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Starwood Hotels & Resorts Worldwide (NYSE:HOT)

Q3 2012 Earnings Call

October 25, 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

Jonathan Mohraz - JP Morgan Chase & Co, Research Division

Felicia R. Hendrix - Barclays Capital, Research Division

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

Joshua Attie - Citigroup Inc, Research Division

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

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

Robin M. Farley - UBS Investment Bank, Research Division

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

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

Nikhil Bhalla - FBR Capital Markets & Co., Research Division

Shaun C. Kelley - BofA Merrill Lynch, Research Division

Operator

Good morning, and welcome to Starwood Hotels & Resorts Third Quarter 2012 Earnings Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Mr. Stephen Pettibone, Vice President of Investor Relations. Sir, you may now begin.

Stephen Pettibone

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

Before we begin, I'd like to remind you that our discussions during this conference call will include forward-looking statements and that actual results could differ materially from those projected in the forward-looking statements. The factors that could cause actual results to differ are discussed in Starwood's 2011 annual report on Form 10-K and in other SEC filings. With that, I'm pleased to turn the call over to Frits for his comments.

Frits van Paasschen

Thank you, Stephen, and thank you all for joining us today. On this call, I'll discuss the overall business environment, our strategy and our performance around the world. The 3 key messages I want to leave you with are: First, we are seeing a deceleration in demand growth around the world, but just to be clear, we're seeing growth is slowing. Occupancy and rate continue to grow at our hotels, and adjusted EBITDA, excluding Bal Harbour and asset sales, was up 10%. As for the deceleration, it's not clear today whether the recovery is shifting to a slower course, or whether this is a temporary pause as the world waits for U.S. election results, a new Chinese government and the next act in the euro drama.

This leads me to my second message. In an uncertain world, we've made Starwood far less vulnerable to changes in business conditions. Our business model, cost structure and balance sheet have never been more resilient. We're also set to get more than our fair share of travelers' business, thanks to our focus on brands, on innovation and on high-end travelers and on building a global platform that delivers outsized profits to hotels. This is an important part of why we've done well this year despite the troubling headlines.

Finally, the third message I want to leave you with is that our strategy is based on the premise that over the long term, demand for travel will continue to grow, thanks to rising wealth, global businesses and a digitally connected world. Over the next few minutes, I'll discuss these points in more detail. And afterwards, Vasant will share more color on our results and discuss our initial thoughts for 2013.

So let's turn now to what we're seeing. Looking back, in the first quarter, momentum was building. It was led by Asia and Latin America and supported by solid growth in the U.S., along with better-than-expected performance in Europe. As we got into Q2, we noted that Asia and Latin America were showing signs of slowing down, not declines by any means, but a slower upward trajectory. The U.S. business then was holding up well, and Europe was on track for modest growth.

This brings us to the third quarter. During the quarter, the euro situation grew more tenuous. REVPAR was up 3%, helped somewhat by the Olympics and an early Ramadan. In Asia, our REVPAR growth eased to 4.3%, with business in China held back by weaker exports, uncertainty about the new government and tighter monetary policy. Our results were also affected by new supply in some metro markets there. But when asked to put this all into perspective, our total gross hotel revenues in China were up more than 25%. Meanwhile, North America in Q3 saw slower growth than in the first half of the year, plagued by high unemployment, uncertainty about the outcome of the election and the looming fiscal cliff.

Despite this, REVPAR in North America grew by over 5%. And if you adjust for a mid-week 4th of July and the Jewish holidays, the underlying growth for our owned and managed hotels was more like 7%. So with Europe, China in the U.S. all slowing, commodity prices were soft, hurting the resource-rich markets. So after several strong quarters, Latin America posted 3% REVPAR growth. Africa and the Middle East fared a little better, up 7%, benefiting from easier comps on last year's unrest, as well as strong demand in Saudi Arabia and Dubai.

This all rolls up to global REVPAR increases of about 5%, with fees up 11% in local currencies. We controlled property and corporate costs. Vacation ownership drove strong results, so our adjusted EBITDA, excluding Bal Harbour, was $263 million. That was near the high end of our expectations even without about $2.5 million in EBITDA that we would've generated from the 2 properties we sold in the quarter.

As we look ahead, the key question as whether this quarter's results show a recovery that's lost its steam. Of course, we won't know for a while. We've seen mixed signals in North America and China, but the case can be made that the current deceleration is a temporary pause in growth.

Corporate transient travel, for example, continues to be robust, with occupancies up versus last year. That said, some group bookings are on hold as customers wait to see how their business will perform next year. A more positive sign in lodging, as with autos and housing, is that pent-up demand for new hotel construction might soon contribute to growth. We're beginning to see more interest among owners to initiate projects than any time since before the crisis.

In China, the deceleration that we've seen appears to be linked to reports of credit tightening, uncertainty about the government transition and lagging consumer spending. It may help for a moment to disaggregate these 3 factors and relate them to our business. Starting with credit tightening, we have yet to see an existing hotel project stop for lack of financing. And year-to-date, we've signed more new deals and opened more hotels than last year. The bulk of our development has moved from Tier 1 to Tier 2 and Tier 3 cities. This shift is very much in line with government efforts to spread economic growth across the country. And by the way, it also means that we're extending our first-mover advantage into new markets by adding the first five-star hotel into these new metro areas. So overall, despite tighter credit, we see an active development community that's bullish on hotels and has confidence in Starwood.

The second factor is the pending government transition, now expected for mid-November. Not surprisingly, this has coincided with a drop in our government business. But our associates familiar with our government customers tell us that this business will likely rebound after the transition.

And finally, there's the consumer spending, which still forms an undersized part of the Chinese economy. For our part, we see this as a growth opportunity. And GDP figures show that consumption is already contributing more to exports than to economic growth. And that's consistent with what we're seeing as well.

Despite decelerating GDP growth, Chinese outbound travel is up, as is demand at our resort hotels inside China. One Chinese publication recently ran a profile of the nearly 3 million people in China, who are roughly dollar millionaires. According to that publication, their average age is 39, and their #1 planned use of discretionary income is travel. It's interesting to note that these consumers already own an average of 3 cars. And one wonders whether they have room for a fourth. More certain is that they have many more years ahead to travel.

So on balance, the view from our business is that the U.S. and China seem more likely to resume growth than to continue to slow down. And this points to a pause in the global recovery. But that's by no means a given. Moreover, the euro situation remains volatile and far from over. Now that we're in the travel off-season there, it may be a while before we see where that market is headed. That leaves us with the resource-rich economies, and their prospects depend on the collective direction of the U.S., China and Europe.

So to wrap up on this topic, the one thing that we can say for sure is that forecasting 2013 will be quite difficult, which is why, as we've mentioned in previous calls, we're not in the forecasting business. We remain committed to a scenario approach to planning. And this brings me to my second message. We recognize that we live in an uncertain world and the reality of our sector is that hotel demand fluctuates with business activity and consumer confidence.

So we've been working to de-risk Starwood's business. One way is to manage our costs. Since 2008, we've held the line. As a leadership team, we review every G&A headcount request, even ones that are backfills and budgeted. The result is that our corporate office headcount today is 10% lower than it was 4 years ago.

Our corporate SG&A per room is down 28% over the last 5 years. We've also made sure to shockproof our balance sheet, which allows for liquidity to seize opportunities. Even more important, we've reduced the inherent risk in our business model. As many of you know, the fee business is far less volatile than owned real estate. Recall that in the '09 crisis, our fee earnings were off less than 20% compared to 50% for owned hotels.

In this quarter, we brought Starwood another step closer towards an asset-light structure, having sold the W Lakeshore in Chicago and the W Westwood in L.A. As in the past, we move quickly to take advantage of a window opportunity to sell. Also in October, we completed the sale of the former Sheraton Manhattan. These 3 transactions brought in over $500 million in cash and traded above 16x EBITDA. Going forward, we can now expect our earnings to be 65% fee generated. That compares with less than 20% prior to our host transaction in '06.

I also want to add that based on these recent sales, and recognizing the strength of our balance sheet, our board has approved a change in our dividend policy and declared a dividend of $1.25 per share in December 2012. That equates to a yield of over 2% based on yesterday's stock price close.

Finally, another way to manage risk is to outperform the market. For the last 3 years, we've been able to do just that, thanks to the strength of our global brands and our first-mover advantage in markets around the world. The so-called network effect has helped us accelerate our growth. Here's an example. After opening the W in St. Petersburg last year, the number of Russian SPG guests at our other Ws tripled, bringing more demand to W properties in places like the Maldives, Bali and Paris. And so with each new W, we have stronger performance and faster ramp-up. This, in turn, creates more growth potential for the brand in other markets. And the presence of Sheraton and Le Méridien gives us the relationships and know-how to realize that growth.

The success of Aloft is another example of the growth power of our platform. Now just 4 years old, the brand boasts 60 hotels in 10 countries, on its way to 100 by the end of 2014. That represents organic growth of 15 hotels per year. So by way of recent comparison, Hyatt Place was launched in 2006, and excluding the properties gained through acquisition, its organic net growth has been about 4 hotels a year.

Another insurance in difficult times is brand loyalty. We've consistently leveraged SPG as a platform to increase loyalty to our system by providing more choice, more recognition and more services to our highest value guests. For the first time in the history of our company, SPG consistently delivers over 50% of our occupancy. This is up from 1/3 of our occupancy just 6 years ago despite having nearly 30% more rooms.

The resilience of our platform can be seen in our performance this year in China. In the face of a less favorable supply/demand balance, our hotels delivered a full 6 percentage point increase in REVPAR index, increasing from 115 to 121. Another barometer of our success is what our owners are saying. At our recent North American owners meeting, we presented our plans. This is a group that's known for their direct feedback, and they were very positive on our vision, our strategic plan and our ability to deliver on what we say. And our owners see real value in our work to deepen guest relationships, using technology to deliver more personalized service.

And this brings me to my third message. As we said in previous calls, our strategy puts us in a position to benefit from long-term secular growth in demand for high-end travel. The trend lines, not the headlines, give us confidence that our strategy is the right one. As a case in point, during the 2009 downturn, the headlines said luxury was dead. A look at the trend lines told us that luxury would come back stronger than ever, which it did.

So what are the trend lines showing us today? Here are some examples from my recent travels. I was just in Macau for the opening of the first 1,800 rooms of what will be a 4,000-room Sheraton. When all the stores open early next year, it will be by far the largest hotel in our system. Market and media reception to the property has been tremendous. The hotel was full shortly after opening, helped by Sheraton's strength in China.

Those are the headlines. But it's the long-term opportunity that really excites us. Many people are surprised to hear that gaming revenues in Macau are running about 6x what they are in Las Vegas. And yet the hotel market there is less than 1/4 the number of rooms. Macau is in a great spot to grow as a major entertainment and meetings destination. Relative to the population and business activity, there are so few accessible destinations in Asia. Macau is rapidly filling that void.

And Macau is just one example of what we see playing out across Asia. We see huge trend line opportunities in China. When the Sheraton Great Wall opened at Beijing 25 years ago, the country was about 20% urbanized. Today, about half of the Chinese population lives in cities. And in most fully developed countries, that number exceeds 80%.

The flow of tens of millions of people to cities each year is a catalyst for long-term growth. Urban dwellers have higher incomes and are far more likely to have jobs and lifestyles that include travel. It was recently reported that life expectancies in Shanghai are longer than Italy, and income per head is higher than in some areas of the U.K.

The rest of China has a long way to go before they reach the level of Shanghai. But over 1 billion people have been heading in that direction, almost uninterrupted for the last 3 decades. The outbound numbers also speak for the unabated rise of China. A projected 77 million will travel outside China this year, rising to 100 million by 2015. China is the world's largest outbound travel market and Chinese travelers today may already be outspending Americans abroad.

And China is also the locomotive for growth throughout Asia and in resource-rich markets. We follow the economic development as it unfolds, whether it's driven by manufacturing in Vietnam and Bangladesh, outsourcing and mining in the Philippines or a renewed interest in tourism in Myanmar, Bhutan or Sri Lanka.

We've also been following the trend lines of growth in markets where we've had a long presence. I saw this during my recent visit to Kuala Lumpur. We've had a Sheraton there for 15 years and a Westin for 9. Seven years ago, we added of a Le Méridien, which is now under renovation. But soon, we'll open a 400-room Aloft, a W near the Petronas Towers and a St. Regis complete with luxury residences.

In Jakarta, we recently opened a Luxury Collection Hotel that already posts the highest rates in town. Soon to come are a St. Regis and a W. Along with the renovations of the existing Le Méridien and Sheraton, we have several other projects in Jakarta for our other brands.

As a last example, let's turn to Singapore, where a Sheraton opened in 1987 in the midst -- and is in the midst now of a major renovation. Four years ago, we opened the St. Regis, which is now the market leader and the hotel of choice among world leaders, including the Chinese Premier and U.S. President. Adding to that, last month, we opened the W Singapore to great fanfare, and we have a Westin under construction. Some years back, we closed an aging Le Méridien, and we're working to have a world-class Le Méridien take its place.

Another trend line driving demand growth are the increasingly global businesses. Our largest multinational accounts do more than half of their business with us outside of their home markets. Accenture's growth is illustrative. Outside the America, it's more than doubled its business in the last 10 years. And global businesses are creating new travel patterns as well. Few locations around the world better epitomize this than Dubai. It lies literally at the crossroads of Asia, Africa and Europe, and it serves as a focal point for the Middle East. With a great airport and an easy Visa process, Dubai has also done a great job of promoting itself as a tourist destination.

So we've grown our footprint there to 14 hotels with another 4 under construction. In fact, after New York, Dubai has more Starwood Hotels than any other city in the world, and not to mention, 7 more hotels in nearby Abu Dhabi and Sharjah. And despite our hotel count, our occupancies there are running over 83% this year.

This explains why the senior leadership team will relocate to the Middle East next March using Dubai as a hub. As we found with our China move, time on the ground is the best way to learn from the market from our colleagues and from our partners. The relationships and knowledge lead to better decisions and greater global awareness throughout our company. You should also note that while we're in Dubai, we'll be hosting an Investor Day. It's been about 2 years since we showcased our global strategy and our long-term outlook. Please join us and see this vibrant region first-hand.

So this brings me to the close of my prepared remarks. I'll briefly recap what I hope you'll take away from my comments, and then hand off to Vasant.

Despite a deceleration in growth in Q3, occupancy and rates at our hotels continue to grow. In an uncertain world, our business has never been more resilient. And our global brands are set to get more than their fair share of travelers' business. And despite any short-term changes in sentiment, demand for high-end travel will be propelled for some time to come by rising wealth, global businesses and a more digitally connected world.

That concludes my comments. Over to you, Vasant.

Vasant M. Prabhu

Thank you, Frits, and good morning. With great cost control, we were able to achieve our profit goals in the third quarter despite lower-than-expected revenues.

Over the next few minutes, I'll walk through business trends around the globe, some detail on the performance of our owned hotels, a couple of items related to 2013 and discuss deployment of the cash we are generating.

As Frits described, our business hit a soft patch in Q3. The slowdown in trend was more significant in Asia, in particular, China, and to varying degrees, in other parts. We'll start with our quick trip around the world in North America.

Our reported numbers in North America are not an accurate reflection of the underlying trend due to the calendar, which started with a mid-week July 4 and ended with both Jewish holidays moving into September. We estimate the REVPAR impact of the calendar at around 150 basis points in Q3. This would put U.S. REVPAR in Q3 adjusted for the holiday shift at around 7%. So the trend in the U.S. was fine and appears stable as we enter Q4. Corporate America is cautious ahead of the election and fiscal cliff discussions, so it's unlikely that we'll see any uptick in the fourth quarter.

On the positive front, Canada is improving sequentially and will have REVPAR growth in Q4. Also, system-wide occupancies in North America are now above the prior peak set in 2006. Rate is still 5% below prior peaks. In Q3, rate accounted for 80% of the REVPAR gain. The business in the U.S. is well positioned to benefit from meaningful rate improvement should demand trends pick up.

We remain of the view that corporate rate negotiations should result at least in a high single-digit increase for 2013. We would describe the group business as steady, but not robust. The large group segment is an area of weakness. We expect that North America REVPAR growth in Q4 will be in the upper half of our 4% to 6% guidance range.

In Europe, there were no surprises in Q3. REVPAR grew around 3% in local currencies, helped by the Olympics in London. Rate accounted for 70% of the REVPAR gain. Despite the issues in Europe, our company-operated hotels are almost at peak REVPAR levels in constant dollars. We're experiencing a fair amount of volatility from week to week in Europe, but no meaningful change in trend. As it has been for most of the year, Europe REVPAR growth will be at the low end of our guidance range.

After almost 10% REVPAR growth in Q2, we did expect Asia to slow down to 8% or so in Q3 when we last spoke to you. The slowdown was much sharper than we expected, especially in China. Frits highlighted some of the reasons: Uncertainty surrounding the leadership transition, an export slowdown, supply/demand imbalances in select cities.

The slowdown was countrywide. We had modest growth in north and the east, modest declines in the south and the west. On the positive front, we had significant rev index gains across China. Our total business is up over 25% this year. We have opened more hotels and signed more deals so far this year than we did last year. We have supply/demand imbalances in a few cities like Guangzhou, Shenzhen, Hainan and Tianjin. We have experienced similar periods in Beijing and Shanghai. They typically last 6 to 9 months as demand growth catches up.

With the leadership change now slated for November 8, we do not expect any improvement in China for the rest of the year. In fact, the trend may get worse before it gets better. As our business in China has grown to over 100 hotels, with more and more in Tier 2 and 3 cities, we are very much a local company with 2/3 of our business coming from Chinese travelers. In a centrally directed economy, where most business is state owned or state dependent, a leadership change of this scale creates a lot of uncertainty and caution in the domestic business community. Our team on the ground is convinced that China will get back to business after the transition, but probably not until early next year.

Across the rest of Asia, we have seen some slowdown in China-linked economies like Australia and South Korea. Meanwhile, Indonesia is booming, up 20%. Thailand and Japan were also up significantly, helped by easy comparisons to last year. We expect Asia REVPAR growth to be in the middle of our guidance range or lower. As Frits indicated, we are optimistic at this point that growth in Asia will pick up as we enter the New Year.

In Africa and the Middle East, Saudi and the Gulf states continue to do well. Across the rest of the Middle East, our business reflects what you read in the papers. Things are not improving in Egypt. Except for Algeria, the rest of North Africa remains unstable. Sub-Saharan Africa is doing well, with Nigeria and South Africa leading the way. Easy comparisons helped reported results in this region in Q3. Comparisons are more normal as we enter Q4, and we expect REVPAR growth in the middle of our range.

The other region where we saw a meaningful change in trend was Latin America. Here, the primary cause is Argentina, where REVPAR declined 16% in Q3. Argentina negatively impacted Latin America REVPAR by as much as 450 basis points. Argentina has severe economic and political problems, high inflation and overvalued currency, controls on currency and imports, political instability, all contributing to a very negative business environment, which is unlikely to get better any time soon. Q3 REVPAR in Argentina was also impacted by difficult comparisons to last year, which included a major soccer tournament.

Mexico, on the other hand, is showing strong signs of recovery. REVPAR was up double digits. Mexican manufacturing is benefiting from wage rate increases in China. The crime situation is improving slowly, and Americans are starting to travel again to Mexico.

Commodity exporting economies like Brazil, Chile and Peru have been impacted by the China slowdown but are still growing. We expect Argentina to remain a significant drag for our Latin American business, and a more significant crisis linked to a currency devaluation cannot be ruled out.

Our owned hotel set has performed below our expectations this year. REVPAR growth has come in below our guidance range of 4% to 6% in local currency for the past 2 quarters. Good cost control has helped us mitigate the profit impact of soft revenues. Our owned hotel set, as you know, continues to shrink as we sell hotels. It is no longer representative in any way of our system as a whole. Owned hotel performance is increasingly driven by the market-specific and hotel-specific factors that are unique to our own portfolio.

To help you better understand our owned hotel results and forecast future performance, we wanted to provide you with some more details on our owned hotel portfolio as it stands today. We currently have 53 owned and leased hotels. Our owned hotels represent just 5% of system rooms. As a result of renovations or other issues, 46 hotels are included in the Q3 Same-Store set.

In 2012, we will only derive 30% of our owned EBITDA from the U.S. market, with 70% of this EBITDA coming from 4 cities, Phoenix, Maui, New York and San Francisco. We will earn 20% of our owned EBITDA from Europe, with more than half coming from Italy and Spain; add in London, and you get 90% of our owned EBITDA in Europe.

Latin America accounts for another 20% of our 2012 owned EBITDA, with 90% of this coming from 3 countries: Mexico, Brazil and Argentina. Finally, Canada and Australia contribute 25% of our worldwide owned EBITDA.

So these are the specific markets/hotels that drive our results. In North America, Canada has been an issue for most of the year for reasons we have discussed before. More recently, we had a soft shoulder period at the Phoenician and some weakness at our New York hotels. In Europe, the W Barcelona has continued to perform strongly in a tough market, but Rome and Florence have been weaker. London benefited from the Olympics with our new W at Leicester Square doing very well.

In Latin America, we have 2 large hotels in Buenos Aires, which have been hard hit lately for reasons described previously. Our city hotels and resorts in Mexico are improving. Finally, after several strong years, our Sheraton in Sydney slowed in Q3 as the market has softened. As you can see, it is hard to generalize about our owned hotel portfolio without talking about specific hotels and markets as it continues to shrink.

Looking ahead, we do not expect much improvement through the end of the year. Canada is recovering, but New York and Phoenix are weaker than we expected. Argentina is worsening and Australia is softer, while Europe is stable, and we see strength in some other U.S. markets.

Our cost control has been good all year with improvements in productivity and flat overheads. REVPAR growth at these levels makes it difficult to grow margins despite good cost management. As such, we now expect our owned hotel margin to be up 50 to 100 basis points this year. Our fee growth has been healthy this year despite some significant exchange rate headwinds. In local currency, our base management fees in Q3 were up 6.2%, in line with REVPAR. Incentive fees were up over 22%, and franchise fees grew 12.5% in constant dollars. Our Q4 management and franchise fee growth will be in the same range as Q3. Our fee and other income line in Q4 will be impacted by some favorable items we had in other income last year, which hurts the year-over-year comparison.

Our vacation ownership business delivered as expected and remains a steady performer. We just completed the securitization on the best-ever terms we have achieved, an advance rate of 95% and a coupon of 2.02%. This reflects the efforts we have made to improve our loan underwriting over the past 3 years and, of course, favorable market conditions.

Bal Harbour condo sales continue to progress well. During the quarter, we closed another 14 units for $12 million in EBITDA. We expect to deliver another $10 million in EBITDA in Q4, bringing the full year total to $135 million. By year end, we expect to have closed over 70% of the residential units available for sale. Demand for units remains strong, and we continue to raise prices. We are on track to achieve our goal of $1 billion from condo sales revenue at sellout.

All of the above drive the Q4 guidance ranges we have provided. Our REVPAR growth will be lower than what we had expected earlier this year, both for the company-operated and the owned hotel set. Assets sales completed to date impacted EBITDA by $2.5 million in Q3 and will reduce Q4 EBITDA by another $8 million.

After adjusting for asset sales, our EBITDA outlook is lower for the quarter and the year as a result of the lower REVPAR expectations. We forecast a Q4 EBITDA range of $295 million to $300 million, which includes $10 million in profits from Bal Harbour.

This results in a full year EBITDA range of $1.19 billion, $1.195 billion, which includes $135 million in Bal Harbour profits. We will provide a more detailed perspective on 2013 in February. At this time, we expect that 2013 REVPAR growth at company-operated hotels globally could be up -- could be in the 4% to 7% range in local currencies.

Current trends are in the lower half of this range. A recovery post-U.S., China leadership transitions will put us in the upper half of the range. As a result of the hotel sales completed to date, our 2013 EBITDA will be negatively impacted by approximately $20 million versus 2012, a total of $30 million on an annualized basis. Since we will have sold 70% of the residential units, we expect 2013 profits at Bal Harbour to be $30 million to $40 million, which is around $100 million lower than 2012.

Almost 2 years ago, at our Investor Day, we promised to deliver both strong earnings growth and significant cash from operations, vacation ownership, Bal Harbour and asset sales. We have been delivering, as promised, on all fronts. This year, SVO will generate $200 million in cash, almost $800 million cumulatively since 2009. Bal Harbour will deliver over $400 million in cash from condo sales, with more to come as we complete sellout. So far this year, we've closed on over $500 million in hotel sales and will continue to take assets to market as we see opportunities. Our hotel business is also generating healthy cash flow from operations as our fee business grows rapidly.

As a result, we finished Q3 with the strongest balance sheet in our sector, $1.65 billion in gross debt, $859 million in net debt, cash in excess of working capital needs of $650 million. Post the end of quarter, we have added another $400 million to this cash balance from our receivable securitization and the closing of the Manhattan hotel sale.

Three years ago, we also -- 2 years ago, we also outlined our priorities for cash deployment, and we've been doing exactly as we promised. Our first priority was to invest in our core business. We are investing in our owned hotels where we see an opportunity to earn a return from improved performance and a subsequent sale.

We're investing where appropriate to drive growth in our pipeline. We're also investing in our technology infrastructure to enhance our capabilities to serve our guests and our owners better. We continue to look for acquisitions that can create value while enhancing our brand and global footprint. We believe, as we have demonstrated through the Le Méridien acquisition, that there is significant value to be created through further consolidation in our business. We have a great portfolio of brands, a powerful global platform and a healthy pipeline. As such, we only -- we will only seek acquisitions that can clearly grow our business and create value for shareholders.

Our second priority was to reduce our debt to levels that would sustain a solid investment-grade rating. Our net debt has come down from over $3.8 billion in 2009 to $859 million at the end of Q3. We have achieved our goals on this front. We intend to maintain a leverage ratio as defined by the rating agencies of 2x to 2.5x so we can retain an investment-grade rating through the hotel cycle.

Our third priority is to return cash we cannot profitably deploy to our shareholders through dividends and buybacks. Earlier this year, we resumed our stock buyback program. To date, we have bought back 2.8 million shares at an average price of $49.33 for $140 million. We have $360 million remaining under our stock buyback authorization.

Today, we are pleased to announce that our board has approved a 150% increase in our annual dividend from $0.50 to $1.25. Given our cash position and future cash generation expectation, it is our board's intent to sustain and grow our dividend over time. We are modifying our dividend policy to drive our dividend off our EPS, as stated previously, but to also supplement it from cash we expect to continue to generate from vacation ownership, Bal Harbour and asset sales. $1.25 dividend puts our yield over 2%, making us one of the highest yielding stocks in our sector.

Complementing our healthy dividend will be stock buybacks as and when opportunities present themselves. We are buyers at a discount to our intrinsic value. As a reminder, we returned over $7 billion to shareholders from 2006 through 2008.

Finally, a quick word on our upcoming 10-Q filing. As a result of the changes we recently made in our organization structure, we're enhancing our segment reporting. Starting with our Q3 10-Q, we will report 4 segments: The Americas; Europe, Africa, Middle East or EAME as we call it; Asia; and vacation ownership. We expect you will find the additional information helpful.

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. [Operator Instructions] Sylvia, can have the first question please?

Question-and-Answer Session

Operator

Your first question comes from line of Joe Greff from JPMorgan.

Jonathan Mohraz - JP Morgan Chase & Co, Research Division

This is John Mohraz in for Joe Greff. Vasant, I apologize if I missed it, but the net cash proceeds, net of tax from the sale of the former Sheraton Manhattan Times Square? And then also, you talked about a pause in the global economy. Are you seeing any slowing of new hotel openings for 2013? And if so, which geographies?

Vasant M. Prabhu

Yes, the cash, as I said, the cash from all the hotel sales we have done so far is a little over $200 million -- $500 million, rather. So the Manhattan would be in the high $200s million towards $300 million.

Frits van Paasschen

Yes. And then, John, in terms of opening activity, again, it's been so slow in terms of new development in North America and Europe that any slowdown in those markets hasn't affected things much. As you go around the rest of the world, if anything, development interest has increased. So no, I think the short answer is, 2013 to us from an opening perspective and development is continuing unabated at this point.

Operator

Your next question comes from Felicia Hendrix from Barclays.

Felicia R. Hendrix - Barclays Capital, Research Division

So your same-store owned REVPAR North America was up 0.6 in constant dollars. I was just wondering, if you strip out Canada, what was that? And then also regarding your 2013 REVPAR outlook, wondering what that implied for North America and international? And then what kind of underlying macro backdrop are you looking at? So for example, U.S. GDP and for Europe and Asia, particularly China?

Vasant M. Prabhu

Yes, the impact on our North American REVPAR of Canada was about 100 basis points on the owned set. The other big impact was Argentina on our international REVPAR. I believe it was 300 or 400 basis points. So the 2 together is probably 200 to 300 basis points in our owned REVPAR so those are the big drags, Argentina and Canada. In the comments earlier, we said we thought the U.S. is trending right now to be in the upper half of our guidance range for the fourth quarter. So we look at the U.S. as being -- for next year, we're sort of assuming the U.S. will be somewhere in the middle of the range we provided. Now as we said, current trends would say that we are in the lower half of that 4% to 7% range for next year. Our expectation is pending further data that there will be a pickup in China, for example, post the transition and potentially in the U.S., which would put us in the upper half of the range. I don't know, Frits, if you want to add anything.

Frits van Paasschen

Yes, I think, Felicia, that's sort of the point. I mean, what we tried to detail in our comments was that there are mixed signals today as to where the overall trend line is headed, more suggesting a return to growth than a continued slowing down. And the range that we indicated, the 4% to 7% for 2013, in essence basically says if there's a resumption of the recovery, we get closer to the 7% number. If things don't pick up based on trends today, we're closer to the 4% number. And I think the other thing that we wanted to be clear about is it's very difficult at this time to know exactly how to read 2013, and thus, the range.

Operator

Your next question comes from Harry Curtis from Nomura.

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

About the M&A activity that you expect in lodging for next year, we've seen Orient -- the Orient Express possible transaction, do you think that's an indicator of larger activities? And where do you think the banks are as far as their desire to finance M&A in the sector?

Vasant M. Prabhu

Well, if you talk about individual hotels, it's a mixed bag in terms of availability of financing. Outside the U.S., there are really no issues, and never have been in terms of hotel construction and the availability of financing. In the U.S., there's been a greater interest in financing existing hotels with cash flow than new construction. But we're hearing that maybe things are improving on that front. If you're talking about bigger deals, our interest really is in things that are complementary to what we have. We like the idea of brands that may be complementary to what we have, where there is a fair amount of leverage in terms of reducing overheads, as well as they would benefit from our infrastructure, SPG, our reservation system, our sales force, et cetera. So beyond that, I don't think there's much more we would say. The Orient Express one is something that's been underway for a long time. [indiscernible] took a position in it a few years ago.

Frits van Paasschen

Yes, I think conceptually, Harry, it's clear based on our own experience with Le Méridien that when we have, as Vasant put it, a complementary brand to add to the portfolio, there's a considerable amount of value to be added by plugging into the platform. So the rationale for consolidating brands, I think, is pretty clear. The opportunity is really the driver of this. And the universe of possible brands that would add to our portfolio isn't huge, and I think any transaction to state the obvious, takes a willing seller and buyer. And for the most part, the brands that would be interesting to us haven't traded anywhere near their volume that would give us a lot of opportunities.

Operator

Your next question comes from Joshua Attie from Citi.

Joshua Attie - Citigroup Inc, Research Division

In the past, you've mentioned wanting to pace your asset sale program so that you're selling when earnings are cyclically high. Given the deceleration of demand that you talked about and also your desire to de-risk the business, would you consider a more aggressive near-term asset sale program because it seems like the demand and financing might be there to support it if you did?

Frits van Paasschen

Yes, Josh, this is Frits. I think your comment about pacing, in my mind, the pace has more to do with the ability to absorb, in terms of the buyer mix, the properties that we have for sale. And our pace of sale has been determined more by our sense of overall demand to buy hotels. In terms of a bigger sale, therefore, the issue that we continue to calibrate on is whether, in fact, there is demand for greater volume. I think your point about how we've characterized this in terms of trying to sell towards the peak, it's as much also looking at it the other way, which is when we were asked about asset sales a couple of years ago, the other concern that we had is we were selling off of very low earnings numbers and would only be interested in doing that if we were getting value commensurate with the long-term earnings potential of those properties, and also, per key sales prices that were closer to replacement costs. So look, I think this is a stage in the cycle where asset sales, I think, make sense, for us, as I said. Just to recap this again, it's in more a function of whether there's been a steady pool of willing buyers, and we have the benefit, in that with the strength of our cash position, we don't need a second buyer in a transaction because our alternative is to hold until we feel like we can get one. So we continue to look at opportunities to sell hotels. It's pretty much a constant activity for us, and we are optimizing timing, pace and price. And also, by the way, making sure we have partners that when we have a 20- or 30- or 40-year contract, we are looking forward to working with them over that long period of time.

Operator

Your next question comes from Patrick Scholes from SunTrust Robinson Humphrey.

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

A question for you on the share repurchase program. As I compare this latest results versus what you had done in the second quarter, it doesn't look like you had purchased any more shares following your second quarter conference call. Question is, are we restricted at all during the quarter from making repurchases?

Vasant M. Prabhu

You're right. Since we had the call, we have not bought any more. We wouldn't comment on whether there were restrictions or not. But in general, I think what we've told you is we have an authorization. We have parameters in terms of when we are buyers, general buyers as to have a point of view on intrinsic value and buy at a discount. But in terms of restrictions and those kinds of things, I don't think we would comment on those. But you're right about the fact that we didn't buy anything since the last call.

Frits van Paasschen

Yes, and I think again philosophically here, we recognize that -- and certainly this has been true over the last 2 or 3 years, our stock has been much more volatile than our prospects. And so we are willing to wait for those moments where we trade it at a good discount to intrinsic value and use those opportunities.

Operator

The next question comes from Ian Weissman from ISI Group.

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

I was wondering if you could discuss any plans to potentially spin out the Vacation Ownership business?

Vasant M. Prabhu

We always look at options for that business. We stated -- we told you a few years ago that we were going to run the business for cash. As we said earlier, we've generated $800 million in cash from that business. So we are pleased, that we, Starwood, and you, the shareholders, have benefited directly from the cash coming out of that business. The business is very stable. It's performing well. It has -- we have ways to grow the business without having to deploy large amounts of capital. There are ways to add inventory in, let's call it, phases. Those are some of the things we're doing. We will continue to evaluate all our options. But there are no imminent plans to do anything along the lines of what you're suggesting.

Frits van Paasschen

Yes, Ian, I just, I think I'm going to amplify what Vasant said. First of all, we have a terrific team managing our Vacation Ownership business, and as a function of that, the product they have to sell and the brands behind them, this business has performed very well. I mean we've been able to get about $800 million in cash now cumulatively out of this business over the last 3 years -- or 3 or 4 years. And if you compare that to what a spinout at that time might have been worth, it's clearly been the smart move to keep this business. Looking ahead, whether it's the profile of our buyers, the response to our securitization, the way we've been able to sell, the way we've been able to use Vacation Ownership business to monetize some of our assets, this is a business that fits within the framework of an 80% fee-driven business. But having said that, I think, as Vasant said, there's not a point here in being any more definitive than that.

Operator

Your next question is from Robin Farley from UBS.

Robin M. Farley - UBS Investment Bank, Research Division

I missed some of your commentary, but it sounded like you were talking about corporate negotiations for next year being on hold until after the election. Does that -- has your expectation for high single-digit increase for next year changed? And then also, just wanted to clarify your comment on REVPAR expectations for next year in Asia, and I understand that range is kind of base case and then upside post-election. But would you say that your expectation for Asia specifically is now kind of below North American REVPAR expectations for next year, or versus previously being above that range?

Vasant M. Prabhu

You asked several questions there. In the prepared comments, we did say that we are still shooting for high single digits rate growth in corporate rate negotiations in the U.S. and feel good about that. As we indicated, our occupancies are pretty much about peak levels. So it's time for rate to go up even more than it has. In terms of next year, it's really early to talk definitively about what each region is going to do next year. We gave you a broad range of 4% to 7%. Our general sense is that at current trends, we're in the lower half of the range. We do think there could be an uptick post the leadership transition in China and in the U.S., which would put us in the upper half of the range. Today, if you look at our numbers for Q3 and what we expect in Q4, Asia in general is growing at a slower pace than the U.S.

Frits van Paasschen

Robin, I think what -- in the prepared remarks, we commented that there were some group business that was on hold until after the election. The corporate rate negotiations are very much in process.

Operator

Your next question comes from Stephen Kent from Goldman Sachs.

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

Yes, if you could just talk a little bit about the ability to grow your unit growth more aggressively in the U.S.? And the reason I ask that is it seems like global growth is slowing, but maybe the U.S. is holding up a little bit better. So do you start to accelerate the unit growth in the U.S. as an offset?

Frits van Paasschen

That -- Stephen, this is Frits. That would certainly be a great way to balance the portfolio growth. It's certainly been the case over the last few years that growth in markets outside of North America have been well offset by the acceleration. And so for that to swing the other way, I think is just something that's quite possible. And as I mentioned in my remarks, the interest among owners today in initiating new projects and their confidence in – or I should say, their growing confidence in being able to finance projects has certainly improved. We'll also look at ways to be a catalyst in that. I think the recently announced conversion of the Aloft at San Francisco Airport and the project we have similarly for a conversion in Tucson, as well as a number of others, would suggest that there are ways for us to look at opportunities to build in and out of the pipeline. As you know from Vasant's comments also that with the rate increases that we would anticipate driving REVPAR in North America, the economics of building a hotel get better by the day. And it's a question of whether the overall development community really picks up in 2013 or whether that takes a little bit longer. And that's something certainly we would try to pull forward if we can.

Operator

Your next question is from Ryan Meliker from MLV & Co.

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

I was just hoping you could talk a little bit about kind of the acquisition/disposition story. You talked a lot about -- or I guess, earlier with regards to somebody else's questions about being focused on selling assets at the appropriate time. I'm first wondering if you can give us some color on is a portfolio deal a possibility? Does the fact that you now have so much exposure to a variety of countries and not just the U.S. any longer, not that you were ever just the U.S., but much less exposure to the U.S. limit the opportunity for a portfolio deal in the future? And then second, historically, you've talked about -- I think you had mentioned somewhere along the lines of 100 properties in a brand, particularly flex service brand really gain scale where it'll be a lot easier to go out and increase the size of that portfolio going forward. Are you willing to put your balance sheet to work to potentially acquire hotels for the Aloft or Element brands? Obviously, you just did an Aloft conversion. It seems like there's going to be a lot of hotels coming to market. There are a lot of hotels coming to market in the select service arena in the U.S. that might create that opportunity?

Frits van Paasschen

Yes, Ryan, I think when it comes to hotel sales, I think what happens when we answer those questions is that because we can't comment on many of the ongoing discussions we have, we tend to make answers that sound more macro when, in fact, the conclusions that we're sharing with you are based on a variety of very specific conversations that we continue to have around our assets with potential buyers. And so the timing that we're talking about is a concept that we're testing in specific all of the time, in real time. And coupled with that is the idea of whether there would be a portfolio sale possible. First of all, management precedent with what we did in 2006 would suggest that we're very comfortable with that concept. I will tell you that those conversations that I alluded to a moment ago would tell us that today, there still isn't yet the kind of volume and depth in the market to create the appetite for that. That could very well change as we get into 2013. We'll certainly keep an eye on it. And then in terms of the select serve brands and the overall notion of scale and particularly in reference to Aloft, which is where our comments around the 100 came from, as you'll have noticed in my comments, we think in the next couple of years, we'll get to 100 with Aloft, that's really the trajectory based on the projects and development conversations we're having now. Our interest in having done the redevelopments that we did in North America point to the fact that the Aloft conversion strategy is a very viable one, and that we're willing to invest behind it. And I don't think that, that meaningfully changes the picture from a Starwood capital or real estate dependence perspective, but I do think it becomes a potential catalyst for growth. And with that, I may just -- let me see whether Vasant or Stephen have something to add to that.

Operator

Your next question comes from Nikhil Bhalla from FBR.

Nikhil Bhalla - FBR Capital Markets & Co., Research Division

Just wanted to ask you a little bit about, as you look forward to the demand you have on the books right now, how is that demand pacing by quarter in 2013? Are there certain quarters that are stronger than others?

Vasant M. Prabhu

I think that's just too much in terms of specificity around '13 that it makes sense to go into right now. We'll talk a lot more about that in February. I think it's fair to say that group is pacing in the mid-single digits as we look ahead to 2013, so we feel good about that, and we feel good about our corporate rate negotiations are likely to play out. So on all those fronts, really, we don't feel too concerned about 2014 -- 2013 in terms of the early indicators.

Frits van Paasschen

Yes, I think it's important, Nikhil, to recognize that in our business, we don't have as much insight into what sales look like by quarter based on commitments from our customers today. Group would be the one area that's the exception there. We see group doing stronger in 2013 than 2012, as a general comment. But I wouldn't feel comfortable splitting that out by quarter and having that be very meaningful. And then again, recognize that outside North America, the group business is less important. And as Vasant pointed out, the only other piece of information we have that's more definitive would be where we think we'll come out on rate. And that clearly is also something that isn't, therefore, an aspect of our demand projection that we could play out quarter-by-quarter.

Operator

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

Shaun C. Kelley - BofA Merrill Lynch, Research Division

I just wanted to ask about kind of capital needs over the next couple of years relative to this year. I know you're -- you haven't provided specific guidance yet, but could you just give a sense of what's needed on the owned hotel front and what might be needed on timeshare? And obviously, where I'm going with it trying to get a sense of just how much cash you guys might have to be able to return to shareholders as you move towards asset light over the next couple of years?

Vasant M. Prabhu

As you might've seen this year, we will probably spend less capital than we had said earlier in the year. There's just been some delays on a couple of projects, so some of those are moving into next year. So if you looked at our release, you'll see that our capital expectations are lower this year. I think you should assume that next year, we'll be at or slightly above where this year was because of some of those things being pushed into next year. And then after that, we should start to see a moderating. Of course, along the way, if we can sell hotels, as we've done in the past, where the new owner takes on the capital spend, then that would reduce our capital need, too. Frits, you want to add anything?

Frits van Paasschen

No. Look, I think that we're investing heavily on our owned assets today as we get through those projects and as we sell hotels over time, that will tail down. I think we're at a considerable high now relative to what the trend line would be. And then timeshare, I don't think is a big number in the scheme of what we've been talking about. And then finally, I think investment in our own infrastructure is already, today, at a pretty high level and is less constrained by our willingness to spend than our ability to deploy meaningfully the changes that would be brought along by that.

Stephen Pettibone

Thanks, Frits and Vasant. I want to thank all of you for joining us today for our third 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 Third Quarter 2012 Earnings Conference Call. You may now disconnect.

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