Marriott International, Inc. (MAR) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to Starwood Hotels & Resorts Third Quarter 2013 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mr. Stephen Pettibone, Vice President of Investor Relations. Sir, you may begin.

Thank you, Sylvia, and thanks to all of you for dialing in to Starwood's Third Quarter 2013 Earnings Call. Joining me today are Frits van Paasschen, our CEO and President; and Vasant Prabhu, our Vice Chairman and CFO. Before we begin, I'd like to remind you that our discussions during this conference will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements. The factors that could cause actual results to differ are discussed in Starwood's annual report on Form 10-K and in our other SEC filings. You can find a reconciliation of the non-GAAP financial measures discussed in today's call on our website at www.starwoodhotels.com. With that, I'm pleased to turn the call over to Frits for his comments.

Thanks, Stephen, and thank you, all, for joining us today. In my prepared remarks, I'm going to focus on 2 topics: First, a brief recap of our Q3 results and how they were influenced by the business environment around the world. Second, a look at the unique aspects of Starwood as an investment proposition as we presented 6 months ago in Dubai. Following our usual format, after I conclude, Vasant will go into more detail in what we're seeing as we enter the fourth quarter and our outlook for the rest of the year. I'll turn now to my first topic, our Q3 performance. It's safe to say that the world economy was not on altogether solid ground. Indeed, if you wanted to look at headlines around the world for things to worry about, there'd be plenty to choose from: The slowdown in China, the weakening rupee in India, upheavals in the Middle East, a Brazilian economy that's lost its zip, not to mention the circus that's Washington, D.C. In the face of all of this, we posted very strong results, with REVPAR up globally nearly 5%, and core management and franchise fees up almost 10%. More importantly, we hold firm to our view of the long-term trend lines of rising wealth and increasing global demand for travel. Those trend lines lie behind the lodging recovery which has been moving forward for some time now, despite the fits and starts. Looking at the mature markets, there's still a lack of new supply even in the face of steady demand growth. The result is as you would expect, another quarter of record occupancies in both the U.S. and in Canada. Company-Operated REVPAR grew by 7%, driven mostly by higher rates. Trends in corporate and leisure demand have continued to grow at a healthy clip. We did see some decline in government demand in the quarter, thanks to the U.S. sequester, but as a reminder, government demand is less than 2% of our North American business. Coming into the fourth quarter, the government shutdown and last-minute brinkmanship created uncertainty in corporate America. So like many of you, we were relieved that the impasse was resolved and it should not meaningfully affect the fourth quarter. In fact, post-D.C. debacle, we see positive signs in both transient and group demand. Europe is also showing very little new supply, and as in North America, demand continues to build. REVPAR was up nearly 2%, with occupancies nearing 74%. Excluding London, which last year in Q3 hosted the Olympics, REVPAR for our owned and managed hotels was up nearly 3%. Both Italy and Spain posted solid growth, helped by strong leisure demand. To be sure, we're not suggesting that the Eurozone has worked through its difficulties, but inbound travelers to Europe, along with marginally better sentiment, were enough to fill our hotels. In Asia by contrast, secular growth in demand and supply powers on and it's a great thing to see firsthand. I was in the Sheraton Macau last month. The property was just coming off a busy August, where it ran over 95% occupancy. Not bad for a hotel less than 1 year old with nearly 4,000 rooms. And as you would no doubt expect, it was outbound travelers from China who filled the Sheraton Macau, just as they're flooding into hotels throughout Asia. This year, Chinese SPG Member nights abroad were up over 20%, pushing REVPAR growth over 9% in our Asian properties outside China. It's true that the Chinese economy still seems to be decelerating, but to put that into perspective, our occupancy in China was up 3 percentage points across a Same-Store footprint that was 35% larger than last year. Where we did feel the slowdown was in lower rates, which held a REVPAR growth below 2%. On a brighter note, our hotels once again posted healthy gains in REVPAR index as our sales teams and strong brands drew guests to our hotels. Economic headwinds and political unrest hampered growth in other parts of the world. In Africa and the Middle East, the troubles in Egypt and Syria cast a shadow over the entire region. Our REVPAR grew less than 1% despite good performance in the UAE. In Latin America, REVPAR was up 1%. Mexico strength was not enough to offset Brazil's weakness. Argentina posted REVPAR gains, but that has more to do with easier year-on-year comps than any green shoots in the economy there. So as I wrap up my Q3 comments, the best way to summarize our take is that the global economy added another quarter to its slow bumpy recovery. And despite an eventful few months, the picture we see has little changed. Long-term trends are intact and we're well-positioned for secular growth in high-end global lodging. This leads me to my second topic. At our Investor Day in Dubai, we outlined what we call the Starwood investment proposition. For the next few minutes, I'll share with you some further insights into what sets us apart from other hotel companies, by looking across our 3 lines of business: Owned and leased hotels, vacation ownership, and finally, management and franchising. At the end of Q3, we had about 14,000 owned and 2,000 leased rooms in our system. The room count for our owned hotels is down nearly 27% since the financial crisis in 2009. We intend to continue our path towards becoming asset light. Along those lines, as noted in the earnings release, we expect to share more news on hotel sales by the end of the year. We pointed out before that many of our owned and leased hotels are in unique -- are unique properties in high barrier to entry locations. We should also point out that they represent one of the most geographically-spread portfolios of any fund, REIT or C Corp. This includes hotels in Australia, Europe, Canada, throughout Latin America and in the U.S. As a result, our profit exposure to any one region is limited. More specifically, our largest market is the U.S., with about 30% of owned and leased EBITDA, followed by Europe at 23%, Latin America at 17%, Asia at 15%, with the remainder in Canada. That diversification also applies to our individual property. No one hotel accounts for more than 15% of owned and leased EBITDA. You should note also that our portfolio is a good blend of resort and city center locations. Collectively, the hotels are in the best shape ever, benefiting from over $800 million in capital, starting in 2010 through the end of this year. We've renovated trophy assets like the St. Regis Florence, The Gritti Palace, the Alfonso XIII, the Maria Christina, all of which who are already showing strong gains in REVPAR index. If you've had a chance to visit these hotels recently, you know just how spectacular they are. And for some time to come, they'll require much less new capital, making them attractive to a broader pool of potential buyers. You'll be pleased to know that soon we'll have completed most of the renovations that we set out to do 4 years ago. We're nearing the end of our work at the St. Regis New York and The Westin Maui, and we plan to have The Sheraton Rio ready in time for the next summer's World Cup. Overall, we expect to begin tapering our renovation CapEx in 2014. As a final note on our owned and leased hotels, I want to point out that for years now, we sold hotels with minimal tax leakage. We'll continue to work to do the same with upcoming sales. With many hotels ready to market and active discussions underway on a few hotels, we're working towards our asset light goal, 80% of earnings coming from fees by the end of 2016. For our other real estate intensive business, Starwood Vacation Ownership, we pointed out repeatedly that SVO has created significant value for us with cash over the past several years to the tune of about $1 billion since 2009. This has left us with a downsized business that can sustainably generate strong returns in line with our philosophy for vacation ownership, with a focus on return on investment, not on chasing EBITDA growth. To that end, SVO is now concentrated in markets where we can replenish high-quality inventory and consistently make high cash-on-cash returns. We also work with our homeowners associations to resell inventory that's returned to them. Our marketing and sales costs remain low as we can meet our revenue goals through our most efficient channels. Vacation ownership also gives us another vehicle to sell our hotels. Most recently, we transferred The Westin St. John to SVO as we work to convert the entire resort to vacation ownership. The signs of SVO today means that a larger portion of our business are generated from sources beyond unit sales. Similar to our managed hotels, SVO generates recurring fees like those from homeowners associations, and our unsold SVO units generate EBITDA much like an owned hotel. In fact, our experience is that the occupancy at these resorts is even more stable than traditional hotels over time. Together, fees and resort operations account for about 30% of our SVO EBITDA. We have a terrific team at SVO, and it's been a great asset in building our brands. Our vacation ownership properties fly the same flags as over 600 Sheraton and Westin hotels in nearly 80 countries. Guest satisfaction at our SVO resorts are among the highest in our system. The vast majority of SVO owners are SPG Members, with over 70% being SPG Elites. This raises another important point about SVO as a foundation for our high-end brand. It explains why you didn't see us loading up on low-quality distressed inventory in the wake of the crisis. This should mean 2 things to you: First, as always, we only have high-quality inventory; and second, we're not sitting on a finite amount of bargain basement inventory that one day will run out. This leads me to our third line of business: Management and franchise fees from branded hotels. We've been clear in the past why we like this business. It's based on long-term agreements, is less cyclical than the owned hotel business and can grow globally with minimal CapEx, resulting in high returns in invested capital. Those are the inherent aspects of the global fee business, but what sets Starwood apart is the quality of our properties and their resulting fees. That quality also applies to the value of our pipeline, as seen by our ability to grow our hotel base and the fee streams from each new hotel. Put another way, it's good to report a large pipeline but only if it materializes into real fee-paying hotels. And behind our growth is the ability of our brands, sales teams and systems to create value for owners anywhere in the world. Our pipeline of about 400 hotels and 100,000 rooms has translated into about 70 to 80 new properties a year. That number is likely to grow, as each year since the crisis, we've signed more agreements to open more hotels. Of the 208 managed and franchised deals signed in 2010 and 2011, over 80% are now either operating or under construction. And our 131 deals from 2012 are similarly on track. This is where growth begets growth. New hotels give us a healthy base of properties that in turn build the strength of our brands. Consider this, of our 883 existing upper upscale and luxury hotels, about 20% are new to our system in the past 4 years. They're mostly new build hotels or converted with a major renovation. At Starwood, our development mantra is, right location, right brand and right partner. All 3, location, brand and partner, are critical to long-term success. Selecting the right brand for a given location is fairly easy if you have the right brand. The right partner is less obvious, but no less important. We know that each contract puts us side-by-side with a partner who may be working with us day after year after decade. So we need partners who not only know how to open and build a hotel, but who will support their hotels over the long term. Our first-mover advantage in rapidly growing markets around the world means that we build generational relationships where those relationships matter most. Our pipeline is also especially valuable on a per-room basis. Nearly 70% of our pipeline is upper upscale and luxury hotels. In other words, hotels with higher rates and therefore, higher fees. They're also mostly hotels purpose-built with our distinct brands in mind, and about 85% of our pipeline is hotels to be built outside the U.S. whose management contracts typically include incentive fees without an owners-preferred return. These agreements closely align our incentives with owners and reward us for delivering bottom line results. At our Investor Day in Dubai, we talked about our leading position in the upper upscale category and the remarkable growth of our luxury brands. You may have heard us say that we've doubled our luxury footprint in the last 5 years. Since the crisis ended, we've added luxury and upper upscale rooms at a rate of 5% per year. Our net growth has been about 3%, as we cull Sheraton and Le Méridien portfolios. In the past 4 years, we've pulled from our system a total of 61 high-end hotels. Moving those hotels out of our system was the right thing to do for the health of our brands. And for the health of the SPG brand, we've chosen not to have a catch-all brand for reject hotels. We know that our SPG Members don't want to stay at hotels that can't make the grade. And not surprisingly, hotels that don't perform well on brand standards also tend to grow more slowly and pay lower fees, on average about 30% less per room. Our discipline, relationships and focus on brand building has paid off in terms of industry-leading growth. Over the past 5 years, Starwood brands accounted for nearly 1 in 5 of all new-branded, upper upscale and luxury hotel openings or conversions worldwide. As a result, we now account for 17% of global branded upper upscale and luxury rooms. And importantly, this growth has translated into value for investors through nearly 12% annual growth in our fees since 2009. Behind that growth is the value we create for our hotel owners. Over the past 3 to 4 years, we've taken significant steps to make our systems more stable, secure, flexible and consistent around the world. This work has set the foundation for our digital connectivity to guests and customers alike. You can see this in our apps and websites across languages and device platforms, and in the growth of our web channels whose sales have doubled over 4 years. Behind the scenes, better access to and use of information helps our sales teams and associates on-property to sell and serve better. Our global sales team now sells 100% more than it did 4 years ago, and our overall guest satisfaction scores have improved each of the last 5 years. And we know that better experiences add to the strength of each of our brands. In turn, the collective strength of our hotel brand adds to SPG. This rounds out the virtuous cycle, with SPG creating value for us and our owners by delivering over 50% of occupancy to our hotels worldwide. By way of summary, each of our 3 lines of business makes Starwood as an investment proposition unique and distinct. Our owned hotels are well-diversified, and as we sell hotels, we'll work to minimize our cash -- our tax exposure. SVO is a cash generator and is rightsized for sustainable high returns. And most importantly, our fee business is unique by virtue of its high-end positioning and skew to managed properties outside the U.S. As a result, we've translated our pipeline into significant fee growth. Before handing off to Vasant, I'd like to round out my comments on Starwood's investment proposition with a look at our balance sheet. We have a conservative capital structure, not because we see a lot of risk to our business today. And as we become more fee-driven, we'll derisk our business even further. But we all know that since the crisis, financial markets have reacted strongly to world events. In uncertain times, it's hard to rule out the possibility of another major shock to the world financial or economic system. Our balance sheet provides us the flexibility in the face of this uncertainty. That said, we intend to keep returning capital to shareholders. From the start of Q3 through October 18, we returned $257 million through the share repurchases, and we'll be increasing our dividend this year to $1.35 per share. We just announced also that for 2014, we'll move to a quarterly dividend. Vasant will give you more details on that in just a moment. And as I turn over to Vasant, I want to close with one last remark on the Starwood investment proposition. For the past 5 to 6 years, this management team has been in place and we've been consistent in what we've been telling you. We've also been consistent in our actions and in the results we've delivered. Vasant, over to you.

Thank you, Frits, and good morning everyone. We are pleased to have exceeded profit expectations once again despite revenues coming in at the low end of our outlook range. Strong results in North America and Asia x China offset weaker trends in other regions, demonstrating once again the advantages of a well-diversified global business. Despite the exchange rate headwinds, our core fee business grew almost 10%, powered by healthy growth from new hotels that have entered our system in the past few years, especially in Asia. Our owned hotels in North America drove 230 basis points of margin improvement, with robust REVPAR growth of 8.5%. With good cost control, our international owned hotels squeezed 120 basis points -- 110 basis points of margin improvement from only 2.9% REVPAR growth due to the challenges in Latin America and Europe. We had a net benefit of around $5 million from some termination fees recorded in other income, which were offset by some nonrecurring expenses in SG&A. Adjusted for these nonrecurring expenses, SG&A growth remains well under control at 2% to 3%. Our vacation ownership business continues to be a steady performer. Bal Harbour condos are now 97% sold, generating $1.1 billion in revenues and $268 million in profits to date. We have bought over $250 million in stock since we last talked to you and will soon pay you an annual cash dividend of $1.35 per share. So those are some of the highlights of the third quarter. Over the next few minutes, we will do our usual trip around the globe to review current business trends, briefly touch upon our 2014 outlook, and finish with some comments on our capital allocation plans. We have said for some time that this up cycle is unlike any we have seen before due to the unprecedented lack of supply growth in the developed economies. As such in North America, we've had very steady REVPAR growth between 6% and 7% for the past 2 years in a macroeconomic environment that remains somewhat unpredictable and generally weaker than expected. Each year, we've added over 100 basis points in occupancy. Occupancies are now about 2007 peaks, at 76% systemwide in Q3, and as high as 78% at Company-Operated hotels, which tend to be larger and more urban. Each year, rated Company-Operated hotels have grown almost 5%, well above inflation, supported by rising occupancies. Driving this growth has been robust, transient demand. Transient revenues have been growing at an 8% to 9% clip each quarter, powered by corporate and high-end leisure travel, which are our sweet spots. Group revenue growth, as you all know, has been slower, but steady, at around 3% to 4%. Once again, corporate groups, generally smaller, are the primary driver, while larger groups, in particular association and government business, have been slow to return. This, in our view, is healthy, balanced and sustainable revenue growth. With no meaningful change in the supply situation evident in the near term, we expect these trends to extend into 2014. Continued vigilance on the cost front has allowed us to deliver 100 basis points or more of gross operating margin gain each quarter. As we look ahead, group pace remains in the mid-single digits, and we expect rate increases in the mid- to high-single digits for the next year from corporate rate negotiations now underway. North America should continue to perform at or about our 5% to 6% worldwide Company-Operated REVPAR outlook range in the fourth quarter. There could be some impact from the recent government shutdown. Staying with the developed economies and moving to Europe. Despite the deep recessions across most of Europe and periodic euro scares, our own business over the past few years has been a very steady performer. REVPAR growth had a slow, but predictable 2% to 3%. Europe has surprised by not surprising. Once again, the absence of new supply has allowed occupancies to exceed prior peaks in what is arguably the most growth-challenged region on the globe. Occupancies in Q3 reached record levels of 74%, and as much as 76% at Company-Operated hotels. The impact of the 2012 London Olympics reduced Q3 reported REVPAR growth by 100 basis points, but the underlying trend remains in the 2% to 3% range. As Frits indicated, we had a good summer in Spain and Italy, with mid-single digit growth, and double-digit growth across most of Eastern Europe. Central Europe has been a soft spot. We expect these trends to continue into Q4. As we look ahead to 2014, we are hopeful the demand situation will improve. There is certainly growing optimism that things are on the mend in Europe. Any pickup in demand in a low-supply environment would substantially improve our pricing power, which has been the issue over the past 2 years. This brings us to our growth markets. While growth has slowed in some markets, our long-term view remains unchanged. These markets will continue to be the growths engines for the high-end global lodging business, powered by rising wealth, aspirational middle classes and expanding infrastructures. Clearly, growth in China has been disappointing this year, and this trend continued into Q3. We saw a small sequential pickup, but not as much as we had expected. More recently, the economic news coming out of China suggests a stronger trend. This should clearly help. On the other hand, the government's focus on curtailing spending on entertainment by public officials continues, hurting our business in regions where this is the largest source of demand. As we have indicated before, in the East and South where local economies are more diversified, growth has been better than in the North and West, which are more government-dependent. Despite the slowdown in demand, occupancies at our hotels grew 300 basis points and we gained significant share as evidenced by REVPAR growth that, once again, substantially exceeds Smith Travel numbers for the market. Our infrastructure in China is unmatched, with a popular localized SPG program, Mandarin language websites with more functionality than our competition, large sales and call center capabilities on the ground, and of course, our experienced smart local teams. This infrastructure advantage counts in times like these and our owners know that. We continue to grow our business at a rapid clip. We entered Q3 with 120 -- we ended Q3 with 122 operating hotels and should end the year close to 140. Our pipeline remains robust. As Frits indicated, we're seeing no slowdown in the pace of construction and new deals coming in. If anything, our demonstrated ability to over-deliver in a tough market should allow us to increase our share of future deals and makes Starwood the preferred option for conversions. For Q4, we're assuming that current trends will continue in China, with REVPAR growth in the 2% range. The rest of Asia on the other hand has been a bright spot all year and was our fastest-growing region in Q3, with local currency REVPAR up 9.3%. Unfortunately, this is where we were hardest hit by unfavorable exchange rates. Sharp weakening of the Japanese yen, the Indian rupee and the Indonesian rupiah caused REVPAR growth, as reported in dollars, to actually decline 1.4%, a more than 10-point swing. Despite this hefty headwind, we still reported global core fee growth of almost 10% in dollars. Thailand, Indonesia and Japan all grew in the double digits, while India was soft. Across the region, occupancies climbed 250 basis points to 71%, 73% at Company-Operated hotels, and rates increased 7.5%. This region has grown at a 9% clip for the past 2 years, relatively unaffected by the slowdown in China. As we enter Q4, we expect continued strength in Southeast Asia and REVPAR growth for the region in the upper half of our global REVPAR outlook range. Through the first half, REVPAR in Africa and the Middle East grew over 7%. This slowed sharply in the third quarter for reasons we highlighted in our last call. Egypt was recovering very well, but declined as much as 37% in Q3 due to renewed political instability. There were riots in Nigeria, too, which caused REVPAR there to decline. In Saudi, visa restrictions are hurting travel, and this will impact the Hajj in October. The Gulf continues to grow in the high-single digits. We do not expect the situation in Egypt or Syria to improve anytime soon, so this trend is likely to persist in the near-term. Volatility is par for the course in some of these markets, with sharp recoveries once local conditions return to some normalcy. And we are bullish about long-term potential in sub-Saharan Africa, which has many of the fastest-growing economies in the world today. Closer to home in Latin America, Mexico continues to be the strongest market, with particularly robust growth at resorts. U.S. travel to Mexico is back. Brazil, however, has been slowing. This is impacting not only business within Brazil, but also outbound travel from Brazil to the region. Our business in Brazil is further affected by major renovations currently underway. Argentina is finally growing REVPAR again. We expect some pickup in REVPAR growth in Q4, mainly from Mexico. In February of this year, we gave you our EBITDA outlook range for 2013. We now expect to finish at the high end of this range, with EBITDA, excluding Bal Harbour, of $1.135 billion to $1.14 billion. We're finishing at the high end of the range despite softer-than-expected trends in some markets, exchange rate shifts since we provided our outlook that hurt earnings, as reported in dollars, by $14 million, and asset sales that we do not include in our outlook, which reduced EBITDA by another $8 million. Other elements of our outlook remain unchanged from the last quarter. 2013 worldwide Company-Operated REVPAR growth of 5% to 6%, worldwide-owned REVPAR growth of 4% to 6%, with 75 to 125 basis points of margin improvement, and SG&A growth for 2% to 3%. As I indicated earlier, we have sold and closed on 97% of condos at Bal Harbour. We expect to complete sellout this year. Total reported profits from Bal Harbour should be at least $117 million in 2013. As always, we have various ongoing discussions for owned hotel sales, some in advanced stages. Purchase and sale agreements have been signed for 2 hotels, and we expect these sales to close in the fourth quarter. As is our practice, we will provide details on these sales when they close. We have LOIs signed for additional hotels sales and will announce them as transactions are completed. We remain committed to our asset light program and our goal of generating $3 billion from hotel sales by the end of 2016. For 2014, we are working with our teams to formulate our plans and budgets. As we did this year, we will provide details about our 2014 outlook when we talk to you in February. At this point, we expect REVPAR growth in the 5% to 7% range in local currencies. This assumes current trends in North America and Asia x China are sustained, and some sequential improvement in China and Europe. We want to remind you that hotels sold to date, including the 2 we expect to sell in Q4, will reduce year-over-year EBITDA by at least $12 million. Also, reported profits from Bal Harbour will go from around $117 million this year to 0 in 2014. Finally, a few points on cash and capital allocation. We have lowered our capital spending forecast for the year again, to [ph] $425 million, excluding Bal Harbour and SVO, a $50 million reduction as a result of hotel sales or decisions to delay projects. We are increasing cash from Bal Harbour to over $200 million, a $25 million increase. We are reducing cash from SVO by $100 million since we will not be securitizing receivables this year. We will look to do a larger securitization next year. As Frits indicated, we intend to start tapering our owned hotel capital spend next year. This will be partially offset by modest increases in capital to drive our fee business and enhance our technology capabilities. We are also starting to replenish inventory at SVO in select vacations: Orlando, Palm Springs, and the conversion of our hotel on St. John. Since we last talked to you, we have bought back over 3.8 million shares for over $250 million. We will be paying an annual cash dividend of $1.35 per share in December. Our board also intends to move to a quarterly dividend schedule starting 2014. In the calendar year 2014, we expect to pay 4 quarterly dividends, with the first dividend to be paid in March. This year, we have returned almost $600 million to shareholders through our dividend and stock buybacks to date. This brings cash returned to shareholders to over $1.1 billion in the past 2 years and over $8 billion in the past 10 years. We are committed to, and have demonstrated by our past actions, that cash we cannot profitably deploy will be returned to shareholders through dividends and buybacks. With that, I'll turn this back to Stephen.

Thank you, Vasant. We'd now like to open up the call to your questions. [Operator Instructions] Sylvia, can we have the first question, please.

Your first question comes from Joe Greff from JPMorgan. Joseph Greff - JP Morgan Chase & Co, Research Division: On the topic of assets sales, first, to Vasant, do you have more assets on the market are being brokered now versus 6 months ago? And then of the 2 asset sales that you expect to close in the fourth Q, I know you don't want to give details on it, I get that. But I'm hoping you can maybe just talk about the buyer profile broadly and maybe the asset profile? And then just to clarify, the first 9 months of this year, these 2 assets, how much EBITDA did they generate that we should take out of the base for next year?

Yes. I'll comment on the general question first, and then I'll hand it to Vasant, although I don't think we want to get into a guessing game about which property by revealing details prematurely. Your question started with, do we have more asset sales on the market than 6 months ago? I would characterize my answer to that in a slightly different way, which is to say, we're putting more effort and seeing more interest in our assets than 6 months ago, and working hard to accelerate the sale process. But as you might imagine, each of our properties is distinct and, typically, also with different buyers. And so, part of what I'm saying is, we haven't yet found a market where a large portfolio of assets can go to the market, but we continue to know which kinds of buyers are interested in which kinds of properties. So with that, let me hand to Vasant and see if he -- Vasant, you want to add some color to the rest of Joe's question?

Joe, you had several elements to the question. In terms of the impact of the asset sales, we gave you a number, it's approximately $12 million, if you include the 2 additional hotels we'll close on fairly soon. So the year-over-year reduction in EBITDA is approximately $12 million from asset sales that -- where purchase and sale agreements are signed and the 2 that will close soon. The reason we don't -- can't tell you more, as you know, is when we do these purchase and sale agreements, they, typically, are confidential. Sometimes, they're even with other public companies, and therefore, we can't give you details ahead of when they are also ready to announce. You also asked who the buyers are. The buyer pool remains essentially the same. Outside the U.S., it's what you might call sovereigns or ultrahigh-net worth families or individuals. They are mostly looking for the trophy-type of hotels and they're only looking for 1s and 2s at a time, as Frits said. In the U.S., it's still very much either public or private REITs, and certainly more the public REITs than the private REITs. So the buyer pool remains what we've described earlier. And as Frits said, in terms of sort of -- we always have quite a few hotels on the market. The only thing I would say that maybe a little bit different now than earlier in the year is, we do have some larger hotels on the market in terms of value, but we'll see. We'll see how it goes and we'll announce them as they're done.

Your next question comes from Joshua Attie from Citi.

So Starwood began its asset light strategy in 2003, and the company's moved from 20% fees to 60%, but it's taken a really long time. And earlier this year, you set a target of $3 billion of sales over a 3-year period, and it seems like you're tracking behind that number. And it also sounds like what you have left is very high-quality, geographically diverse, well-maintained from a capital perspective, something that would make a really good public company. So my question is, what's your appetite for exploring a spinoff of your real estate, I guess, in order to accelerate the asset light transition and make sure you don't miss the cycle, and also to allow you to focus exclusively on the fee side of the business?

Yes, so Josh, this is Frits. I'll deal with some of your question and then see if Vasant, again, wants to add. To your first point, the asset-light strategy, as you described, was first talked about at Starwood in 2003, that predates my tenure, but I believe that we were already quite active, certainly, with the Host transaction prior to my coming. As you know, between 2003 and today, a few things happened on the way to the bank, which relate to the world financial crisis, and that certainly put a hiatus on asset sales. And in fact, today, we still see a market where fewer assets are trading than in the end of the last cycle. In terms of the $3 billion, I suppose if you prorated the 6 months since we said that, over the 3.5 years that we talked about, we would be behind, but it's a bit premature to call that a really lagging issue. As we've said for some time now, selling hotels is a lumpy business. And in order to reach our goal, we do believe that we have to get to a point where we can sell multiple hotels, and that market has not yet returned. We said in Dubai that we expected over the time period that, that demand would continue to grow. As it relates to a REIT spinoff, obviously, we continue to look at different options for moving ourselves to asset light. In the past, as we've looked at REIT spinoffs, it hasn't been attractive in aggregate compared to some of the target sales that we've done. That said, the future may be different from the past and it continues to be an option that we would look at. Vasant, do you want to add anything?

Yes. I might just add a couple of things. As you all know, there's a life cycle to the value of real estate and hotel real estate, and you wouldn't want us to be sellers at the bottom of the cycle. So we are value-driven in how and when we sell, because once we sell, it's -- the value that you get is all locked in. We did -- we don't consider ourselves experts on market timing, but we were able to sell $7 million in the last cycle before it hit its peak at good values. We are very active, but you also -- it's also paced by the availability of buyers and also another element that we have paid a lot of attention to, that you're aware of, is tax planning in selling hotels. And sometimes, that can also dictate the time. In terms of the REIT, we have never ruled out that, the idea of doing a REIT. We've always told you that if we can get a value that is greater than we would get in a REIT float, which is how we looked at the Host transaction, we would do that. The advantages of doing it without a REIT are -- when you do a REIT, you may get a discount to existing REITs and you also have some G&A. But we would never rule out a REIT float if it makes sense.

Your next question comes from Whitney Stevenson from JMP Securities.

I'm wondering if -- with respect to the management fees, if you could walk us through. It looks like the base fees were about 68% this quarter with incentive fees making up the 32%. And if you could sort of walk me through from trough to peak, how that mix skews?

I'm not sure we could give you specific trough to peak. What I can tell you is that, our fees are more stable on the incentive fee side for a simple reason: 90% of our fees come from outside the U.S., 10% from the U.S. Non-U.S. incentive fees don't have preferred returns, so they're less susceptible to cycle, and therefore, we don't see -- I don't think you would see with us the same kind of swing in incentive fees in an up cycle and the swing down in a down cycle. So I would say, if we went back and looked at it, the percentages wouldn't change that much. In terms of where we are today in terms of how many hotels are paying incentive fees, across the world, about 2/3 of our hotels are paying incentive fees today, 80%-or-so outside the U.S. are paying incentive fees and it's more like 1/3 in the U.S. So that's probably the -- sort of the best answer we can give you right now.

Your next question comes from Smedes Rose from Evercore.

I was just curious as to if you could talk a little bit about your policy around the dividend. I think there was an expectation that you would increase it, but I think it seemed maybe a little light relative to some thoughts and the relative -- the amount of cash that you'll be generating. Why did you come up with $1.35 versus higher or lower? Kind of maybe you could just help us think about that?

Yes. From our standpoint, we view the dividend as a long-term commitment. It's a dividend we want to be sustainable. We want to have a dividend that can have steady growth. We are in a cyclical business. We have to be mindful of that. We think that at the levels it's at, you still have that 1.9% to 2% yield. We always have the option of returning additional cash to you in the form of buybacks, as we've done. So the dividend is something we would like you all to think off as something you can count on, that will be delivered now quarterly and will have increases year-over-year and is sustainable through the cycle.

And in terms of dividend payout, is within the range that we've been talking about now for some time.

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

Maybe just stick on the same topic as it relates to capital returns. The share buyback commentary we got from investors this morning was quite good in terms of being pleased with the levels. But could you just talk about, is there any sense that you guys are moving towards a more programmatic buyback versus the historical strategy, which I think, as you've outlined, has been a little bit more opportunistic? Or just kind of how you're approaching the program right now, that'd be helpful.

I would say that our philosophy and approach has changed less than our view of the world and the position of the company and our ability to buy back. So we haven't changed our view, but I do think that circumstances have changed, which have led us to continue the program, even with the stock at the higher prices it's trading at today.

The next question comes from Steven Kent from Goldman Sachs.

Frits, you mentioned, I think, during the call that you were a de-risked balance sheet. What is your view on the ideal net-debt-to-EBITDA target, especially given some of the questions you fielded earlier on share buyback and dividend?

Steven, we prefer to think of it in terms of making sure that we're comfortably into investment grade, and we've been saying that for some time now. And it depends a bit on who you ask and whose EBITDA or net debt you're looking at to the precise ratio that, that leads to. But we want to continue to have a balance sheet that is, as you put it and I did earlier as well, as de-risked as it is, again, not because we think the world today and our business is terribly risky, but we don't know what's around the corner. What we do know is that in the past, markets have certainly responded robustly to any bad news, and that includes to our own stock. And we can't rule out the notion that with 2 crises in the last decade or so, that there may be something else out there. And that with a balance sheet, the way we have it today, we have much more flexibility either to return cash to shareholders in a more meaningful way given a shift in the market, or to do something else with that cash that would be in the longer term interest of the company.

Yes, I think Steve, there's no change at all in our views on what are appropriate ratios. It's BBB, and it's the ratios that go with it. And clearly, we have plenty of room to do things that Frits mentioned, whether it is to return cash to shareholders or deploy our capital if we can see high rates of return. So there is absolutely no change in terms of the views we expressed before as to the ratios we're targeting.

Your next question comes from Thomas Allen from Morgan Stanley.

You made some comments earlier about seeing only a slight impact from the U.S. government shutdown in 4Q. Can you just elaborate on how it's impacted so far? I mean, you mentioned that your U.S. government business is small, but one of the other lodging companies this morning, for example, noted that they're seeing the biggest impact around national parks. So I was just trying to think about the potential impact on a broader scale.

Yes. I think we can talk to sort of things that are more directly attributable to it and then things that are somewhat harder to, let's say, detect. Certainly, we've seen some modest cancellations, particularly in the D.C. Metro area, in cities like San Diego, where there is decent amount of government presence. It is a small piece of our mix. We have seen -- we have some lead time in some of these things where we can -- if it's -- since it's small to fill it with other business. We are seeing some small impact from government-related business in some of our franchised hotels. But overall, it's fairly small. The piece that's harder to, let's say, put your finger on, is in that period where the shutdown was going on and the uncertainty existed, did a broader set of customers just sort of wait and see? So did we have a 2-week period where plans were put on hold and will that have some kind of an impact? There could be some additional impact. But whatever the impact is, as you all know, it's transitory. It will be just in the fourth quarter and not something that we think sustains itself.

Your next question comes from Bill Crow from Raymond James & Associates. William A. Crow - Raymond James & Associates, Inc., Research Division: One clarification, one question. The clarification. Vasant, could you tell us the quarterly impact of deferring the securitization on your financials? And then second question, maybe for Frits. One of the better purchases over the last decade has been the Hyatt acquisition of AmeriSuites. Does that have you thinking at all about what maybe a La Quinta or similar brand could do for Starwood as a quicker entry into lower price point?

Yes, I'll answer the first one. The net impact of not doing the securitization this year, as I said in my comments, was approximately $100 million in cash. We have often, in the past, also done securitizations every other year. Doing larger securitizations has some benefits, some lower -- some savings in transaction costs, as well as you get a larger pool of buyers. So we'll look to do something next year.

So Bill, in answer to your second question, which in some respects, won't be a complete answer because as you could imagine, we wouldn't comment on a specific opportunity or company in either case. But having done the Le Méridien acquisition a number of years ago and seeing that brand grow and flourish in our portfolio in the years since, of course, we would love to look at new brands added to the system that we feel we could add value to. And having said that, as you can see and as we've said also for some time, the reality is, there aren't that many brands and there aren't many deals that actually we feel would make sense and create value for our shareholders. So we would look at any specific deal to see whether it makes sense along those lines. And I think that means both potentially at the high end, which plays strength to strength. I think we could add value to any high-end hotel brand as well or better than anybody else, and in the mid-market, to be able to gain scale and presence in select turf [ph] under the right circumstances.

Your next question comes from Harry Curtis from Nomura Securities.

A quick follow-up on China. If you were to describe the location of your hotels in China, kind of going -- Frits, going back to your East, South, North, West, where has the current portfolio been concentrated, and where is the pipeline concentrated?

Yes. So I'll give you some general comments on that and then again hand to Vasant if he wants to add. The way our business developed in China, and it's, as you know, developed quite rapidly over the last decade, is first, in what the Chinese call the Tier 1 cities of Beijing, Shanghai and Guangzhou. And those markets have been built out well and we have strong presence in those markets. We continue to add properties there, but the real growth are in what are called the Tier 2 and Tier 3 markets. And as you move into those markets, you tend to move to the West from those Tier 1 cities. And so the preponderance of our pipeline looking ahead will geographically shift more to the middle of the country and to cities, many of which you might not have heard of, but have 1 million or 2 million people. Vasant, do you want to add anything to that?

Yes. I mean, just to give you a little more precision, the East, North and South are roughly equal in size. They have roughly similar numbers of hotels. The West and Central part, which Frits talked about, is the smaller one right now, and it's where we think there is going to be growth. We think that is where the Chinese government is directing most of the development, and along with that, of course, come roads and airports and hotels.

Yes. What happens, too, is as growth in footprint and urbanization expands to these second-tiered cities, you start to see the mix of business to be more Chinese national than international. And the strength of our system and our SPG base within China puts us in a good position to be, yet again, the first mover into those markets, which we like, because in many respects, this next decade is an important one for the build out of Chinese cities, and to have hotels in great locations built in that time is, as we see it over a longer period of time, a unique opportunity.

Your next question comes from Felicia Hendrix from Barclays.

Frits, we've talked about this in the past. I just wanted to ask a question about Sheraton's performance. So the REVPAR there has been in the low single-digits for some time now. And in the U.S., it's underperforming its chain scale. So I'm just wondering, is this a function of the strong results you initially had after the revitalization and the investment and now, it's just even-ing out, or is there something else?

No, I think it's function also of, as always, a small number of hotels can influence the trajectory of a brand. We did see a good pop in Sheraton performance over the last few years. But I also think that, broadly speaking, the upper upscale segment in North America is a challenging place to be, and we're working to make sure that all 3 of our brands, Westin, Le Méridien and Sheraton, continue to find relevance in the market. And with the work that we've done with Sheraton revitalization and bringing consistency to the portfolio, and now working on things like Sheraton Club and expanding the F&B offerings into the Link@Sheraton, we still feel very good about where Sheraton is. But again, this is in a market where there's very low supply growth, where upper upscale hotels tend to be older now than the base of other hotels that have come into the market on all sides of that. So we continue to work hard to maintain the presence of Sheraton. And by and large, it's outperformed its peers over the last several years.

Your next question is from Robin Farley from UBS.

One question and one clarification. In terms of your REVPAR outlook for 2014, it's a bullish range, up 5% to 7%. I guess, how do you get comfortable with Q3 coming in just below or at the bottom end of your range? How do you feel comfortable with the visibility kind of further out when it seems challenging near-term? And then just on the asset sales, the 2 that will close by year-end. Can we expect them to be at that sort of -- I think you had said in Q2 that you've been doing trailing EBITDA of 15x or so, and that would maybe put proceeds of those sales at kind of close to $200 million. I'm just trying to get some color on that.

Yes. I think on the asset sales, we'll save that for a conversation when we can talk more specifically about that. In terms of the guidance for next year, obviously, it's early. We'll certainly give you more when we get into February. At this stage, as I mentioned in the comments, we are assuming that U.S. trends stay roughly -- North American trends stay roughly where they are. We are seeing generally decent strength in Asia x China, as we talked earlier. And as we get into next year, certainly, the hope is, and based on recent economic news coming out of Europe, that will begin to see some improvement and we get some where we begin to lap, once again, sort of the weaknesses in Latin America and in Africa, Middle East and China. So the assumption is that there will be some sequential improvement. But we'll get into a lot more detail in February, as we usually do.

Your next question comes from Ryan Meliker from MLV & Co. Ryan Meliker - MLV & Co LLC, Research Division: I just had one clarification and one question as well. With regards to the clarification, can you give us some color on the disparity between this quarter and last year's 3Q in the other management and franchise revenues? I know it was up $13 million when it hasn't been -- it's really been tracking in line year-over-year over the past few quarters. Wondering what that $13 million was comprised of, and if it's a run rate change or it's onetime in nature. And then with regards to questions, similar to what Felicia was just asking with regards to -- or I'm sorry, Robin with regards to 2014. Can you give us any color on how things are tracking from a corporate negotiated rate standpoint? I know it's early, but where your expectations are and how that compares to maybe this time last year.

Sure, on the other income line, again, I mentioned in my comments and it's also in the press release, that the other income line, as you know, sometimes has some noise in it. We did have, in the quarter, some termination fees, which caused the other income line to go up versus last year. Offsetting that, of course, in SG&A, we mentioned we had certain other items that were going in the other direction, also of a nonrecurring variety. The net benefit in the quarter between both sets of items are approximately $5 million. So hopefully, that answers your question. And then the second question was on...

Renegotiations.

Renegotiations. Again, in the comments we had, we said mid- to high-single-digits is what we are targeting. Again, occupancies being where they are, we think is helpful. And overall, corporate business remains strong. And as we've always said, it's linked to corporate profits. And since all the indications are that corporate profits are healthy, we are hopeful that rate will be in that mid- to high-single digits next year.

Yes, and I might just add to that and emphasize what Vasant said. The fact that we have a couple of quarters now of record occupancy means we can go into negotiations with a great deal of confidence, and we can continue to think about the best ways to mix our business so that the rates of different types of customers are optimized, given properties. And with very little new supply looking to come on in North America, with the possible exception of New York, that continues to be a dynamic that we think plays very well to the rate story for hotels in the U.S. and in Canada.

Your final question comes from the line of Ian Weissman from ISI Group.

One question and one follow-up. The question on rate declines in China. If you look at the Star data, I think occupancies, as you point out, continue to climb. I think they're up 200 basis points over the last 2 years, although rates are down about 10% to 15% over that time period. Maybe you can give us a little more color on how we should think about that rate trend. And is that all the ramp-up in supply which is pressuring rates? And then my follow-up question is just on your asset sale program, given some of the challenges that you point out in Europe as you highlighted, is it safe to assume that you're still concentrated on selling assets in the U.S. only at this point?

So in terms of rate versus occupancy in China, the picture is changing so quickly there year to year. I think it's hard to apply the conventional thinking, which is, hotels should have occupancy decline and then with a lag, you should see rates fall down after that. But with a picture that's shifting so much in terms of the mix of properties, you end up with a situation where the comparable set over time starts to change. From our own perspective, ideally, of course, we'd like to see both rate and occupancy going up. But with a footprint that's growing as quickly as ours, to have occupancy rise means that, fundamentally, primary demand and our ability to capture that primary demand is still pretty healthy. In terms of asset sales, the good news is, I suppose, that even though Europe, by and large, has not worked through to become whatever it will be post-euro crisis, but as we've been saying for a while, occupancy of the gateway cities, where we have a large number of our hotels, continues to be really strong. And interest in those properties, likewise, for the ones that we own, is correspondingly still high. So no, I wouldn't say that our interest in selling assets is solely in North America, but I also just want to be clear. I'm not saying that to indicate one way or the other that the asset sale that we have pending is either here or somewhere else.

Thanks, Frits and Vasant. I want to thank you all for joining us today for our third quarter earnings call. We appreciate your interest in Starwood Hotels & Resorts. If you have any other questions, feel free to reach out to us. Take care.

Ladies and gentlemen, this concludes today's Starwood Hotels & Resorts Third Quarter 2013 Earnings Conference Call. You may now disconnect.