Sharp drop for Starwood’s profits

Starwood showed a sharp drop in second quarter profits. Yet it managed to please investors after raising its full-year earnings forecast.

Starwood’s revenue per room, REVPAR rose 8.4 percent with double-digit increases in most international divisions where REVPAR averaged a 13.1 percent increase.


Second Quarter 2007 Highlights

* Excluding special items, EPS from continuing operations was $0.82 compared to $0.74 for the second quarter of 2006. Including special items, EPS from continuing operations was $0.67 compared to $3.01 in the second quarter of 2006. Special items in 2006 net to a $511 million benefit, or $2.27 per share primarily due to significant one-time income tax benefits realized in connection with the sale of 33 hotels to Host Hotels & Resorts (“Host”) during the period.

* Worldwide System-wide REVPAR for Same-Store Hotels increased 8.4% compared to the second quarter of 2006. System-wide REVPAR for Same-Store Hotels in North America increased 5.0%.

ADVERTISEMENT

* Worldwide REVPAR for Starwood branded Same-Store Owned Hotels increased 10.4%. REVPAR for Starwood branded Same-Store Owned Hotels in North America increased 6.1%.

* Margins at Starwood branded Same-Store Owned Hotels Worldwide and in North America improved 148 and 77 basis points, respectively, as compared to the second quarter of 2006.

* Management and franchise revenues increased 13.8% when compared to 2006.

* Reported revenues from vacation ownership and residential sales increased 17.1% when compared to 2006. 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 $178 million compared to $169 million in the same period of 2006. Net income, including special items, was $145 million compared to $680 million in the second quarter of 2006.

* Total Company Adjusted EBITDA was $362 million when compared to $332 million in 2006.

* During the second quarter, the Company repurchased 6.8 million shares at a cost of $471 million.

* The Company signed 33 hotel management and franchise contracts in the quarter representing approximately 7,000 rooms.

Starwood Hotels & Resorts Worldwide, Inc. (“Starwood” or the “Company”) today reported EPS from continuing operations for the second quarter of 2007 of $0.67 compared to $3.01 in the second quarter of 2006. Special items in 2007 net to a charge of $0.15 per share and primarily relate to accelerated depreciation of fixed assets at the Sheraton Bal Harbour which is being demolished and converted into a St. Regis hotel with residences and fractional units. Special items in 2006 net to a benefit of $2.27 per share primarily due to significant one-time income tax benefits realized in connection with the sale of 33 hotels to Host during the period. Excluding special items, EPS from continuing operations was $0.82 for the second quarter of 2007 compared to $0.74 in the second quarter of 2006. Excluding special items, the effective income tax rate in the second quarter of 2007 was 24.1% and benefited from the Company recognizing foreign tax credits generated in prior years.

Income from continuing operations was $145 million in the second quarter of 2007 compared to $680 million in 2006. Excluding special items, which net to a $33 million charge in 2007 and a $511 million credit in 2006, income from continuing operations was $178 million for the second quarter of 2007 compared to $169 million in 2006. The Company’s earnings before special items during the second quarter of 2007 benefited from $27 million (pre tax) or $22 million (after tax) of earnings from an unconsolidated joint venture that sold several hotels during the quarter. In the second quarter of 2006, the Company recognized earnings before special items of $22 million from sales of hotels in unconsolidated joint ventures. The gains in 2006 had no related tax expense due to the utilization of capital loss carry-forwards.

Net income was $145 million and EPS was $0.67 in the second quarter of 2007 compared to net income of $680 million and EPS of $3.01 in the second quarter of 2006.

“Starwood’s strong second quarter results are indicative of our globally diversified revenue streams, with worldwide System-wide REVPAR up 8.4%, fueled by our international business where REVPAR grew by 13.1%,” said Chairman and Interim CEO Bruce Duncan in a statement. “Our pipeline now consists of approximately 105,000 rooms, of which over 70% are in the upper upscale and luxury segments and approximately half are outside of North America. We remain committed to returning cash to shareholders and bought back $471 million of our stock in the quarter.”

Operating Results

Second Quarter Ended June 30, 2007

Management and Franchise Revenues

Worldwide System-wide REVPAR for Same-Store Hotels increased 8.4% compared to the second quarter of 2006 including 15.7% in Africa & the Middle East, 12.8% in Europe, 12.8% in Asia Pacific, 9.8% in Latin America and 5.0% in North America. Worldwide System-wide REVPAR for Same-Store Hotels by brand was: Le Méridien 15.7%, St. Regis/Luxury Collection 10.7%, Four Points by Sheraton 9.6%, W Hotels 8.5%, Sheraton 7.3% and Westin 6.5%.

Management fees, franchise fees and other income were $196 million, up $22 million, or 12.6%, from the second quarter of 2006. Management fees grew 12.8% to $106 million and franchise fees grew 19.4% to $37 million. Base management fees increased 16.1% and incentive fees increased 6.3%. Incentive fees in 2006 included the recognition of previously deferred incentive fees. Approximately 50% of the Company’s management and franchise fees are generated in markets outside of North America.

During the second quarter of 2007, the Company signed 33 hotel management and franchise contracts (representing approximately 7,000 rooms: 9 Four Points by Sheraton, 8 alofts, 5 Westins, 3 Sheratons, 3 St. Regis hotels, 2 Le Méridiens, 2 Elements and 1 W Hotel). Of the hotels signed in the quarter, 31 were new builds and 2 were conversions from other brands.

At June 30, 2007, the Company had approximately 440 hotels in the active pipeline representing 105,000 rooms, driven by strong interest in all Starwood brands. Of these rooms, over 70% are in the upper upscale/luxury segment, half are outside of North America, and 60% represent management contracts.

During the second quarter of 2007, 26 new hotels and resorts (representing approximately 7,800 rooms) entered the system, including the Sheraton New Delhi Hotel (New Delhi, India, 220 rooms), The Westin Guangzhou (Guangzhou, China, 448 rooms), and the Sheraton Cable Beach Resort (Nassau, Bahamas, 694 rooms). Six 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 10.4%. REVPAR at Starwood branded Same-Store Owned Hotels in North America increased 6.1%. Internationally, Starwood branded Same-Store Owned Hotel REVPAR increased 10.3% excluding the impact of foreign exchange, and as reported, in US dollars, branded Same-Store Owned Hotel REVPAR increased 17.7%.

Revenues at Starwood branded Same-Store Owned Hotels Worldwide increased 8.9% while costs and expenses increased 6.7% when compared to 2006. Margins at these hotels increased 148 basis points.

Revenues at Starwood branded Same-Store Owned Hotels in North America increased 4.9% while costs and expenses increased 3.7% when compared to 2006. Margins at these hotels increased 77 basis points.

Revenues at owned, leased and consolidated joint venture hotels were $634 million when compared to $674 million in 2006. Revenues and operating income were impacted by the sale or closure of 44 hotels since the beginning of the second quarter of 2006. These hotels had $5 million of revenues and $5 million of expenses (before depreciation) in 2007 as compared to $81 million of revenues and $60 million of expenses (before depreciation) in the same quarter of 2006.

Vacation Ownership

Total vacation ownership reported revenues increased 40.3% to $268 million when compared to 2006 due primarily to the timing of the recognition of deferred revenues under percentage of completion accounting for projects under construction. Originated contract sales of vacation ownership intervals increased 2.7% with strong growth in sales in the Company’s open projects offset by a decline at the Westin Kierland Villas in Scottsdale, Arizona where the inventory is sold out. The average price per vacation ownership unit sold increased 0.8% to approximately $26,000, and the number of contracts signed increased 1.7% when compared to 2006. We expect originated sales growth to accelerate in the second half of the year.

During the second quarter of 2007, the Company was actively selling vacation ownership interests at 15 resorts and is also in the predevelopment phase of new fractional or vacation ownership resorts in Arizona, California, Colorado, Hawaii, Mexico and Aruba.

While the Company continues to expect strong growth in originated sales of vacation ownership products in 2008, the Company has experienced some delays in the entitlement and construction approval process at its newest projects in Maui and Aruba. As a result, the Company now expects its percentage-of-completion on these projects in 2008 to be lower than originally anticipated, which will negatively impact its reported earnings from vacation ownership next year. The project in Aruba has now received the appropriate approvals, and construction and sales will begin later this year. The Company expects construction and sales for its next Maui project to begin in the second half of 2008.

Residential

During the second quarter of 2007, residential revenues decreased to approximately $6 million from $43 million in the prior year as our existing residential inventory is substantially sold out. The St. Regis Museum Tower in San Francisco sold out in the first half of 2006 and the St. Regis New York has only a few units remaining in inventory.

Selling, General, Administrative and Other

Selling, general, administrative and other expenses increased 7.4% to $130 million compared to the second quarter of 2006. The increase is due to investments in our global development capability and costs associated with the launch of the Company’s new brands and initiatives.

Asset Sales

During the second quarter of 2007, the Company sold three wholly-owned hotels for cash proceeds of approximately $42 million. In addition, the Company received proceeds of $69 million related to the sale of several hotels by four unconsolidated joint ventures.

Capital

Gross capital spending during the quarter included approximately $53 million in renovations of hotel assets including construction capital at the new aloft and Element hotels under construction in Lexington, MA, the W Los Angeles in Westwood, CA, and the W San Francisco in San Francisco, CA. Investment spending on gross vacation ownership interest (“VOI”) inventory was $82 million, which was offset by cost of sales of $64 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 Lagunamar Resort in Cancun, and the Westin St. John Resort and Villas in the Virgin Islands.

Share Repurchase

During the second quarter of 2007, the Company repurchased 6.8 million shares at a total cost of approximately $471 million. At June 30, 2007, approximately $701 million remained available under the Company’s previously approved share repurchase authorization. Starwood had approximately 210 million shares outstanding (including partnership units) at June 30, 2007.

Balance Sheet

At June 30, 2007, the Company had total debt of $3.032 billion and cash and cash equivalents (including $293 million of restricted cash) of $567 million, or net debt of $2.465 billion, compared to net debt of $2.113 billion at the end of 2006.

At June 30, 2007, debt was approximately 35% fixed rate and 65% floating rate and its weighted average maturity was 4.5 years with a weighted average interest rate of 6.9%. The Company had cash (including total restricted cash) and availability under domestic and international revolving credit facilities of approximately $2.151 billion. Availability under domestic and international revolving credit facilities, not including cash and cash equivalents, was $1.584 billion. On June 29, 2007 the Company closed on new unsecured bank loans totaling $1 billion, with $500 million maturing in each of June 2009 and June 2010. The proceeds from these new loans were used to repay outstanding balances under the Company’s revolving credit facility.

Results for the Six Months Ended June 30, 2007

EPS from continuing operations decreased to $1.23 compared to $3.34 in 2006. Excluding special items, EPS from continuing operations was $1.30 compared to $1.15 in 2006. Excluding special items, income from continuing operations was $282 million compared to $260 million in 2006. Net income was $267 million and EPS was $1.23 compared to $685 million and $3.02, respectively, in 2006. Total Company Adjusted EBITDA, which was impacted by the sale of 49 hotels since the beginning of 2006, was $647 million compared to $598 million in 2006.

Outlook

For the full year 2007:

* Adjusting for the asset sales included in previous guidance, Adjusted EBITDA is expected to be approximately $1.384 billion, assuming:


    —REVPAR growth at Same-Store Company Operated Hotels
        worldwide of 8% to 10%

    —REVPAR growth at branded Same-Store Owned Hotels in North
        America of 7% to 8% and EBITDA growth of 10% to 12% with
        margin improvement of approximately 100 basis points

    —Growth from management and franchise revenues of
        approximately 18% to 20%

    —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 $597 million reflecting an effective tax rate of approximately 31%.

* EPS before special items is expected to be approximately $2.78

* 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 $337 million

* Full year cash interest expense would be approximately $180 million and cash taxes of approximately $240 million.

For the three months ended September 30, 2007:

* Adjusted EBITDA is expected to be $340 million assuming:


    —REVPAR growth at Same-Store Company Operated Hotels
        worldwide of 8% to 10%

    —REVPAR growth at branded Same-Store Owned Hotels in North
        America of 5% to 7% and EBITDA growth of 0% to 5% with
        margin declines of 0 to 50 basis points. As expected,
        Same-Store Owned Hotels in North America are impacted by
        renovations at major hotels.

    —Growth from management and franchise revenues of
        approximately 13% to 15%

    —An increase in operating income from our vacation ownership
        and residential business of $0 to $5 million  


——-