Marriott International, Inc. (MAR) Q2 2011 Earnings Report, Transcript and Summary

Good morning. My name is Sylvia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Starwood Hotels & Resorts Second Quarter 2011 Earnings Release Conference Call. [Operator Instructions] I will now turn the call over to Mr. Jason Koval, Vice President of Investor Relations. Sir, you may begin.

Thank you, Sylvia, and thanks to all of you for dialing in to the Starwood's Second Quarter 2011 Earnings Call. Joining me today are Frits van Paasschen, our CEO; and Vasant Prabhu, our Vice Chairman and 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 expectations 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 starwoodhotels.com for some of the factors that could cause results to differ. With that, I'm pleased to turn the call over to Frits for his comments. Frits?

Thank you, Jay, and thanks all for joining us on our call today. Following the format of previous calls, I'll start with our take on the current business environment, the highlights of our Q2 results, followed by our outlook for the rest of the year. I'll close with some thoughts on the month we spent in China. Here's how we see the business environment. Like many of you, we find ourselves once again looking at an uncertain global economy. As euro rose, our net with stopgap accords, worries grow at a real estate bubble in China. Social unrest woes in the Arab world and U.S. lawmakers play at fiscal brinksmanship. Reading headlines, it's easy to feel skittish about the near term. And to be sure, there are many factors that could upend this recovery. At the same time though, from our vantage point, drivers of our business paint a more robust picture. At least for now, trouble spots are contained while underlying growth and demand for travel continues to build. Developers in many markets around the world are eager to invest in hotel projects. This reflects both their confidence and their access to capital. Our biggest customers: global corporations, professional firms, growth companies and high-income individuals are telling us that they have earnings power and little debt. And perhaps most importantly, our customers are busy and look to stay busy. This has led us to conclude that the recovery continues to play out as a tale of 2 cities. We've known for a while that emerging markets are growing fast while developed ones are languishing. But the split is increasingly clear even within developed markets. Times are good for successful companies and highly skilled individuals. For companies with looming debt maturities and for people out of work, the crisis lingers. On a global level, this tale of 2 cities that [ph persists is not healthy for any of us. But for our business today, it explains why tepid U.S. economic growth and persistent high unemployment have not dampened our own business momentum. I'm making this point for 2 reasons: first, to address the observation that our stock fluctuates in the short term, based on day-to-day sentiments about the state of the world, without considering whether our core customers are going to be affected; and second, our conviction that the value of our company is set to rise with an unprecedented and seemingly unstoppable growth in the ranks of a new class of affluent global business and leisure travelers. This major secular trend will continue to fuel demand for our brands well into the future. And it's this second point on economic growth that prompted us to move our leadership team to China for part of the summer. More about that in a few minutes. But our time there has left us as bullish as ever about our long-term growth prospects in China and other rising markets around the globe. As a company, we're confident that we have the right foundation for realizing this growth. We've talked before about our global brands and local smart teams. Less well known outside of our company is that we've created a corporate culture that has a global perspective, a collaborative style and alignment around our direction. I should also add that during the financial crisis, we weren't just cutting costs and reducing debt. We were also busy launching a slate of initiatives aimed at boosting our performance in these growth markets. Today, we're 2 years into realizing the benefits of those efforts. So in that context, let me walk you through our Q2 results and recent trends. We continue to see strong demand around the world. I'm happy to report that worldwide fees grew 14%, driven by REVPAR up 8%. As expected, rate and occupancy now contribute equally to REVPAR growth. This is typical for an early stage recovery. Occupancies have now reached the point where we expect rates to rise further. And as you'd expect, higher revenues mean higher margins. Worldwide Company-Operated Hotel margins expanded by 90 basis points. As we look around the world, the 2 main trouble spots are Japan and parts of the Arab world. Excluding these regions, worldwide REVPAR increased 10% and margins widened by 140 basis points. REVPAR outside of North America grew at 7% in constant dollars or 11% excluding Japan, North America and the Middle East. Latin America was our fastest growing region with REVPAR up 17%. And our Mexican resorts are showing signs of growing confidence among travelers. Europe performed well despite the sovereign debt circus. Our REVPAR growth was 12%, thanks to strong corporate and leisure demand and no new supply to speak of. We're also encouraged by our results in Asia, even if overall REVPAR was up a modest 7%. That growth was on top of last year's 28% jump, driven in part by the World Expo in Shanghai. Outside of Japan and Shanghai, Asia Pacific's REVPAR grew 16%. North America delivered 9% REVPAR growth, and our focus on margins is paying off with an increase of 170 basis points in the second quarter. Year-to-date, North American margins have expanded 180 basis points and REVPAR has grown 10%. Finally, our worldwide portfolio of owned hotels delivered REVPAR growth of almost 13%, and margins expanded 225 basis points. These results show that our brand-led approach is paying off. Each brand has a distinct positioning that appeals to a different traveler or travel location. Collectively, our brands benefit from our work to grow SPG, to upgrade revenue management and to improve our sales effectiveness. The result is the eighth quarter in a row of REVPAR index growth, up 250 basis points in North America and 170 basis points worldwide. We've been talking for a while about the momentum of Sheraton, which once again posted record high guest satisfaction scores and drove REVPAR increases. Year-to-date, REVPAR index for Sheraton North America is up another 210 basis points. Our outlook for the rest of the year foresees more brand-led success. Group pace for 2011 is up, even as booking windows are lengthening, and rate trends are very encouraging. Rates on newly-booked business for 2012 are up 9%, and for beyond 2012, up 12%. Business transient trends continue to point to a travel-intensive recovery. Banks and corporations are high in profits and low in debt. Professional service businesses have record backlogs, tech companies are booming and global businesses are benefiting from the robust growth in emerging markets. So it's no surprise that business transient revenue is up 9%, with rate up 6%. Transient revenue booking pace through September, by the way, is up double digits. So with supply already tight in the U.S. and Europe, we foresee strong rate increases, not just for the rest of this year, but also for corporate rate negotiations for next year. And finally, our leisure business is doing quite well as high-end guests fare better than the economy as a whole. The strength of our business will mean less inventory sold through costly channels such as OTAs. Our leisure business for the remainder of the year will build on the second quarter's 7% price increases and 12% revenue growth. Before I wrap up on my remarks for the quarter, let me call your attention to our Vacation Ownership business to where flows steadily improved up 4%, and for the first time in nearly 4 years, realized price increased. Our Vacation Ownership team continues to do a stellar job driving sales and generating cash from the business. We expect more of the same for the coming years. In summary, for Q2, we beat the high end of EBITDA expectations by $7 million and EPS by $0.04, and that despite continued pressures in Japan and Northern Africa. Our outlook for the rest of 2011 is robust with solid group and transient pace and with good prospects for rate and margin. In line with our baseline scenario, we expect REVPAR growth of 7% to 9% in 2012. We're sticking to our 2011 EBITDA range of $975 million to $1 billion. And I should add that, that's in spite of asset sales, which will reduce full year EBITDA by about $20 million. We're also raising our EPS range to $1.67 to $1.77. Vasant, of course, will provide more details on our outlook and asset sales in a few minutes. But before I hand over to Vasant, I'd like to share some thoughts on the month our leadership team spent in China. Since returning, I've been asked many times what surprised me most, and the answer is easy. I had no idea there would be so much media attention. In retrospect, I guess it makes sense. For many global businesses and journalists, the Chinese market is a huge phenomenon. Our move and the success of our business there makes for a compelling story. It also seemed that many Chinese were keen to see how our move highlighted the importance of their market. Being in China, we were all struck once again by the rate and scale of change. A few superlatives stand out among our site business, our largest hotel, the 4,000-room Sheraton in Macau, our highest hotel, the St. Regis in Lhasa at nearly 4,000 meters and our tallest hotel, the St. Regis in Shenzhen. The Shenzhen for me was especially an eyeopener. It reminded me of when I first came to Hong Kong in 1986. Back then, the cityscape stood in stark contrast to the tiny fishing village with Shenzhen. From our 100-story perch at the St. Regis, it was hard now not to think that the tables had turned, with Mainland China in 2011 looking decidedly more modern. But I should emphasize our goal in coming to China was not for publicity nor was it to arrive at some blazing new insight. My colleagues and I have been going to China many times. We were there to deepen our dialogue with our leadership team and to add to our set of shared experiences. This dialogue makes for better decisions and better global support to our local team as the business grows, which reminds me, when I was asked about my motivation for going to China, it reminded me of what the gangster Willie Sutton said when he was asked why he robbed banks. And he replied, "Because that's where the money is." For our case, that's where the growth is, and the growth continues to be spectacular. More to the point, this decade represents a once-in-a-lifetime opportunity, not just to grow, but to shape the market. We have 75 hotels in operation in China and nearly 100 more under construction. It's rare that any country has more hotels in the pipeline than in its existing footprint. But it's unprecedented for this to be happening in our second largest country. Many people don't realize that already today, the number of domestic and international trips taken in China is roughly equal to those in the U.S. But in China, travel's growing at 15% to 20% a year, and there's only a fraction of the high-end hotels needed to serve this growth. Even after we open the next 100 hotels in China, our total number of hotels will be about 1/3 the size of our U.S. footprint. And by the way, Sheraton continues to lead our footprint in our growth in China, accounting for over 1/2 of our pipeline. China's -- excuse me, Sheraton's footprint will more than double over the next 3 years. Westin and Four Points by Sheraton will make up another quarter of our growth. Four Points enjoys its association with Sheraton, and Westin's trajectory builds on its successful launch in major cities several years ago. For many luxury brands, from handbags to champagne, China's already the world's largest market. With 9 St. Regis hotels in the pipeline, in a few years, China could well be the largest market for that brand as well. Luxury consumption is evolving quickly in China. Like other developing markets, consumers first tend to luxury brands as a sign of status. But people are increasingly seeing luxury defined what they themselves choose to enjoy during their free time. And some travelers would choose to collect the indigenous experiences we offer through Luxury Collection. Others will seek the informal contemporary feel of W. Our first Luxury Collection hotel opened last year in Tian Jin, and the first W will open in Guangzhou early next year. The distinct personalities of these brands mean that all 3 can thrive side-by-side, each appealing to a different type of high-end traveler. Another aspect of the growth in China is that it's spreading beyond the major markets to the so-called second- and third-tier cities. In fact, over 80% of our hotels are being built in the roughly 170 such cities, each with populations of more than 1 million. We're often asked whether this rapid growth will lead to temporary overcapacity. And no doubt, there will be some wrenching adjustments as supply and demand move in and out of balance. That said, our occupancies are above last year, and we've been careful in selecting the right partners and the right locations. And as another 300 million people move from the countryside into cities over the next 10 to 15 years, today's overcapacity will be tomorrow's needed supply. Take Beijing, for example. Post-Olympics in '08, there was plenty of talk about excess supply. Fast-forward to today, year-to-date REVPAR in Beijing is up 21% and new hotels are once again coming onstream. Or take Shanghai. Where else in the world would you see flat REVPAR the year following a World Expo? So this growth is why even in the dark days of 2009, we were building out our leadership teams in growth markets like China. As a result, today we have the foundation to triple the number of associates over the next 5 years in China to the 90,000 we'll be needing. But now, let me return to my earlier point about why having a dialogue and working in support of our local leadership teams is so vital to our growth. To do that, I'll walk you through a number of examples of what we mean by this. Nearly 4 years ago, during my first Starwood visit to China, we discussed our SPG strategy, which up until then, had been tailored -- had not been tailored to local Chinese travelers. We decided then to translate more collateral signage, train associates in enrolling guests in Chinese and maybe most importantly, adapt the program benefits, including tie-ins to food and beverage. Today, the program drives over 50% of our occupancy on the heels of a 71% jump in enrollment in 2010. China's our biggest SPG market outside of North America. On a subsequent visit, we developed another foundation for our growth. With about 60% of our guests in China being local nationals, we all decided it was time to open a call center in-country. In the midst of the 2009 crisis, we opened what is now the largest call center for any global hotel company. And we're also learning that, that call center is a great launch pad for promotions and for developing talent for our operations. And then there's our website. Consider this: What if Starwood were a Chinese company, and in the U.S., you were booking a vacation through our website? The web pages would begin in English, but the moment you would click to make a reservation, suddenly all you saw was Chinese. Sounds crazy, but that's basically what global lodging companies have been doing to Chinese consumers, starting in Chinese and then switching to English. Today's -- today, ours is the only website of its kind where Chinese guests can book start to finish in Chinese. Most importantly or most recently, we also turned our focus to the outbound Chinese traveler. This outbound opportunity is the third stage in what we've been calling the Outpost to Outbound transformation of our business. Our first hotels in China were outposts for Western travelers. Today, our business is mostly Chinese. And now we're seeing the rise in the Chinese outbound travelers. The same is true, by the way, for knowledge transfer. We used to bring know-how into China, but more and more, we're taking best practices from China and sharing them with other markets. So getting back to the outbound travelers, but remind you that here again, China's already about the same size as the U.S., roughly 50 million trips. But this number has grown fivefold since 2000, and Beijing is now the world's second busiest airport. Looking ahead, estimates are that each year, there will be 25 million Chinese traveling for the first time outside of their home country. And so that's why in close consultation with our team in China, we've launched our Chinese personalized travel program in 19 gateway cities, including New York, Mexico City and Paris. The goal is simple, bring the comforts of home to our Chinese travelers when they stay abroad with us. The program includes language specialists, local welcome packets in Chinese, in-room amenities, not to mention special menus. And we're expanding the program to other hotels around the world. These are a few important examples of what we mean by better dialogue and working together to support growth. Over the past 25 years, we built what we believe to be the best local smart team in the industry. Supporting local teams is what gives Starwood the edge not just in China, but in the Middle East, Africa, Latin America and other markets around Asia. Here's one way to think about how this edge translates into results. According to Smith Travel, in China during 2010, Starwood opened 15 upper upscale and luxury hotels, over twice as many as Marriott and 5x as many as Hilton. In fact, globally, we opened 47 upper upscale and luxury hotels in 2010 versus 39 for Marriott, 22 for Hilton and 11 for Hyatt. So when we talk about our pipeline, we intend to realize it. And we've all read headlines in our industry about mega development deals in emerging markets that have fizzled. Less apparent than the headlines though is the quality of our growth. Our pipeline is strong -- is so strong today that we don't feel the need to impress investors, present or future, with projected deals that won't stand the test of time. For example, we won't sign a deal if the economics compromise the integrity of our existing contracts, and we won't buy deals with exorbitant key money. We'll walk away from the deal if it's not right for our brands or if the partner is not right for the long term. Moreover, we have a branded strategy so we won't sell our distribution without a brand. We believe that generic distribution is not fair to owners who invest with us to build their brands. Understandably, owners wouldn't want us to open a low-cost generic hotel that undermines one of our branded hotels next door. In short, we're staying close to our local teams, and it gives us the knowledge and discipline to be selective in our development. As I look back on it, the time we invested with our team in China will certainly pay off. We were thrilled to join their discussions in strategy, marketing, sales, new deals and developing talent. The familiarity gives us a way to reach across cultural differences and to talk in shorthand. I'm confident that as we brace for more growth, our joint decisions and judgment calls will benefit from our shared experiences. So I hope this gives you a better sense of why we went to China, and we return all the more convinced of the once-in-a-lifetime opportunity that emerging markets represent around the world. Never before have 3 billion people moved from poverty to prosperity in a single generation. And there are huge ripple effects. Raw material exporters are getting enriched. And in a few years, China will shift from being a net exporter of low-cost labor to a massive importer. And when that happens, it will jump start other countries. Think about this. The U.S. took 75 years to industrialize. Japan took 40 and China took only 25. This acceleration will continue in markets like Bangladesh, Vietnam, not to mention parts of Africa. So to sum it up, the world really is changing like never before, and the way we see it, it's changing in our favor with so many new travelers who want our brands. The only thing that keeps me up at night, is the fear of not fully seizing this moment. And so with that, let me turn the call over to Vasant.

Thank you, Frits, and good morning, everyone. We had a strong second quarter with EBITDA up 16% and EPS up 43%. We exceeded the high end of our expectations by $7 million despite the sale of 3 large hotels, which resulted in lost EBITDA of around $5 million in the quarter. These results were once again driven by the power of our brand portfolio, which gained 250 basis points of REVPAR index in North America, our revenue and cost management programs, which delivered industry-leading margin improvements of 170 basis points that come from the operated hotels in North America and continued tight control of SG&A, which declined by 4.3% in the quarter. Asset sales and operating cash flow increased our cash balance to over $1 billion and reduced our net debt by almost $400 million. We have maintained the outlook range we first provided late last year despite a $25 million to $30 million EBITDA hit from the unexpected events in North Africa and Japan, and an additional $20 million in lost EBITDA from asset sales completed in Q2, which were not included in our outlook. In other words, our core continuing business is performing better than we projected at the start of the year. I'll provide some more color on business trends around the world and on our outlook for the year. North American owned REVPAR was up double digits, with occupancy exceeding levels reached at 2008 peaks. Tight cost controls converted this revenue growth into strong EBITDA growth, with owned EBITDA margins up over 250 basis points. System-wide REVPAR was also up strongly, with Sheraton up 7% and Westin up 10%, handily outperforming the competitors once again. Our Luxury brands continued their industry-leading performance with W up almost 14% and St. Regis up almost 16%. At this point, there is no discernible impact on our business from the much discussed soft patch in the U.S. economy or the debt limit shenanigans in Washington. Transient revenue pace, both corporate and leisure, is up double digits in Q3. Leads are up, group pace is gaining steam and booking windows are lengthening. So far in July, the momentum of the second quarter has been sustained. As we've said before, rate is the make-or-break variable this year. Rate trends are improving as occupancies enter the 70s. Like you, we remain on high alert for any signs of a change in trend. Since we do not see any evidence of that, our outlook assumes the normal cyclical recovery we have been experiencing in lodging will continue. The euro crisis has not impacted our business so far in Europe, which is one of our strongest regions in the quarter. In local currencies, system REVPAR in Europe was up 12%, rate was up 5.1% and occupancy is up 4.5 points. Our owned hotels did even better, up 18%, with rate up 10% and occupancies hitting 87% in June. Once again, good cost control delivered EBITDA margin increases of 350 basis points. Italy and Spain REVPAR were up 20%, France was even stronger, U.K. and Australia grew double digits. German results were in line with what we expected given their biannual convention calendar. As in the U.S., no change in momentum is evident as we enter the third quarter. Africa and Middle East REVPAR was down 7%, impacted by the political turmoil across the region. By and large, there is no improvement in sight. Syria was down 80%, Bahrain down 65%; Egypt, minus 50%; and Jordan down 26%. The Gulf continues to work through oversupply issues while Saudi Arabia remains on track. The full year impact of North Africa we had provided you in April remains unchanged. The situation is playing out as we had forecast, neither materially better nor worse. The most significant impact to softness in the Middle East and North Africa is in our incentive fees. Asian REVPAR grew 7% in local currency despite lapping the World Expo in Shanghai last year and the issues in Japan this year. With over 60,000 rooms open at the end of Q2, Asia has now overtaken our Europe, Africa, Middle East divisions to become our second largest after North America, with a growth trajectory that will double its size again over the next 5 years. And as you heard from Frits, our China business is on track to triple in 5 years. Strong REVPAR growth testifies to the fact that demand continues to grow faster than supply in Asia. India was up 9%, South Korea and Indonesia, up 11%, Australia, up 10%; Thailand, lapping last year's troubles, up 47% and China x Shanghai, up 12%. Japan was down 22%. The recovery from the earthquake is slow. The full year impact of the Japanese earthquake tsunami remains unchanged from what we provided you in April. Latin America was our fastest growing region in Q2, clocking in at 17%. We experienced some extraordinary growth in Peru, up 60%; Brazil, plus 45%; and Chile, up 32%. The cities in Mexico were strong while the results are starting to improve with group business beginning to come back. Finally, our Vacation Ownership business performed as expected. Cash flows are improved, while close rates are stable. Mix management is improving price realization. Default rates continue to improve and are now back to 2007 levels. We expect these trends to continue. We remain focused on cash flow generation with a securitization planned in the fourth quarter. SVO will generate over $150 million in cash this year and over $700 million in total in the last 3 years. Our SG&A declined in the quarter. This is partially due to lapping incentive compensation accruals from last year. We also had some legal expenses last year. These positives were offset by higher costs of non-U.S. overhead due to the weak dollar. For the year, we continue to expect a 4% to 5% increase. Moving on to our outlook. We assume the normal cyclical lodging recovery continues in the second half. As such, our outlook remains unchanged from what we provided at the start of the year. It is important to highlight 2 major negatives we have absorbed since then. In April, we estimated a $25 million to $30 million full year impact from the unexpected events in Japan and North Africa and left our outlook unchanged. Now we're absorbing an additional $20 million from the sale of 3 large hotels in Q2 while leaving our outlook unchanged again. As such, we're offsetting almost $50 million in EBITDA, thanks to better-than-expected performance in our core continuing business, particularly at our owned hotels worldwide, from strength across Asia and helped by a weak dollar. That said, we are more comfortable with the middle of the EBITDA outlook range rather than the high end where many of your estimates currently are. All other metrics, REVPAR growth, owned margin improvement, SVO and SG&A remain unchanged. Fee growth ticks up due to a weaker dollar. EPS is higher from lower depreciation and interest expenses, partly as a result of the accretive asset sales. A point on our owned EBITDA. It is lower in Q2 than you may have expected. Owned EBITDA as reported was up 8%. If you adjust for asset sales, EBITDA growth was 16%. The same-store sale actually grew 28%. Non-Same-Store results were negatively impacted by some large renovations like the Sheraton Kauai, The Grand in Florence and the Hotel Alfonso in Seville, also by the earthquake impact at the St. Regis in Osaka and the new W Leicester Square in London, which is still ramping up. In total, asset sales in Osaka reduced 2011 owned EBITDA by approximately $25 million. These factors will make total owned EBITDA not quite as high as the projection based on Same-Store REVPAR growth and margin improvement might lead you to. On the fee front, North Africa and Japan hurt 2011 management fees by as much as $18 million or a reduction of almost 300 basis points in year-over-year fee growth. 2/3 of the impact is on incentive fees and more significantly in the fourth quarter than these fees were anticipated. As such, our Q4 fee growth rate will be lower than the trend we have seen in the first 3 quarters. Some of this impact is offset by favorable currency translation due to the weak dollar, a 200 basis point positive for the year. As you know, only about 40% of our fees are earned in the U.S. The remaining impact of Japan is on the unconsolidated joint venture line, roughly $7 million in 2011, since we've written off our investment in the Sheraton Grande Tokyo Bay. Through June, we've opened 34 hotels and remain on track to open 70 to 80 hotels in 2011. Last year, we opened more luxury and upper upscale rooms globally than any other hotel company and hope to repeat that this year too. As Frits indicated, we are focused on signing high-quality contracts with great long-term owners. This ensures both a healthy fee stream and a very high probability that deals we sign actually open with an owned-brand hotel. The signing pace is picking up, and the pipeline is growing again. 85% of our 90,000-room pipeline is outside North America, and 75% of the rooms are in the high-fee Luxury and Upper Upscale segments. We sold the Westin Gaslamp and the W Chicago Center in Q2. In the case of the Gaslamp, then you all know we'll spend $23 million to complete a full renovation that we had started. We also sold our interest in the Boston Park Plaza, a consolidated joint venture hotel. This is a 941-room hotel that was unbranded and in need of significant capital. We've been working with our partner to explore options for years. The hotel was a legacy investment from Starwood's REIT days. We're happy to have finally exited this venture on mutually acceptable terms. In total, these asset sales generated $281 million in cash and $57 million in debt reduction. EBITDA lost in 2011 will be $20 million and $23 million on an annualized basis. After the asset sales, our net debt is $400 million lower and stands at $1.74 billion. Cash in excess of working capital needs is almost $1 billion. We intend to use cash on hand to pay down debt maturing in 2012 as we work towards a solid BBB investment grade rating. Our priorities for cash deployment remain reinvesting in our business to drive growth, reducing our debt to target levels, and of course, returning cash to shareholders as we did in the last cycle. At Bal Harbour, construction is proceeding on schedule. We're also on track to receive our TCO in Q4. Our plan is to start closings in November. Meanwhile, the sales pace is good this year, particularly from Latin American buyers. Square foot rates realized on new sales are at precrisis levels and deposits are much higher, more than 40%. We expect that there will be revenue profits and cash from Bal Harbour in the fourth quarter as we start closings, which are not currently in our outlook. We will provide you our best estimates when we talk again in October. In summary, a normal cyclical recovery in lodging continues around the globe followed by extraordinary demand growth in emerging markets and record low supply growth in developed markets. As always, there are many results there that could derail this recovery: The euro debt crisis damaging key European economies, the debt reduction debate in the U.S. loan growth, the hardlining in China from efforts to control inflation are, of course, the big ones to watch. So far so good, and we hope it stays that way. With that, I'll turn this back to Jay.

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

Your first question comes from the line of Steve Kent from Goldman Sachs.

Yes. Could you just talk about your group business for the first half of this year? How much was booked in 2009? How much was booked in 2010? Just to get a sense for how that pricing has worked out and then what we can look forward to in the balance of '11 and going into '12 as you start to work off maybe some of those lower-priced groups that were booked?

Yes, Steve, I mean it's not -- it's fairly typical in terms of the thing we've told you before, 1/3, 1/3, 1/3. So 1/3 tends to, for 2011, for example, 1/3 would be from a couple of years of -- and before, 1/3 would be the year before and 1/3 is in the year before the year. So in that sense, it wouldn't be atypical as to what we're seeing in 2011. And at this stage, 1/3 of the business in 2012 is probably from '09 and before, and 1/3 would be from what we're booking this year.

Yes. And I think the good news is because of the better rate, and as you look ahead with windows that have been shorter, we'll be booking a higher percentage now looking ahead than we would normally. And that means that the higher rates that I was talking about in some of my prepared remarks would be the direction we would expect things to head in '12 and certainly in '13.

Your next question comes from Shaun Kelley from Bank of America Merrill Lynch.

Vasant, you gave some good color on the balance sheet, but I just wanted to see if we could get like a little bit more kind of clarity on some timing. So you sold assets this year and you will have some Bal Harbour closings beginning in the fourth quarter. So are you at the right leverage ratio kind of now? Based on our calcs, you'd be running at kind of 1.7x, 1.8x net leverage to kind of hit that target investment grade market. And how do you think about the timing at which you might be able to actually start returning some cash to shareholders?

Yes. In terms of balance sheet, as you know, the way the rating agencies look at ratios, it's probably a little over -- close to a turn higher than a simple net-debt-to-EBITDA calculation. It's just things they add in like something for the leases and something for securitized receivables and so on. Having said that, yes, our ratios are getting to levels -- once you comp the cash that would put us where we would like to be. There's also a question on how the cash is counted. Certainly, the rating agencies, this is the way they do it today. I don't really give you for credit for cash in the balance sheet. Net-net, we're on the right track. We expect -- and this is not something we control but we expect that ratings will move probably towards the end of this year or into next year. And our priority is we have maturities next year, roughly $600 million in public debt, as well as there's some debt on assets, which is a small amount, maybe another $50 million or so that can be prepaid. So there's about $615 million in prepayments -- in repayments that we can make next year. So our priorities remain as we've said before, healthy investments is our business, reducing our debt levels and then of course, returning cash to shareholders. And I don't know, Frits, if you want to add something to that.

Yes, just a couple of general comments, Shaun. First is certainly based on our 2009 experience and I think we're not alone in corporate America in this respect, I think our approach will be more conservative than it might have been in the past. And given some of the uncertainties that we, that Vasant and I both described in our remarks. And that while those are not affecting our business today, one well, obviously, doesn't know for sure what tomorrow will bring. And so as a consequence of that, keeping our powder a bit drier than we might have in the past is something that we are inclined to do. And what Vasant has also said is actually true and that is, we continue to look at opportunities to invest in our business, and whether that's some of the renovations that we have underway or other opportunities that may come up, we want to be ready. And that's not to signal anything significant, but it's to mention the fact that, that's something that continues to be on our minds. That said, we're not ambivalent. And in terms of giving cash back to shareholders, and I think the $4 billion or $5 billion that we've given back in the past would let you know that as a management team and philosophically, we don't have any problems with doing that. And as you pointed out in your question, it's more a function of timing than anything else.

Your next question comes from Joe Greff from JP Morgan. Joseph Greff - JP Morgan Chase & Co: The development pipeline increased nicely sequentially. Can you help us understand which geographies drove that sequential increase? And then a quick question on the full year 2011 outlook. You provided an outlook with regard to Same-Store Owned Hotels on a worldwide basis with respect to margin increases. I was hoping if you can help us break that out between North America and international.

Yes. So Joe, this is Frits. I'll address the first part of your question around development pipeline, then hand off to Vasant to talk a bit more about the 2011 outlook and margins. As we look at our pipeline, I don't think it would surprise anybody to hear that the growth in where we're signing deals is more in Asia, not just China, but other markets in Asia, as well as in some of the resource economies in Latin America and elsewhere. Most of the work that we're doing in North America, thanks to the lack of construction heater, is to look at conversions. And the interesting thing about conversions is they don't generally sit in your pipeline for 3 years. You sign them and within a much shorter period of time, they become your own brand. And so the pipeline will never look the same as long as you're doing conversion work relative to de novo construction. And so that gives you a good sense of where the breakout is, and then of course, we continue to look at ways to find better opportunities in North America especially, but also Europe where as demand builds and as there's no construction, we still maintain that there is going to be a day out in the future where rates will be so compelling and financing will finally be available that there will be quite a bit of development. And we want to be ready for that moment, and we'll continue to look at ways to do that. So with that, Vasant, you want to talk about 2011?

Sure. The margins you asked about on owned hotels, Joe. So the best way to describe it is you saw that we had some healthy margin improvement in our North American hotels and actually even in our European hotels. So where we have the margin pressures for the reasons we mentioned in our Latin American hotels, the best way I would describe it is the range we've given you is 150 to 200. I would say our North American hotels will have margin improvements that are north of 200, but our international hotels will be below 150. Mostly because in Europe, we'll do well, but in Latin America, the margin pressure continues, although it's getting a little better. So let's say international below 150 and North America, about 200, with the whole portfolio in the 150 to 200 range.

And Joe, to give you some color on the continued impact from Latin America, if you excluded Latin America from our worldwide margins in the second quarter, the 225 increase would've been closer to 300.

The next question comes from Janet Brashear from Sanford C. Bernstein. Janet Brashear - Sanford C. Bernstein & Co., Inc.: As you look at the Vacation Club business, it's static now, pretty much with the exception of Bal Harbour. You're neither investing big sums nor neglecting the business. But as you look towards the long term, that can't really be a good long-term strategy because you wouldn't retain people and prosper without plans to grow the business. So I wonder if you're beginning to think about that now, and what you're envisioning the long-term strategy becoming, if it has elements of asset-light timeshare or a different view of the product or any other element?

Yes, Janet, this is Frits. Two things. First, from our perspective, Bal Harbour is a completely different animal from SVO. And our point of view on Bal Harbour, of course, is that it is a onetime episodic development of something that wouldn't be on strategy today. But given the improving macro environment and particularly given the increase in demand among the kinds of high net worth buyers from around the world that are looking at that property, we think we're going to exit that whole project far better than we could have imagined a couple of years ago. So the real issue is around Vacation Ownership. And we've been very clear for some time now about our strategy to be 80% fee-driven and 20% driven by owned real estate, which would include Vacation Ownership from our perspective. And we do think that as time passes, there will be sufficiently high IRR places for us to invest in the Vacation Ownership business. Although at the same time, we have no expectation that the size of that business will get to anywhere near where it was before the downturn. And in terms of the team there, they continue to do a spectacular job. The morale in the leadership there is very strong. We're keeping the people that we want. The fact that we, Starwood, have stayed committed to that organization is a great selling point for us and the industry. So we believe we can be both right-sized, generating high returns and still maintain a high quality of smaller team than where it was before.

Your next question comes from the line of Alistair Scobie from Atlantic Equities.

You talked very interesting terms about the pace of growth in terms of Chinese outbound travel and this confidence of what you're doing in terms of your personal program for the Chinese. Can you just talk a little bit about what is -- any discussions that you're having with the U.S. authorities surrounding the difficulties perhaps in Chinese business to the U.S.? And maybe just give a little bit of color as to where you're currently within your existing portfolio, seeing these outbound Chinese guests traveling at the moment.

Yes, Alistair, I love your question because this is a topic that I haven't gotten tired of talking about. And more specifically, as you look at the U.S., the U.S. economy is clearly losing an opportunity to generate economic growth and jobs by turning Chinese away or we're making it too difficult for Chinese, and by the way, travelers from other markets to come to the U.S. As a point of fact, something like 5x as many Chinese today go to Europe has come to the United States. And if you think about the difference between 2 to 4 weeks to get a visa in your hometown versus 90 days or longer to get a visa having to travel to a different city if you're Chinese, you can imagine why someone would choose to go elsewhere. It also means that when people think about booking conventions or other meetings business, and they know that there will be Chinese people coming, that they don't consider the U.S. as quickly as they otherwise might. So have we been vocal about this? Absolutely. Do the gears of government turn far more slowly and in a much more frustrating ways than the gears of business? Absolutely. And I think that's why we're on the business side in our own lives. That said, the good part about our business is we don't just have hotels in the United States. And so while we would love to generate more jobs in the U.S. and more growth here from that, we are enjoying the growth in Chinese travelers around the world. And around the announcement of our China personalized travel program, we mentioned some of the triple-figure increases we're seeing in gateway cities around the world and places you'd expect, places like Paris, places like Buenos Aires, places like London. And so we know the demands there. We also believe that as you look at the distribution of income in China today and the threshold level for people to become high-end travelers, while that economy may grow at let's say 8%, the number of people, the percentage growth and the number of people who cross that threshold grows at a much higher rate. So this is already an important business for us, but we believe in the coming years, it will be an increasingly important business. And for those of you with longer memories, going back to the waves of Japanese tourists, this is a far greater wave. You have 10x as many people in China as in Japan. The whole country of Japan would have to have emptied out to equal what we think ultimately will happen once the Chinese become even more active traveling outbound. So short answer, we're very vocal. Second is, we see the growth in other markets, and we hope that it comes to the U.S. as well.

Your next question comes from Smedes Rose from KBW. Smedes Rose - Keefe, Bruyette, & Woods, Inc.: I just wanted to go back to your -- the pace of group trends for 2012. Frits, you mentioned that the newly-booked business is up. I think, you said rates were up around 9%. But I guess just looking at, I guess, blended overall, kind of what does the pace look back -- look like in terms of just overall volume? And then the rate breakout and I guess, on the margin, it's getting better but...

The group pace in 2012 continues to improve, particularly as you're seeing the booking window lengthen. Today, it's still volume-driven. Rate is marginally positive. But as Frits mentioned in his comments, rate on newly-booked business in the second quarter was up 9%, and for periods beyond 2012, we saw rate increases closer to 13%. Another interesting thing that we saw during the second quarter was a pretty big shift in percentage of business being booked more than 12 months out. So we saw a very strong pickup in terms of the business being booked for 2013 and beyond.

Your next question comes from Josh Attie from Citigroup.

Can you update us on the status of your tax loss carry forwards? How much is left after the second quarter asset sales, your ability to preserve these beyond 2011? And if not, how this plays into your asset sales strategy?

I think we can tell you -- we'll tell you more in Q3. I think we're feeling good about it, we've used a fair amount, there's some left. There's a fair amount of work on the way that we're comfortable that we will use most, if not all of it, before the end of the year and essentially be able to realize the value as asset sales are done in the future.

Your next question comes from David Katz from Jefferies & Company. David Katz - Jefferies & Company, Inc.: If we could just go back to the Owned portion of the business, and it sounded from Vasant's commentary that there's a fair amount of fluidity in there and comparability issues. What I'm trying to gauge is the gross margin on your Owned business and which looked to me at first blush to be sort of flattish or down slightly, but it sounds as though there's some construction issues in there. Can you talk about what the impact or what it would have been without some of the renovations that are going on? And if it's fair for us to look back a few years ago at peak gross margins, which were probably 500 basis points higher than where I think they are today.

A couple of data points that were in my comments. So in North America, the Same-Store Owned Hotels set had EBITDA margins going up 250 basis points. In Europe, the Same-Store set had margins going up 350 basis points. We also -- we have a small base of Owned hotels in Asia, the margins went up there too. In fact, they're doing very well, especially given the Australian economy. In Latin America, certainly the margins are under some pressure, although the pressure on the margins has eased a little bit. I think yes, the margins may have been down between 100 and 200 basis points in Latin America in Q3. The comparability issues come from 2 factors, the biggest, of course, is asset sales. Second in line is we have 2 hotels in there that are new in the non-Same-Store set, one is the St. Regis Osaka, which suffers not just from being new, but also being affected by the earthquake. The second is the W Leicester Square, which is doing very well but just opened in February. And then of course, there's the renovation impact. But I would say the biggest impacts are the new hotels in there, as well as the asset sales, which does make sort of simple comparisons from what we have in our reported P&L somewhat harder to do. And this is why we try to give you a little bit of the breakdown in our comments today.

And David, I can spend some time with you after the call, walking through the numbers if you still have questions on them.

Your next question is from Mark Strawn from Morgan Stanley.

One question on Bal Harbour. I was wondering if you could give us some more detail on some of the metrics there in terms of the number of units currently under contract, maybe price per square foot on those units? And would it be correct to assume that a high percentage of those units would currently under contract would close upfront?

Yes. We're approaching close to 60% of the value that is already under contract. And the value we provided you before is north of $1 billion in terms of the condos. Now, there'll also be a hotel there that we intend to keep. We have got deposits already for many of the sales done prior to this year in the 20% range. And then more recently, our deposits have been much higher than that, as I said earlier, more than 40%. We have been contacting people who signed contracts going back to '08, '09, '07, letting them know that we're getting ready for closings. Our indications are very good that the closing rates will be high. There's no way to know until you actually -- you get people to sign on the dotted line and give you the check. Our view is yes, there may be some falloff, but close rates are going to be high. The good news is the square footage rates we're selling at right now are at precrisis levels, which means that there isn't sort of recent sales going on -- no recent sales going on that are below prices people paid when they signed up a couple of years ago. And in terms of square footage, you can find out if you're in the market. It does vary depending upon the units. But it's well north of $1,000 and could be north of $1,300 and $1,400, depending upon the unit.

Yes, I think Vasant's point on the price per square foot is important to keep in mind. When we look at comparisons with precrisis levels, what we look at are units that are truly comparable. And in a building like this where some buyers are buying multiple units, different floor sizes, different floor patterns, for us, there is some art as well as science to seeing what's comparable. So we don't think it's appropriate to throw out an overall number because it then becomes a weighted average of what you're selling. But as we've done the analysis like-for-like with precrisis sales, as Vasant says, we're at the same point. The biggest difference being previously, we were getting 20% deposits and today, we're getting north of 40%. And so that tells us 2 things. First of all, people really want to buy, and second of all, a 40% deposit on a $2 million, $3 million, $4 million, $5 million purchase is a serious transaction and something not done speculatively. So we feel very good about certainly, the sales of late. And given the strength in the market, I feel better and better about the sales from before.

Your next question is from Harry Curtis from Nomura Securities.

A quick question on the acquisition environment. So, so far this year, you've sold a handful of full-service assets quite well. And can you give us a sense of how that environment is trending? Is it improving with respect to factors like financing availability, price per key multiples? And maybe a bit of color on your expectations over the next 12 months.

Yes, I think, Harry, you have to put an answer to that question, at least in my mind, in some historical context, right? So '06, '07, when the market was frothy, many things were selling and selling at extraordinary prices in great volume. The market was off 90% as we went into the crisis. And so we've definitely seen a pickup in volume, but that pickup in volume still leaves us with a transaction pace that's still south of certainly 1/2 and more and more like 30% or 40% of where it was. But that said, it continues to build. And so we are seeing more buyers, not just from well-capitalized REITs who've been the most active buyers of late, but we continue to see more interest from high net worth individuals and sovereign wealth funds. But I don't think that the transaction market today is anywhere near where it will be once this recovery is fully underway. And that's one of the reasons that we continue to take assets to market, but we don't feel that this is the right time to be considering a much more substantial asset sales. We think the buyer end of the market has to be much deeper than where it is now. We'd see the right trends, exactly when that will happen, I think, is not something I'm ready to speculate on. Perhaps, Vasant, you want to add something to that one?

No, I think we see the pricing improving substantially for sure. Certainly, the underlying EBITDAs are improving. The per keys are getting better but as Frits said, obviously, a market for 1s and 2s as we've been doing, but not a market for a mega sale.

Perfect. Sylvia, I think that's all the time we have today for questions. I want to thank all of you for joining our call today, and please feel free to contact us if you have any additional questions. We appreciate your interest in Starwood Hotels & Resorts. Goodbye.

Ladies and gentlemen, this does conclude the Starwood Hotels & Resorts Second Quarter 2011 Earnings Conference Call. Thank you for participating. You may now disconnect.