Starwood’s Increase in Worldwide Expansion Leads to Higher Profit and More SVOs

Starwood Hotels & Resorts Worldwide Inc. released its third quarter analysis at the end of October and reported not only that its stock is at it’s highest since the company’s personal peak in 2007, but that it’s rate of occupancy (RevPAR) is also at an all time high. This, the company says, is what gives it the confidence to continue expanding and open over 30 hotels worldwide starting in 2014.

In the press conference call, Frits D. van Paasschen, Chief Executive Officer, President and Director of the company, assured that they have exceeded profit expectations “despite revenues coming in at the low end of our outlook range,” and discussed the company’s profits on a global scale.

Starwood brands, which own hotels such as the Sheraton, W Hotels, Aloft hotel, St. Regis and more, accounted for nearly 1 in 5 of all new-branded, upper upscale and luxury hotel openings or conversions worldwide. Throughout the third quarter, Starwood has returned $257 million through the share repurchases, and will increase their dividend to $1.35 per share. The company’s stock price is the highest it has been since 2007, at $74.11, and has increased 43% in the past year alone.

Van Paasschen explained that this growth was somewhat of a pleasant surprise to the company, seeing as how there has been a lack of revenue coming in at the low end of the company’s outlook range. “We have said for some time that this up cycle is unlike any we have seen before due to the unprecedented lack of supply growth in the developed economies,” he said.

Van Paasschen also mentioned that while the United States and Canada had record occupancy levels, Starwood saw it’s RevPAR rate increased in a similar fashion on a global scale. “As such in North America, we’ve had very steady REVPAR growth between 6% and 7% for the past 2 years in a macroeconomic environment that remains somewhat unpredictable and generally weaker than expected.”

“Our pipeline of about 400 hotels and 100,000 rooms has translated into about 70 to 80 new properties a year. That number is likely to grow,” van Paasschen said, “We’ve signed more agreements to open more hotels. Of the 208 managed and franchised deals signed in 2010 and 2011, over 80% are now either operating or under construction. And our 131 deals from 2012 are similarly on track.”

The company insists that it has its long-term trends intact and is “well-positioned for profane growth in high-end global hospitality,” according to the report. They stated that “The hotels are in the best shape ever,” and are benefiting from over $800 million in capital, which has been documented from the start of 2010 through the end of this year.

Starwood stated that it predicts 80% of earnings coming from various additional fees the company plans to implement by the end of 2016. “With many hotels ready to market and active discussions underway on a few hotels, we’re working towards our asset light goal,” Van Paasschen said.

One way the company plans on achieving its high profit goal is through an increase in sales of Vacation ownerships (SVO). Most recently, The Westin St. John converted to an SVO in hopes to turn the entire resort to vacation ownership. “The signs of SVO today means that a larger portion of our business is generated from sources beyond unit sales,” said Vasant M. Prabhu, Vice Chairman, Chief Financial Officer and Executive Vice President of Starwood.

He also explained that SVO’s generate recurring fees like those from homeowners associations, and that their unsold SVO units generate as much profit as those in an owned hotel. “Our experience is that the occupancy at these resorts is even more stable than traditional hotels over time,” Prabhu said.

From these potential profit increases, Prabhu explained that by expanding and opening new hotels, it is a sure way for them to remain on a consistent incline. “New hotels give us a healthy base of properties that in turn build the strength of our brands,” he said.

Out of Starwood’s 883 existing upper upscale and luxury hotels, about 20% were constructed in the past 4 years, which includes new hotels or converted with a major renovation. The company has doubled its luxury footprint in the last 5 years and has added luxury and upper upscale rooms at a rate of 5% per year

Just last week the company has confirmed three new Sheraton hotels throughout Africa, which will increase its African portfolio by over 30%, with more than 15 new hotels set to open around the continent over the next five years. This growth will add more than 5,000 guest rooms and create thousands of local employment opportunities.  Starwood also recently revealed that they will open a Sheraton in Thailand and in Rio by 2014, just in time for the World Cup.

Prabhu assured that while group revenue growth has been slower, it has been steady, at around 3% to 4%. “This, in our view, is healthy, balanced and sustainable revenue growth,” he said. “With no meaningful change in the supply situation evident in the near term, we expect these trends to extend into 2014.”