Owning The Upswing
Team Starwood heads toward 1,000th hotel while working hard to manage cash and preserve financial options for brighter days.
By Jeff Weinstein, Editor In Chief -- Hotels, 5/31/2009 11:00:00 PM
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| (l. to r.) Simon Turner, Frits van Paasschen and Phil McAveety drive development and brand innovation at Starwood. |
Frits van Paasschen is the first to admit the hotel industry is going through an economic reset with potential further implications ahead that no one has been able to forecast just yet. Smith Travel Research data thus far in 2009 has been numbing, and virtually no one seems immune; Starwood Hotels & Resorts’ first quarter showed more than 20% declines in revenue and RevPAR. Yet, as the bad news continues to batter the industry, van Paasschen and his Starwood leadership team talk about “owning the upswing.” At the moment that means eliminating concerns about liquidity and maturity risks, as well as managing day-to-day operations with their cinching “belt and suspenders” approach. “We are trying to preserve our strength so when the economy regains its strength we will be ready to take full advantage,” says van Paasschen, who has been president and CEO of Starwood Hotels & Resorts Worldwide since September 2007. “So, the focus has been on managing cash and preserving our financial options.”
Despite the poor performance in the first quarter of 2009, Starwood actually “beat the Street” due predominantly to its belt-tightening, which is formally referred to as activity value analysis (AVA). Starwood says the AVA should reduce 2009 selling, general and administrative expenses by roughly US$85 million from 2007 levels, while procurement cost reductions are anticipated to create another US$35 million in direct savings by the end of the year. The publicly stated goal is to reduce overhead costs by US$100 million and cut fixed property-level costs by 3% to 4%.
“The process of the AVA—because it was deliberate, disciplined and seen as fair—has created the belief among people at corporate that we went through a tough time with this, but it was also a great way for us to be thoughtful about structuring ourselves,” van Paasschen says. “It was a great reflection on the way management thinks about leading the company forward.”
Despite the impressive cost reductions, some Wall Street analysts remain cautious about Starwood as a result of a recent bank deal amendment and newly announced senior notes that will increase the company’s cost of capital going forward. At the same time, however, J.P. Morgan boosted its rating on Starwood in mid-May, citing improving sentiment in the lodging sector, Starwood’s relative valuation, its ability to cut more costs as needed, as well as potential asset sales acting as a further catalyst.
Of course, van Paasschen also is hopeful that the industry’s downward spiral might have reached a plateau—with some variations among geographies. “It remains to be seen whether this is a bottom or a pause to further depths,” he says.
Starwood’s approach to managing debt and finances remains conservative. “We talk about the belt-and-suspenders approach all the time,” van Paasschen says. “At US$4 billion debt, which is less than four times 2008 EBITDA and with [EBITDA four to five times interest costs], those are relatively low numbers, and we are significantly less leveraged than other players in this space—certainly on the real estate and private equity side.”
On the capital side, van Paasschen says some bigger development projects are being put on hold until the leadership team has a better idea about where the bottom of the economic slide will be found. Until then, conversion activity appears to be the bright spot and should translate into a significant portion of pipeline growth in the near term, especially in North America.
“You can argue that the economic meltdown is a detour—and I would concede this changes our trajectory, at least in the near term—but the fundamental picture of our ability to grow around our brands is in place,” van Paasschen says. Even being acquired or going private would do nothing to alter the company’s strategy as it stands today, he says, though he gives no indication that any such deal is in the works.
Over the course of 2009, Starwood expects to open between 80 and 100 hotels, including its 1,000th hotel worldwide, and plans to enter its 100th country. Fully one quarter of those hotels will have opened within the past three years, another 300-plus will have been significantly renovated and about 60 tossed from the system for not meeting standards. “If you anticipate a recovery in 2010—and I am not predicting that—we will be entering a recovery with Starwood in the best shape it has ever been in,” van Paasschen says.
Net Sellers
Another part of Starwood’s near-term strategy is growing its fee-driven business to 80% from 50%, where it stands today. However, van Paasschen says Starwood is maintaining its long-term vision and is not about to start a fire sale on its remaining real estate holdings. “We look for opportunities to sell but don’t feel great pressure from a financial perspective or a strategic one in a market that is not open,” he says.
Van Paasschen further believes that the economy has not reached a point of stability to predict when the real estate market will open. “When it does happen, we will see a lot on the market abruptly and see very interesting transactions,” he adds.
At the time of this interview in mid-April, Starwood’s President of Global Brand Development Simon Turner said he was seeing an increasing number of investors beginning to look at the next 60 to 120 days as a potential opportunity to strike in the sector. “That will inevitably materialize,” Turner said. “Much like the conversion story, we are seeing equity partners who approached us about opportunities that might be presenting [themselves] in the months ahead.”
With the days of highly leveraged investments behind the industry for a while, Turner also sees the profile of the investor changing. “We see high-net-worth investors who recognize value in the real estate coming back into the hotel business. They have longer-term horizons.”
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| Turner calls the new Sheraton in downtown Phoenix “as good a convention center facility as you will ever want.” |
For example, Turner cites Latin America, where Starwood’s development team is seeing a lot of high-net-worth families become more interested in hotels now because land and construction costs are down. “Money is not going to sit on the sideline forever,” Turner adds. “Investment funds, endowments, institutional investors are sitting in treasuries earning a paltry return. In time, you will see people come back.”
But even the most well intentioned and capitalized players are finding it challenging to get anything financed beyond US$50 million to US$75 million in debt. “You have to get club deals together—meaning multiple banks,” Turner says. “And this is a truly global situation, with pockets in the Middle East, China and India where deals can get done a bit easier.”
Otherwise, developing bigger hotels remains challenging. “The feedback we are getting is that developers are not canceling projects—they are deferring them,” Turner says. “They are not selling the land and bailing out. They are sitting on the land and waiting for financing markets to come back. It is a timing issue more than a go, no-go issue.”
Quality Growth
Going forward as a developer, the focus for Starwood’s mature brand organization is one of being responsive and reactive to market trends and circumstances. “The quality of our growth is more important than the quantity,” Turner says. “We could turn on the growth engine quickly by relaxing standards, but at the end of the day that is not appropriate for the company or owners. We make sure every hotel is additive to our brand positioning.”
At the same time, Starwood is taking a pragmatic approach to development and will relax some standards when and where appropriate. “We can focus on elements that don’t touch the guest experience,” Turner says. “We are very clear about what we think truly differentiates our brands and delivers real value, and those things remain sacrosanct.”
Around the edges, Starwood (not unlike its competitors) has relaxed the timeline on some upgrades, but not compromising or taking things away, according to Phil McAveety, chief brand officer.
All that being said, Starwood is on track to expand its portfolio by more than 40% in the next five years with a pipeline that consists of more than 400 hotels—60% of which are outside the United States. Among the milestones expected to be reached in 2009: the first Four Points by Sheraton in India; the first Middle East Aloft in Abu Dhabi; the first Sheraton resort in Vietnam; the 150th hotel in Asia; and the 50th hotel in China.
Turner points to markets in the Middle East and, even more so, China, that still can absorb new upscale and luxury hotels, especially at a time when most developers have hit the pause button in those segments. “There was huge momentum,” Turner says. “While it has slowed down measurably in certain parts of the Gulf—and obviously Dubai being one of them—there are still an awful lot of projects actually happening. The same is true elsewhere in Asia Pacific. While growth may have come off a bit, there is still 6% GDP growth in China and demand is being generated there.”
Turner says Starwood has 100 deals signed in China that reach across the brand portfolio. He even points to St. Regis resorts in parts of China that he says will become incredibly strong resort markets.
Looking at development from a bigger and more global perspective, the two Starwood brands the executive team seems to talk about most today are Sheraton and W.
Sheraton Hotels & Resorts is the largest brand in Starwood’s portfolio and has a huge halo effect, according to Turner. “Our team in China says the two most requested brands are Sheraton and Four Points by Sheraton because of the halo effect of the brand,” he says, adding the same is true elsewhere in Asia Pacific, the Middle East, Europe and Latin America.
The huge effort surrounding Sheraton for the past few years has been looking at the strength of the brand internationally and making sure North America hotels are on par. “We got serious with Sheraton in 2007,” says McAveety. “We are investing more than US$2 billion in new hotels (16 hotels in North America last year and nine more in the region this year) and in the process of investing US$1.3 billion in renovations (more than half of the hotels in North America have been upgraded) and US$400 million in brand initiatives, such as the Link@Sheraton and Sweet Sleeper bedding.”
As a result of the efforts, McAveety reports guest satisfaction indices are at record levels—8.12 this year versus scores in the 7s a year ago. Guest likelihood of returning has jumped to 8.8 from 7.8. “I am a believer that you don’t tell your story until you can back it up,” McAveety says. “The fact that we are 70% complete with Sheraton gives us the right to start talking about it more and more. In 24 months, we will be 100% there.”
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| Eleven W hotels are slated to open in 2009. |
For W Hotels, McAveety says the next two to three years will take the lifestyle brand to true global levels. Eleven properties are slated to open this year in markets that include Barcelona, Bali, Doha, Santiago, Atlanta, Hollywood and Washington, D.C. “The great thing about first-mover advantage in the lifestyle space is that we will be at 50 hotels before anyone else is at five,” Turner boasts.
McAveety says he is working on W’s sensitivity to local cultures. “It has a New York soul and the DNA stays, but it must be more sensitive to local market needs, including the language we use, the style of service and design delivery.”
Among Starwood’s other brands, Aloft has grown to 25 hotels in a hurry, and there are another dozen fully financed and under construction. “The pipeline has slowed, but the goal is to get to 50 Alofts as soon as possible, and while that might be tough, I am optimistic we are going to get there in the relatively near term,” Turner says.
The Westin brand has about 165 hotels globally and will add 12 hotels this year, with the bulk of the development internationally. “It is a super growth vehicle internationally and very well defined, so developers are drawn to it,” Turner says.
The Le Méridien brand is somewhat established internationally, with North America sitting as a blank slate. “The big opportunity is to make Le Méridien a conversion opportunity (urban and resort) in any number of major markets in North America,” Turner says.
To that end, Starwood is spending a lot of time with a number of North America developers to refine the Le Méridien model to give it that “go-to” appeal as a conversion vehicle.
Wrapping up the brand expansion story, Element is scheduled to open five hotels in markets that include Dallas, Denver and Houston; Four Points by Sheraton has 30 openings this year, including a new prototype in San Antonio, Texas; The Luxury Collection is expected to add more than 10 hotels by 2011; and St. Regis should open in Atlanta; Park City, Utah; Mexico City; and Lhasa, China.
Perhaps the most difficult segment facing Starwood and its competitors in the space is vacation ownership. “We have been clear we are resizing our expectations of timeshare and will focus on geographies and projects where we can generate a meaningful rate of return,” van Paasschen says. “I am much more interested in a smaller, very profitable timeshare business.”
Brand Positioning
With new development so challenging, McAveety says the way he is working with brand leaders now is that the starting proposition is that all Starwood brands are conversion brands. Of course, each conversion opportunity is being looked at on a case-by-case basis, but McAveety stresses, “I am working with development people to define the key ingredients necessary [by brand] to do conversions.”
McAveety is concentrating on driving effectiveness and efficiencies across the nine-brand portfolio. He says his teams focus on key differentiators that set each Starwood brand apart from the others to create clear alignment and understanding. At the same time, the brands are sharing intelligence and best practices across the portfolio.
“One of the mantras we have been driving through the brand organization is the idea of individual spirit but collective strength,” McAveety says.
In addition, with design leadership and innovation now a big part of Starwood’s DNA and something owners like about the company, McAveety says design is an area that will require even further investment to stay ahead of the pack. “That is something we are investing time and energy in, and we are putting the right people in place to support that,” he says.
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| Starwood's Aloft brand has reached 25 units in a hurry and another dozen are fully financed and under construction. |
In fact, Starwood is creating a showcase for its luxury and design-led brands at an existing space on the edge of New York City’s SoHo neighborhood. By September, global marketing, brand management and design teams from W, Le Méridien, St. Regis and The Luxury Collection will join Starwood’s Bliss and Remède spa teams in a redesigned space that will include brand experience rooms to make presentations to potential development partners. “It will be our design hub and creative lab for those brands,” McAveety says. “Design leadership and innovation is important when it comes to how we position ourselves as a brand organization.”
This all fits into van Paasschen’s desire to position Starwood as a group with a strong, cohesive leadership team.
“Business leadership is a team sport, and it is absolutely a team sport in this business, as there are very few questions or big decisions we take as a leadership group that doesn’t involve our finance, operations, brand and development teams,” van Paasschen says. “The integration of those perspectives across the leadership group has come a long way in the last year.”
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What a great article and what a great company, and well done Frits. There was a time when I felt that Starwood was actually getting our of the hotel business, as it became harder and harder to find a Starwood hotel anywhere near where I needed to be. Thankfully that is changing now. Keep up the great work!
Barry Graham - 2009-7-6 21:28:00 PDT -
What a well written article. Starwood is one of my favorite companies. The hotels are great and it makes for nice add to investment portfolio.
Irville Sargent - 2009-4-6 14:39:00 PDT
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