Hotel Analyst
Starwood plans investment as deals market
slows Starwood Hotels & Resorts used its third-quarter earnings call to confirm that, despite “a lacklustre economy”, the group was maintaining the full-year 2011 forecasts made at this time last year.
Looking forward to next year,
the group forecast revpar growth between 4% and 8%, wider than this year’s 7% to 9% range, with Ebitda of $1.03bn to $1.12bn. President & CEO Frits van Paasschen said that group was planning to “reinvest significantly” in its owned hotels to ready them for sale when the transactions market improved. Full year 2011 Ebitda is expected to reach between $980m and $990m, up 12% on the year before adjusting for asset sales and in the middle of the forecast range. CFO Vasant Prabhu said that, should recession return to the global markets, “This could lead to the much talked about new normal scenario of low global growth”. This outcome would correspond to the lower half of the group’s revpar and Ebitda ranges, and Prabhu added: “If we actually have 4% revpar growth, the bottom of our range, owned Ebitda growth becomes hard to realise despite our cost containment initiatives. “Whatever growth we get at a
4% revpar scenario will have to come from our fee business.” Starwood will continue to pursue
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its asset-light model, although the CEO acknowledged that the group was seeing weaker demand for hotel sales. “The strongest buyers over the last couple of years has been the public lodging Reits,” he said, “and they’ve pulled back. But we can afford to be patient”. The company did not go into
the exact value of the planned investment, but vice chairman and CFO Vasant Prabhu said that there would be further details at the full-year results announcement in February. The projects underway next year including the shutdown of the Gritti Palace in Venice and the Maria Christina in Spain, as well as renovations at The Westin Maui, The Westin Peachtree and the Sheraton Rio. The group is also shutting down two other hotels in the US to convert them to Alofts. Van Paaschen said: “We have
the balance sheet flexibility to invest in creating a slate of hotels that are in great shape with a proven track record and, if the transaction market picks up more quickly in 2012, we may turn some of these projects over to a potential owner. The opportunity to sell right now isn’t one that we think is very strong and that we’d rather hold – invest in our assets and find a time where we can get a strong price. “This will detract from Ebitda
in 2012, but importantly, will position us well when the time comes to sell assets.” While the group expected
business in North America to remain much the same in the final quarter as it had in the third quarter, revpar growth in Europe was expected to fall to between 3% and 4%, from 7.7%. Vasant Prabhu, vice chairman and CFO, said: “Hopefully the announcement on the Euro rescue plan will improve business sentiment in Europe.”
108 JANUARY / FEBRUARY 2012
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In Asia Pacific, Prabhu said booking pace remained on trend, with leads up and cancellations down. However, with India weak and Thailand severely disrupted by floods, the group expected a “small sequential slowdown” in revpar growth in the final quarter. In Latin America, the third
quarter saw 24% revpar growth, which the company did not expect to maintain based on current booking trends, although it expected double-digit growth. Van Paasschen said he was confident of resilience of both the group’s fee businesses and the sustained growth in high-end global travel, despite identifying “Economy A, or the land of the haves
.....and Economy B, the land of have-nots”. Van Paasschen said that, in the
former, travel continued to be key to the pursuit of growth around the world, with rates expected to increase as demand continues, aided by limited supply as few new projects are being financed. Looking at Economy B, he took
the opportunity to criticise the US government for its restrictive visa regime, commenting that the US had lost a third of its share of global travel over the last decade, while less restrictive regions had benefited from the rise in travel from emerging markets. He added: “Major new travel
patterns are springing up, spurred by travel and by rising wealth among billions of people. And we stand to benefit as these emerging travellers are loyal to brands they know from home and that speak to their needs.” The group continues to
look to growth outside the domestic market, with the CEO commenting that 80% of its pipeline was outside the developed world, with its emerging market pipeline equal in size to 70% of
its entire existing footprint in those countries. He added: “In valuing our
global pipeline, remember that the average non-US managed luxury contract is about three times the present value per room of a typical American mid-market franchise. This underscores the value of our pipeline, which is comprised of 80% emerging markets; 84%, managed contracts; and over 75%, upper upscale and luxury hotels.” The group continues to move
towards its goal of being 80% fee- driven. Van Paasschen said that in 2007, when he joined the group, fees drove up 45% of Ebitda before overhead, with that figure set to be over 60% for this year. He said: “While it seems
unlikely, we can’t rule out the possibility that today’s issues are a prelude to a full-on double dip. What we can say is, that so far, this does not feel anything like 2009. The impact on Starwood is far less dramatic than you might think – both our corporate and leisure customers are doing pretty well and still travelling.” Despite the concerns, the company was confident that its focus on global corporation and high-end travellers, the lack of new supply in developed markets and the rise of middle classes in emerging markets would continue to deliver.
HA Perspective: There are few signs yet of a slowdown in demand for hotels. But the industry typically lags the business cycle by a quarter or two so it may be coming. That said, it was a difficult start in many economies at the start of this year and this should by now be in these trading figures. It remains a murky picture. What is encouraging is that
hotel companies are thriving even in this “new normal” environment
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