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| HOT > SEC Filings for HOT > Form 10-Q on 30-Oct-2009 | All Recent SEC Filings |
30-Oct-2009
Quarterly Report
Forward-Looking Statements
This report includes "forward-looking" statements, as that term is defined in
the Private Securities Litigation Reform Act of 1995 or by the Securities and
Exchange Commission in its rules, regulations and releases. Forward-looking
statements are any statements other than statements of historical fact,
including statements regarding our expectations, beliefs, hopes, intentions or
strategies regarding the future. In some cases, forward-looking statements can
be identified by the use of words such as "may," "will," "expects," "should,"
"believes," "plans," "anticipates," "estimates," "predicts," "potential,"
"continue," or other words of similar meaning. Forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those discussed in, or implied by, the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, general economic conditions, our financial and business prospects,
our capital requirements, our financing prospects, our relationships with
associates and labor unions, and those disclosed as risks in other reports filed
by us with the Securities and Exchange Commission, including those described in
Part I of our most recently filed Annual Report on Form 10-K. We caution readers
that any such statements are based on currently available operational, financial
and competitive information, and they should not place undue reliance on these
forward-looking statements, which reflect management's opinion only as of the
date on which they were made. Except as required by law, we disclaim any
obligation to review or update these forward-looking statements to reflect
events or circumstances as they occur.
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") discusses our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of
revenues and costs and expenses during the reporting periods. On an ongoing
basis, we evaluate our estimates and judgments, including those relating to
revenue recognition, bad debts, inventories, investments, plant, property and
equipment, goodwill and intangible assets, income taxes, financing operations,
frequent guest program liability, self-insurance claims payable, restructuring
costs, retirement benefits and contingencies and litigation.
We base our estimates and judgments on historical experience and on various
other factors that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily available from other sources. Actual
results may differ from these estimates under different assumptions and
conditions.
CRITICAL ACCOUNTING POLICIES
We believe the following to be our critical accounting policies:
Revenue Recognition. Our revenues are primarily derived from the following
sources: (1) hotel and resort revenues at our owned, leased and consolidated
joint venture properties; (2) management and franchise revenues; (3) vacation
ownership and residential revenues; (4) revenues from managed and franchised
properties; and (5) other revenues which are ancillary to our operations.
Generally, revenues are recognized when the services have been rendered. The
following is a description of the composition of our revenues:
• Owned, Leased and Consolidated Joint Ventures - Represents revenue primarily
derived from hotel operations, including the rental of rooms and food and
beverage sales from owned, leased or consolidated joint venture hotels and
resorts. Revenue is recognized when rooms are occupied and services have
been rendered. These revenues are impacted by global economic conditions
affecting the travel and hospitality industry as well as relative market
share of the local competitive set of hotels. Revenue per available room
("REVPAR") is a leading indicator of revenue trends at owned, leased and
consolidated joint venture hotels as it measures the period-over-period
change in rooms revenue for comparable properties.
• Management and Franchise Revenues - Represents fees earned on hotels managed worldwide, usually under long-term contracts, franchise fees received in connection with the franchise of our Sheraton, Westin,
Four Points by Sheraton, Le Méridien, St. Regis, W, Luxury Collection, Aloft and Element brand names, termination fees and the amortization of deferred gains related to sold properties for which we have significant continuing involvement, offset by payments by us under performance and other guarantees. Management fees are comprised of a base fee, which is generally based on a percentage of gross revenues, and an incentive fee, which is generally based on the property's profitability. For any time during the year, when the provisions of our management contracts allow receipt of incentive fees upon termination, incentive fees are recognized for the fees due and earned as if the contract was terminated at that date, exclusive of any termination fees due or payable. Therefore, during periods prior to year-end, the incentive fees recorded may not be indicative of the eventual incentive fees that will be recognized at year-end as conditions and incentive hurdle calculations may not be final. Franchise fees are generally based on a percentage of hotel room revenues. As with hotel revenues discussed above, these revenue sources are affected by conditions impacting the travel and hospitality industry as well as competition from other hotel management and franchise companies.
• Vacation Ownership and Residential - We recognize revenue from Vacation Ownership Interests ("VOIs") sales and financings and the sales of residential units which are typically a component of mixed use projects that include a hotel. Such revenues are impacted by the state of the global economies and, in particular, the U.S. economy, as well as interest rate and other economic conditions affecting the lending market. Revenue is generally recognized upon the buyer's demonstration of a sufficient level of initial and continuing involvement. We determine the portion of revenues to recognize for sales accounted for under the percentage of completion method based on judgments and estimates including total project costs to complete. Additionally, we record reserves against these revenues based on expected default levels. Changes in costs could lead to adjustments to the percentage of completion status of a project, which may result in differences in the timing and amount of revenues recognized from the projects. We have also entered into licensing agreements with third-party developers to offer consumers branded condominiums or residences. Our fees from these agreements are generally based on the gross sales revenue of units sold.
• Revenues From Managed and Franchised Properties - These revenues represent reimbursements of costs incurred on behalf of managed hotel properties and franchisees. These costs relate primarily to payroll costs at managed properties where we are the employer. Since the reimbursements are made based upon the costs incurred with no added margin, these revenues and corresponding expenses have no effect on our operating income or our net income.
Frequent Guest Program. Starwood Preferred Guest ("SPG") is our frequent
guest incentive marketing program. SPG members earn points based on spending at
our properties, as incentives to first time buyers of VOIs and residences and
through participation in affiliated programs. Points can be redeemed at
substantially all of our owned, leased, managed and franchised properties as
well as through other redemption opportunities with third parties, such as
conversion to airline miles. Properties are charged a fee based on hotel guests'
qualifying expenditures. Revenue is recognized by participating hotels and
resorts when points are redeemed for hotel stays.
We, through the services of third-party actuarial analysts, determine the
fair value of the future redemption obligation based on statistical formulas
which project the timing of future point redemption based on historical
experience, including an estimate of the "breakage" for points that will never
be redeemed, and an estimate of the points that will eventually be redeemed as
well as the cost of reimbursing hotels and other third parties in respect of
other redemption opportunities for point redemptions. Actual expenditures for
SPG may differ from the actuarially determined liability. The liability for the
SPG program is included in other long-term liabilities and accrued expenses in
the accompanying consolidated balance sheets. The total actuarially determined
liability, including the estimated liability associated with the amended
co-branded credit card agreement discussed in Liquidity and Capital Resources,
as of September 30, 2009 and December 31, 2008 is $863 million and $662 million,
respectively, of which $237 and $232 million, respectively, is included in
accrued expenses. A 10% reduction in the "breakage" of points would result in an
estimated increase of $86 million to the liability at September 30, 2009.
Long-Lived Assets. We evaluate the carrying value of our long-lived assets
for impairment by comparing the expected undiscounted future cash flows of the
assets to the net book value of the assets if certain trigger events occur. If
the expected undiscounted future cash flows are less than the net book value of
the assets, the excess of the net book value over the estimated fair value is
charged to current earnings. Fair value is based upon discounted cash flows of
the assets at a rate deemed reasonable for the type of asset and prevailing
market conditions, appraisals and, if appropriate, current estimated net sales
proceeds from pending offers. We evaluate the carrying value of our long-lived
assets based on our plans, at the time, for such assets and such qualitative
factors as future development in the surrounding area, status of expected local
competition and projected incremental income from renovations. Changes to our
plans, including a decision to dispose of or change the intended use of an
asset, can have a material impact on the carrying value of the asset. In the
fourth quarter of 2009, we expect to re-evaluate our current plans with regards
to a number of vacation ownership properties.
Assets Held for Sale. We consider properties to be assets held for sale when
management approves and commits to a formal plan to actively market a property
or group of properties for sale and a signed sales contract and significant
non-refundable deposit or contract break-up fee exist. Upon designation as an
asset held for sale, we record the carrying value of each property or group of
properties at the lower of its carrying value which includes allocable segment
goodwill or its estimated fair value, less estimated costs to sell, and we stop
recording depreciation expense. Any gain realized in connection with the sale of
properties for which we have significant continuing involvement (such as through
a long-term management agreement) is deferred and recognized over the initial
term of the related agreement. The operations of the properties held for sale
prior to the sale date are recorded in discontinued operations unless we will
have continuing involvement (such as through a management or franchise
agreement) after the sale.
Loan Loss Reserves. For the vacation ownership and residential segment, we
record an estimate of expected uncollectibility on our VOI notes receivable as a
reduction of revenue at the time we recognize profit on a sale of a vacation
ownership interest. We hold large amounts of homogeneous VOI notes receivable
and therefore assess uncollectibility based on pools of receivables. In
estimating our loss reserves, we use a technique referred to as static pool
analysis, which tracks uncollectible notes for each year's sales over the life
of the respective notes and projects an estimated default rate that is used in
the determination of our loan loss reserve requirements. As of September 30,
2009, the average estimated default rate for our pools of receivables was 9.4%.
Given the significance of our respective pools of VOI notes receivable, a change
in the projected default rate can have a significant impact to our loan loss
reserve requirements, with a 0.1% change estimated to have an impact of
approximately $3 million.
For the hotel segment, we measure the impairment of a loan based on the
present value of expected future cash flows discounted at the loan's original
effective interest rate or the estimated fair value of the collateral. For
impaired loans, we establish a specific impairment reserve for the difference
between the recorded investment in the loan and the present value of the
expected future cash flows or the estimated fair value of the collateral. We
apply the loan impairment policy individually to all loans in the portfolio and
do not aggregate loans for the purpose of applying such policy. For loans that
we have determined to be impaired, we recognize interest income on a cash basis.
Legal Contingencies. We are subject to various legal proceedings and claims,
the outcomes of which are subject to significant uncertainty. An estimated loss
from a loss contingency should be accrued by a charge to income if it is
probable that an asset has been impaired or a liability has been incurred and
the amount of the loss can be reasonably estimated. We evaluate, among other
factors, the degree of probability of an unfavorable outcome and the ability to
make a reasonable estimate of the amount of loss. Changes in these factors could
materially impact our financial position or our results of operations.
Income Taxes. We provide for income taxes in accordance with principles
contained in FASB ASC 740, Income Taxes. Under these principles, we recognize
the amount of income tax payable or refundable for the current year and deferred
tax assets and liabilities for the future tax consequences of events that have
been recognized in our financial statements or tax returns. We also measure and
recognize the amount of tax benefit that should be recorded for financial
statement purposes for uncertain tax positions taken or expected to be taken in
a tax return. With respect to uncertain tax positions, we evaluate the
recognized tax benefits for derecognition, classification, interest and
penalties, interim period accounting and disclosure requirements. Judgment is
required in assessing the future tax consequences of events that have been
recognized in our financial statements or tax returns.
The following represents our top five markets in the United States by
metropolitan area as a percentage of our total owned, leased and consolidated
joint venture revenues for the three and nine months ended September 30, 2009
(with comparable data for 2008):
Top Five Metropolitan Areas in the United States as a % of Total Owned
Revenues for the Three Months Ended September 30, 2009 with Comparable Data
for the Same Period in 2008(1)
2009 2008
Metropolitan Area Revenues Revenues
New York, NY 13.8 % 12.6 %
Maui, HI 5.2 % 4.4 %
Chicago, IL 5.1 % 4.4 %
Boston, MA 4.8 % 4.2 %
San Francisco, CA 4.7 % 5.8 %
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Top Five Metropolitan Areas in the United States as a % of Total Owned Revenues for the Nine Months Ended September 30, 2009 with Comparable Data for the Same Period in 2008(1)
2009 2008
Metropolitan Area Revenues Revenues
New York, NY 13.4 % 12.7 %
San Francisco, CA 5.7 % 5.6 %
Phoenix, AZ 5.2 % 5.7 %
Maui, HI 4.9 % 4.5 %
Boston, MA 4.6 % 3.7 %
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(1) Includes the revenues of hotels sold for the period prior to their sale.
The following represents our top five international markets as a percentage
of our total owned, leased and consolidated joint venture revenues for the three
and nine months ended September 30, 2009 (with comparable data for 2008):
Top Five International Markets as a % of Total Owned Revenues for the Three
Months Ended September 30, 2009 with Comparable Data for the Same Period in
2008(1)
2009 2008
International Market Revenues Revenues
Canada 9.4 % 8.9 %
Italy 8.7 % 10.5 %
Australia 5.6 % 5.0 %
Mexico 4.1 % 4.4 %
Austria 3.3 % 2.9 %
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Top Five International Markets as a % of Total Owned Revenues for the Nine
Months Ended September 30, 2009 with Comparable Data for the Same Period in
2008(1)
2009 2008
International Market Revenues Revenues
Canada 9.1 % 9.0 %
Italy 7.9 % 8.9 %
Australia 5.0 % 4.9 %
Mexico 4.9 % 5.3 %
Austria 2.7 % 2.8 %
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(1) Includes the revenues of hotels sold for the period prior to their sale.
The following table summarizes REVPAR(1), Average Daily Rate ("ADR") and occupancy for our Same-Store Owned Hotels for the three and nine months ended September 30, 2009 and 2008. The results for the three and nine months ended September 30, 2009 and 2008 represent results for 56 and 54, respectively, owned, leased and consolidated joint venture hotels (excluding 13 and 14, respectively, hotels sold and closed and 7 and 9, respectively, hotels undergoing significant repositionings or without comparable results in 2009 and 2008).
Three Months Ended
September 30, Variance
2009 2008
Worldwide (56 hotels with approximately 19,300
rooms)
REVPAR $ 130.48 $ 170.14 (23.3 )%
ADR $ 185.66 $ 229.49 (19.1 )%
Occupancy 70.3 % 74.1 % (3.8 )
North America (30 hotels with approximately 11,800
rooms)
REVPAR $ 136.18 $ 177.61 (23.3 )%
ADR $ 177.25 $ 226.73 (21.8 )%
Occupancy 76.8 % 78.3 % (1.5 )
International (26 hotels with approximately 7,500
rooms)
REVPAR $ 121.46 $ 158.31 (23.3 )%
ADR $ 202.74 $ 234.56 (13.6 )%
Occupancy 59.9 % 67.5 % (7.6 )
Nine Months Ended
September 30, Variance
2009 2008
Worldwide (54 hotels with approximately 19,100
rooms)
REVPAR $ 124.37 $ 176.97 (29.7 )%
ADR $ 191.67 $ 240.81 (20.4 )%
Occupancy 64.9 % 73.5 % (8.6 )
North America (28 hotels with approximately 11,600
rooms)
REVPAR $ 131.02 $ 184.56 (29.0 )%
ADR $ 188.38 $ 242.05 (22.2 )%
Occupancy 69.6 % 76.3 % (6.7 )
International (26 hotels with approximately 7,500
rooms)
REVPAR $ 114.09 $ 165.24 (31.0 )%
ADR $ 197.80 $ 238.72 (17.1 )%
Occupancy 57.7 % 69.2 % (11.5 )
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(1) REVPAR is calculated by dividing room revenue, which is derived from rooms and suites rented or leased, by total room nights available for a given period. REVPAR may not be comparable to similarly titled measures such as revenues.
The following discussion presents a forward looking analysis of goodwill
impairment.
The hotel segment has approximately $1.365 billion of goodwill and is not
currently considered to be at risk of failing the first step of the impairment
evaluation, in which the fair value of the reporting unit must exceed its
carrying value.
The vacation ownership and residential segment has approximately $241 million
of goodwill. The segment generates revenues through development, marketing and
selling of VOI's, operating resorts, and providing financing to customers. As of
the last annual impairment test completed in the fourth quarter of 2008, the
fair value of the reporting unit exceeded its carrying value by approximately
$100 million. Future cash flows are expected to be impacted by the revenue
streams, new capital projects, the value of undeveloped land and projects under
development. A continued downturn in the economy would negatively impact these factors causing a decrease to this segment's fair value. Additionally, a strategic decision to not build out future phases of an existing or proposed vacation ownership location would also impact fair value. Although year to date 2009 results are trending lower than projected, we have managed to substantially . . .
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