Starwood Q4 2009 Earnings Call Transcript

123jump.com Staff
09 Feb, 2010
New York City

Sales fell 1.5% to $1.28 billion and net loss was $107 million or 59 cents per diluted share. On an operating bases vacation ownership business will be down $40 million or so versus 2009. Operating incomes for vacation ownership and residential was around 118 million.

Starwood Hotels & Resorts Worldwide, Inc. ((HOT))
Q4 2009 Earnings Call Transcript
February 4, 2010 10:30 a.m. ET

Executives

Jason Koval – Vice President of Investor Relations
Frits D. van Paasschen - President and Chief Executive Officer
Vasant M. Prabhu – Executive Vice President and Chief Financial Officer

Analysts

Joseph Greff - J.P. Morgan
Steven Kent - Goldman Sachs
Josh Attie - Citigroup
David Loeb - Robert W. Baird & Company, Inc.
Alistair Scobie - Atlantic Equity
William Crow - Raymond James and Associates
David Katz - Oppenheimer & Co.
Bryan Maher - Collins Stewart
Jeffrey Donnelly - Wells Fargo Securities
Janet Brashear - Sanford C. Bernstein
Smedes Rose - Keefe, Bruyette & Woods
Amanda - Wedbush Morgan Securities
Chris Woronka - Deutsche Bank
Patrick Scholes - Friedman, Billings, Ramsey Group, Inc.

Presentation

Operator

Good morning. My name is Silvia [ph]. And I will be your conference operator today. At this time I would like to welcome everyone to the Starwood Hotels Fourth Quarter 2009 Earnings Release conference call. All lines have been placed on mute to prevent background noise. After the speaker''s remarks there will be a question-and-answer session.

If you would like to ask a question during this time, simply press star then the number one, on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you, Mr. Koval, you may begin your conference.

Jason Koval

Thank you, Selvia. And good morning, everyone. Thanks for joining us this morning for Starwood''s fourth quarter 2009 earnings call. Joining me today I have Frits van Paasschen, our CEO and Vasant Prabhu, our CFO. We will be making statements on this call related to Company plans, prospects and expectations that constitute forward-looking statements under the Safe Harbor provision of the Securities Reform Act of 1995.

These forward looking statements generally can be identified by phrases such as Starwood or its management believes, expects, anticipates, foresees, forecasts, estimates or other words or phrases of similar import.

All such statements are based on our expectation as of today and should not be relied upon as representing our expectations as of any subsequent date. Actual results might differ from our discussion today.

I point you to our 10-K and other SEC filings available from the SEC or through our offices here and on our website at www.starhotels.com for some of the factors that could cause results to differ.

With that I am pleased to turn the call over to Frits for his comments.

Frits D. van Paasschen

Thank you, Jay and thanks for joining us today for our fourth quarter call. I would like to begin by reflecting on just how bleak the economic outlook was one year ago. On January 2009, incoming U.S. Treasury Secretary Timothy Geithner declared that the economy was on, the verge of collapse.

Recently by contrast, he said, we are back from the brink and we have traveled a long way from January and I couldn''t agree more. Even a tepid recovery will feel good. For the lodging business, 2009 was the worst downturn in our lifetimes. RevPar was down over 20% for Starwood.

Our competitive strengths became temporary but significant head winds. In fact, upper upscale and luxury hotels were hit the hardest. And these segments generate over 95% of our profits. Our owned hotels saw a 55% drop in EBITDA and the dollar strength as a safe haven currency added to the operating declines outside of the U.S. RevPar comparisons were worse than the second quarter with RevPar often eye popping 30% plus.

During the summer, we saw the beginning of stabilization. Leisure travel showed signs of life with weekend occupancies rising and RevPar improving to minus 20% in the third quarter. By the way, before 2009, none of us ever expected to use the words improving and minus 20% in the same sentence.

In our group business, the third quarter also brought signs of stabilization in cancellations and net production. Starting in October, short term group bookings and corporate transient travel started to improve leaving our RevPar trends for Q4 at only minus 7%.

We believe there is light at the end of the tunnel as business is following patterns similar to the recovery post 9/11. But we remain prepared for a challenging 2010. Just like prior cycles, ADR improvements will lag the general environment.

Recall as the economy began the slowdown in December of 2007, our business didn''t drop off until the summer of 2008. We would expect a similar lag on the way up as group and corporate rates are priced looking backwards and finally, as excited as we are about the strong results in Q4, they were the result of less negative not positive RevPar growth.

Looking ahead, it is safe to declare that our head winds of 2009, luxury brands, owned hotels, global footprint and even foreign exchange will soon be tailwinds. Moreover, supply growth in North America will drop below 1% in 2011 and beyond which means we are bullish on rates during the recovery cycle.

Looking further out, we foresee other important reasons to be confident in Starwood''s performance. As we shed hotel assets, we will yield cash and transform our Company to a business model that generates long term growth without major capital needs.

The transformation taking place in rapidly growing markets around the world implies a huge secular growth in demand for our high end brands. So with that as context, I would like to cover five topics.

First a quick review the fourth quarter and a look back on our accomplishments in 2009. Second, a discussion of our recent business trends and implications for 2010. Third, our efforts to own the upswing as business move up or down. Fourth, a reminder of why we remain bullish about our long term secular growth prospects. And fifth, a quick review of how we are pulling our four financial levers to create value for our shareholders.

So, let''s start with my first topic our fourth quarter results and a review of our 2009 accomplishments. We were able to beat EBITDA expectations by roughly $50 million. That includes as $25 million securitization gain that was not part of our original guidance. We also beat EPS by $0.29 per share, including that gain.

After four quarters of beating expectations solely by cutting costs, it is refreshing to see the beat come from both lower costs and better than expected top line results. Each of our brands performed well in the quarter. As we have been predicting for some time, guests are coming back to luxury.

With higher occupancy, RevPar for this segment was down roughly 3%. Regionally, Asia Pacific stood out with RevPar at plus 1%. Yes, folks, you heard correctly that was plus 1% but it does include 600 basis points of foreign exchange tail wind.

So looking back on 2009 if I were to put a head line on the year it would be, as the world fell apart, we got busy. Simply put, we didn''t let this crisis go to waste and Starwood is in the best shape ever. What did we accomplish in 2009? I will cover that across four areas, Finance, operations, growth and innovation.

First, we put our financial house in order, reducing total debt by roughly $1.1 billion from its peak in April. We ended the year with less than $3 billion in debt, beating our target. And that despite the delay of the $200 million tax refund into 2010. We sold several assets, including Bliss, the St. Regis retail space and the W San Francisco at an average multiple of 20 times EBITDA generating proceeds of $300 million.

We also worked with our vacation ownership team to generate $315 million in cash. The remaining $500 million was the result of operating cash flow and our deal with American Express. Vasant and his team also worked diligently to de-risk the company through maturity management.

Through debt reduction, as well as two bond offerings and a tender, we now have no maturities due over the next two years and have reduced our 2012 and 2013 maturities to roughly $500 million each.

We also took a hard look at the vacation ownership business. Let me say that I am convinced that we have a world class time at SVO, along with some of the best resorts and brands in the industry.

Nonetheless, in light of future expectations about the business, we spent much of the fourth quarter reviewing our projects. As a result, we recorded a $362 million impairment charge.

This charge reflects decisions to stop new development of current land holdings, curtail further development of existing projects and reduce prices to increase the velocity of cash generated from our inventory.

Second, in 2009 we pushed ourselves to improve overhead and operations. We completed the AVA process, creating run rate SG&A savings of over $100 million. At the property level, our lean operations team beat their goal of 50% flow through margins.

At the same time, each of our brands achieved record scores for guest satisfaction. For revenue management, we rolled out our analytical tools to 80 new properties. The tool improves forecasting so we can better manage our mix and push for higher rates.

In properties where this is implemented, we typically see a market share jump of about 2%. We also initiated efforts to make the most of the sales force. As a result, we now have a truly global sales force, allowing better sales support across regions and aligned with global customers.

We use SPG promotions like free weekends to drive business to the properties, to bring in new members and to grab share of wallet from existing guests.

Finally, by rationalizing brand standards and better procurement, we are reducing costs for our owners and partners. Third, during 2009, we kept growing. The bottom of the cycle is actually a great time to open new hotels. It means we have the newest and best product on the block in the first inning of an up cycle.

To that end we opened up 83 hotels in 2009 and signed contracts to open 77 more. We expect 2010 to be the third straight year of 8% plus gross unit additions. Meanwhile, over the last five years we have been cleaning up the Le Meridien and Sheraton hotel portfolios which means we eliminated 20% of the hotels in the system that were not up to brand standards.

We also reached several other milestones including our 500th hotel in North America, our 150th in Asia, our 50th in China and our 25th Westin in Asia. Starwood is on the cusp of two more milestones that highlight our global presence. Over the coming months, we will open our 1000th hotel in our 100th country. And fourth, as the innovation leader in the lodging industry in 2009, we kept the hammer down on our innovation agenda.

We reached 40 Aloft properties in the brand''s first 18 months. That marks the fastest growth in the history of select serve. We also launched Element, our first all lead certified brand. To support these new brands, along with Four Points by Sheraton, we created a dedicated select serve organization to focus on the future growth we expect from this segment.

We rolled out the Lincoln Sheraton at 95% of our properties around the world and guest uptake has been terrific with over 50% of our guests using the link. That’s more, by the way than use the gym, the bar or eat breakfast.

Coupled with a cool $6 billion spent over the past three years upgrading Sheraton, we are proudly re-launching the brand this year. I will share some more Sheraton stats with you in a few minutes.

So you can see I meant it when I said we got busy in 2009. Now I will move on to my second topic for the day. Recent trends and their implications for 2010. Leisure travel continues to rebound after the depths of 2009.

Group is improving with new leads up in the mid-teens. Business travelers have returned as witnessed by improving Monday to Thursday occupancy. New York, a good leading indicator saw occupancy levels of roughly 88% in Q4, that''s just short of the peak of 88.5% in 2007.

These trends bode well for 2010 as compared to even one quarter ago. As I mentioned before we remain cautious. The trajectory of the economic recovery is still fragile. And we know rate takes a while to build even when business turns, so RevPar will not turn positive right away.

Based on what we see unfolding today, we expect worldwide company-operated RevPar to be between flat and plus 5% in 2010 and RevPar in our owned hotels to be roughly flat year over year. Vasant will share in greater detail on recent trends by region and our baseline for 2010. So that leads me to my third topic. Why Starwood is well positioned to own the upswing in 2010.

First of all, the tail winds we described earlier should help in an up market. We were hit on all sides in 2009. The decline in luxury, dropping demand in major urban markets where we own hotels and international footprint exposed to foreign exchange fluctuations.

As the world economy rebounds, these should bounce back. Second, our portfolio of hotels has never been stronger. We have been painting the proverbial house building, opening and renovating our properties.

So, as of today, 60% of our hotels are either brand new or freshly renovated. Let me mention a few openings, as these iconic properties will redefine their markets such as the St. Regis''s in Atlanta and Mexico City, the W''s in Barcelona and South Beach, The Westins in Hyderabad and Mumbai, the Alofts in Dallas and Abu Dhabi and the Sheratons in San Juan and Chongqing.

Speaking of Sheraton, we are putting the finishing touches on our three year revitalization program. Bear in mind Sheraton is the most recognized hotel brand in the world. As I mentioned earlier, over $6 billion has already been spent with an additional $4 billion in new development planned for new development planned through 2012.

We have opened 65 new hotels, renovated 100 others, redesigned over 300 lobbies and rolled out over 100,000 new sweet sleeper beds. We also pulled the Sheraton flag off 40 hotels that could not meet our standards. That includes the Sheraton Manhattan. This hotel will operate as an unbranded property, so we can take our time to explore options with partners to either renovate or redevelop the property.

So what are the results of this revitalization? Measures for guest satisfaction, likelihood to return and meeting planner satisfaction are at historic highs. We feel great about where the brand is today and invite you to revisit Sheraton.

And to drive awareness of the brand''s re-launch, we are in the early stages of Sheraton''s biggest marketing campaign ever. Finally, we are also continuing our top line efforts from 2009, improving revenue management, optimizing our sales force and leveraging our powerful SBG program.

All of these factors together will ensure that we will indeed own the up swing which brings me to my fourth topic, our long term growth prospects. As I look back, we responded aggressively to the downturn but we always continue to see ourselves as a growth Company.

And put another way, the crisis may have delayed but it didn''t alter our growth strategy. If anything, our view is that the crisis has shown just how unstoppable the trend in wealth creation is around the world as 3 billion people enter the global economy.

Asia represented 75% of global growth last year, with China and India''s rate dipping to 6% to 7%. Some expect that more than 70% of the world''s growth over the next decade will come from emerging or should I say, rapidly growing markets.

This represents a once in a lifetime secular not cyclical growth opportunity for infrastructure, including high end hotels. For us, as the world''s most global hotel Company, this could not be better news.

Today, we are already witnessing the first recovery in the post World War era where the U.S. is pulled by strength of the emerging markets and as middle classes are formed and people travel outside of their native countries, they will look to brands they know well and the potential numbers of new international travelers is staggering.

We estimate that by 2015, 400 million Chinese and Indians will have sufficient income to travel abroad. That was 400 million, seven times the number of international travelers who visited the U.S. last year.

Meanwhile, as companies globalize their operations, their demand for global branded hotels will also grow. At Starwood, for example, we recently outsourced much of our IT to India which is generating hundreds of incremental trips there.

These trends underscore why we continue to pursue a quality global growth. We are already the global leader in four and five star categories with over half of our hotel properties outside the U.S. and over 80% of our 85,000 room pipeline to be built in international markets.

Asia Pacific is far and away our largest source of future growth with 50,000 rooms in that pipeline. The majority of our signing since the financial crisis began have been outside the U.S. which we believe reflects the beginning of a long term secular growth trend. Great properties strengthen brands which sets the stage for more new hotels.

So now for my fifth and final topic. I wanted to remind you of the four financial levers and how we are creating value for our shareholders. The first lever is driving RevPar growth. Just a few minutes ago, I outlined our efforts to accelerate RevPar growth and take advantage of the bounce back we should see in our business.

The second lever is cost containment. We achieved significant cost savings over the past year and half as we streamlined the company. Having made these sometime painful changes, we are committed to keeping our lean cost structure. The third lever is pipeline growth.

Our development team is working hard around the world to reignite growth as capital markets and confidence allow. We kept our discipline, preferring to walk away unless we have the right deals with the right partners in the right places.

As a result, our pipeline as a percentage of existing rooms is still the highest in the industry, skewed outside the U.S. in the four and five star categories. The fourth lever lies in our balance sheet.

We continue to transform Starwood''s business mix to be over 80% fee driven, unlocking the value of our assets. We own or leased 21,000 high end hotel rooms and continue to test the market for asset sales. Monetizing our timeshare inventory and completing the Bal Harbour project are two more ways we can generate incremental cash over the coming years.

This transformation should generate substantial after tax proceeds that would not only allow us to pursue growth opportunities but also return large amounts of cash to the shareholders. What will remain is a large and growing fee base and franchise business which we regard as one of the best business models in the capitalist world.

Growth is generated by unit additions, RevPar increases and incentive fees. The contracts are 20 years or more, with limited capital requirements, the business is a free cash flow machine.

Let me end my prepared remarks by repeating three key takeaways. First, we are cautiously optimistic about the near term business environment. Two, we are working hard to own the upswing. And three, we are bullish about long term growth.

With that I will turn the call over to Vasant.

Vasant M. Prabhu

Thank you. Frits. And good morning, everyone. Over the next few minutes I will cover three topics. The current state of our business around the world, more color on the 2010 outlook and an update on the liquidity and leverage enhancement program.

The big story of the fourth quarter was the return of the business traveler. We exceeded our RevPar expectations as late breaking in particular corporate transient business, was stronger than we had anticipated around the world.

And the recovery trend accelerated as the quarter progressed. In North America, RevPar improved from down 11% to 12% in October, November to down 6.5% in December and down 3% in January at Company operated hotels.

This base of improvement was entirely driven by occupancy which went from being flat to up 1 point in December, to up over 6 points in January. Most of the occupancy increase was driven by week day room nights which grew 6% to 7% in December and January.

Leisure transient room nights remained consistently positive offsetting group declines. Rate continues to lag but periods of compression in December and January allowed us to improve rate realization from negative 12% in October to negative 9% in January. Year-over-year comparisons are also helped as we they lap the sharpest declines from prior year.

Last year at this time our group business was heading downhill fast but now we are seeing a few positive trends. In Q4, lead volume was up 15%, the first increase since the financial crisis broke. Cancellations in Q4 were down 50%. Although December group production was still well below last year, bookings into 2010 were up over 50% and bookings in the first half of 2010 were up over 100%.

So our booking window has shortened dramatically. In addition, businesses have started to confirm meetings that had been put on hold. Corporate renegotiations are ending better than we might have expected a few months ago. We are hearing from our corporate customers that cuts in travel are behind them companies want to get their people back on the road drumming up business and motivating their teams.

Internationally we are seeing similar trends with the sharpest base of recovery in Asia. Local currency RevPar at Company operated hotels in Asia went from negative 10% and 6% in October and November to positive 7% and 12% in December and January.

A 20 point swing over the past four months, as occupancy jumped from up 3-points to being up 9-points, while the rate decline in local currency moderated from minus 14% in October to minus 7% in January. The recovery was broad based across Asia led by China.

The only market that lags is Japan. Barring the recovery was in the quarter for the quarter business, up 20% in transient and up over 60% in group over the last year. Europe, Africa and the Middle East RevPar were down 2% in December, January after being down 12% in October, November.

Once again, occupancy turned positive and rate declines moderated. The trend in Europe tracks the U.S. In Africa and the Middle East, the UAE where we have a sizeable business was hurt by the debt crisis in Dubai. While Latin America is also recovering, it was our weakest region. South America is coming back strongly as H1N1 effects fade but Mexico which is tied closely to the U.S. remains weak.

In summary, across the world, there are clear signs of recovery, followed by late breaking transient, in particular, corporate business. That said, it is important to point out that we are digging out of a deep hole. While RevPar in Q4 exceeded expectations it was still down 10% in constant dollar worldwide. In our vacation ownership business, the trend toward stabilization continued.

Tours and close rates are holding up and pricing is under some pressure. By limiting capital allocated to this business, cutting costs and with two securitizations completed last year, SVO generated over $300 million in cash flow, contributing meaningfully to debt reduction that we achieved.

During the fourth quarter, we made a series of decisions in line with our future strategy for this business. We have decided not to develop some sites where we own the and had been investing to obtain permits and start construction. These projects have been written down to our best estimate of the fair value of the land.

At some of the projects where we have been completing current phases, we decided not to develop future phases. This requires us to write down the value of land as well as some infrastructure that would have benefited future phases. These decisions resulted in the write down of $255 million of SVO inventory and fixed assets.

Also, we are reducing prices at some projects to step up the pace of sales, requiring an adjustment of $17 million in cost of sales. This $17 million is recorded in the vacation ownership expenses line on the P&L. so this piece of the write-off is not recorded in the restructuring line but in the vacation ownership expenses line.

Finally, based on these decisions and as well as our future expectations for the business, we wrote off $90 million out of the $240 million in goodwill we had on the books for SVO from its acquisition in 1999. We are pleased with the cash the business generated last year and remain focused on running this business for cash in the foreseeable future.

What does all this tell us about 2010? As you can see, what could make or break 2010 is the strength of late breaking, in particular corporate transient business and our ability to improve rate realization as the quality of business improves. Group always lags and group based, while recovering from some sharp declines, would not point to a robust year. By definition late breaking business is hard to forecast.

As such, it is very difficult to look four quarters out with any reliability. In the final analysis, the pace of recovery in 2010 will depend on the long standing and still evident correlation between RevPar growth and GDP/corporate profit growth by region and country.

While it is tempting to extrapolate the most recent trend all the way through 2010, we think it would not be prudent to do so this early in the year for several reasons. Firstly, we lapped the steepest declines in the first two quarters, comparisons get somewhat tougher in the second half.

Second, GDP growth rate right now is about trend with inventory replenishment, fiscal and monetary stimulus. Will this be sustained as we enter the back half? Countries like China, India, Australia and Brazil are all taking steps to prevent their economies from overheating.

Could things cool down a bit in some of our fastest growing markets? Finally, we have taken a massive hit on rates. What will be the pace of rate improvement? It is too early to tell. The world remains an uncertain place with many unknowns.

That said, given expectations for a global recovery in GDP, corporate profits and our recent trends, we have substantially upgraded our RevPar outlook for 2010 from flat to down 5% to flat to up to 5% in constant dollars at Company operated hotels worldwide.

In developed markets, we do not expect much growth. North America could be flat to down 3%. Europe only up modesty flat to up 3%. Positive RevPar growth will be driven by emerging markets, Asia, Latin America, the Middle East and Africa were beyond more than 40% of our fees in 2009.

Assuming Asian economic growth remains robust, Asia could grow 5% to 8% in local currencies. Similar growth rates are likely in Latin America, mostly due to the sharp decline the region experienced last year from H1N1.

Mexico remains a key risk. A weak economy is hurting business travel, crime and lingering H1N1 effects hurting leisure travel. But South America is a bright spot with its significant commodity exports to fast growing Asia. Africa and the Middle East could grow 3% to 6% assuming the situation in the Gulf stabilizes and oil prices hold up.

Exchange rates are currently a tailwind. If rates remain at current levels, dollar RevPar could be 100 basis points higher globally. It is unclear that foreign exchange will remain a tailwind. Expectations are that the dollar could strengthen further versus the pound, the euro and the yen.

Our exposure to the euro and the yen is partially hedged which will mitigate some of the earnings impact of dollar stress. We would expect management and franchise fee growth to track RevPar growth globally.

Our own hotels as you know, are concentrated in developed markets, North America, Europe and Mexico. As such, we expect all RevPar to be flattish, down 2% to up 2% in local currencies. Occupancies are likely to be positive but rates will stay negative. With flat RevPar and occupancies up, we will need to continue to work hard to limit cost growth.

Our intent remains to offset wage and expense inflation with various productivity and procurement programs as we did in 2009. However, 2010 will be another year of declining owned EBITDA.

We substantially scaled back our SG&A, down $100 million from 2008 run rates. We believe we are now right sized and are holding the line on headcount, except in growth markets like Asia, Africa and the Middle East. However, with salary adjustments and central compensation resets, the negative impact of a weak dollar and a couple of other items moving in the wrong direction, SG&A in 2010 will be up 3% to 5%.

On an operating bases, our vacation ownership business will be down $40 million or so versus 2009. 23 million of the reduction would be from securitization gains which we will not have in 2010 due to the change in accounting rules. We also did two securitizations last year, as a result interest income this year will be 15 million to 20 million lower. This 40 million or so decline in vacation ownership operating results is offset by a 40 million add back from the adoption of FAS 166, 167.

In 2009, operating incomes for vacation ownership and residential was around 118 million. Our range for this year is essentially the same, with the accounting change included. At the midpoint of the zero to up 5% RevPar range and the plus 2% to minus 2% range for owned hotels, baseline Company EBITDA would be $750 million.

Each point of RevPar adds or subtracts 15 million in EBITDA. For an apples-to-apples comparison to 2010, you have to adjust 2009 down by around 20 million for asset sales and the de-flagging of the Sheraton Manhattan. The FAS 166, 167 add back in 2010 as we just outlined is a wash with the reduction of financing income at SVO. So, what''s this 775 million in 2009, the 750 million scenario is a 25 million decline almost entirely from owned EBITDA.

To get to EPS, our D&A and depreciation and amortization is down about 10 million or so due to asset sales. Our book interest expense is up by about 20 million from the accounting change. With a 22% tax rate, the 750 million scenario for EBITDA translates to $0.63 of EPS.

Moving on to liquidity, leverage and cash flow. Our liquidity and leverage enhancement program is largely complete. Debt is down below $3 billion from over $4 billion. Our year-end leverage ratio was at four times, well below the covenant level of five and a half times.

We started the year with 2.9 billion in debt maturing through 2013. We end the year with slightly over 1 billion in maturities through 2013 and no maturities until 2012. All maturing debt in 2010 and 2011 has been paid down. Our financial flexibility has been substantially enhanced.

In the first half of 2010, we will be working with our bank group to extend the maturity of our revolver beyond 2011. In the fourth quarter, we generated 400 million from the sale of the 5th Avenue retail shops at a 20 multiple of ‘09 EBITDA, Bliss has a 30 multiple and securitization that generated a $23 million gain all accretive transactions.

In 2010, we will spend 250 million in hotel capital. Investment capital spending will be 100 million as we undertake some ROI projects which were on hold. Maintenance and IT spending will be 150 million as we step up spending on technology. We''re scaling back capital spending at SVO again as projects are completed.

The securitization planned in Q4 2010, SVO will generate over $150 million is cash flow, more than adequate to cover capital it at Bal Harbor. Bal Harbor capital is estimated at 140 million but could be lower as we receive deposits from additional condo sales. Both inquiries and contract activity at Bal Harbor have picked up meaningfully after the turn of the year.

Cash generated in the hotel business will be sufficient to cover cash interest and taxes, so on an operating basis we will be cash flow neutral in 2010. We are still expecting to receive our tax refund from the IRS sometime in 2010. Assuming we receive 200 million plus from the tax refund, after paying dividends and before any additional asset sales, debt should come down another 100 million to 200 million by the end of the year.

In summary, we are entering what we believe will be a multiyear up swing with a great cost structure, excellent liquidity, a strong balance sheet and of course the best brands, pipeline and global footprint in the hotel business.

As Frits indicated we feel very good about the long-term outlook for our business. With that I will turn this back to Jay.

Jason Koval

Thanks Vasant. We''d now like to open up the call to your questions. So in interest of time awareness, please limit yourselves to one question at a time and then we''ll take any follow-up questions you might have as time permits. Selvia, we''re ready for the first question.

Question-and-Answer Session

Operator

Thank you. Your first question comes from Joseph Greff from J.P. Morgan.

Joseph Greff - J.P. Morgan

Question on the group side of things. When you look at what you have on the books for the second half of this year domestically and when you look at 2011 group bookings where does rate compare versus year-ago periods?

Jason Koval

Joe, I''m sorry, you cut out at the beginning. Could you just reiterate that?

Joseph Greff - J.P. Morgan

Okay. If you -- my question is on the group side of things. If you were to look at the second half of 2010, domestic group bookings, how does the rate on those group bookings compare to last year? Then when you look at 2011 domestic group bookings, how does 2011 group rate compare to what you think 2010 is or what you have on the books for 2010? Obviously trying to get a sense of the sequential trends in rate on group and if you are seeing improvement in group rate which obvious is pretty soft right now.

Vasant M. Prabhu

I think the best way to answer that is, things are improving almost week by week and as we look at 2010 versus 2011, the rate is improving sequentially in terms of what''s on the books between what''s on the books in 2010 versus what''s on the books in 2011. So the rate in 2011 is better than the rate for 2010. And the moderation in rate in 2010 is getting better as each week goes by. As we indicated earlier, a lot of business is coming in quite late.

Jason Koval

Next question, please.

Operator

Your next question comes from Steve Kent from Goldman Sachs.

Steven Kent - Goldman Sachs

Hi. Just one clarification. Vasant, you said for this years for 2009, your timeshare business generated I think free cash flow of roughly $300 million. Next year you''re saying I think 150 million of free cash. May be if you could just sort of lay out what that would be over the next five years. And one thing, Frits, do you think, what we''re hearing from our hotel people there''s almost like a bull whip effect of sort of people going back on the road in a more aggressive form than before, almost like what we see in inventory rebuilding. We''re seeing travel rebuilding. Is that something that you would subscribe to?

Frits D. van Paasschen

Yes. Steve, I''ll take both of those questions. You are correct on the timeshare cash. I think it was 315 million in 2009 and 140 million or 150 million for what we''re expecting here in 2010. We''re going to continue to pull cash out of time share and haven''t yet made a projection beyond that. But I think the number would be closer to the 2010 number than 2009 and will depend on securitizations and velocity and all the things you could imagine. In terms of your bull whip effect, I like that turn of phrase. We''ve been talking internally about some degree of pent up demand. We''ve certainly seen that on projects that companies were planning and then put on hold or meetings or conventions that they normally held each year but they held off on. And I think you will some of that bouncing back. And in fact that''s largely, I think what explains the growth in transient and bookings for group over the last few months.

Jason Koval

Next question, please.

Operator

Your next question comes from Josh Attie from Citi.

Josh Attie - Citigroup

Thanks. It seems you guys have made the strategic decision to be a net seller of real estate over the next year or two. Can you walk us through what the reinvestment priorities beyond growing the fee side of if business which shouldn''t excuse me that much capital? Also, do you feel like you need to get an investment grade credit rating before you repurchase shares or ask the Board for new authorization?

Frits D. van Paasschen

Yes. this is Frits again. You''re absolutely right about us being a net seller of real estate. We''ve talked in the past and continue to pursue an asset-light strategy. The reality of the matter is though this is not a great time to be selling assets. What we would be looking for today is a multiple of peak EBITDA somewhere in the double figures. And given the decline in EBITDA that would be a very high multiple today and we may get it, we may not.

In fact, if you look at the sales we made in 2009, we were, in fact, able to average over 20 times EBITDA for what we sold. To the second part of your question, in terms of reinvestment, I think there are two areas where we would be investing. The first and most importantly is making ourselves the best operator of global hospitality brands around the world which means investing in IT technology and support so that we can bring as much value as possible for our owners and partners.

The other thing that we''re going to explore on a selective basis is, if this is not a great time to sell assets but we have hotels that could be shaped up and perform better by having put some capital in and I''m thinking about, for example, the ballroom at the Phoenician, as an example. Those might be projects we would undertake as a way to try to put the properties we have for sale in the best shape possible. And then in terms of investment grade for share repurchase, we would like to get to investment grade and I think only after that we''d really think seriously about significant share repurchase. Next question, please.

Operator

Your next question comes from David Loeb from Baird.

David Loeb - Robert W. Baird & Company, Inc.

Frits I want to applaud your efforts at cost control both at the property level and with corporate G&A. Can you give a little bit of view on domestic brand market share trends, RevPar penetration for example, 2009 versus previous years?

Vasant M. Prabhu

In terms of market share trends, we''ve seen in the early part of the year, some of our brands were harder hit, given where they sit in the pricing spectrum but we saw the year go by, we saw some significant improvement in the share picture. At the end of the year with W and Westin, on Sheraton we''re in the process of launching the big program to communicate the changes that have been made.

Sheraton did lose share last year but our expectation is that will return as we go out and explain to people everything that has gone on with Sheraton. That''s in the U.S. In general, outside the U.S., we had a very good year. We gained share in most parts of the world, especially in places like Asia and Latin America. So, it''s a story that, as you always know, it''s hotel by hotel and location by location, region by region.

Frits D. van Paasschen

So that you are looking at numbers in the lodging business compared to other businesses that I''ve been in is a slightly more imperfect measure. What we''ve seen generally in up cycles we tend to do better in terms of share performance. In down cycles we tend to do worse. This cycle was no exception particular well the hard fall-off that we saw on the luxury side of the business.

Jason Koval

Next question, please.

Operator

Your next question comes from Alistair Scobie from Atlantic Equity.

Alistair Scobie - Atlantic Equity

Hi. Good morning. I just wanted to ask, in relation to corporate rates, you mentioned on the call you felt more comfortable than expected with the way these were turning out. Can you expand on that a little bit of talk? Any particular markets? I''m thinking of New York, if we could get a little bit of guidance as to where you think the corporate rate negotiations are coming outs.

Vasant M. Prabhu

As is always the case with this, this is account specific, region specific. I think the best way to describe it is the way we did it which is we had a certain feeling going into at few months ago.

We''re certainly coming out better than we expected. It seems to be getting better every day. It would be difficult to put a single number on it. These things are not able to put a single number on but I would say sort of ending flat to slightly down, certainly not as much down as we might have estimated even a few months ago.

Frits D. van Paasschen

I think just to build on that little bit, the growth in occupancy certainly emboldens us to take a more aggressive stand on rates looking forward and the last piece is the efforts that we were talking about earlier on the call around revenue management and understanding load and projected occupancies gives us a better way of anticipating just where we can play on rate.

Jason Koval

Next question, please, Silvia.

Operator

Your next question comes from Bill Crow from Raymond James.

William Crow - Raymond James and Associates

Two items. Frits, if you could talk about the Sheraton Manhattan. Whether you think you would maintain ownership or is that something you would sell the property and then insure that you had a franchise or managed asset? Also, what brand would you think would fit in that in market given the competition among your other brands? And then, Vasant, one clarification, you said that net debt would decline $100 million to $200 million this year. I assume that''s before the SFAS 167 adjustment.

Frits D. van Paasschen

I''ll take the Sheraton Manhattan question first. I think the important thing that investors should know is that we as management don''t want to have another Bal Harbour project that we would run and develop on our own. So Bill, whether we would sell or maintain some ownership as we went into development with a partner depends on what kind of deal we would structure. Our point of view here was that and the reason we took the flag off, we wanted to take our time to do this right and we felt like, given the $6 billion that''s been invested behind the share to be Sheraton brand over the last three years and the additional $4 billion that will be putting a gains developing this brand over the next three years.

This property really just didn''t hold up in terms of guest satisfaction and the physical plant. And I say that acknowledging sincerely that the work that our team has done to keep guests happy over the last few years has been terrific. In terms of which brand at this point given the location, it''s too early to tell. I think with the size and with the mix of properties we have, we''d be looking at an upper upscale brand for that area and quite possibly maintaining the Sheraton flag on what comes next.

Vasant M. Prabhu

Yeah. On the question, on the debt, Bill. Yes. The 100 million to 200 million reduction was based on what our debt was at the end of this year. The accounting change, FAS 167 on page eight of our press release, we tell you sort of roughly what it is going to do to the balance sheet. We have about 400 million. That is added back to assets in the account receivable and other assets line. And we''ll have about $445 million that comes back on to the balance sheet on the liability side in short term and long-term debt. So the 100 million to 200 million I gave you was versus the old way of defining those lines.

Jason Koval

Next question, please.

Operator

Your next question comes from David Katz from Oppenheimer.

David Katz - Oppenheimer & Co.

Hi. Good morning, all.

Frits D. van Paasschen

Hey, David. Thanks.

David Katz - Oppenheimer & Co.

Just a quick question on time share. We try and sort of look outgoing forward modeling both the cash flow and the earnings for it. And if we were to have a sneak peek at your inventory and thinking about what not only this year but next year brings us, from an earnings and cash flow perspective, are there any comments that you can make that will help us think about 2011 with respect to what your timeshare business should generate?

Vasant M. Prabhu

Yeah. I think the simple answer to that without going into a lot of detail and giving you sort of what are the specifics, the current pace of sales can be sustained without any meaningful amounts of capital for about two or three years. In certain locations, we can sustain those locations beyond that also without significant amounts of capital but assume that this pace of sales is probably good for two or three years with about the level of capital we might be putting in next year.

Frits D. van Paasschen

I just reaffirm that. I think that we have, as we''ve been saying, we have a great team at vacation ownership and some terrific product. You can imagine given our inventory levels that we have something like three years worth to be able to sustain the current velocity now, depending on your own view of consumer confidence does that pick up a little bit and do we run through it more quickly I think remains an open question. Then just to reiterate Vasant''s other point, we would continue to maintain our capital expenditures at quite a low level.

Jason Koval

Next question, please.

Operator

Your next question comes from Bryan Maher from Collins Stewart.

Bryan Maher - Collins Stewart

Good morning, guys. Quick question as it relates to hotel acquisitions and all the discussion going on with the stressed hotels. You really haven''t talked about that much here. Given your cash availability, is there any effort at all on the part of Starwood to look at hotels that may or may not be stressed where you have a need to increase your market share in a particular location?

Frits D. van Paasschen

Yeah. I think the bigger strategic statement to make around that is that we continue to want to move towards being asset light. I think that under all circumstances though we would want to continue to have peripheral vision. Our preference, though, would be to have any available opportunities like that done with a partner, someone that we can turn to who has a long-term interest in owning real estate.

Where we would be really excited is to continue to add brands to our portfolio which isn''t to say we feel like we need any to fill holes but our success over the last four or five years with Le Meridien in terms of cleaning up that brand generating RevPar increases, bringing SBG, combining the SG&A into our own existing platform, I think has shown that that''s a real vehicle for us to create value. We''re not modeling or anticipating that but we''re certainly looking opportunistically to see whether that might be something we could do.

Jason Koval

Next question, please.

Operator

Your next question is from Jeffrey Donnelly from Wells Fargo.

Jeffrey Donnelly - Wells Fargo Securities

Frits. How should we think about growth in your unit pipeline from this point over the next few years? So many of your flagship products, W and arguably Westin, are largely new construction assets. At least they market themselves that way. The economics of ground-up construction really don''t make a lot of sense for partners today.

Frits D. van Paasschen

Well. I think you have to take a global perspective and the fact of the matter is outside of the U.S. and may be Western Europe, there actually still are great opportunities for ground-up construction. And as importantly, there are financial resources available to support that. Inside the U.S., what we have worked carefully to do is to make sure that, in essence, all of our brands are conversion friendly brands and that we will continue to look at opportunities to do that. So I mentioned on this call that this year will be the third straight year in which we''ll have greater than 8% unit growth.

I think looking forward we can sustain that for a while and that the number of hotels exiting the system ought to taper off, now that we''ve gotten closer to completing our cleaning up of the Le Meridien and Sheraton brands. I think the unit growth story for us will be very good. Particularly with the shift towards international markets, as we mentioned on the call, 80% of our pipeline looking forward will be development of new hotels outside of the U.S. and I think that just speaks to the robust opportunity we''re continuing to see in so many markets, particularly developing ones around the world.

Jason Koval

Next question, please.

Operator

Your next question is from Janet Brashear from Sanford Bernstein.

Janet Brashear - Sanford C. Bernstein

Thank you. Speaking of those developing markets around the world, I''m wondering if you see more opportunity in these emerging markets in the full service segment or the select service segment and particularly relative to the secular change in the select service segment. We haven''t seen a big track record of success relative to global brands versus, say, regional brands and independents in other markets. What will make this cycle different?

Frits D. van Paasschen

Yeah. I think, Janet, it''s an important point. The select service business is less global than the full serve or luxury end of the spectrum which is why we continue to want to grow on the full-serve side. Having said that a good example of how we can make the extension into a select serve space but that its nonetheless at the high end of that space would be a market like China where with the strength of Sheraton we''ve been able to grow four points by Sheraton and also start to had a Aloft.

The formula is slightly different than in North America. They''re really great hotels. They''re not at the same level as our full-serve hotels but they''re certainly not your father''s select serve hotel in North America, either and we do think there''s a great opportunity at that slice to grow our select serve brands around the world.

Jason Koval

Next question, please.

Operator

Your next question is from Smedes Rose from KBW.

Smedes Rose - Keefe, Bruyette & Woods

Just wondering if you would talk about what you think the normal flow-through of your pipeline to kind of net room additions should be now that most of the Sheraton stuff is behind us.

Vasant M. Prabhu

Yeah. To say about 80 hotels opening. We would say exits are probably in the hopefully in the 25 to 30 range. So a net 50 with an average of 300 rooms. So that would give you 15,000 rooms a year on a base of 300. So it''s about 5%.

Jason Koval

Next question, please.

Operator

Your next question is from Rachael Rothman from Wedbush.

Amanda - Wedbush Morgan Securities

This is actually Amanda for Rachael. Just wondering, If you had to break down the price of revision in worldwide RevPar to North America versus international what would that look like?

Vasant M. Prabhu

Yeah. I think I indicated in my comments, I said that in our zero to 5% that we have for local currency RevPar company operated hotels North America was flat to down 3%. So obviously what''s pushing everything into positive territory is non-U.S. business.

Jason Koval

Next question, please.

Operator

Your next question comes from Chris Woronka from Deutsche Bank.

Chris Woronka - Deutsche Bank

Good morning, guys.

Frits D. van Paasschen

Good morning. Chris.

Chris Woronka - Deutsche Bank

Wonder if you could just expand a little bit on the commentary regarding the late-breaking business. If we look at that versus group versus corporate transient is there any discernible difference there and as you''re thinking about the guidance does that assume that late-breaking business continues throughout the year at the same pace you''ve seen recently?

Frits D. van Paasschen

Yes, I think the last part of your question is tough to answer, because in my view that''s so dependent on the continued growth in GDP and business and consumer confidence. But the way we look at that time group business and we suspected that this would happen, is in the fall, when we started to see group bookings pick up, they were largely farther out and I think people were taking advantage of what they saw to be favorable rates but at the same time, 2010 was still pretty light. Our suspicion was that people were waiting to see just what kind of a budget year 2010 would be and as the year has emerged people have decided that, in fact, there is an opportunity and we''ve come back and seen some very short window bookings that Vasant referred to earlier.

I think on the business transient side, it''s as simple as this. For business to work, people to have get out and travel and I think in our business, as in many others, we spent the last year and a half working very hard to reduce our costs. And we''ve all recognized that the path to prosperity from here is by growing the top line. And I think in so many ways to do that people are getting out and I think that''s what we''re seeing on the transient side of the business.

Vasant M. Prabhu

There is a couple other points. Outside the U.S., group is not as large a part of the business as it is in the U.S. Also, group business outside the U.S., even historically has it not been booked as far in advance as it is in the U.S. So outside the U.S., in the year, business, even on the group side has always been more important, also a smaller peace of continues. In the U.S., if you just went by the historical views of group base, et cetera and you project it strictly on group base, you''re down next year.

The reason we only expect that we''ll be down zero to 3% is on the basis that you have to believe in corporate trends in business and late breaking group business. So that has to be factored into get even it to the zero to down 3% range.

Jason Koval

Silvia, we have time for one more question, please.

Operator

Your final question comes from Patrick Scholes from FBR Capital Markets.

Patrick Scholes - Friedman, Billings, Ramsey Group, Inc.

Hi. Good morning. One question here. With your North American RevPar expectations for flat to down 3%, what would you forecast for your given that scenario, your owned North American hotel EBITDA margin, as far as change and change margin for the year?

Vasant M. Prabhu

Yeah. If you look at it, we indicated that the bulk of our EBITDA decline was in the owned hotel portfolio. So I think what you have next year is flat RevPars but it''s declining ADR and growing occupancy so your fighting not only normal wage and expense inflation, you''re fighting cost increases because occupancies are growing up -- going up.

So yeah. clearly another year of decline in EBITDA. We haven''t gone as far as to give precise margin declines et cetera but you should assume that there is another year of somewhere in the range of 10 % to 15% declines in owned EBITDA.

Jason Koval

Thanks Vasant. Well. That wraps up our fourth quarter call today. We appreciate your time and interest in Starwood Hotels and Resorts. Please feel free to contact to us review any information or follow up with additional questions. Bye-bye.

Operator

Ladies and gentlemen, this concludes today''s conference call. You may now disconnect.