? And then a follow-up, if I may, not to beat a dead horse on asset sale potential here, maybe one way you can talk about it, I know you won't disclose much until things are closed, but are you actively marketing more assets for sale now, say versus 3 to 6 months ago, that would be a, I think, a helpful answer to us.

Frits van Paasschen

Yes, Joe. So in terms of your first question, so just to reiterate, the 100 projects that we have underway to build hotels for our brands, we don't see any of those projects on hold. So again, what that would just indicate is that the developers that we're working with have not seen such a change in their trajectory of their projects and, presumably, the overall market to have them change their behavior. I think, Vasant mentioned the numbers, but year-to-date, our pace for development, which will be then the signings of projects for new hotels is up in China. It's also up overall around the world. And I'm not going to take you through each market but overall, the pace for development continues to build, and this should be the strongest year yet since the crisis, in terms of signings. In terms of your question and your attempt to ferret out a little bit more about impending asset sales, I think the better way to answer your question would be to say, not so much are we putting more on the market than 3 to 6 months ago, but then I would say, between 3 to 6 months ago and now, we have more on the market and we're having more discussions than we were prior to that. And that reflects a greater confidence among buyers and presumably some better financing conditions among buyers than we've seen for some time. But we oftentimes end up in negotiations where -- what we tell a potential buyer is, we may decide that if -- or a potential book buyers, we may decide not to sell an asset if we don't feel like we're getting the appropriate price for it. So the fact that we're having more discussions would lead you to conclude that we're going to sell more hotels. And that may, in fact, be true, but we may also decide, at any point, if we don't think we're getting the prices we would expect, then we'll pull back. So not sure I answered your question and give you any more information than that, but it was a nice try.

Operator

Your next question comes from Steven Kent from Goldman Sachs.

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

Vasant, did you say that you achieved a 7.9% rate in the quarter in the U.S. market? And considering that Marriott showed REVPAR that was lower than that and suggested that they pre-sold too many rooms and conference and corporate did not allow them to get to sort of the higher spot rates, did you hold back more rooms? Take in more of last-minute customers and is that part of the old management system that you or Frits just mentioned? And maybe -- did the Sheraton brand really pull up? I mean, I know that, that's been a real turnaround and been very successful, so maybe that's a factor, too.

Vasant M. Prabhu

Yes, I'll start and then I'm sure Frits will answer. So the 7.9% is probably not that easy for you to ferret out from our public releases. What it really is, is if you take Canada out, because we report North America, if you take Canada out and just look at U.S. system-wide hotels, all our hotels in the U.S., yes, we were at 7.9%, so it was a healthy growth. And yes, Sheraton has been one of our strongest brands. We do compare our results to Marriott, for comparable time periods, and Sheraton comfortably outperformed equivalent brands in the Marriott portfolio, and Sheraton also gained share again. So Sheraton clearly is driving our growth in the U.S. The other part of the question on this, and perhaps -- in terms of your question on group versus transient, there's no question that, as a company, we believe in an uptrend like this with strong corporate demand, that the better thread is to hold back rooms and sell them to transient guests, especially corporate transient guests. And there's no question that our revenue management systems, which are increasing deployed in these hotels are driving us in that direction, but I'll let Frits amplify, if he'd like to.

Frits van Paasschen

Yes, I may just add a thought on that. I mean, as we look at our group business, the trends have been pretty continuous over time. So we haven't seen some of the bigger shifts in our group mix that it sounds like Marriott has been talking about. But candidly, as you would expect, I don't know all the answers to what's going on there. And then in addition to the points Vasant made about the strength of Sheraton, the use of our revenue management system and our ability to yield better, I think the other piece is, as we've invested behind SPG, the move in and among our most loyal guests who are, as I remarked earlier, tending to pay higher rates, tending to ask for more, has been another boost our results. So -- and again, I think it pays homage to the statement that the best marketing investments are those that get more business from your existing strong customers.

Operator

Your next question comes from Will Marks from JMP Securities.

William C. Marks - JMP Securities LLC, Research Division

Just wondering about this 4% REVPAR growth that x Canada, I guess, if you can give a little more detail on that, weak market, strong markets. It seems to be a little bit above -- or sorry, below sector averages, but obviously, this is a different mix of business.

Vasant M. Prabhu

You were breaking up. 4% -- could you repeat the question? Did you hear the question, Stephen?

William C. Marks - JMP Securities LLC, Research Division

I'll repeat the question. I'm wondering about the 4% REVPAR growth, domestically, x Canada. And can you give a little bit more detail on where that came from, strong markets and weak markets?

Vasant M. Prabhu

It wasn't 4.4% REVPAR growth domestically. The growth in the U.S., as I mentioned in my comments, was 7.9%. In U.S. systemwide hotels, so I don't know what the full percent [ph] ...

William C. Marks - JMP Securities LLC, Research Division

I'm sorry, I meant for the old portfolio.

Vasant M. Prabhu

Got it, I'm so sorry. The owned hotels -- in the U.S., where we are -- market by market -- first of all, the owned hotel base is no longer representative because we have substantially fewer owned hotels than we used to, and each hotel has its own specific market conditions. I don't have something in front of me that goes through market by market on the owned hotels. In the U.S., it's better for us to tell you how system as a whole did. I mean, we had some real strength in markets like, let's see, Steven -- and this wouldn't be that different from what you would see in from Smith Travel. We had some good strength on the West Coast, in L.A. and parts of Hawaii and Philadelphia, and D.C. was softish, New York was okay, Boston was great. So that's sort of what the picture is. Our owned hotels, you know what the footprint is, there's only a few of them and they have unique stories, one by one.

Operator

Your next question comes from Shaun Kelly from Bank of America.

Shaun C. Kelley - BofA Merrill Lynch, Research Division

I'm just wondering if you guys can elaborate a bit more on kind of the high versus low. In this quarter, you did see from here, you luxury brands, particularly, your Saint Regis and Luxury Collection, not grow quite as much and obviously, they've already had a big surge in gross so they have tougher comps. But -- just anything else that you're seeing in the business across kind of high and low -- lower end brands would be helpful.

Vasant M. Prabhu

Yes. I mean, first of all, as you know, as you look at our brand-specific REVPARs, you have to be a little careful because they're a function of their footprint. And not all brands have the same footprint, and therefore, you could see performance difference of the brands based on footprint. So if you look at certain brands like Le Mèridien, they have a very big footprint in Europe, that would skew it. If you look at brands like Saint Regis and Luxury Collection, especially the Luxury Collection has a very big footprint in Europe and is heavily concentrated there. So I would caution you from drawing too many conclusions based on specific brands because you sort of have to adjust it for where the hotels are, and each of their footprints actually are quite different. And I don't think you can draw conclusion, as you seem to be drawing that the Luxury -- the St. Regis Luxury Collection brands didn't do as well as the others. We did gain share in those brands, too, wherever they are. It's just the footprint that gives you a weighted average.

Frits van Paasschen

If you look at the Luxury Collection, for example, we've got sort of 5 on a same-store basis in the U.S. that performed very, very well. But that was offset, unfortunately, by some of the 23 that are operating in Europe. Greece, for example, was down in the double digits, so -- for the Luxury Collection company-operated properties, so that's in total for the properties.

Operator

Your next question comes from Ryan Meliker from MLB & Company.

Ryan Meliker - McNicoll, Lewis & Vlak LLC, Research Division

I was just hoping you can give us a little color on demand mix and how things are shaping up for the back half of the year, particularly across your portfolio and then specific to Europe. I know you mentioned that group revenue pace is up in the mid-single digits. Is that what it was like the second quarter? And how is transient holding up specifically in Europe?

Frits van Paasschen

So on group pace, we've continued sort of our run of strong mid-single-digit numbers for the pace in the rest of the year. It's been something that's actually, as we've talked about before, been allowed us to remix the corporate transient, or the transient side of the business where we've seen revenue increases of sort of nearing 10%. And at the same time, we've reduced our opaque and lower rated discounted business.

Vasant M. Prabhu

Overall, I think that the easiest way to answer that question is, our core business is the global corporations, and the health of our business in the corporate segment, across the board, is strong. The global corporations are, as Frits said in his comments, they're on the road, they're traveling, they're doing business, they're doing well and demand from the global corporate base, anywhere in the world is strong. And that really is the biggest driver today. That includes some of the group business, too. The high-end leisure traveler is also strong. In some parts of the world, where local economies have trouble, the local business is a little weak, certainly very weak in some parts like southern Europe, but the global business, whether it's leisure or corporate, remains very strong. I don't know, Frits, if you want to add something to that.

Frits van Paasschen

Yes, the only thing I might mention in addition to that is, the next interesting point I think for us, given the time of year is to see what happens in September. And as you can imagine, every year, there is something of a lull in the transient part of our business at this time of year, and the real strength of the back half will be determined by that. As we've indicated, everything that we've seen so far would lead us to believe that the trends that we have seen will continue, and we don't think there's any reason to believe that will bring us new data, but that would be the next important time to be able to check in on the market.

Operator

Your next question comes from Smedes Rose from KBW.

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

I was just was hoping if you could remind us, what do you see as sort of your gross room additions now for this year at this point? And do you have any thoughts on what the number could be for next year?

Vasant M. Prabhu

70 to 80 hotels is what we're still targeting this year. As Frits said, net rooms will be closer to 4%, hopefully higher. Gross rooms will be probably 6% to 7%. That will be our estimate at this point, and we'll keep an eye on this. We're not seeing any slowdowns or halts in opening plans at this point.

Operator

Your final question comes from Joshua Attie from Citi.

Joshua Attie - Citigroup Inc, Research Division

How do you think about the value of your European real estate in the context of a possible further devaluation of the euro? And does that make you consider selling some of those assets earlier in the cycle than you otherwise might? And separately, could you tell us have you hedged any of your euro profit exposure for 2013 yet?

Frits van Paasschen

Okay. Josh, I'll take a commentary on the European assets. And then, Vasant, you can comment a bit more on the degree which we've have hedged 2013. I think that the way we look at our European assets is they're in extraordinary locations, in places where you can't build hotels like they are today, and there isn't simply the space, either. And so, in many cases, the properties that we're talking about would be valued more likely on a per key basis than on a multiple of EBITDA. And we want to do is to make sure that we have our hotels in great shape, so that a buyer would feel like they don't have the uncertainty of when -- where the renovation might look like. Gritti Palace being a great example of what's underway now or the St. Regis in Florence, being an example of one that has been through that process. So in terms of would -- are we trying to sell before Europe starts to look worse, or something like that, look, I think that if you try to rush properties to market because you're worried about the world going a certain direction, it's hard to imagine whoever is buying hotels isn't reading the same newspaper. So I'm not sure that's going to make a meaningful difference for us. What we'll continue to do is make sure that we have assets that are in great shape, find those buyers who have a great interest in those particular locations and make sure that we get great contracts to go along with them.

Vasant M. Prabhu

On the hedging question, sorry...

Frits van Paasschen

I should probably just add one more thing, too, which is the fact that these hotels are not just irreplaceable is one thing, but the other piece of this is, as more and more people, whether they're in the Middle East or Asia or Latin America, come in to a means to be able to go and see Rome for the first time in their lives, that just means that there will be more and more people able to do that, and more and more real demand for it. So the euro can get a lot weaker, that might mean, among other things, that there are other aspects of being in Europe that would be most expensive, but in a global markets, for a scarce asset, we think that the returns on those properties, I won't say are quite independent of the value of the euro, but they're nowhere near as dependent on the value of the euro as they might be, say, in the U.S. or somewhere else. So, Vasant, please, go ahead.

Vasant M. Prabhu

Yes, just quick round on your hedging question. Our philosophy on hedging is, we don't hedge to speculate, we hedge to reduce some of the volatility. Historically, we have hedged about half of our exposure to the euro. At this point, we have not put had any hedges in for next year. We typically lure them in a different point in the year. At this point, we have nothing in for next year.

Stephen Pettibone

Thanks, Frits and Vasant. I want to thank you, all, for joining us today for our second quarter earnings call. We appreciate your interest in Starwood Hotels & Resorts. 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 Second Quarter 2012 Conference -- Earnings Conference Call. You may now disconnect.

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