A pair of hotels — a 200-room Sheraton and a 260-room Westin — that will soon be added to the 700-plus Starwood Hotels & Resorts Worldwide properties are signaling a major turning point for the White Plains, N.Y.-based giant.
That's because the hotels, which will be built side-by-side near the Baltimore/Washington International Airport, were among the first franchise agreements signed in February by the company's reorganized real estate group. By establishing four specialized development units, each with a mission to grow specific branches of the company's business, Starwood expects to produce dramatic growth in its portfolio of company-owned and franchised properties.
“We didn't have the reputation that we wanted of being development friendly,” says Ted Darnall, president of the Starwood Real Estate Group. “We didn't respond fast enough. We weren't aggressive in looking for opportunities.”
With its revamped real estate group in place, Starwood has set particularly ambitious growth goals for W, its trendy boutique flag, and St. Regis, its ultra-posh luxury brand. Starwood plans to increase the number of St. Regis properties from 11 to 30 over the next five years, while building W properties — which now stand at 20 — at the rate of 10 to 15 per year. The company is eyeing major business and resort markets worldwide, including the red-hot Asia/Pacific region, to grow its premiere luxury brands.
In the case of the Baltimore project, the franchise/management group found a new franchisee, Brentwood LLC, that previously opened projects under rival flags. “That's a great example of something we wouldn't have been able to do in the old organization because we weren't actively pursuing these relationships,” says Darnall.
Before the realignment in January, employees often worked in a variety of disciplines across the company's six brands. Under the new setup, employees have a well-defined plan to grow the company's portfolio, which includes 140 company-owned hotels, and about 600 franchised and managed properties.
For instance, the division that reached thewith Brentwood concentrates on growing the company's portfolio of managed and franchised properties under the company's Westin, Sheraton, Four Points by Sheraton and Luxury Collection brands. Under the realignment, this franchise/management group will have more time and resources to seek developers interested in opening properties under one of those four flags.
Another division, the investment group, will work to grow those brands through acquisitions, new-build projects and conversions. The realignment also created two separate groups aimed at expanding the W and St. Regis portfolios. By forming the divisions for W and St. Regis, the company hopes to capitalize on the growing demand among investors for condo-hotel projects.
“We've grown up from being an opportunistic developer into a more strategically driven development group,” notes Darnall. “We're now better organized — we have a good capacity.”
Budget Matches Ambitious Plans
Starwood has a considerable purse to carry out its aggressive growth mission: the company raised $1.1 billion in proceeds by selling 16 non-core assets in 2003. Through those asset sales and other initiatives, Starwood reduced its overall debt load from $5.3 billion at the end of 2002 to $4.6 billion at the end of 2003.
“These are better times for us. A year-and-a-half ago, we didn't really have the balance sheet to be much of an investor,” says Darnall. “We now have the capacity to become a much more involved investor.”
And a deal completed prior to the reorganization shows how serious Starwood is about becoming a more aggressive investor. In December 2003, Starwood and Lehman Brothers Holdings Inc. teamed up to acquire $1.3 billion in senior debt from London-based Le Meridien Hotels & Resorts Ltd.
Starwood, which will assume $200 million of the total debt, is working with Lehman and other debt holders on a recapitalization plan. Although Starwood declined to discuss its role in the deal, analysts expect the company to take over management of Le Meridien's 120 international hotels.
The company also is making a major push to increase revenues from franchise and management fees, which now represent about 30% of total revenues. To achieve that goal, the company has more than doubled the number of employees dedicated to the franchise/management division, from five to 12.
“Our specific business plans allow more people to cover more opportunities,” says Chuck Tomb, senior vice president of development, North America, who leads the franchise and management division. “It's simply a numbers game.”
And Tomb is determined to rack up impressive revenue gains in the franchise/management group. His division generated $771 million in revenues in 2003, and Tomb's long-term goal is to double or triple the total income from managed and franchised properties.
The reorganization puts Starwood in a position to capitalize on large-scale acquisitions such as the Le Meridien portfolio as well as single-property deals, says Marc Falcone, an analyst at Deutsche Bank-North America.
“That's part of the culture at Starwood — to be aggressive,” says Falcone. “We would anticipate the company to take more market share, which should also facilitate stronger earnings growth.”
Investors also appear to be optimistic about Starwood's prospects. In early March, the company's stock price soared to a 52-week high of $40.30 per share, up from $22.30 in April 2003. Starwood also is anticipating a significant increase in revenues. In its 2003 annual report, the company predicts revenue per available room (RevPAR) at its properties will rise by 5% to 6% this year, while its rival Hilton Hotels Corp. is projecting RevPAR growth of 3% to 4%.
Poised to Capture Condo Business
Starwood's aggressive strategy for its W and St. Regis brands is a response to the growing demand among investors for condo-hotel projects. In fact, the vast majority of W and St. Regis projects currently in the works feature ownership units.
One such project is the massive, 40-story St. Regis Museum Tower in San Francisco scheduled to open in June 2005. Starwood has teamed up with Carpenter & Co., a Cambridge, Mass.-based developer, to build the tower, which will feature 269 hotel rooms and 100 condo units. Starwood also is adding 25 timeshare units to the 170-room St. Regis Aspen Hotel, a renovation project slated for completion in December 2004.
Investors favor condo-hotels because the sale of units can be used to pay off part of a project'sloan, which also makes them more attractive to lenders.
“I think if you had asked me a year ago if we anticipated this kind of activity level for St. Regis, we would have said ‘absolutely not,’” says David Martinez, senior vice president of acquisitions and development for St. Regis, referring to the plan to triple the brand's portfolio in the next five years. “We have a significant pipeline of opportunities, and right now our challenge is sorting through them and trying to figure out which ones to focus on.”
The separate groups for the two brands are designed to prioritize the opportunities. The St. Regis division, which will include seven employees when all the positions are filled vs. one dedicated St. Regis development executive prior to the restructuring, will expand St. Regis through new development, acquisitions and conversions of existing properties.
The realignment places acquisitions, development,and construction personnel all under one roof to create a streamlined system for completing deals with developers and investors. Starwood will typically be a minority investor and occasionally a 100% owner in these projects.
“Today, we have some functional expertise on this, and we can cut to the chase pretty early on for these projects,” says Martinez. “There are clearly things we're working on today that a year ago we were not capable of working on in a meaningful fashion.” There are currently about five St. Regis projects in final negotiations that are likely to move forward due to the additional resources the brand has at its disposal, says Martinez.
The company also has four W Hotels and Residences under construction in, Montreal, Fort Lauderdale and Seoul, South Korea. There are also ten W properties in the planning stages, and construction is expected to begin this year on eight of the smaller Westin and Sheraton prototype properties.
With the realignment in place, the company is prepared to pursue opportunities across all its property types: everything from condo-hotel deals in gateway cities to prototype projects designed for secondary markets.
“This allows us to respond to changes in the marketplace,” says Martinez. “We have the ability to move the ball down the field quickly.”
Steve Webb is a Buffalo, N.Y.-based writer.