Marriott International, Inc.
Q3 2007 Earnings Call Transcript

Published:

  • Operator:
    Ladies and gentlemen, please stand by. We are about tobegin. Good day everyone, and welcome to the Starwood Hotels and Resorts thirdquarter 2007 results conference call. Today’s call is being recorded. At thistime, for opening remarks and introduction, I would like to turn the call overto the Vice-President of Investor Relations, Mr. Jay T. Koval. Mr. Koval,please go ahead, Sir.
  • Jay Koval:
    Thank you, Rufus, and good morning, everyone. I’d like tothank all of you for joining us for Starwood’s third quarter 2007 earningscall. 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 companyplans, prospects and expectations that constitute forward-looking statementsunder the Safe Harbour Provision of the Securities Reform Act of 1995. Theseforward-looking statements can generally be identified by phrases such as starttowards management, believes, expects, anticipates, perceives, forecasts,estimates, or other words or phrases of similar import. All such statements arebased on our expectations as of today and should not be relied upon as representingour expectations as of any subsequent date. Actual results might differ fromour discussion today. I point you to our 10K and other SEC filings availablefrom the SEC or through our offices here and on our website atstarwoodhotels.com for some of the factors that could cause results to differ. With that, I’m pleased to turn the call over to Frits forhis comments. Frits.
  • Frits van Paasschen:
    Thank you, Jay, and good morning. I’m delighted to be heretoday for my first call as Starwood’s CEO. Yet again, Starwood reported strongquarterly results delivering EPS of 68 cents and generating $348 million inEBIDTA. After adjusting for some of the one-time items for the quarter, we beatboth consensus and our own guidance. This is thanks to continued strength acrossthe globe in our core hotel operations. Our own properties delivered strong results and I’m happy toreport that worldwide business fundamentals remain robust. But before I diginto the quarter I want to share four preliminary observations based on myfirst five weeks on the job. The first observation will take a couple ofminutes, so bear with me. It’s quite simply that Starwood has some of the best brandsin the hotel industry. These brands are unique and highly differentiated. Theygive Starwood a leading position in the upper upscale and luxury segments,segments that have powerful demographic and economic tailwinds that I believewill allow them to outperform over the long run. These brands also have globalreach. This in turn drives developer interest for the brands and has resultedin a pipeline that’s now reached 115,000 rooms. Remember, this pipeline isskewed towards the upper upscale and luxury hotels and is diversified aroundthe world. So with our comparatively smaller base of hotels, Starwood is wellpositioned to grow its managed and franchised business at above-industry growthrates for years to come. To stay on this observation further, I’d like to elaborateon our brand. Starwood is known as an innovator in the lodging industry and I’mfocused on making sure that our brand teams continue with their excellent work.Our brands need to remain unique and differentiated. Our service delivery mustcontinue not just to meet, but exceed our guests needs. This will drive revpar(sic) premiums that will fuel developer demands for our brands and returns toour shareholders. Let’s take Sheraton, for example. It has a leading positionin Asia, Europe, and the Middle East, but is underpenetrated relative to Marriott and Hilton in North America. So I believe we have an enormous opportunity to increaseour footprint and improve the quality and consistency of the guest experiencefor our North American hotels. Our two other upscale brands, Westin and Le Meridien, alsoare powerful draws for consumers and developers. In fact, Westin is one of themost sought after brands in the category. Le Meridien continues to seek greatrevpar gains from its successful integration in to Starwood and is generatingsubstantial value for our shareholders. Our three luxury brands are also unique and complimentary toone another. The St. Regent and luxury collection assets have received numerousawards in the luxury category. To this end, we’re implementing a global set ofbrand standards specifically designed to meet Triple-A and mobile guidelines.Our aim is to increase the number of Five-Diamond and Five-Star hotels in oursystem. Meanwhile, W’s track record has convinced the development world thatthis brand is not just for real, but is redefining the face of luxury aroundthe world. And finally, we have a small but growing offering of brandsin the Select Serve category. Four Points has been completely re-invented andthe increases in GSI scores and pipeline are impressive. Aloft and Element haveenormous potential as these brands have sparked strong developer interest. Thatis, even before the first hotels open in the summer of 2008. These brands havea wide open playing field to grow through a unique positioning that in my viewredefines what consumers can expect from Select Serve hotels. So that concludes my take on Starwood’s brand. Let me turnnow to my second observation coming into Starwood. I believe we have a deep andtalented group of associates. Over the last few weeks I’ve visited many of ouroffices and hotels, and including a trip to Japan and China just last week, andI’m truly impressed with the enormous amount of industry experience that ourpeople bring to the table. Equally important, they’re motivated and focused onleading the industry in propelling Starwood’s growth. My third observation, Starwood owns the highest qualityportfolio of hotels that you can buy. These hotels are predominantly in theFive-Star category and are geographically dispersed around the world. They arevaluable assets for our shareholders for two reasons
  • Vasant Prabhu:
    Thank you, Frits, and good morning, everyone. We exceededour expectations in the third quarter with strong hotel performance offsettingweakness in our vacation ownership business. Hotel revpar growth in North America picked up in August and has stayed strong through October.September, as you know, was affected by both Jewish holidays falling in thesame month this year. International revpar growthwas in the mid-teens across all geographies, helped of course by a weakeningdollar. We see no evidence at this point of a change in trend and areprojecting some of the best growth rates we have seen so far this year for thefourth quarter. Nine to 11% revpar growth at company operated hotels worldwideand 8 to 10% revpar growth at owned hotels in North America.Revpar growth at international owned hotels will be even higher at 10 to 12percent. Europa’s revpar growth projected in the fourth quarter atNorth American owned hotels is a function of the improved trend we’veexperienced since August, with the benefit in October from comparisons to lastyear and the completion of renovations at key hotels. Margin improvement willbe a healthy 150 to 200 basis points with North American owned EBIDTA growing13 to 15 percent. Strong fee growth will continue in the 13 to 15% range,helped by the underlying revpar trend, the global scope of our fee business,and the new hotels we have been adding to our system over the last two years.The 117 Meridien hotels we added last year continued their outstanding growthwith revpar up 16% on top of the 13% revpar growth we achieved in the thirdquarter last year. This is hard evidence of the significant value we can bringto both new brands and new owners entering our system. And we remain wellpositioned to sustain industry leading fee growth well into the future, with apipeline of 115,000 rooms. This is the largest pipeline in the industryrelative to our size and also the highest quality, with 17% of the rooms in theupper upscale and luxury segments and 50% outside the US.So all in all, we expect a strong finish to the year in our hotel business. In our vacation ownership business, as we indicated lastquarter, we are experiencing delays in gaining necessary approval for ourprojects in Hawaii. As a result,we have limited inventory in Maui, which is our largestproject in Hawaii, and this hasbegun to affect our sales space. In September we had a slowdown in sales at ourMaui sales galleries as we are increasingly selling ourPrinceville project, which is on Kauai. Selling off siteproduct is harder, of course, and close rate – in other words, the percentageof people who take our sales pitch and then agree to buy – have dropped. Closerates were lower than we expected when we guided the last time. Our vacation ownership business fell short of expectationsin the third quarter and we expect these trends will continue into the fourthquarter and next year until we are able to start selling the next phase of our Mauiproject, most likely in the fourth quarter of 2008. Sales trends in Orlandoand Cancun have remained strong and on track. Primarilydue to these Hawaii relatedissues, we have lowered our vacation ownership profit expectation byapproximately $25 million in the fourth quarter. In addition, we werescheduled, as you know, to complete our annual sale of vacation ownershipreceivables in the fourth quarter and expected to record a gain on the sale of$25 million. After recovering both the fed rate cut, ABS market deterioratedsharply in the last week. Spread has widened and demand is weak. The sale ofreceivables has always been optional for us as a low-cost source of financing.Column spreads are not attractive relative to other sources of financingavailable to us, and our liquidity position of course is very strong. So thebest business decision at this time is to postpone the sale until marketconditions improve. As such, we do not expect to record the $25 million gain inthe fourth quarter this year and this has been incorporated into our guidancefor next year. So all in all, we expect our vacation ownership businesswill be off prior for your expectation by almost $55 million and this accountsfor the reduction in our quarterly and full-year guidance. Moving on to 2008. We are early in our process, but wantedto give you some indication of how we see 2008 shaping up. Our current view forrevpar growth is 6 to 8% worldwide in both company operated and owned hotels.At our own hotels worldwide, we expect margin improvement of 50 to 100 basispoints and only the dark road of 8 to 10 percent. While we have a couple ofmajor renovations next year, one in North America and one in Asia, renovationimpacts will be more modest than it was this year. Fee growth will continue in the 13 to 15% range helped byrevpar growth, our global scope, and new hotel openings. Our vacation ownershipand residential profit will decline primarily due to the previously announceddelays in Hawaii, offset to someextent by the shift in the receivables sales from Q4 this year most likely tothe fourth quarter of next year. In addition to the decline in our vacation ownership business,our EBIDTA growth next year is impacted by significant PNL investments we aremaking to drive long-term growth. We’re investing between $15 and $20 millionto launch the Lofton Element across all aspects of the launch program. Whilethe first of the Lofton Elements will open next year, fees from these brandswill be negligible in 2008. As such, a sizeable pipeline – I’m sorry. As oursizeable pipeline is converted to open hotels over the next few years, thesebrands will create significant shareholder value and ensure that our fee growthcan be sustained well into the future. We have shut down the Sheraton Bell Harbour.In addition to losing the EBIDTA from this hotel we will incur $10 million orso in expenses associated with the project in 2008, with no revenues until weget closer to completion in 2010. The project continues to sell steadily. Weexpect to earn a great return from condo sales and add a spectacular St. Regis Hotel in aworld class location. We also continue to invest in capability to find and opennew hotels. Our pipeline is as large as our competition, global in scope, andof higher quality. These expenses have to be incurred ahead of fees and arelargely expensed as incurred even though the contracts we sign and the hotelswe open will deliver fees for 20 years or longer and have significant MPV. Theseare all PNL investments that pressure short-term earning, but position us wellfor significant long-term growth and shareholder value creation. One other item that hurts us in 2008, our owned hotels in New Orleans will earn $10 million less in 2008 than theydid pre-Katrina. Like the last two years, we are no longer able to claimbusiness interruption insurance and will have to absorb the entire shortfall in2008. But back to the good news. Overall, hotel businessfundamentals remain strong. Despite the investments outlined, our hotelbusiness will deliver healthy growth in 2008. While our vacation ownershipbusiness declines in 2008, we expect to bounce back in 2009 as we start salesof new projects in Hawaii, Mexico,Palm Springs, Colorado,and other location. (Inaudible) guidance range for EBIDTA is $1.3 to $1.34billion and EPS of 247 to 260. We will, as always, provide updated and moredetailed guidance in January on our year-end call. Finally, our fully diluted shares outstanding for guidancepurposes, assuming no further buy backs than what we have already done, are 203million. Our buy backs this year have reduced our fully diluted share countfrom 217 million at the end of 2006 to 203 million today, a 7% reduction. Andas just indicated, we feel very good about the prospects for our business longterm relative to where our stock price is currently. We think our stock offersgreat value, as evidenced by our record buy back in Q3. With that, I’ll turn this back to Jay.
  • Jay Koval:
    Thanks, Vasant. In the interest of time and fairness, pleaselimit yourselves to one question at a time and then we’ll take any follow upquestions you might have as timepermits. Rufus, we’re ready for the first question, please.
  • Operator:
    Thank you, Sir. Ladies and gentlemen, our question andanswer session will be conducted electronically. (Operator Instructions) Forour first question we go to Celeste Brown with Morgan Stanley.
  • Celeste Brown –Morgan Stanley:
    Hi, guys. Good morning. Vasant, can you just talk about thetime-share business a little bit more? I’m a little bit confused by some ofyour comments. Are you suggesting that with the lower close rate in Hawaiithat you’re seeing some impacts to the consumer slow down we’ve seen in some ofthe other businesses out there?
  • Vasant Prabhu:
    Yeah, let me explain sort of what’s going on in Hawaiiand tell you, sort of, what our perception of the situation is. Our biggestproject in Hawaii is on the island of Maui. It’s the Kanapali (sp)Ocean Resort. We did phase one of that. It was a huge success. We are now inthe process of finishing selling phase two, which is also been an outstandingsuccess from both a margin and return standpoint. For phase three, we own the land. We’ve owned it for a fewyears. We’re in the process of getting all the necessary entitlements andapprovals. So what happened right now is we have delays. So we can’t sell phasethree yet and we’re running out of inventory on phase two. So a couple ofthings are going on. As we run out of inventory on the island of Maui, which isour largest sales operation and we have a lot of tour flow there – both fromour hotel and the fact that we have a lot of owners staying there – we have alot of opportunity to sell things to people in Maui. We don’t have a whole lot of inventory, so we’reincreasingly selling inventory from Kauai. So we havePrinceville, which is our project in Kauai.It’s a lot smaller than what we’ve done in Maui, but wedo have that inventory to sell. So when people come in to take our pitch we’reselling them something which, unlike Maui where they can walk across and seethe project, they can, you know, get a good feel for it, we’re essentiallyshowing them pictures and telling them, look, we have this wonderful project inHawaii, in Kauai, so what you really have is you’re trying to sell what we calloff-island inventory, which of course is a harder sell. It’s a little hard, it’s hard to predict what happens toclose rates ahead of time when you start doing that. So as we got into thequarter increasingly our mixer shifted to selling people Kauairather than Maui and as a result the close rate ended upbeing lower than we might have expected going in and we started to see more andmore of it as the mix shifted more and more to trying to sell Kauai. As it relates to Maui itself, we dohave some inventory, but like all situations, you know, when you’re running outof inventory you can’t offer them the entire range of options. So we don’t haveevery week they might want. We don’t have every price point they might wantbecause some of that stuff is sold out. So the other thing that you have issort of a limited amount of options for people and that can affect your closerate because you’ll have more people saying, well, I really wanted thatparticular week or I’d rather have had something that was island view at alower price, and we might not be able to sell them that because it’s sold out.The third aspect of it is, you know, the right business decision when you’rerunning out of inventory is to hold your head high, keep your prices high,because you’re going to make more money that way. It’s highly prized inventory. So we’re doing that. We’retaking our prices up because while that may slow down our sales pace and lowerour close rates a little bit, it’s the right business decision, it’s the rightdecision in terms of maximizing our return. Now, in that all, are a variety ofreasons why our sales pace has slowed down and our close rates were lower,lower than we anticipated. Is there also a softness in demand dimension tothat? It’s hard for us to separate, you know, all these aspects from a softnessin demand. Could there be some softening of demand? Maybe there couldbe, but there are sufficient other reasons to believe that these are the, youknow, the other reasons I mentioned are maybe the primary causes. The otherreason that argues against demand not softening is that demand is very strongon our eastern projects. Cancun and Orlandoare selling extremely well. They’re exactly in line with what we expected.Unfortunately, doing well there has not been enough to offset, you know, ourshortfalls in Hawaii. A littlelong answer, but I knew this was a question on lots of people’s minds.Hopefully that provides more colour on it, but we’re happy to answer morequestions on it.
  • Jay Koval:
    Next question, please.
  • Operator:
    And we go next to David Katz with CIBC World Market.
  • David Katz:
    Good morning. You know, Frits, you touched on the Sheratonbrand a little bit. Just taking all this in and looking at where yourcapitalization is at this point, how would you feel about or what about thenotion of perhaps getting a bit more aggressive in fixing that brand, steppingup that brand and using some of the available capital that you have to sort ofpush that brand forward right now? And clearly we would understand investing inthe future and the new brands and all of that sort of thing, but the Sheratonfix has been on for a while and how about getting a bit more aggressive withthat?
  • Frits van Paasschen:
    I love the question, David, and I think it’s a veryinteresting idea. It’s a little early for me to have a strong point of view onspecifics around that. I will tell you, I think that we’ve made considerableprogress on the Sheraton brand, which you can see reflected in the performancein some of the other measures that we have. Whether we should be moreaggressive in the future is something I’m very keen to take a look at.
  • Operator:
    And we go next to Felicia Hendrix with Lehman Brothers.
  • Felicia Hendrix -Lehman Brothers:
    This will be a bit of a forward-looking question, but lastyear at your investor day, you provide a long-term REVPAR growth outlook ofabout 7% to 9%. I’m wondering if that’s changed at all, or if there is anopportunity for you to readdress this outlook in the near future. And then, just a follow-up on the first question, justwondering -- do you have a sales office on Kauai forthat Princeville property?
  • Vasant Prabhu:
    Sure, Felicia. Second question, do we have a sales office inKauai? Yes, we do. We are selling Kauaifrom Princeville from Kauai too. We have a hotel rightnext to where this timeshare development is. But given that we don’t have awhole lot of inventory to sell on Maui, we are selling Kauaifrom Maui too. As you can see, it’s not an idealsituation. Our general approach is to sell inventory that is right next towhere the sales office is, but given our shortage of inventory in Mauinow, we are using our significant sales resources in Mauito also sell Kauai. On your first question with regard to three-year guidance, Ithink we are thinking about another investor day some time in 2008. We haven’tobviously finalized when, but at which point we would intend to give you alonger term picture of our business.
  • Operator:
    And we go next to Joseph Greff with Bear Stearns.
  • Joseph Greff:
    Good morning, guys. For your ’08 timeshare profitabilityguidance range next year, how much do you have included for gains? Do you havebasically two gains -- what you would have had in 4Q07 and what you would havein 4Q08? And then, could you just remind us what is contemplated for theremaining asset sales in your ’08 guidance as well?
  • Vasant Prabhu:
    In terms of the receivable gains, I think yes, you shouldassume that there was -- you know, we’ve been on an annual cycle, so you shouldassume that there was a receivable sales planned in Q4 of ’08. The size of thatsale would have probably been a little smaller than this year because, givenwhere we are in our cycle, we had completion of a major project in Hawaiithis year, so we had somewhat more receivables this year than we would have hadlast year. So you should assume probably that next year’s gain wouldhave been somewhat smaller than this year, and so you add this year’s gain onto that and that gives you a rough idea of what next year’s gain might be. To some degree, it depends on when in the year we do it. Ithink our inclination right now is just to do one financing, is the mostefficient way to do, and to do as large a financing as we can, which wouldargue for pushing it out into the fourth quarter of next year. But we’ll give you a little more decision on this on ournext call as we get early in the year, in case we are going to do anythingdifferent and maybe do two securitizations. But I think you should assume itwill probably be one and it will be late in the year next year.
  • Frits D. VanPaasschen:
    Just to build on that, I think as you reflect on this, youcan see that we made the right call now to delay the receivable sales, andwe’ll continue to do what’s in the best interest of the company from afinancial perspective. I think our preliminary plans are as Vasant outlined,but as he also mentioned, those are subject to change based on our view onwhere the market is and what’s in the best interest of the company.
  • Operator:
    We go next to Harry Curtis with J.P. Morgan.
  • Harry Curtis:
    Good morning. I’ve got a follow-up question on timeshare,but it’s in two parts. On your second quarter call, you talked about the $125million I guess shortfall in ’08, and in your press release, you mention $30million to $50 million. Can you parse the shortfall now that some of it iscoming in ’07? The question we’ve been getting is some investors are confusedthat the shortfall won’t be as bad in ’08, and I’m just wondering if it’s justa function of the moving pieces. And then the second part of the question is on the timeshareside, it seems like it, it seems like there is constant bleeding as a result ofor reflected in the earnings per share number, and I’m wondering, are there anyother clauses or reasons that the EPS number or guidance for ’08 is likely tobleed some more related to timeshare?
  • Vasant Prabhu:
    Your first question, Harry, on the reconciling the 125 towhat the guidance range is right now, so you can start with originally we saidwe’d be 125 below what was then expected to be this year’s timeshare profit.Well, this year’s timeshare profit, as we indicated in our release, is down $55million for the full year versus prior expectation. So you take 55 out of the125, and the year-over-year decline would have dropped to 70. Then we move thereceivable sales, which was a gain of about $25 million, so if you just assumedthe $25 million moves from this year to next year, then the year-over-yeardecline actually drops to 45, so it is in that 30 to 50 range. So by and large, we are still in the same range and that isstill essentially our view and the bulk of the impact on next year is alldriven by the delays that we told you about last quarter. In addition to that, as far as EPS, as far as EPS goes,there is nothing else out there other than the translation of expected EBITDAinto EPS. You’ve seen the assumptions on interest and depreciation in our pressrelease, so there is nothing else, other than the fact that our earnings aregoing to be lower from the time share business.
  • Frits D. Van Paasschen:
    Just to add on to that, Harry, if you take a look at thebusiness and, as you put it, parse it out, the effects really are the timing ofthe securitization and the Hawaiibusiness, and that accounts for the vast majority of the performance there. Andthen that, as Vasant said, translates from there into EPS from earnings.
  • Operator:
    We go next to William Truelove with UBS.
  • William Truelove -UBS:
    Just to beat a dead horse here on timeshare, I was hoping wecould parse out the different components of timeshare, because obviously it’snot just timeshare -- there’s condo sales. So when you are talking abouttimeshare performance, are you talking about just the timeshare portionexcluding condos in the income statement? Or are you talking about the line itemsthat are shown in the income statement when you are giving the guidance for’08? And then furthermore, given the volatility of this business,could you help us maybe think about timeshare operating income excluding thegains that you might take on the sale on a quarterly basis for ’08 at thispoint? Thanks.
  • Vasant Prabhu:
    There were quite a few questions in there. I am going to tryand answer every one of them. When we talk about timeshare and residential, theline on the reported P&L, there are essentially three components in there.There is the timeshare interval business, where we sell weeks. It is thelargest piece of the business. Then there is the fractional business, where wesell four weeks at a time, typically under our St. Regis brand, and there weare selling fractionals right now in the St. Regis New York and the [Panetian].That’s a much smaller piece of the business, and then the last piece is theresidential, sales of condos, which is the smallest piece of the business. In our press release, we actually break out the residentialpiece, and it’s on page four of the release. And you can see that sale ofcondos was a minute part of the business. I think total revenue from sale ofcondos in the quarter were only $2 million, so that doesn’t -- that is not theexplanation. It is very much all around the timeshare interval business and itis all around the timeshare interval business in Hawaii,which is in fact the largest piece of that timeshare interval business. Hopefully that answers one of your questions. The other question was can we give you quarterly forecastsyet for ’08 -- no, too early. We will do the best we can to give you -- we knowyou need some sense of how timeshare breaks out quarter by quarter, so we willdo the best we can, obviously when we give you guidance again at the end of theyear on our year-end call. And then I think your last question was around thereceivable gains. We’ve always been very explicit about what our receivablegain has been, so each year, you can always pull out what the receivable gainwas and we also try to make it a little easier by doing it always in the fourthquarter, and that’s been our practice for the last couple of years. So peoplehave come to expect a receivable gain in the fourth quarter and assuming westay with those plans, it will happen again in the fourth quarter next year.
  • Operator:
    We go next to William Marks with JMP Securities.
  • William Marks:
    Good morning. I just have a question on -- you mentionedinternational, franchise, and management fees are 50% of the model. Does themanagement fee include the incentive fee portion when you talked about that?
  • Vasant Prabhu:
    Yes.
  • William Marks:
    Okay, and then, if we looked at the ownership side ofrevenues, how much of that is international versus North Americaor U.S.?
  • Vasant Prabhu:
    North America, 60%, international is40%. If you consider Canada international, which I think most people would,especially with the Loonie at parity, it’s really more like 50-50 U.S. andnon-U.S.
  • Operator:
    With a follow-up question, we return to Celeste Brown withMorgan Stanley.
  • Celeste Brown -Morgan Stanley:
    With the debt markets in turmoil, I know it’s been difficultto sell assets, which is reflected in your guidance, how do you think aboutsome of the things you’ve talked about, selling the share to Manhattanand some of the other sort of non-core assets, how do you think about timing?And also, in relation to timing, do you think, given the outlook right now, youcan actually use up that tax asset that you have that’s pretty valuable?
  • Frits D. VanPaasschen:
    In terms of the timing, clearly we want to make sure that weget the best value for these properties. Given the unique nature of some ofthem, the timing may be less important because this may be the one opportunitythat buyers have. So I think the short answer is timing may affect our sales.It won’t affect our intent to sell over time, if that makes sense. And then -- I’ll leave it there, actually.
  • Vasant Prabhu:
    And I just remembered, there was a question earlier I thinkthat I didn’t address, which was what have you included in your guidance fornext year in terms of asset sales -- all we’ve included in our guidance fornext year is, or rather, excluded from our guidance for next year is the salesof assets that we had previously announced. We expect to complete all those byearly next year. It was the $450 million or so in asset sales. It does notinclude -- our guidance does not include an expectation that the SheratonManhattan will be sold. It is on the market. We will make adjustments if andwhen that sale happens. But at this point, it just includes the hotels we’vepreviously announced as being for sale.
  • Frits D. VanPaasschen:
    The other thing I think you mentioned, Celeste, was tax, andI think we have enough time that -- it’s our belief that the debt markets indemand, if they are not there today, will be back in time for us to takeadvantage of that. My recollection is we have until the middle of 2011, which Ithink gives us enough time for quite a few things to happen and hopefully amongthose things being a great demand for our asset.
  • Operator:
    We go next to Jeff Alexander with Citigroup.
  • Jeff Alexander -Citigroup:
    You had mentioned a couple of times that you felt thatyou’ve got an under-leveraged balance sheet. Have you guys thought about atarget leverage going forward?
  • Vasant Prabhu:
    I think we’ve been fairly clear about our target leverage.It is around 3.5 to 4 times gross debt to EBITDA. It’s sort of what keeps us inthe investment grade territory. We’ve also said that our focus is on valuecreation and we won’t let ratios get in the way of doing what’s right from avalue creation standpoint. But over long periods of time, we expect our leverageto be in that range, which would keep us investment grade credit.
  • Operator:
    And with a follow-up question, we return to Felicia Hendrixwith Lehman Brothers. Ms. Hendrix, your line is open.
  • Felicia Hendrix -Lehman Brothers:
    Fritz, I know it’s still early days for you, but I’mwondering, did you play any role in the decision to delay the asset sales untilearly ’08? I’m wondering if there’s delays, is there anything beyond justwaiting for the right price? And then also, I’m wondering in your 4Q and 2008 REVPARguidance, how much of that is attributable to the benefit of the renovation?
  • Frits D. VanPaasschen:
    I’ll leave the renovation part to Vasant, and let me talkabout my role in terms of [waiting around for securitization]. It became clearto us in the last couple of weeks that the market had changed significantly andthe kinds of spreads that we were able to get were not favorable, and thereforedidn’t really make it a source of financing that we thought was attractive. So I played a role in the decision to the extent that wereviewed the situation and made a decision that we felt again, while somewhatdisruptive to the even flow of delivering earnings, made absolute sense interms of value creation and our shareholders interests. And then, I think your 2008 question I’ll hand it over toVasant.
  • Vasant Prabhu:
    Your question was how much is the fact that we don’t haverenovations in the fourth quarter helping the fourth quarter? Well, it ishelping it. I couldn’t give you a precise number. It is also helped by the factthat October is a stronger month for comparative purposes, and the business hasticked up. So I think all three factors are playing in. I think your other question was how much is it helping nextyear. Again, I couldn’t give you a precise number on that, but I wouldn’t besurprised if it’s somewhere in that 50 to 100 basis point range, given that wassort of the impact we had this year.
  • Frits D. VanPaasschen:
    Right, so our renovation slate for next year is a little bitlighter than for this year, so we should benefit somewhat from that comparison.But I don’t think we’re ready to give you an exact breakout right now.
  • Operator:
    And we go next to Joseph Greff with Bear Stearns.
  • Joseph Greff:
    Vasant, earlier you mentioned that you have some investmentsthat are hitting the P&L, the $15 million to $20 million investment in thealoft and Element, and then $10 million expenses at the Sheraton Bell Harbor.Are there any other big ticket items, or can you give us sort of an aggregateamount that’s maybe sort of a, kind of a one-time ’08 expense issue, withoutgenerating any incremental revenues?
  • Vasant Prabhu:
    Okay, let’s run through the list -- $15 million to $20million on aloft and Element; add another $10 million from the fact that therewere expenses at Bell Harbor that hit the P&L but no revenue to recognize;somewhere in the region of let’s say $5 million to $10 million for New Orleans,where there is no business interruption insurance. That gets you in the rangeof probably at the high end somewhere in the region of $35 million to $40million. Now, the other one that is a little harder to quantify isthe fact that we made a -- we are -- we have a great pipeline. We are makingsignificant investment to create that pipeline. We have development teamsaround the world signing up new owners. It costs us money to get hotels open.The fees from these hotels don’t come until future years. We’ve got aninteresting situation where you are essentially signing up hotels that have20-year fee streams or more and significant NPVs, but all your cost associatedwith bringing them into the system has to be expensed up front. So what you have is a situation where your costs of signingand opening hotels in the year is quite a bit higher than the fees you aredelivering from the new hotels. As we get into this over the next two or threeyears, those costs come back in line, so you don’t have a net investment in theyear for the year, so to speak, on the development side. You know, that’s a reasonable and decent-sized investment,which over time becomes smaller because your fee streams grow. So I don’t knowif that helps you but that’s sort of a rough idea of some of what we are takingin the short-term to drive strong and we believe industry-leading fee growth.
  • Frits D. VanPaasschen:
    Just from my perspective, if you roll up the P&L rightnow for 2008, the aloft launch, Bell Harbor,Katrina, and general investment in the pipeline in my view would be the lion’sshare of the big swings. At the same time, and it is I think, Felicia, you mentionedearlier, it is early days for me to have a specific number for you, but we aregoing to continue to focus very specifically on managing our expenses so thatthe increases that you see are directly related to investments for futuregrowth.
  • Operator:
    We go next to Steve Kent with Goldman Sachs.
  • Steven Kent:
    Good morning. Could you just talk a little bit more aboutthe delay in the securitization? And the reason why I’m asking is that Marriottis highly, highly confident that their timeshare securitization will closeshortly, with only a slight decline in the gain they would have expected.Wyndham’s timeshare conduit looks like it is moving along very effectively, andtheir timeshare securitization for later this fall will be on track. I guess I’m trying to understand -- is it because yourbalance sheet is relatively under-leveraged, or the benefit of keeping thesetimeshare loans on your income statement will be helpful into 2008? Is it moreof a strategic decision rather than a capital markets decision?
  • Vasant Prabhu:
    Let me answer it by saying securitizations are done bydifferent people for different reasons, and there are generally three reasonsyou can do a securitization for. Sometimes it is pure need for liquidity. Ifyou are a smaller timeshare company, this is often one of the ways that theycan get access to financing, so if you are a smaller timeshare company, yousort of do it because without it, you don’t have access to financing. That’snot our issue. We have plenty of liquidity. We have plenty of access toliquidity so we don’t need to do it for that reason. The second reason people often do it is because it is acheap source of financing. It often is because it is asset-backed, could beyour cheapest source of financing. That is often the reason why we’ve done it. Today, where the spreads are, it is not our cheapest sourceof financing. We have cheaper sources of financing available to us. In fact,the last time we did it, it was in fact our cheapest source of financing. So itdidn’t meet that test, which has always been our major test. The third reason you do it is because you want to book again in a particular quarter, purely an earnings-driven consideration, and forsome that’s important. You know, if that was our primary consideration, thenyou would say okay, I’ll accept a spread that’s not so great, I’ll accept somedeterioration in the economics because I really want to book this gain in thisquarter. And you know, we chose to go with the view that the spreadswill get better and that this is, given our liquidity position and our cost ofour other sources of financing, it was better to wait. So that was the reason. Now, these markets change from week to week, so marketsimproved after the fed rate cut. We know one of our competitors was in themarket. The market deteriorated just as they were in the market. They barelygot the deal done. We were told the spreads were somewhat wider than they mighthave liked. The market has gotten worse since then. It changes from week toweek. We had to make a decision. We decided that given our situation with theliquidity being great and where the spreads word, that it made a lot of senseto just take our time and do it when times were right.
  • Frits D. VanPaasschen:
    I am not going to comment specifically about either of ourcompetitors, but I do want to assure you that this decision was not strategicin some sense, nor was it coincident with my arrival to the company. This decisionwas based on, pure and simple, the cost of financing for the company andsecondly, it’s a question of timing. As Vasant alluded to, these are thingsthat change week to week and this is a decision that we took flexibly, readingthe situation as we saw it.
  • Operator:
    We go next to Bill Crow with Raymond James.
  • William Crow -Raymond James:
    Good morning, guys. A question for each of you -- Vasant,the $25 million reduction to timeshare in the fourth quarter on an operatingincome basis translates to what, $60 million or $70 million gross sales? I’mjust curious what the original budget was for Hawaiifor sales in the quarter. And then Fritz, welcome aboard. The question for you is whendo you anticipate going back to the board to get an increased authorization onthe share repurchase program?
  • Vasant Prabhu:
    On Hawaii, Ithink your rough numbers are about right. That is sort of a rough sense of howit translates from revenue to profit. Hawaiiis the largest chunk of our timeshare business and the fourth quarter happensto be one of the larger quarters for Hawaii,as you might guess from seasonality factors. So Hawaiibeing off as significantly as it is definitely affects you quite hard in thefourth quarter.
  • Frits D. VanPaasschen:
    Thanks for the welcome. We have every intention ofcontinuing to buy back our shares, and so as we have our next board meeting, itwill certainly be on the agenda for us to discuss how we can continue to dothat.
  • Operator:
    We go next to William Truelove with UBS.
  • William Truelove -UBS:
    Just to follow up on that, in terms of your EPS expectationfor 2008, I just want to clarify -- did that include any additional sharerepurchase or just assume that your base share count of 203 remains constantthrough 2008?
  • Frits D. Van Paasschen:
    William, as you know, what we do actually is we calculatethat EPS guidance based on the current shares outstanding. We have to adjustthat number over the course of time as we continue to repurchase.
  • William Truelove -UBS:
    Okay, thank you.
  • Operator:
    And we go next to Felicia Hendrix with Lehman Brothers.
  • Felicia Hendrix -Lehman Brothers:
    One of the questions I asked before was misinterpreted, sojust wanted to hop back on. The question that I was asking was about assetsales, not about the securitization. So I was just trying to understand morewhy they were being delayed until next year. Is it just price or it issomething else?
  • Vasant Prabhu:
    No, in general, some of the assets that are being delayed,they’ve not being delayed as much as the process is taking longer. These aresome of the international assets we had in the portfolio. A couple of themhappen to be in Venice. Thatprocess is inherently longer. Things are going well. We still expect to meet what we toldyou as the cash proceeds from those sales. We said a couple of purchasing saleagreements were signed in Q3 and were going to close in Q4. One of them isactually closed, so deals are happening, people are closing. We definitely holdout for the best price but sometimes the process takes a little longer. Other than that, there is no new news there. It’s justtaking a little longer.
  • Frits D. VanPaasschen:
    I think underlying your question is probably a view on whatmy philosophy is here, and since I’m new, let me try to help you out a littlebit. It is my view that our owning assets comes at some economic cost becauseof our own leverage situation and because of tax. As a result of that, Ibelieve it is in our best interest to continue to look at which assets we haveand whether they fit the long-term strategic interest of the company, orwhether we and our shareholders are better served by our selling those assets.And that’s a process that we are going to continue to go through. I don’t want to do that with any urgency that would compromiseour ability to get the absolute best price for those assets, nor would Ipreclude that on that same basis, if we feel for strategic reasons there’s anasset we need to acquire, that we wouldn’t do that, not with the idea that wewould hold that over the long-term or permanently, but that we would do thatagain for strategic interest. I hope that helps a little bit in clarifying what we aredoing and helping you not read the timing of those sales as to be anythingother than the process of executing it.
  • Operator:
    Ladies and gentlemen, that does conclude ourquestion-and-answer session. Therefore, Mr. Koval, I will turn the conferenceback over to you for any closing remarks.
  • Jason Koval:
    Thanks, Rufus. That wraps up today’s third quarter call. Weappreciate your time and interest in Starwood Hotels and Resorts and pleasefeel free to contact us to review any of this information or to follow-up withany additional questions you might have. Thanks again. Goodbye.
  • Operator:
    Ladies and gentlemen, that does conclude the Starwood Hotelsand Resorts third quarter 2007 results conference call. We do appreciate yourparticipation and you may disconnect at this time.