Good margins sees Starwood’s profits climb

Starwood’s fourth-quarter profits rose 28 per cent on increased revenue per available room and higher operating margins.

The hotel operator issued an upbeat full-year forecast and its shares rose more than two per cent.

Full statement

Starwood Hotels & Resorts Worldwide, Inc. (NYSE: HOT) today reported strong fourth quarter 2006 financial results, driven by double-digit worldwide REVPAR increases and higher operating margins.

Fourth Quarter 2006 Highlights

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—Excluding special items, EPS from continuing operations was $0.92 compared to $0.71 for the fourth quarter of 2005. Including special items, EPS from continuing operations was $0.94 compared to $0.70 in the fourth quarter of 2005.

—Worldwide System-wide REVPAR for Same-Store Hotels increased 11.4% compared to the fourth quarter of 2005. System-wide REVPAR for Same-Store Hotels in North America increased 9.1% compared to the fourth quarter of 2005.

—Worldwide REVPAR for Starwood branded Same-Store Owned Hotels increased 11.7% compared to the fourth quarter of 2005. REVPAR for Starwood branded Same-Store Owned Hotels in North America increased 8.6% compared to the fourth quarter of 2005.

—Margins at Starwood branded Same-Store Owned Hotels Worldwide and in North America improved 280 and 153 basis points, respectively, as compared to the fourth quarter of 2005.

—Management and franchise revenues increased 54.8% over 2005, including revenues from the Le Meridien hotels and the hotels sold to Host.

—The Company signed 61 hotel management and franchise contracts in the quarter (representing approximately 12,500 rooms). For the full year, the Company signed 156 hotel management and franchise contracts (representing approximately 36,700 rooms).

—Excluding residential sales, contract sales at vacation ownership properties increased 15.0% over 2005. Reported revenues from vacation ownership and residential sales increased $130 million when compared to 2005. Strong increases in revenues from vacation ownership sales were partially offset by a decline in residential sales.

—Excluding special items, income from continuing operations was $199 million compared to $162 million in the same period of 2005. Net income, including special items, was $203 million compared to $159 million in the fourth quarter of 2005.

—Total Company Adjusted EBITDA was $383 million when compared to $391 million in 2005. The year over year reduction is due to the sale of 50 hotels since the beginning of the fourth quarter of 2005 and stock based compensation expense, offset in part by increases in management and franchise revenues.

—During the fourth quarter, the Company repurchased approximately 0.6 million shares at a cost of $34.2 million. For the full year, the Company repurchased 21.7 million shares at a cost of $1.263 billion.

Starwood Hotels & Resorts Worldwide, Inc. (“Starwood” or the “Company”) today reported EPS from continuing operations for the fourth quarter of 2006 of $0.94 compared to $0.70 in the fourth quarter of 2005. Excluding special items, EPS from continuing operations was $0.92 for the fourth quarter of 2006 compared to $0.71 in the fourth quarter of 2005. Excluding special items, the effective income tax rate in the fourth quarter of 2006 was 21.4% including a $19 million benefit resulting from the recognition of certain tax credits related to 2005.

Income from continuing operations was $203 million in the fourth quarter of 2006 compared to $159 million in 2005. Excluding special items, which net to a $4 million benefit in 2006, income from continuing operations was $199 million for the fourth quarter of 2006 compared to $162 million in 2005.

Net income was $203 million and EPS was $0.93 in the fourth quarter of 2006 compared to net income of $159 million and EPS of $0.70 in the fourth quarter of 2005.

Steven J. Heyer, CEO, said, “I am extremely proud of what Starwood accomplished this year and am even more excited about our positioning for 2007. With our fee business now the largest contributor to our bottom line, our broad global presence, our industry-leading pipeline, and our significant brand initiatives throughout 2006, we are transforming from a cyclical real estate business into a leading global lifestyle brand company. We emerged from 2006 with the right asset mix, a clear strategy, focus, process and discipline. By any measure, it is clear our new model has been paying off. Today, Starwood is a higher-growth, more capital-efficient, cash-rich and less-cyclical business.”

Heyer continued: “Fourth quarter results were impressive, beating our guidance. While North America branded REVPAR at Same-Store Owned Hotels increased at the high end of our guidance, up 8.6%, Worldwide REVPAR jumped 11.7%. Importantly, this REVPAR growth had great flow-through at these hotels, driving North American and Worldwide margin increases of over 150 basis points and 280 basis points, respectively. Worldwide System-wide REVPAR increased 11.4% and managed and franchised revenues increased 54.8% in the quarter.

Our pipeline’s upward trajectory is a testament to the strength of our branding initiatives, our development focus, and our emphasis on building relationships with the best development partners in the world. We signed 156 new long-term hotel contracts this year, the most in our history, and according to December 2006 Smith Travel data, our brands emerged as #1 overall in the upper-upscale and luxury development market, with 38% of the hotels and rooms in the pipeline today. This represents strong growth on an absolute basis, and significant market share gains. We have a leading position in the upper-upscale and luxury segments, and our global development group and brand teams are working to extend this lead.

Revenues at our timeshare division grew 13% year over year, and we expect our St Regis, Westin and Sheraton brands to continue driving strong growth in this under-penetrated business. Contract sales were up 15% in the quarter due to the combination of higher pricing and additional units sold.

We fully expect 2007 to be another great year for our company and we remain focused on our strategic initiatives - service excellence, brand development, pipeline development, vacation ownership growth, real estate development and repositionings. We believe that these initiatives will allow us to outperform the competition and continue to create value for our shareholders.”

Operating Results

Fourth Quarter Ended December 31, 2006

Management and Franchise Revenues

Worldwide System-wide (owned, managed and franchised) REVPAR for Same-Store Hotels increased 11.4% compared to the fourth quarter of 2005 including 24.8% in Africa & the Middle East, 17.0% in Europe, 12.5% in Latin America, 11.2% in Asia Pacific and 9.1% in North America. The 9.1% increase in System-wide REVPAR for Same-Store Hotels in North America by brand was: St. Regis/Luxury Collection 15.7%, W Hotels 13.5%, Westin 9.8% and Sheraton 7.7%.

Management fees, franchise fees and other income were $209 million, up $57 million, or 37.5%, from the fourth quarter of 2005. Management fees grew 57.4% to $107 million and franchise fees grew 34.8% to $31 million. The increases are related to the addition of new hotels (including Le Meridien hotels and the hotels sold to third parties, including Host Hotels & Resorts, Inc. (“Host”)), and growth in REVPAR of existing hotels under management, offset in part by fees associated with hotels that left the system.

The hotels sold to Host contributed $28 million, and the Le Meridien hotels added $16 million, respectively, of management and franchise revenues during the fourth quarter of 2006. The Le Meridien hotels contributed $5 million in the same quarter of 2005 as the Company acquired that business at the end of November of 2005. Excluding the hotels sold to Host, and fees from Le Meridien, management and franchise revenues increased 18.2% in the fourth quarter of 2006 when compared to 2005. Worldwide Le Meridien hotels that were in operation during both periods had REVPAR growth of 21.8% in the fourth quarter of 2006 when compared to 2005 with ADR increasing 16.8% and occupancy increasing 290 basis points.

During the fourth quarter of 2006, the Company signed 61 hotel management and franchise contracts (representing approximately 12,500 rooms: 15 Sheraton, 15 aloft, 11 Four Points by Sheraton, 9 Westin, 3 W Hotels, 2 Le Meridien, 2 Luxury Collection, 2 St. Regis, and 2 Element). Of the hotels signed in the quarter, 46 were new builds and 15 were conversions from other brands. For the full year, the Company signed 156 hotel management and franchise contracts (representing approximately 36,700 rooms). The Company now has roughly 400 hotels in the active pipeline and almost 100,000 rooms at December 31, 2006, driven by strong interest in all Starwood brands. Approximately half of the pipeline is in international locations.

During the fourth quarter of 2006, 18 new hotels and resorts (representing approximately 4,400 rooms) entered the system, including The Westin Chicago North Shore (Wheeling, Illinois, 411 rooms), The U.S. Grant (San Diego, California, 270 rooms) and The Westin St. Maarten, Dawn Beach Resort & Spa (St. Maarten, Netherland Antilles, 416 rooms). Eight properties (representing approximately 1,700 rooms) were removed from the system during the quarter. The Company expects to open more than 80 hotels (representing approximately 20,000 rooms) in 2007 and is targeting signing approximately 200 hotel management and franchise contracts in 2007.

Owned, Leased and Consolidated Joint Venture Hotels

Worldwide REVPAR for Starwood branded Same-Store Owned Hotels increased 11.7%. REVPAR at Starwood branded Same-Store Owned Hotels in North America increased 8.6%. REVPAR growth was particularly strong at the Company’s owned hotels in Chicago, New York, Phoenix, and San Diego. Internationally, Starwood branded Same-Store Owned Hotel REVPAR increased 12.5% excluding the impact of foreign exchange, and as reported, in US dollars, branded Same-Store Owned Hotel REVPAR increased 17.5%.

Revenues at Starwood branded Same-Store Owned Hotels in North America increased 8.3% while costs and expenses increased 6.1% when compared to 2005. Margins at these hotels increased 153 basis points.

Revenues at Starwood branded Same-Store Owned Hotels Worldwide increased 10.6% while costs and expenses increased 6.5% when compared to 2005. Margins at these hotels increased 280 basis points.

Reported revenues at owned, leased and consolidated joint venture hotels were $602 million when compared to $894 million in 2005. Reported revenues and operating income were impacted by the sale of 50 hotels since the beginning of the fourth quarter of 2005. These hotels had $2 million of revenues and $1 million of expenses (before depreciation) in 2006 as compared to $358 million of revenues and $254 million of expenses (before depreciation) in the same quarter of 2005.

Vacation Ownership

While contract sales of vacation ownership intervals were up 15.0%, total vacation ownership reported revenues increased 108.1% to $310 million when compared to 2005 due primarily to the timing of the recognition of deferred revenues under percentage of completion accounting for pre-sales at projects under construction. The average price per vacation ownership unit sold increased 11.2% to approximately $27,000, and the number of contracts signed increased 3.5% when compared to 2005.

During the fourth quarter of 2006, the Company was actively selling vacation ownership interests at 15 resorts. Starwood Vacation Ownership is also in the predevelopment phase of several other new vacation ownership resorts in California, Colorado, Hawaii, Mexico and Aruba.

During the fourth quarter of 2006, the Company sold approximately $133 million of vacation ownership notes receivable and recognized gains of $17 million as compared to gains of $25 million in the same period of 2005.

Residential

During the fourth quarter of 2006, the Company recognized residential revenues of approximately $12 million primarily from sales at the St. Regis in New York. To date, the Company has recognized approximately $40.7 million in revenues from the sale of condominiums at the St. Regis in New York. In the fourth quarter of 2005, the Company recognized residential revenues of $43.0 million primarily associated with sales at the St. Regis Museum Tower in San Francisco which sold out in the first half of 2006.

Selling, General, Administrative and Other

Selling, general, administrative and other expenses increased 33.3% to $128 million compared to the fourth quarter of 2005. Approximately one-third of the increase is due to the impact of stock-based compensation, including stock option expense. The remaining increase includes investments in our global development capability, and costs associated with the launch of the Company’s new brands, aloft and Element, as well as the addition of the Le Meridien business.

Asset Sales

During the fourth quarter of 2006, the Company sold two wholly-owned hotels for cash proceeds of approximately $29 million. Additionally, the Company received proceeds of approximately $20 million from the sales of two unconsolidated joint ventures in the fourth quarter of 2006.

Capital

Gross capital spending during the quarter included approximately $55 million in renovations of hotel assets including construction capital at the Sheraton Centre Toronto Hotel, the Westin Cancun Resort & Spa, and the Westin Maui Resort. Investment spending on gross vacation ownership interest (“VOI”) inventory was $107 million, which was offset by cost of sales of $74 million associated with VOI sales during the quarter. The inventory spend included VOI construction at the Westin Ka’anapali Ocean Resort Villas North in Maui, the Westin Princeville Resort in Kauai, the Westin Kierland Resort in Arizona, Sheraton’s Vistana Villages in Orlando, and the Westin Lagunamar Resort in Cancun.

Share Repurchase

During the fourth quarter of 2006, the Company repurchased approximately 0.6 million shares at a total cost of approximately $34.2 million. Since January 1, 2006, the Company has returned more than $4.3 billion to shareholders, including $2.8 billion in connection with the sale of 33 hotels to Host, approximately $1.263 billion for the repurchase of approximately 21.7 million shares of its stock and $276 million in dividends. At December 31, 2006, approximately $380 million remained available under the Company’s share repurchase authorization. Starwood had approximately 214 million shares outstanding (including partnership units) at December 31, 2006.

Dividend

The Company’s former REIT subsidiary paid dividends of $0.21 per share for each of the first and second quarters of 2006. The remaining 2006 dividend of $0.42 per share was declared by the Board of Directors in December 2006 and paid by the Company on January 19, 2007.

Balance Sheet

At December 31, 2006, the Company had total debt of $2.632 billion and cash and cash equivalents (including $336 million of restricted cash) of $519 million, or net debt of $2.113 billion, compared to net debt of $2.437 billion at the end of the third quarter of 2006.

At December 31, 2006, debt was approximately 67% fixed rate and 33% floating rate and its weighted average maturity was 4.4 years with a weighted average interest rate of 6.97%. The Company had cash (including total restricted cash) and availability under domestic and international revolving credit facilities of approximately $1.867 billion.

Results for the Twelve Months Ended December 31, 2006

EPS from continuing operations increased to $5.01 compared to $1.88 in 2005. Excluding special items, EPS from continuing operations was $2.73 compared to $2.34 in 2005. Excluding special items, income from continuing operations was $607 million compared to $526 million in 2005. Net income was $1.043 billion and EPS was $4.69 compared to $422 million and $1.88, respectively, in 2005. Total Company Adjusted EBITDA, which was significantly impacted by the sale of 56 hotels since the beginning of 2005, was $1.309 billion compared to $1.417 billion in 2005.

Outlook

The Company’s 2007 Guidance assumes the following changes since we last provided guidance:

—The sale of two unconsolidated joint ventures in the fourth quarter of 2006

—The expected sale of 14 owned hotels and 8 hotels in unconsolidated joint ventures in 2007 with anticipated gross proceeds of $475 million to $500 million. Most sales are expected to be completed in the first half of 2007.

For the Full year 2007:

—Adjusted EBITDA is expected to be approximately $1.365 billion prior to anticipated asset sales. Adjusting for the asset sales mentioned above, 2007 Adjusted EBITDA is expected to be approximately $1.335 billion, assuming:


    —REVPAR growth at Company operated (Owned and Managed)
        hotels worldwide of 8% to 10%

    —REVPAR growth at Same-Store Owned Hotels in North America
        of 7% to 9%

    —North America Same-Store Owned Hotel EBITDA growth of 12%
        to 14% with margin improvement of 100 to 150 basis points
        at these hotels

    —Growth from management and franchise revenues of
        approximately 17% to 19% including revenues earned from the
        hotels sold to Host, and 13% to 15% excluding the hotels
        sold to Host

    —An increase in operating income from our vacation ownership
        and residential business of $45 to $55 million (including
        gains on sale of vacation ownership notes receivable)
 
—Income from continuing operations, before special items, is expected to be approximately $543 million reflecting an effective tax rate of approximately 33%.

—EPS before special items is expected to be approximately $2.50

—Full year capital expenditures (excluding timeshare inventory) would be approximately $650 million, including $300 million for maintenance, renovation and technology and $350 million for other growth initiatives, including the Bal Harbour project. Additionally, net capital expenditures for timeshare inventory would be approximately $150 million.

—Full year depreciation and amortization expense would be approximately $340 million

—Full year cash interest expense would be approximately $184 million and cash taxes of approximately $240 million.
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