Starwood Reports Second Quarter 2013 Results

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Starwood Reports Second Quarter 2013 Results

STAMFORD, Conn.--(BUSINESS WIRE)-- Starwood Hotels & Resorts Worldwide, Inc. (NYS: HOT) today reported second quarter 2013 financial results.


Second Quarter 2013 Highlights

  • Excluding special items, EPS from continuing operations was $0.79. Including special items, EPS from continuing operations was $0.71.
  • Adjusted EBITDA was $333 million, which included $30 million of EBITDA from the St. Regis Bal Harbour residential project.
  • Excluding special items, income from continuing operations was $153 million. Including special items, income from continuing operations was $137 million.
  • Worldwide Systemwide REVPAR for Same-Store Hotels increased 4.4% in constant dollars (3.9% in actual dollars) compared to 2012. Systemwide REVPAR for Same-Store Hotels in North America increased 5.2% in constant dollars (5.1% in actual dollars).
  • Management fees, franchise fees and other income increased 6.3% compared to 2012.
  • Worldwide Same-Store Company-Operated gross operating profit margins increased approximately 94 basis points compared to 2012.
  • Worldwide REVPAR for Starwood Same-Store Owned Hotels increased 4.4% in constant dollars (3.7% in actual dollars) compared to 2012.
  • Margins at Starwood Same-Store Owned Hotels Worldwide increased approximately 160 basis pointscompared to 2012.
  • Earnings from Starwood's vacation ownership and residential business increased approximately $1 million compared to 2012.
  • During the quarter, the Company signed 32 hotel management and franchise contracts, representing approximately 6,500 rooms, and opened 18 hotels and resorts with approximately 3,100 rooms.

Second Quarter 2013 Earnings Summary

Starwood Hotels & Resorts Worldwide, Inc. ("Starwood" or the "Company") today reported EPS from continuing operations for the second quarter of 2013 of $0.71 compared to $0.66 in the second quarter of 2012. Excluding special items, EPS from continuing operations was $0.79 for the second quarter of 2013 compared to $0.70 in the second quarter of 2012. Special items in the second quarter of 2013, which totaled a charge of $16 million (after tax), primarily related to certain non-recurring income tax charges associated with an asset disposition, interest on deferred income from sales of vacation ownership units, and the resolution of certain tax positions. Special items in the second quarter of 2012, which totaled a charge of $9 million (after-tax), primarily related to costs associated with the early extinguishment of debt. Excluding special items, the effective income tax rate in the second quarter of 2013 increased to 33.8%, compared to 31.5% in the second quarter of 2012, primarily due to the higher percentage of pretax income in the United States in 2013.

Income from continuing operations was $137 million in the second quarter of 2013, compared to $129 million in the second quarter of 2012. Excluding special items, income from continuing operations was $153 million in the second quarter of 2013 compared to $138 million in the second quarter of 2012.

Net income was $137 million and $0.71 per share in the second quarter of 2013, compared to $122 million and $0.62 per share in the second quarter of 2012.

Frits van Paasschen, CEO, said, "We exceeded our profit expectations -- despite slower revenue growth and exchange rate headwinds -- thanks to SG&A cost control and good margin performance at Owned and Managed hotels. The global recovery continues. Tight supply in North America and Europe is the order of the day, with virtually no new high-end hotels coming on stream. Our occupancies in Europe are close to 72%. In North America, they reached 76%, the highest Starwood has ever reported. In China, our hotels significantly outperformed the competition, demonstrating the value our brands bring to our hotel owners, even in soft market conditions.

Our global luxury business performed especially well in the second quarter, highlighting the strength of our global footprint of over 35,000 luxury rooms in nearly 40 countries. Rising wealth, global business demand, and interest in new destinations are set to fuel the growth in luxury travel for some time to come. With St. Regis, Luxury Collection and W Hotels, our three distinct approaches to luxury, we are well positioned to capture greater share in this profitable segment."

Six Months Ended June 30, 2013 Earnings Summary

Income from continuing operations was $280 million in the six months ended June 30, 2013 compared to $258 million in the same period in 2012. Excluding special items, income from continuing operations was $301 million in the six months ended June 30, 2013 compared to $262 million in the same period in 2012.

Net income was $350 million and $1.80 per share in the six months ended June 30, 2013 compared to $250 million and $1.27 per share in the same period in 2012. Net income in the six months ended June 30, 2013 included a tax benefit of $70 million, in discontinued operations, as a result of the reversal of a reserve associated with an uncertain tax position related to a previous disposition. The applicable statute of limitation for this tax position lapsed during the first quarter of 2013.

Adjusted EBITDA was $648 million in the six months ended June 30, 2013 compared to $620 million in the same period in 2012.

Second Quarter 2013 Operating Results

Management and Franchise Revenues

Worldwide Systemwide REVPAR for Same-Store Hotels increased 4.4% in constant dollars (3.9% in actual dollars) compared to the second quarter of 2012. International Systemwide REVPAR for Same-Store Hotels increased 3.3% in constant dollars (2.2% in actual dollars).

Changes in REVPAR for Worldwide Systemwide Same-Store Hotels by region:

 
REVPAR

Constant

   
Region

    Dollars    

   Actual Dollars
Americas:
North America5.2%5.1%
Latin America0.7%0.7%
Asia Pacific:
Greater China0.9%2.7%
Rest of Asia5.3%0.3%
Europe, Africa & Middle East:
Europe2.5%2.4%
Africa & Middle East7.5%5.5%
 

Changes in REVPAR for Worldwide Systemwide Same-Store Hotels by brand: 

 
REVPAR

Constant

   
Brand

    Dollars    

   Actual Dollars
St. Regis/Luxury Collection8.7%8.4%
W Hotels4.2%4.0%
Westin4.4%3.8%
Sheraton3.3%2.5%
Le Méridien1.8%1.9%
Four Points by Sheraton5.3%5.3%
Aloft8.2%8.2%
 

Worldwide Same-Store Company-Operated gross operating profit margins increased approximately 94 basis points compared to 2012. International gross operating profit margins for Same-Store Company-Operated properties increased 70 basis points. North American Same-Store Company-Operated gross operating profit margins increased approximately 123 basis points, driven by REVPAR increases and cost controls.

Management fees, franchise fees and other income were $236 million, up $14 million, or 6.3% compared to the second quarter of 2012. Management fees increased 8.7% to $137 million and franchise fees increased 7.7% to $56 million.

Development

During the second quarter of 2013, the Company signed 32 hotel management and franchise contracts, representing approximately 6,500 rooms, of which 23 are new builds and 9 are conversions from other brands. At June 30, 2013, the Company had approximately 400 hotels in the active pipeline representing approximately 100,000 rooms.

During the second quarter of 2013, 18 new hotels and resorts (representing approximately 3,100 rooms) entered the system, including Le Méridien Yixing (China, 280 rooms), Aloft Ahmedabad, SG Road (India, 178 rooms), King George, a Luxury Collection Hotel, Athens (Greece, 102 rooms), The Westin Sacramento (California, 101 rooms), Sheraton Pittsburgh Airport Hotel (Pennsylvania, 200 rooms), and Element Vaughan Southwest (Canada, 152 rooms). During the quarter, two properties (representing approximately 400 rooms) were removed from the system.

Owned, Leased and Consolidated Joint Venture Hotels

Worldwide REVPAR at Starwood Same-Store Owned Hotels increased 4.4% in constant dollars (3.7% in actual dollars) when compared to 2012. REVPAR at Starwood Same-Store Owned Hotels in North America increased 9.8% in constant dollars (9.2% in actual dollars). Internationally, Starwood Same-Store Owned Hotel REVPAR increased 0.7% in constant dollars (decreased 0.1% in actual dollars).

Revenues at Starwood Same-Store Owned Hotels Worldwide increased 5.5% in constant dollars (4.8% in actual dollars) while costs and expenses increased 3.6% in constant dollars (2.7% in actual dollars) when compared to 2012. Margins at these hotels increased approximately 160 basis points compared to 2012.

Revenues at Starwood Same-Store Owned Hotels in North America increased 11.1% in constant dollars (10.5% in actual dollars) while costs and expenses increased 6.2% in constant dollars (5.7% in actual dollars) when compared to 2012. Margins at these hotels increased approximately 360 basis points.

Internationally, revenues at Starwood Same-Store Owned Hotels increased 1.5% in constant dollars (0.7% in actual dollars) while costs and expenses increased 1.5% in constant dollars (0.2% in actual dollars) when compared to 2012. Margins at these hotels increased approximately 40 basis points.

Revenues at owned, leased and consolidated joint venture hotels were $419 million, compared to $453 million in 2012. Expenses at owned, leased and consolidated joint venture hotels were $328 million compared to $360 million in 2012. Second quarter 2013 results were negatively impacted by asset sales completed since the second quarter of 2012.

Vacation Ownership

Total vacation ownership revenues increased 7.4% to $159 million in the second quarter of 2013, when compared to 2012, primarily due to increased revenues from resort operations, which included the transfer of the Westin St. John's revenues from owned hotels to vacation ownership. Originated contract sales of vacation ownership intervals and number of contracts signed increased 3.9% and 1.7%, respectively. The average price per vacation ownership unit sold increased 2.8% to approximately $14,800, driven by inventory mix and increased focus on sales through new buyer channels.

Residential

During the second quarter of 2013, the Company's residential revenues were $80 million compared to $168 million in 2012. The Company realized residential revenues from Bal Harbour of $74 million and generated EBITDA of $30 million, compared to revenues of $167 million and EBITDA of $35 million in the same period of 2012. During the second quarter of 2013, the Company closed sales of 22 units at Bal Harbour and realized incremental cash proceeds of $71 million associated with these units. From project inception through June 30, 2013, the Company has closed contracts on approximately 93% of the total residential units available at Bal Harbour and realized residential revenue of $1.0 billion and EBITDA of $249 million.

Selling, General, Administrative and Other

During the second quarter of 2013, selling, general, administrative and other expenses increased 2.3% to $88 million for the three months ended June 30, 2013, when compared to the corresponding period of 2012, primarily due to an increase in reserves for uncollectible receivables and the unfavorable impact of foreign exchange. These increases were partially offset by approximately $7 million of favorable benefits from certain government incentives received in connection with the relocation of our corporate headquarters. These incentives were forecasted for 2013, but were anticipated in the back half of the year. The Company now forecasts selling, general, administrative, and other expenses to increase 2% to 3% for the full year.

Capital

Gross capital spending during the quarter included approximately $31 million of maintenance capital and $48 million of development capital.

Asset Sales

During the second quarter of 2013, the Company completed the sale of the W New Orleans for cash proceeds of approximately $65 million. This hotel was sold subject to a long-term management contract and the Company recorded a deferred gain of approximately $3 million.

Share Repurchase

In the second quarter of 2013 the Company repurchased approximately 140,000 shares at a total cost of approximately $8 million and a weighted average price of $59.77 per share. As of June 30, 2013, approximately $624 million remained available under the Company's share repurchase authorization.

Balance Sheet

At June 30, 2013, the Company had gross debt of $1.266 billion, cash and cash equivalents of $803 million (including $141 million of restricted cash) and net debt of approximately $463 million, compared to net debt of approximately $746 million as of March 31, 2013, in each case excluding debt and restricted cash associated with securitized vacation ownership notes receivable. Net debt at June 30, 2013, including $435 million of debt and $17 million of restricted cash associated with securitized vacation ownership notes receivable, was approximately $881 million.

Outlook

For the Full Year 2013:

Including Bal Harbour, which is expected to contribute approximately $110 million of EBITDA, Adjusted EBITDA is expected to be approximately $1.230 billion to $1.250 billion (based on the assumptions below).

  • Excluding Bal Harbour, Adjusted EBITDA is expected to be approximately $1.120 billion to $1.140 billion, assuming:
    • REVPAR increases at Same-Store Company-Operated Hotels Worldwide of 5% to 6% in constant dollars (approximately 50 basis points lower in actual dollars at current exchange rates).
    • REVPAR increases at Same-Store Company-Owned Hotels Worldwide of 4% to 6% in constant dollars (approximately 100 basis points lower in actual dollars at current exchange rates).
    • Margins at Same-Store Owned Hotels Worldwide increase 75 to 125 basis points.
    • Management fees, franchise fees and other income increase approximately 7.5% to 9.5%.
    • Earnings from the Company's vacation ownership and residential business of approximately $165 million to $170 million.
    • Selling, general and administrative expenses increase approximately 2% to 3%.
  • Full year earnings from owned hotels are negatively impacted by approximately $8 million due to assets sold year to date in 2013.
  • Shifts in exchange rates since we first provided our outlook will negatively impact full year earnings by $12 million if exchange rates stay at current levels.
  • Depreciation and amortization is expected to be approximately $295 million.
  • Interest expense is expected to be approximately $120 million.
  • Full year effective tax rate is expected to be approximately 33%, and cash taxes are expected to be approximately $125 million.
  • Including Bal Harbour, EPS before special items is expected to be approximately $2.81 to $2.88 (based on the assumptions above).
  • Full year capital expenditures (excluding vacation ownership and residential inventory) are expected to be approximately $175 million for maintenance, renovation and technology. In addition, in-flight investment projects and prior commitments for joint ventures and other investments are expected to total approximately $300 million.
  • Vacation ownership (excluding Bal Harbour) is expected to generate approximately $200 million in positive cash flow. Bal Harbour is expected to generate at least $175 million in net cash flow.

For the three months ended September 30, 2013:

  • Including Bal Harbour, which is expected to contribute approximately $15 million of EBITDA, Adjusted EBITDA is expected to be approximately $280 million to $290 million (based on the assumptions below).
  • Excluding Bal Harbour, Adjusted EBITDA is expected to be approximately $265 million to $275 million, assuming:
    • REVPAR increases at Same-Store Company-Operated Hotels Worldwide of 5% to 6% in constant dollars (approximately 50 basis points lower in actual dollars at current exchange rates).
    • REVPAR increases at Same-Store Company-Owned Hotels Worldwide of 4% to 6% in constant dollars (approximately 100 basis points lower in actual dollars at current exchange rates).
    • Management fees, franchise fees and other income increase approximately 7.5% to 9.5%.
    • Earnings from the Company's vacation ownership and residential business are flat to up approximately $5 million year over year.
  • Depreciation and amortization is expected to be approximately $75 million.
  • Interest expense is expected to be approximately $30 million.
  • Including Bal Harbour, income from continuing operations is expected to be approximately $117 million to $124 million, (based on the assumptions above).
  • The effective tax rate is expected to be approximately 33%.
  • Including Bal Harbour, EPS is expected to be approximately $0.60 to $0.64 (based on the assumptions above).

Special Items

The Company's special itemsincluded a pre-tax benefit of $1 million ($16 million charge after-tax) in the second quarter of 2013 compared to a pre-tax charge of $16 million ($9 million after-tax) in the same period of 2012.

The following represents a reconciliation of income from continuing operations before special items to income from continuing operations including special items (in millions, except per share data):

    Three Months Ended
June 30,
      Six Months Ended
June 30,

   2013   

  

   2012   

   2013   

  

   2012   

 
$153 $138 Income from continuing operations before special items$301 $262 
$0.79 $0.70 EPS before special items$1.55 $1.33 
Special Items

Restructuring and other special (charges) credits, net (a)

111
1(1)

Gain (loss) on asset dispositions and impairments, net (b)

(8)(8)
   (15)

Debt Extinguishment (c)

   (15)
1(16)Total special items - pre-tax(7)(12)
 (17) 7 

Income tax benefit (expense) for special items (d)

 (14) 8 
 (16) (9)Total special items - after-tax (21) (4)
 
$137 $129 Income from continuing operations$280 $258 
$0.71 $0.66 EPS including special items$1.44 $1.31 
 
    a) During the six months ended June 30, 2012, the Company recorded a favorable adjustment of $11 million to reverse a portion of a litigation reserve established in 2011.
b)During the six months ended June 30, 2013, the net loss primarily related to the sale of three wholly-owned hotels. During the three months ended June 30, 2012, the net loss primarily related to various asset dispositions. The six months ended June 30, 2012 included a net loss primarily related to the sale of one wholly-owned hotel.
c)During the three and six months ended June 30, 2012, the net charges were associated with the redemption of approximately $495 million of senior notes.
d)During the three months ended June 30, 2013, the net charges included $4 million related to an asset disposition, $8 million to accrue interest on deferred income associated with vacation ownership sales, and approximately $5 million for charges associated with tax reserves and resolution of certain tax positions. The six months ended June 30, 2013, included a tax benefit of $3 million related to an asset sale. During the three and six months ended June 30, 2012, the benefit primarily represented income tax benefits on special items at the statutory rate.
 

The Company has included the above supplemental information concerning special items to assist investors in analyzing Starwood's financial position and results of operations. The Company has chosen to provide this information to investors to enable them to perform meaningful comparisons of past, present and future operating results and as a means to emphasize the results of core ongoing operations.

Starwood will be conducting a conference call to discuss the second quarter financial results at 10:30 a.m. Eastern Time today, available via webcast on the Company's website at http://www.starwoodhotels.com/corporate/about/investor/earnings.html. A webcast replay will be available at 1:30 p.m. Eastern Time on Thursday, July 25 and will run for one year. Alternatively, participants may call into (866) 921-0636 with conference ID 99326536; please dial in fifteen minutes early to ensure a timely start. A call replay will be available from 2:00 p.m. Eastern Time on Thursday, July 25, 2013 through Thursday, August 1, 2013 and can be accessed by dialing (855) 859-2056 with conference ID 99326536.

Definitions

All references to EPS, unless otherwise noted, reflect earnings per diluted share from continuing operations attributable to Starwood's common stockholders. All references to continuing operations, discontinued operations and net income reflect amounts attributable to Starwood's common stockholders (i.e., excluding amounts attributable to noncontrolling interests). All references to "net capital expenditures" mean gross capital expenditures for timeshare and fractional inventory net of cost of sales. EBITDA represents net income before interest expense, taxes, depreciation and amortization. The Company believes that EBITDA is a useful measure of the Company's operating performance due to the significance of the Company's long-lived assets and level of indebtedness. EBITDA is a commonly used measure of performance in the Company's industry which, when considered with GAAP measures, the Company believes gives a more complete understanding of the Company's operating performance. It also facilitates comparisons between the Company and its competitors. The Company's management has historically adjusted EBITDA (i.e., "Adjusted EBITDA") when evaluating the operating performance for the Company, as well as for individual properties or groups of properties, because the Company believes that the inclusion or exclusion of certain recurring and non-recurring items, such as restructuring, goodwill impairment and other special charges, and gains and losses on asset dispositions and impairments, is necessary to provide the most accurate measure of core operating results and as a means to evaluate comparative results. The Company's management also uses Adjusted EBITDA as a measure in determining the value of acquisitions and dispositions and it is used in the annual budget process. The Company has historically reported this measure to its investors and believes that the continued inclusion of Adjusted EBITDA provides consistency in its financial reporting and enables investors to perform more meaningful comparisons of past, present and future operating results and provides a means to evaluate the results of its core ongoing operations. EBITDA and Adjusted EBITDA are not intended to represent cash flow from operations as defined by GAAP and such metrics should not be considered as an alternative to net income, cash flow from operations or any other performance measure prescribed by GAAP. The Company's calculation of EBITDA and Adjusted EBITDA may be different from the calculations used by other companies and, therefore, comparability may be limited.

All references to Same-Store Owned Hotels reflect the Company's owned, leased and consolidated joint venture hotels, excluding condo hotels, hotels sold to date and hotels undergoing significant repositionings or for which comparable results are not available (i.e., hotels not owned during the entire periods presented or closed due to seasonality or natural disasters). References to Company-Operated Hotel metrics (e.g., REVPAR) reflect metrics for the Company's owned, leased and managed hotels. References to Systemwide metrics (e.g., REVPAR) reflect metrics for the Company's owned, managed and franchised hotels. REVPAR is defined as revenue per available room. ADR is defined as average daily rate.

All references to revenues in constant dollars represent revenues, excluding the impact of the movement of foreign exchange rates. The Company calculates revenues in constant dollars by calculating revenues for the current year using the prior year's exchange rates. The Company uses this revenue measure to better understand the underlying results and trends of the business, excluding the impact of movements in foreign exchange rates.

All references to contract sales or originated sales reflect vacation ownership sales before revenue adjustments for percentage of completion accounting methodology. All references to earnings from vacation ownership and residential represents operating income before depreciation expense. All references to management and franchise revenues represent base and incentive fees, franchise fees, amortization of deferred gains resulting from the sales of hotels subject to long-term management contracts and termination fees.

Starwood Hotels & Resorts Worldwide, Inc. is one of the leading hotel and leisure companies in the world with 1,162 properties in nearly 100 countries and 171,000 employees at its owned and managed properties. Starwood is a fully integrated owner, operator and franchisor of hotels, resorts and residences with the following internationally renowned brands: St. Regis®, The Luxury Collection®, W®, Westin®, Le Méridien®, Sheraton®, Four Points® by Sheraton, Aloft®, and Element®. The Company boasts one of the industry's leading loyalty programs, Starwood Preferred Guest (SPG), allowing members to earn and redeem points for room stays, room upgrades and flights, with no blackout dates. Starwood also owns Starwood Vacation Ownership, Inc., a premier provider of world-class vacation experiences through villa-style resorts and privileged access to Starwood brands. For more information, including reconciliations of non-GAAP financial measures to GAAP financial measures, please visit www.starwoodhotels.com or contact Investor Relations at (203) 351-3500.

Note: This press release contains forward-looking statements within the meaning of federal securities regulations. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties and other factors that may cause actual results to differ materially from those anticipated at the time the forward-looking statements are made. Further results, performance and achievements may be affected by general economic conditions including the impact of war and terrorist activity, natural disasters, business and financing conditions (including the condition of credit markets in the U.S. and internationally), foreign exchange fluctuations, cyclicality of the real estate (including residential) and the hotel and vacation ownership businesses, operating risks associated with the hotel, vacation ownership and residential businesses, relationships with associates and labor unions, customers and property owners, the impact of the internet reservation channels, our reliance on technology, domestic and international political and geopolitical conditions, competition, governmental and regulatory actions (including the impact of changes in U.S. and foreign tax laws and their interpretation), travelers' fears of exposure to contagious diseases, risk associated with the level of our indebtedness, risk associated with potential acquisitions and dispositions and the introduction of new brand concepts and other risks and uncertainties. These risks and uncertainties are presented in detail in our filings with the Securities and Exchange Commission. Future vacation ownership units indicated in this press release include planned units on land owned by the Company or by joint ventures in which the Company has an interest that have received all major governmental land use approvals for the development of vacation ownership resorts. There can also be no assurance that such units will in fact be developed and, if developed, the time period of such development (which may be more than several years in the future). Some of the projects may require additional third-party approvals or permits for development and build out and may also be subject to legal challenges as well as a commitment of capital by the Company. The actual number of units to be constructed may be significantly lower than the number of future units indicated. There can also be no assurance that agreements will be entered into for the hotels in the Company's pipeline and, if entered into, the timing of any agreement and the opening of the related hotel. Although we believe the expectations reflected in forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained or that results will not materially differ. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
Unaudited Consolidated Statements of Income
(In millions, except per share data)
    
Three Months Ended
June 30,
Six Months Ended
June 30,

  2013  

  

  2012  

  %
Variance

  2013  

  

  2012  

  %
Variance
Revenues
$419$453(7.5)Owned, leased and consolidated joint venture hotels$798$855(6.7)
239316(24.4)Vacation ownership and residential sales and services548830(34.0)
2362226.3Management fees, franchise fees and other income4534237.1
  Read Full Story

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