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Starwood Hotels

Starwood Hotels

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Starwood Hotels & Resorts Worldwide (NYSE: HOT) owns and operates luxury hotels, retreats, and residences across

the world. Approximately half of Starwood's hotels are outside of North America, with 397 in Europe, Africa, the Middle East, and Asia[1] and new Starwood hotels are being built in developing countries like China.[2][3] The company manages franchises that operate under its various brand names - St. Regis, The Luxury Collection, W, Westin, Le Méridien, Sheraton, Four Points, Aloft, and Element.[1] Because the company receives management and franchise fees regardless of actual hotel performance, operating as franchiser and hotel management company introduces a measure of stability into the company's earnings. In addition to its traditional hotel business, Starwood is involved in selling timeshare propertiesand residential properties.[1] Starwood's markets its hotels under luxury brands, competing for customers on the basis of perceived quality rather than price.[1] This strategy works best in economies characterized by healthy levels of business travel and vacationers can afford to pay more for Starwood-branded hotels. HOT's brand name focus has been undermined by internet booking agencies that help customers select hotels based on price and star ratings instead of brand names.[4]

In 2009, RevPAR decreased 20% due to hard hits in the upscale and luxury hotel segments, which generate 95% of the Starwood's revenue.[1] [5] Moreover, the company's push into Asia, particularly China, is a major part of its strategy for future growth. Slowing economic growth, in these countries has the potential to make these investments less profitable in the near term. Contents

• o

1 Business Overview 1.1 Business & Financial Metrics


Overview

1.1.1 2010 Second Quarter


Overview

1.1.2 2010 First Quarter

  o • o

1.1.3 2009 Overview 1.1.4 2008 Overview 1.2 Business Segments

2 Trends & Forces 2.1 There is lower supply of

available rooms while demand is increasing

o

2.2 Demand for Starwood's luxury

hotels is cyclical

[5] Business & Financial Metrics 2010 Second Quarter Overview HOT's net income was $114 million in the second quarter of 2010 compared to net income of $134 million in the second quarter of 2009.[7] Despite higher revenue increases than costs. Much of this increase in revenue was due to a 14.6% when compared to 2009. general. 95% of all of Starwood's hotel net income comes from upper upscale and luxury hotels.4 Starwood's increased presence in China means exposure to Chinese economic slowdown • • 3 Competition 4 References Business Overview Starwood .2 billion total since 2006. luxury hotels throughout the world were hit the hardest among all hotels.9% to $2. [7] Similarly. The rest come from its other hotel divisions.[1] As of 2009.9% while costs and expenses increased 10.o 2.[6] as a result.3% when compared to 2009.[7] The decrease is attributed to the increase in SG&A costs.[5] This single source of income poses risk during economic downturns such as the 2008 and 2009 financial crisis. During the 2009 recession. causing Starwood's 20% decrease inRevPAR.[1] Starwood's strategy focuses on decreasing exposure to direct real estate investment and increasing hotel management and franchise agreements which management believes will be more profitable.one of the world’s largest hotel companies . and despite better economic outlook.0% increase in management and franchise revenues compared to year ago 2009.uses its nine brand names to conduct business directly and through subsidiaries. including The Westin Turnberry in 4Q2008 for net cash proceeds of $99 million.476 million.[7]Selling. revenues at Starwood branded same-store owned hotels worldwide increased 16. the company has sold 60 properties for over $5.0% while costs and expenses increased 10.[6] The company primarily generates income through its traditional hotel business but also makes money by selling timeshares and residential properties. Revenues at Starwood branded same-store owned hotels in North America increased 15. net income decreased between this and year ago second quarters. HOT has properties in all six habitable continents.3 Internet reservation websites have the upper hand over Starwood o 2. .[7] The increase in net income came from a few specific sources.[7] This is on account of revenues increasing 7.[1]While over half of the company's 979 properties are in North America.

187 million from $1.4% decrease in operating revenue for 2Q09.[9] Operating income went up a substantial amount to $85 million from $61 million last year.[10] Although revenue fell by 23.000 rooms.[9] 2009 Overview Despite the fact that Starwood was able to maintain profitability in the first quarter of 2009. while remaining 'cautiously confident' in their nearterm outlook.6% in 2Q09 as compared to 2Q08. to $1.administrative and other expenses increased 17.2 percentage points to 60.0% and RevPAR fell by 30. in anticipation of increased global demand for luxury. made no comment on long-term prospects.[11] The impact of the recession can be seen in Starwood's Revenue Per . the company had net income growth of 27.7% to $117. [10] The impact of the recession is clearly reflected on Starwood's occupancy rates and RevPAR for 1Q09 relative to 1Q08. which illustrates Starwood's ability to scale back costs when faced with an unfavorable environment. General & Administrative Expenses (SG&A) and vacation ownership and residential expenses fell by 30. Selling. HOT had approximately 350 hotels with construction or finishing in progress representing approximately 85.10% from $31 million in 1Q08 to $4 million on 1Q09.[7] Starwood maintains that the economy is too unpredictable and.4% and 38. representing approximately 4.[8] This is an increase solely due to increased revenue from hotels.200 rooms. seven hotels left the system.6%.78. Of these rooms.205 billion.[9] This active pipeline of construction is driven entirely by stronger demand for Starwood brands.000 rooms of which nine are new builds and four are conversions from another brand and opened 14 new hotels and resorts representing approximately 2. Worldwide occupancy fell by 10. due to the timing of accruals for incentive based compensation this year when compared to last year. far less than the drop in net income.[9] During the first quarter of 2010. the company had a $19 million restructuring charge in 1Q09 as compared to $8 million in 1Q08. 69% are in the upper upscale and luxury segments and 70% are outside of North America.127 million in first quarter 2009. respectively. 2010 First Quarter Overview Revenue for HOT increased to $1. [9] During the first quarter of 2010.74%. [8] This is due to increased hotel room prices driven up by post-recessionary increase in global luxury hotel demand. the company signed 13 hotel management and franchise contracts representing approximately 3. 2010. [11] The diminution of demand and real estate prices is reflected in the 23. there was a precipitous drop in net income of 87.600 rooms.<ref/ name = 1stquarter2010_item2> As of March 31.[10] Although Starwood is in an industry that is particularly sensitive to economic recessions.4%. however. which was due to Starwood's attempt to offset slowing growth with lower costs. This reflects the increasing demand for luxury hotels in the post-recessionary period of 1st quarter 2010. operating expense for the quarter fell by 19.9% to $92 million compared to the second quarter of 2009.

2008 Overview In 2008. 3rd.6%. which dropped by 27.2% fall in Starwood's revenue from vacation ownership and residential sales. The Luxury Collection.86% and 39.2% to $168. 2009 was plagued by decreases in most hotel metrics for Starwood Hotels. leaving $3 billion in debt.3% in both the North America and International segments.5% fall in the North America market. Overall. RevPAR growth for the 2nd.[15] The company built or signed contracts for a few additional hotels despite the recession because of their forecast in rebounding vacationing for 2010 and later.9% decrease in RevPAR in comparison to the 4th quarter of 2008.080 of long-term debt. W. and -7% respectively. which was manifest in an occupancy rate of 71.[12] During the quarter. and 4th quarter of 2009 were -30%. the sale and closure of 19 hotels that had been previously wholly owned by Starwood. Le Méridien. Sheraton.the company signed 20 hotel contracts representing 4200 and opened 24 hotels with 5000 rooms in total. which led to a reduction of the company's Debt to Equity ratio from 4.[12] While RevPAR fell 23. but operating income and net income fell by 27. Starwood repaid $1.Available Room (RevPAR)and Occupancy Rate.93.7%-11.[14] In 2009. management and franchise revenues increased by 0. Regis. despite a 20% decline in revenue as compared to a 14% decline in expenses.[17] Business Segments Hotels and Vacation Ownership (84. -20%.[16] The decline in revenue was led by vacation ownership and residential operations. the recession battered revenues across all the geographical segments. the damage to RevPAR is slowly decreasing. respectively.6% as compared to the 1. Starwood reported a 7.6% due to a small expansion in number of rooms and properties .[12] The global recession's effect on travel can be seen in the 44.8% in North America in response to falling demand.[13] The company ended 2009 with a net income of $73 million.9% decreases.[12] By the end of 2009. Nevertheless. Starwood reduced prices by 13. compared to $329 million in 2008. [5] For the 4th quarter of 2009. [11] However. which fell 27% to $749 million. occupancy in International fell by 7. However. North American business had a 10. with Latin America and Africa and Middle east having 11. respectively.7% in 2007. Revenue Per Available Room (RevPAR) still fell by 1.90 to 3.[12] This is due to a reduction in the average daily rate of 21. whereas internationally.45. Westin.1% decrease in RevPAR. revenue fell by 4%.87% of total revenue): [18] Includes a worldwide network of owned. Starwood paid off $1.1 billion dollars of debt. leased. [13] However.[17] In order to offset falling demand.78 in 3Q09.30%.[5] Starwood reported net income of $40 million in 3Q09. and Four Points.1% in 2008 compared to 72. as well as decreased demand related to the economy resulted in revenue and net income losses for the company. and consolidated joint venture hotels and resorts. [1] Sometimes .[1] These properties are generally operated under HOT's proprietary brand names like St. Starwood increased its average daily rate by 1% to 237.7% and 810 Basis point (bps).

business travel decreased significantly in 2008[22] . As businesses looked for ways to cut costs in the worsening economic climate.[20] Fewer travelers and tighter budgets mean less business for Starwood Hotels.this means fewer business travelers filing into HOT hotels. reduced room rates. and operates timeshare properties and provides financing to its customers.5% to 56. [1] As of 2009. new orders for rooms have come to a standstill.2%. or other significant contract concessions from hotel operators. many companies are avoiding hosting meetings at luxury hotels as the economic climate worsens to maintain good public relations.[19] Since the recession. owns.[5] Residential Operations (15. indicative of severe. with occupancy of 55. this segment generates income through licensing fees from branded properties and by selling residential properties. [25] Although HOT continues to generate most of its .3% drop in leisure travel during 2009.[25] These companies also promote the importance of price and anonymous quality indicators (like star ratings) over brand identification in the hotel selection process. the sheer volume of bookings they make gives them bargaining power over HOT. This increase in occupancy rate may continue beyond the first year since hotels are delaying or have delayed construction orders for more rooms until market has shown stability.6% in 2009.[23] Internet reservation websites have the upper hand over Starwood Internet bookings made by third party companies like Expedia and Travelocity have been growing at rates of up to 20% per quarter. [19] The room occupancy rate fell 8. For 2010.[19] For 2010.0%. near depressionary levels.[24] As more bookings are completed by third parties.[1] Additionally. the intermediary companies can obtain higher commissions. The company has been cutting its costs and staff in response to the economic slowdown that included the layoff of 18% of its Westin and Sheraton Grand Bahama Our Lucaya Resort employees in January 2009.3%.properties are owned or operated independently but HOT collects fees for the use of its brand names. reflecting construction and redevelopment projects already financed before the financial crisis.[21]Since HOT primarily operates luxury and upscale hotels. 95% of the total net income from this segment comes from the upper upscale and luxury hotels. [25] this prevents HOT from fulfilling its brand establishment goals.[19] Higher occupancy rate is typically followed by increased daily rates. Demand for Starwood's luxury hotels is cyclical Vacationers are staying home and a nationwide travel forecast survey predicted a 1. Furthermore.1%.13% of total revenue):[18] Develops. the smaller increase in supply and higher demand should lead to a rise in occupancy to approximately 55.[1] Trends & Forces There is lower supply of available rooms while demand is increasing The number of available room nights in 2009 increased 3.[3] demand for its offerings are dropping as businesses and leisure travelers have less money to spend. thus reducing the available number of rooms present for an ever-increasing global travel and hotel population. S&P sees room night supply increasing a smaller 2.

the rise of these websites impacts Starwood's profitability. availability of a global distribution system. [28] The general economic situation is causing civic unrest throughout the country[29] and millions of Chinese workers are losing their jobs.[34] Companies operating in this industry generally compete on the basis of quality and consistency of rooms. Although it enjoyed a boom during the past decade. and price. meeting facilities and services. exports fell 2. restaurants.revenues through traditional booking channels and its own website.[6] the impact that these new hotels will have on the company increases. restaurants.[32] In its 3 casino hotel properties. under 15 brand names. and operates destination casino resorts. Starwood will open 63 hotels in China and others in nearby countries.[31] Operates through the Wynn Las Vegas and Wynn Macau casino resorts.[33]  Orient-Express Hotels (OEH): A worldwide corporation that engages in real estate and residential property development and invests in individual deluxe hotels.[32]  InterContinental Hotels: Owns. operates and franchises hotels and related lodging facilities worldwide.[31]  Trump Entertainment Resorts: Owns and operates casino hotel properties in the United States. such as:  Marriott International: A hospitality company that. manages. tourist trains. [26] As Starwood sells many of its older hotels to decrease its real estate investments.[25] Starwood's increased presence in China means exposure to Chinese economic slowdown Between 2008 and 2012.[27] China's economy is stalling.[6] .[30]  Wynn Resorts: Develops. and river cruise businesses. it offers gaming. and leases hotels and resorts under seven brand names in 100 countries and territories . casino resort. and entertainment services. franchises.[6] Unlike many of its competitors that attract customers with low costs.3% from December 2007 to December 2008. other factors include attractiveness of locations. Starwood's strategy focuses less on keeping rates low and more on the development of brand names to draw in revenue. owns. Starwood seeks to maintain a global presence which will offer equal quality of service to its customers throughout the world.8% and imports dropped 21.[28] Competition Starwood competes with global players in the hotel industry.

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