Marriott International, Inc. (MAR) Q1 2013 Earnings Report, Transcript and Summary

Stephen Pettibone - Vice President of Investor Relations Frits D. van Paasschen - Chief Executive Officer, President and Director Vasant M. Prabhu - Vice Chairman, Chief Financial Officer and Executive Vice President

Carlo Santarelli - Deutsche Bank AG, Research Division Charles Patrick Scholes - SunTrust Robinson Humphrey, Inc., Research Division Shaun C. Kelley - BofA Merrill Lynch, Research Division William A. Crow - Raymond James & Associates, Inc., Research Division Joshua Attie - Citigroup Inc, Research Division Harry C. Curtis - Nomura Securities Co. Ltd., Research Division Steven E. Kent - Goldman Sachs Group Inc., Research Division Felicia R. Hendrix - Barclays Capital, Research Division Joseph Greff - JP Morgan Chase & Co, Research Division Thomas Allen - Morgan Stanley, Research Division Robin M. Farley - UBS Investment Bank, Research Division Ian Rennardson - Jefferies & Company, Inc., Research Division Ian C. Weissman - ISI Group Inc., Research Division Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Good morning, and welcome to Starwood Hotels & Resorts First 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 First 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 call 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 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 welcome, everyone, to today's call. I'll cover 3 topics in my prepared remarks today. First, a brief recap of our Q1 results and a look at our business around the world. Second, some comments on our month-long relocation to Dubai. And third, a look at how we've grown our fee business over the last few years. Before I turn to these 3 topics, though, I want to talk briefly about the shocking events at the Boston Marathon. I've mentioned this before, but our presence around the world means we often find ourselves at the front line of what's happening, whether it's the turmoil of the Arab Spring, protests in Athens, unrest in Bangkok or the aftermath of Fukushima. The most inspiring stories I've heard in my career are about our associates and how they've cared for victims, protected stranded travelers or helped relief efforts. Boston was another one of those situations. I want to recognize and thank our associates, especially at the Westin Copley and The Sheraton Boston, for their response to this terrible event. Most companies say their business is about people, but at moments like these, it's hard to imagine a business that relies more on the skill and the spirit of its teams than Starwood. With that, I'll turn now to my first topic. We're happy to report that we had a very solid first quarter across the board. We said last quarter that 2013 looked to be a somewhat better version of 2012. The trends we're seeing in the globalizing recovery has continued along those lines. Of course, any of a number of disruptions could change all of this, there are base case assumptions call for more of what we're seeing now. Our EBITDA, not including Bal Harbour residential sales, came in well above expectations at $257 million. We saw strong fee growth, better performance at our owned hotels and good sales momentum at Starwood Vacation Ownership. Also, as of the end of the quarter, we sold and closed about 86% of Bal Harbour residences. That means there's only about 40 units left, and we expect to complete the sellout this year. So if you're interested in one, now is definitely the time to act. In a few minutes, Vasant will share more details on our financial results and look ahead. For right now, I'd like to give you a global look at our business. Our customers and hotel developers are telling us that they have confidence in their plans. More importantly, they're putting money and actions to back up their words. For our corporate customers that means holding to travel plans. And for developers, that means moving forward with projects to build hotels. This is why we're upbeat about the balance of the year. We, nonetheless, continue to plan with a range of scenarios. Nothing is a sure of thing. The 2 biggest question marks for 2013 remain the U.S. fiscal and job creation challenges and the new Chinese government and its policies. As we look at China, our business is generally picking up. In fact, REVPAR in Q1 was up over 5%. This is an acceleration from flat REVPAR in Q4. China, of course, is a huge country and our results are a story of regions. For example, results were softer in Beijing and other markets more dependent on government business. As many of you may know, the government transition was not complete until March. Meanwhile, across markets in the South, the REVPAR was up nearly 10%. Our hotels across all of China outgrew their competitors once again as reflected in REVPAR index gains. This builds on last year's outperformance. Our results in Q1 were in line with the long-term trends that we've seen in China. We're convinced that the country will be a huge growth engine for years to come. Along the way, we do expect there'll be periodic mismatches between supply and demand. But over time, our view is that there is far greater risk in being too timid about this growth phase. Better to grow while cities are being formed and live with the fits and starts than to miss out on this onetime growth. Elsewhere in Asia, revenue grew by nearly 6%, thanks to strong performance most notably in Indonesia, Thailand and Malaysia. South Asia, primarily India, on the other hand, was slower. But there again, we have no doubt about the long-term prospect of this massive market. For now we're encouraged to see smart capital in India moving to convert existing hotels to our brands. We've had many such discussions during our last visit there last month. When we announced, for example, a conversion to Four Points by Sheraton in Ahmedabad. Meanwhile, in Europe, Q1 was soft, largely a result of a weak start in London, suggesting possible oversupply in the wake of the Olympics. Excluding London, overall Europe REVPAR was flat. Our hotels in Italy and Spain saw a REVPAR up over 5%. And outside of London, our owned and leased hotels in Europe were up nearly 10%. Bear in mind, of course, that Q1 is golf season in Europe so it's hard to draw conclusions about the full year. Our base case for Europe, though, is to stay in its current trajectory until the economic and fiscal issues are resolved. When that happens, is anybody's guess. The story in Latin America was similar to last quarter. Mexico's are down, in particular at resorts, but the economic woes in Argentina continue and are in fact bleeding into Uruguay. In North America, REVPAR growth was up over 6%, excluding Canada, up nearly 7%. As we've said for some time, tight supply in North America is supporting rising rates. This is great for margins also, which were up by 110 basis points. Despite the broader economic news, the lodging sector is still strong in its recovery. As such, we remain bullish on the U.S. for this year. Pent-up demand for housing, autos and other consumer durables could have a multiplier effect on the rest of the economy. Manufacturing, tech and energy point to continued strong growth. Of course, as I mentioned already, there are risks. The fiscal situation and political climate do concern us. Brinksmanship in Washington is not healthy for business. That said, government travel is about 2% of our North American business, but the sequester itself is less of a drag today than you might think. We are keeping an eye, however, on whether the austerity measures are having a broader effect on demand. In summary, our top line outlook for the rest of the year is in the range that we put forward in the last call. As I mentioned, Vasant will cover in more detail on how we see things playing out in Q2 and for the rest of 2013. The one region I have not yet mentioned, of course, is Africa and the Middle East. Business there is generally very good with REVPAR increasing by over 7%. As you know, we relocated our headquarters in March to the Middle East, basing ourselves mostly out of Dubai. I'm often asked why we would move our senior team 7,000 miles and 8 time zones to run the company. Let me put this in terms of what we got out of our relocation to China 2 years ago. On our last call, I spoke to some of what we learned they are. I stressed the value of getting closer to the dynamic markets in order to see the realities of extreme growth, to see how travelers use technology and to deepen relationships with developers, customers and partners. And of course, importantly, to take what we like to make us better in mature markets. In the end, we judge the success of what we do by our results. After our time in China, we increased RPI by 6 percentage points in 2012 alone. We doubled the number of SPG active members, and SPG now accounts for 55% of our occupancy. We grew outbound travel from China to our hotels globally by 52%. And since the relocation, we've signed 54 deals, meaning our pace of signings is up by about 40%. And we've opened 45 hotels, more high-end hotels than Marriott, Hilton and Hyatt combined. I'm convinced that these results were made possible by our being more responsive to our teams customers and owners in China. We expect an acceleration in our business following our month in the Middle East as well. To put this all on perspective, the relocation cost us less than the present value of one incremental deal in the region. In the our meetings with owners and developers during the month, we discussed scores of new deals, so I'll take our odds on that. The second question I get asked is why we chose Dubai. For one thing, Dubai lies at a global crossroads, at the center of new travel patterns from China to Africa and from Southeast Asia to Europe. About 4 billion people live in an 8-hour flight of Dubai, and Emirates Airlines is one of the world's premiere airlines. They've added daily direct flights around the world to places like Ho Chi Minh City, Johannesburg, Rio and Seattle. This explains why, as we mentioned on our last call, we have more hotels in Dubai than any other city in the world outside of New York. And the region is home to pools of capital, of course, looking to invest outside of the Middle East. As in the many other regions around the world, Sheraton and Le Méridien enjoy a first-mover advantage in the Middle East. Our local smart teams have deep relationships with developers and customers. Our teams know how to get things done in market, and our decades-long presence means that local travelers are loyal to our brands. On top of this, we deliver superior results, thanks to SPG and the rest of our global platform. Spending the month in market brought us much closer to our local teams. The benefit is shared experiences and the kind of open dialogue that leads to better decisions. Let me emphasize this; this is not about oversight. We didn't go to Dubai to sit at the head of the table, we went to sit at the same side of the table, roll up our sleeves and gain insight into the region. We were there to help our local teams succeed. We also wanted to get to know our partners better and show them how important the business is to us. Stepping back, the global trends that we keep talking about were fully evident throughout our relocation. You can see firsthand the burgeoning demand for travel from the rising global middle class. The move reaffirmed also our belief in the growth potential of the region. Bear in mind, Dubai is a hub for both India and Africa. In fact, you can get to more points in India and Africa from Dubai than from just about anywhere else. Also, if you take Africa, South Asia and the Middle East, you get a market for us in terms of hotels that's comparable in size to China, roughly 120 hotels opened and about 90 in the pipeline. In fact, we used our time in the Emirates as a base to travel to places like India, Ethiopia, Mauritius, Tajikistan and Lebanon. And which, by the way, begins to answer the third question I often get asked, "What do you do during such a relocation?" Some of it is the normal course of business. You can lead a global company from Dubai, as well as anywhere. Of course, we also took time to immerse ourselves in the region. We visited 19 cities across 13 countries, flew 61,000 kilometers and saw 64 properties, including all 14 in Dubai. We met over 3,000 of our own associates, 150 customers and about 60 hotel owners. And we looked at best practices. Our hotels in Dubai have some of the highest guest satisfaction results at anywhere in the world. We explored ways to take learnings from those hotels to our other properties. And our food and beverage operations have very effective mobile and social media marketing. Our hotels in the region are also incredibly diverse in terms of the number of associates. The W Doha, for example, boast no fewer than 64 nationalities working together. Across the Middle East, we're working to bring our top talents to Starwood Properties in their home markets. These associates bring Starwood know-how to places where we're opening hotels, like the Philippines, Sri Lanka and India, and that works the other way as well. With so many inbound Chinese travelers, we're also launching programs to bring Chinese associates to the Middle East. And of course, when those associates want to return home, they'll bring the benefits of the global experience back to our properties in China. So before concluding my prepared remarks, I want to spend a few minutes on my third topic, our transformation out of real estate and into the fee business. We began back in 2005. We acquired Le Méridien, sold 33 hotels to Host and went to work on growing our footprint. We also undertook a multiyear, multibillion effort to strengthen our portfolio of Sheraton and Le Méridien hotels. And despite the crisis, our footprint of managed and franchised rooms has increased by nearly 50% in less than a decade. In 2009, we took a thorough look at our business. We exited ancillary ventures such as Bliss, to focus on our core business. We rightsized and refocused SVO turning it into a cash generator, and we cut SG&A by reducing redundancies, finding synergies and putting in controls to keep costs from creeping back. As a result, our SG&A per room today is down over 25% from peak levels. Over the years, I've said more than once, the managed and franchised fee business is one of the great business models in the capitalist world. It combines 2 things: revenue streams with long-term growth potential and relatively low cash needs for overhead, working capital or CapEx. Underlying our revenues are long-term contracts, that are often 20 to 40 years in length. These contracts specify that our fees per room grow with rising revenue and rising incentive fees from profits. And of course, we gain unit growth through more hotels. Thanks to the secular trends driving demand growth for lodging around the world, unit growth is said to continue for some time to come. Also, at some point, pent-up demand for more hotels will lead to more footprint growth in the U.S. and even in Europe. And don't forget, the fee business is more stable in downturns, as it doesn't have the high fixed cost base of an owned hotel. During the crisis, for example, our fee EBITDA was off less than 20% versus 50% for our owned hotels. The variable cost of adding new hotels is low, thanks to our scalable global infrastructure. This is even more true as digital technology plays a greater role in what we do. And on the guest side, every new hotel entering our system becomes a new place to stay, to experience our brands and to earn SPG points. We call this the network effect. For example, after we opened the Saint Regis in Doha, we saw a jump in our Qatari business at the St. Regis in Beijing. The same could be said for the Saint Regis in Bal Harbour with incremental business from the Emirates. So each new hotel deepens brand loyalty among guests and customers, and those same new hotels bring more fees into the system to reinvest in building capabilities for all of our hotels. The potential for long-term growth without capital is borne out by our results and built into our expectations looking ahead. Since 2004, our management franchise fees are up over 160%. That includes an increase in fees per room of almost 60%. And that time period, of course, includes the economic crisis. Looking ahead to the next 3 to 4 years, we have a pipeline of 100,000 rooms, most of which are high-end managed hotels in markets outside of North America. We also continue to sell owned hotels with long-term contracts. These 2 sources of growth, along with the continuation of the recovery, mean we have the potential to grow our fees at 9% to 12% per year. At the same time, we don't see the need to grow our SG&A faster than 3% to 5% a year. And most of our capital investments in making our system more attractive for owners is covered by our breakeven funds. So with that, I'll turn it over to Vasant.

Thank you, Frits. As you have seen, we had a great start to 2013, especially in North America. We significantly exceeded our profit expectations with strong results from owned hotels, vacation ownership and continued tight control of SG&A costs. Before I review business trends around the globe, I'll spend a few minutes summarizing the main points from our Investor Day in Dubai, for those of you who might have missed it. As many of you know, Starwood has been a company in transformation for the past decade on 3 major fronts. First, from owning hotels to owning relationships. On this front, we have sold 124 hotels since 2000 for almost $8.4 billion. In Dubai, we announced our intent to sell another $3 billion of hotel assets by 2016, market conditions permitting. This will achieve our asset-light goal of delivering 80% of profits from management and franchise fees by 2016. Second, from a U.S.-centric to a global enterprise. On this front, we have gone from earning 37% of our fees from outside the U.S. in 2000 to 56% today. With over 80% of our pipeline outside the U.S., we are well on our way to achieving our goal of 80% non-U.S. fees. Third, Starwood pioneered and continues to lead the industry in moving from price point brands to lifestyle brands. Building on the launch of W, the Westin Heavenly program and the revitalization of Sheraton, we have repositioned Le Méridien, created the St. Regis brand from a single iconic hotel, launched Aloft and Element. All these transformations have created a company with a faster growth trajectory, low cyclicality, higher margin, greater capital efficiency and significant cash generation potential. As a result, we have delivered a superior value to you, our shareholders, over the past decade with total returns of 256% through the end of 2012 versus 98% for the S&P 500, and outperformed our lodging peers. So what are the reasons to own Starwood for the next decade? We would offer up 6 compelling propositions. First, Starwood is the leading hotel company in high-growth markets. We are 50% larger than our peers outside the U.S. in luxury and upper upscale hotel rooms. We have a significant lead and an established infrastructure in high-growth markets like China, India, Southeast Asia, the Middle East and Africa. We are the best positioned company to benefit from the revolution in global travel that has been underway. Second, Starwood has the best portfolio of global high-end lifestyle brands and lodging. Over the past 5 years, we have been the fastest-growing company in the Luxury segment, almost doubling our rooms. We have the largest global portfolio of upper upscale lodging brands today and a fast-growing portfolio of differentiated select serve brands. Third, our high-quality 400 hotel pipeline will ensure that the 5% net room growth we have delivered over the past decade can be sustained. Each room in our 100,000-room pipeline is worth more than the pipelines of our peers, since 67% are in the upper upscale and luxury segments and 87% are outside the U.S. These, as you know, are higher-value contracts. Fourth, our owned hotels portfolio, while much smaller than it used to be, remains one of the best you can buy among public companies. We continue to own trophy hotels, hotels in high barrier to entry urban and resort markets, which are well diversified globally. We will continue to unlock this value by selling hotels at great prices. Our goal is to complete $3 billion hotel sales by 2016, as demand for high-quality hotel assets grows. Fifth, we have an unmatched global platform, with critical mass in all the key high-growth markets. SPG delivers more than 50% of occupancy, Starwood central systems influence over 70% of room nights. Our sales and revenue management program are powerful, supported by best-in-class operating teams. We believe the appeal of our brands, the attractiveness of SPG and our global sales platform makes Starwood the best proposition for guests, customers and owners at the high end of the hotel business. Finally, we have an extraordinary cash generation capacity from our fee-driven hotel business, a cash positive vacation ownership business and continuing hotel sales. Over the past 5 years, we have generated $1.6 billion from hotel operations, $600 million from vacation ownership, $1.4 billion from hotel sales and of course, cash from Bal Harbour unit sales. We reduced debt by $2.4 billion while returning $1.7 billion back to our shareholders via dividends and buybacks. Over the next 3 years, we expect this recovery in lodging to continue supported by low supply in mature markets and robust secular growth in high-growth markets. Leveraging the 6 factors we just described, our current outlook is annual growth of 5% to 7% in REVPAR, 10% to 12% in EBITDA and 16% to 20% in EPS. If this outlook is realized, we expect to generate around $2 billion in cash from operations after owned hotel and IT capital spending. As our EBITDA grows, we will have more capacity to add debt, while comfortably retaining our investment-grade rating. As such, we expect to have $3 billion to $3.3 billion in cash to deploy, plus proceeds from asset sales. Our priorities for cash deployment going forward are twofold. Investments that can drive growth at high ROI, or a return of cash we cannot profitably deploy to you, our shareholders, through dividends and stock buybacks. We do not need to, nor plan to, reduce our debt further and know that we have capacity to add borrowing should we need the money. We're also investing at a healthy level in our core business, and would expect capital spend to decline as we complete renovations and sell hotels. We offer a healthy dividend yield of 2% and have bought back almost $400 million in stock since mid-2012. We expect to continue to buy our stock below intrinsic value as opportunities arise. In summary, the Starwood transformation has delivered industry-leading shareholder returns for the past decade. And for all the reasons I just outlined, we remain confident we can continue to do so over the next decade. With that, let's turn to the here and now. Our performance in the first quarter was powered by great momentum in the U.S., where REVPAR was up 6.7% despite the negative impact of the holiday shift in March. We saw strong transient demand with transient rate up over 5%. Resort destinations, both sun and snow, had a great quarter with particular strength in Hawaii. The Northeast and Canada were softer, but trends are improving. As we entered Q2, business conditions remain robust. Helped by the holiday shift, we expect North American REVPAR growth to be sequentially higher at the high end of our Q2 outlook range of 5% to 7% for company-operated hotels. Rate increases should approach 5% as we hit peak occupancies. Group business continues to pace in the mid-single digits. More importantly, earnings growth of major U.S. corporations, our primary customers, remains on track. As such, we expect North America to remain our strongest region in 2013. In terms of the impact of the sequester, our government business is down, but it is less than 2% of our company-operated North American business. And in many cases, we have been able to replace it with higher rated corporate customers. Nevertheless, we will continue to monitor what impact the sequester has on the broader U.S. economy as the standoff in Washington continues. In Europe, Q1 was weak with REVPAR down 1.3% in local currencies. As we have indicated before, Q1 in Europe is a small quarter and not a particularly useful leading indicator. Northern Europe was generally soft, especially London, which is still absorbing some of the new supply that came in prior to the Olympics despite the headlines, we had growth in Southern Europe. Russia and Eastern Europe were up double digits. Based on booking trends, we expect some modest REVPAR growth in Q2, but this will still be below our 5% to 7% worldwide outlook range. As may be expected, European companies are watching their costs, groups are smaller, staying closer to home and booking later. However, despite all its issues, Europe over the last couple of years has grown REVPAR 2% to 3%, helped by the lack of supply and high occupancies. We see no sign that this trend is changing. There is a growing consensus in Europe over the need to shift to more pro growth policies. We would very much welcome that. As you know, we saw a slowdown in our China business in the second half of 2012 as we approach the once-in-a-decade leadership transition. After the major -- the Chinese Communist Party meeting in March, the new leadership is finally in place. As we expected, we did see business picking up in Q1. REVPAR was up 5.4% in local currency, a meaningful improvement from the Q4 trend but not quite at the high-single-digit level that we have had in the past few years. The new leadership has been vocal in asking government officials to reign in their ostentatious lifestyle, and social media in China has been particularly active on this topic. This austerity focus is impacting us in our food and beverage business, and in regions where the government is a large customer. Harder hit are the North and West regions and some Tier 2 and 3 cities. In the South and the East, where the business base is more diversified, the impact is smaller. We'll have to see how this plays out over time. We have some impacts on the recent outbreak of bird flu in the Shanghai area, but the government this time around has been very proactive and transparent in its response. Moreover, it appears that this strain is not contagious and we're not aware of any travel advisories. We will be monitoring the situation closely. In terms of the demand-supply balance, we remain of the view that demand growth will absorb new supply in most markets over a 9- to 12-month period, as evidenced by REVPAR growth in Guangzhou, up 6.5% in Q1, Shenzhen, up 22%; and Hainan, up 14%. All 3 markets have had significant supply additions in the past few years. At this point, we expect the Q2 REVPAR trend in China to be in the middle of our worldwide outlook range of 5% to 7%. New deal signing and new hotel opening pace remain robust. Starting with this quarter, we are breaking out Greater China REVPAR in room count in our earnings release. Greater China includes Hong Kong, Macau and Taiwan. We hope you will find it helpful. Across the rest of Asia, growth has been driven by Indonesia and Thailand, both up in the high teens. Japan and Malaysia were also up 7% to 8%. We have seen some impact on traveling to Japan and South Korea from the North Korea issues, but this seems to be improving. The sharp decline in the yen has significantly hurt our fees from Japan as reported in dollars. India remains sluggish but sequentially a little better. Overall, the rest of Asia should grow in the upper half of our Q2 REVPAR outlook range. With REVPAR up 7.1%, Africa and the Middle East was our fastest-growing region in Q1. Perhaps it has something to do with the fact that we were all there for the month of March. Jokes aside, the UAE is booming again with REVPAR growth of almost 14%. Saudi was up 8%. In North Africa, while the situation remains volatile, we are seeing some visitors return to the region. Egypt was up 30% in the quarter. We expect these trends to continue into Q2. In Latin America, REVPAR was flat, dragged down by Argentina, which dropped 15% at company-operated hotels. Local inflation has significantly slowed travel into the country. The gap between the official and unofficial exchange rates continues to widen. Our margins are squeezed by weakening demand and rising local costs. This situation is unlikely to improve anytime soon. Offsetting Argentina to some degree is Mexico, which was up 10% in Q1. U.S. guests are returning to Mexican resorts as the crime situation improves, and business travel is picking up as Mexico regains competitiveness as a manufacturing hub for the U.S. We expect Latin America growth to remain challenged in the near term due to Argentina. Our owned hotels exceeded profit expectations in the quarter. As our owned hotel portfolio has shrunk, performance can be impacted by significant move at specific hotels or in specific markets, as was as the case in Argentina in Q1. Excluding the 923 owned rooms we have in Buenos Aires, where REVPAR declined 27%, our owned hotel REVPAR was up over 5% in local currencies and owned hotel margins were up 100 basis points. We were helped by strong performance at our U.S. owned hotels, in particular the St. Regis Bal Harbour. We know it's hard for you to make year-over-year comparisons of our owned hotel results due to asset sales and significant renovation activity. Year-to-date, we have sold an additional 4 hotels for $126 million, which will reduce balance of your profits by approximately $8 million versus the 2013 outlook we provided last quarter. As you know, it is our practice to adjust our outlook only after asset sales are completed. Our same-store results also do not include hotels coming out of and going into renovation. This year, the Gritti Palace, the Maria Christina, Westin Peachtree are some the major hotels coming out of renovation. While the St. Regis New York, the Westin Maui and the Park Lane in London are among hotels going into renovation. In our vacation ownership business, trends remain stable. Our resort business was up sharply, interval sales were flat. Our loan portfolio continues to improve in quality, FICO scores are now over 740, and the average interest rate is over 13.5%. Annualized defaults, which peaked at 8.5% in 2009, were below 2.9% in Q1. As a result, the reserves we need to satisfy for loan losses continue to decline. Cash flow from this business remains strong. As you know, our priorities on achieving an acceptable IRR on projects commensurate with the risk we take in this business and on the cash flow we generate. Reported profit growth is an outcome, not an objective. We know that the absence of profit growth in this business drags down our overall growth rate. We also know that you can drive reported profits in this business while achieving poor IRRs and consuming cash that could be more productively deployed. We are selectively adding to inventory in Orlando and Palm Springs. This year, we moved our Westin Resort in St. John to SVO to be converted over time to vacation ownership inventory. We're also working on capital efficient options to develop the land we own on Maui. At Bal Harbour, we had a blockbuster quarter, we significantly exceeded our expectations. We have sold 86% of the units generating revenues of $939 million and profits of $219 million so far. We expect to complete sellout this year. As such, we are raising our profit outlook for the year from $50 million to $90 million. Since the number of units left to sell is finite, any upside to these numbers will have to come from higher price realization, which we will be pushing for. In total, sale of condo units is expected to exceed $1 billion, with profits over $250 million. We could not be happier over this outcome. It was difficult decision in 2009 to stay the course, while everybody around us is abandoning ship in South Florida. Our SG&A as reported was down year-over-year. There are variety of reasons for this. We have reduced our costs with some of the structural adjustments we made last year. There were also some delays in anticipated expenses, which will be incurred in Q2 and later this year. In addition, 2013 comparisons benefited from some nonrecurring costs incurred last year. We had indicated that we would have $10 million in severance costs in Q1. We have made many of the changes we plan, but only incurred $4 million in severance costs. We could incur some more costs in future quarters. We still expect our SG&A to grow 3% to 5% in 2013. Based on current trends, we continue to believe we can achieve the 5% to 7% REVPAR outlook range we provided earlier this year. We're narrowing the REVPAR outlook range for our owned hotels to 4% to 6%, despite the issues in Argentina. We are raising our full year EBITDA outlook range x Bal Harbour by $5 million, to $1.12 billion to $1.145 billion, after absorbing $8 million in profit losses from asset sales to date and some exchange rate headwinds, especially from Japan. Bal Harbour profit expectations go from $50 million to $90 million. Our new EPS outlook range, which includes Bal Harbour, is $2.75 to $2.83, which is up $0.15. 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 line of Carlo Santarelli from Deutsche Bank.

Just to clarify, Vasant, you obviously laid it out pretty nicely in terms of your thoughts on uses of cash. But given the -- a little bit of a slowdown in the buyback in the quarter, could you first maybe quantify how much of the quarter you are actually able to be in the market and how you're thinking about the next 6 to 12 months with respect to your balance sheet?

Sure. I mean, we've been very clear about this for several years. I mean, we started out with a view that we should reinvest in our business, we have done that. We lowered our debt, we don't need to anymore, and don't plan to. We regularly review with our board our buyback parameters, certainly, with an eye on intrinsic value. So as you can see, we were buyers earlier in the quarter when the stock was below $60. We do review price goals and at what prices would we be buyers, and so that's not a static number. As you can see, it has changed over time. And we'll continue to do that as we go forward. I don't know, Frits, if you wanted to add some.

No. I think the answer still remains a philosophical one. We recognize that we're in a good position in terms of our leverage that we have cash coming in. And as we've said repeatedly, we'll find ways to return that to shareholders. But for us to speak in specific terms, prospectively, we feel in our view isn't a prudent thing to do.

Yes. I think the only thing we would point to, as always, is history. I mean, if you go back and look at our history, we have been very good in looking at what are the options for deploying cash and have been very good in terms of returning cash we cannot productively deploy to shareholders to the tune of $8 billion or more over the past several years.

Your next question comes from Patrick Scholes from SunTrust.

A question for you on your REVPAR out of China and Asia. I'm sure you look at the monthly Smith Travel International results. Certainly, you performed much better than Smith Travel had on the results. I wonder if you can help me reconcile why that may be?

I think in the broadest terms, we do see, and this is something I alluded to, continued outperformance of our hotels relative to their concept mix. I think that, that accounts for a good deal of the outperformance relative to the overall industry numbers. I think in addition to that, you always have the impact of mixed hotel -- of hotels geographically. And as you could see, both within China and throughout the region, there was a pretty big range of performance in different locations, and some of that mix has to do with it as well. And then I think that there is always the benefit of some additional momentum that you have when you have a lot of new hotels in the region. Now whether the base of our hotels is a percentage of the total that are new relative to others is greater, is something you guys could work out. But that's another thing that I think continues to push our results.

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

Just wondering if you guys could comment a little bit about maybe the overall M&A environment. As we continue to track it, it still looks on the hotel -- and I'm talking on the individual assets side, still looks fairly kind of fairly slow. Could you just talk a little bit about what you guys are seeing? We did see a big asset trade in London in the quarter and are you guys seeing any material pickup from interested parties?

Yes. Look, I think that -- even on the assets side, when you look at the kinds of properties that we're talking about, the upper upscale and beyond, it's still a bit of a lumpy market. And I think that the more important point that I could share with you on this is that qualitatively, there's clearly more interest than there was 12 months ago. And 12 months ago, there was more interest certainly than the year or 2 before that as well. And clearly, that's a combination of low long-term interest rates, improving profitability in the sector, and I think a sense that we all have that this overall global recovery still has some legs in front of it. Our sense is that volume in this kind of environment should continue to pick up. And if you look at the simple calculation of our pace of asset sales in the first quarter and our goal by the end of 2016, we have a ways to go in terms of dollar volume. On the other hand in terms of absolute number of hotels, I think we're closer to where we need to be. The reality is, as long as we're selling 1 or 2 hotels at a time, it takes the same amount of energy and work and also identifying opportunities to sell a hotel that's large and valuable as one that's smaller on the scale. Vasant, you may want to add something to this.

No. I think what we're seeing is certainly -- mobile, certainly a lot of interest you get in the U.S. It's the public REITs. There's the sovereign wealth funds and high net worth outside the U.S. But I think the main point we would make is we do have quite a few hotels that, as always, we're testing the market on. We are not yet seeing a market that is looking for what you might call large deals, truly multi-hotel deals, billion dollar plus deals. It is still a market for 1 and 2 hotels at a time, and that's what Frits talked about. That does drive your pace and we'll see how that evolves.

Your next question comes from Bill Crow from Raymond James. William A. Crow - Raymond James & Associates, Inc., Research Division: Vasant, on the asset sales, you've done a great job in the U.S. Obviously, Europe is maybe a year away from a fundamental perspective and a pricing perspective. To what extent to the tax laws make it challenging to distribute the proceeds to shareholders when you start selling the European portfolio?

As you know, we've been doing a fair amount of tax planning over the years, and we do have the ability to sell our European assets. Most of them tax efficiently, as well as to repatriate the cash. At this point, we really have no cash strapped outside the U.S. We do have demand for some of those unique hotels in Italy. Over time, hopefully, we will be selling them and we do have plans by which we could bring the cash back to the U.S. So it can be repatriated.

Your next question comes from Joshua Attie from Citi.

If I could just follow up on Bill's question. Vasant, could you explain exactly what you mean when you say you have the ability to sell the European assets tax efficiently and repatriate the cash? Do you mean that you have NOL or capital loss carryforwards that you could use or is there some other method? Could explain to us how that would work?

No. It's a structure that we put in place a while ago. It's what the tax basis in those infrastructures is. It's how you structure the sale, whether it's an asset sale or a stock sale. Typically, we require our buyers to work with us on a structure that is good for them and good for us. And essentially, we knew going back a while that most of our hotels are going to be for sale. So we've always had an intent of setting things up in a way that allows us to sell them with limited leakage. And in the case of international assets, with the ability to bring the cash back.

Your next question comes from Harry Curtis from Nomura.

A quick question on improving return on invested capital, it's a stated goal of yours. How does your vacation ownership segment fit into that? Do you think that it could be spun off at some point?

Yes. So Harry, I think the general part to your question, first, in terms of return on invested capital, by having scaled back our business to where it is today, we're in locations and with projects that by themselves intrinsically have a very favorable IRRs, and so we can continue to run the business at its current size with returns that we feel are very well in excess of any risk-adjusted weighted average cost of capital for us. In terms of the more specific part of your question, in spinning off the business. So far we think it's been, from our own perspective, and I'm not going to compare us to anybody else because situations may be different. But from our own perspective as Starwood, given the cash that we've pulled out of this business, we're very happy to have kept this into our portfolio. Also, we think that the synergies, the strength of working our brands together, the strength of our teams, all point to having a successful business as part of what we're doing. You may have noticed Vasant having mentioned the move of the Westin St. John into vacation ownership. And I think it becomes an interesting example of how we can get out of some of our owned assets more efficiently from a tax perspective by doing that. So as of right now, no plans to spinoff.

Your next question comes from Steven Kent from Goldman Sachs.

Just to continue on this asset sale issue. What indicators give you confidence that you can, in fact, wait 3 or 4 years to sell hotels to achieve asset light? As you've mentioned, you are seeing high asset sale multiples, strong interest broadly. And then together with that, given your low leverage and the potential for $3 billion in asset sales, why are you not more aggressive in share buyback today or soon, before the positive impact of these asset sales boost your share price?

Steve, when it comes to asset sales, as you know, we've always been unwilling to give you sort of precise dates on when certain assets would be sold. For the very reason that you can't predict markets nor do you want to put yourself in a position where you have to sell something just because you said you were going to sell it. I don't think -- we know more about this than, let's say, anybody else in our business. What we know is that we are ready. What we also know is that our assets -- we work on our assets to make them ready for sale. We are ready to move fast when the market is there. We are always testing the market. We are always willing to sell. If someone walks in tomorrow and offers us the price we want on our entire portfolio of owned hotels, it's for sale. So the key here is to be ready. The key here is to move fast and not be tied to timetables and so on. So could we be done faster than 2016? Yes, depending on market conditions. Could it take all the way through 2016? It won't be because we say we only sell -- we were going to sell x number of hotels a year, it will all be driven by market conditions. And the second question was on buybacks. Look, I mean, on buybacks, too, our goal is to be disciplined and be focused on buying back when we can, buy back at levels that are good relative to intrinsic value. You have seen us be very aggressive on buybacks in the past so, again, this is something that we will review on a regular basis and you should expect that our past behavior will tell you a lot about what we might do in the future.

Your next question comes from Felicia Hendrix from Barclays.

Vasant, just wanted to reconcile your worldwide REVPAR growth outlook. So that was reiterated, you said North America was going to be at the high end. China now moves to the midpoint of the range from what you had said previously, high end to the range or above the high end. Europe sounds like now it's going to be kind of flattish or maybe slightly worse than what you said last quarter. So obviously, a lot of moving parts in there and we're dealing with ranges, but I'm just trying to reconcile maybe what's better than what you thought last quarter because a lot of the things that you highlighted were a little bit worse.

I think the easy way to answer it is the U.S. is better than we expected. So clearly, the U.S. is trending and certainly helped by the holiday shift in Q2, it's trending at the high end, if not higher than the range. China is a little softer than we expected, but holding at somewhere in the 5% to 6% level. The rest of Asia is doing just fine. So I would say the big changes, the U.S. being better, China being a little softer and Europe really no change. We did have a soft start, but Q1 doesn't matter. We're still projecting the kind of growth 2% to 3% that we've seen in the last few years. So I think the best way to answer it is that most of the difference is in the U.S. and China.

Your next question comes from Joe Greff from JPMorgan. Joseph Greff - JP Morgan Chase & Co, Research Division: Most of my questions have been asked and answered. But one comment or question in the earnings press release this morning when it comes to your outlook and guidance. You admitted in the paragraph, from about a quarter ago and I guess the last bunch of quarters, talking about operating in an uncertain world, and macro and political tail risks and things like that. And that wasn't in there, this go around. Can we talk about why you took that out? I guess, that implies a couple of things, you're either feeling that the macro risks are lessening or you're just getting used to operating in a world of uncertainty. If you can just help us understand that, that would be great.

It's very much what you just said. You shouldn't read too much into it. I think we've all come to believe that we live in a world where there is, as Frits like to say, it's a world with -- you operate under scenarios. Our baseline scenario is what we always talk about. We continue to be mindful of the fact that there are a variety of things out there that could impact things. We've said that many times, you've heard us. That's the only reason it's not there. In fact, we probably didn't spend much time talking about whether it should or shouldn't be in there. So it's what you said, Joe, at the very end, that explains it.

Yes. And I think, Joe, just to draw your attention to it as well. If you look at the text of my prepared remarks this morning, I did allude a few times to the fact that our outlook, by and large, is consistent with what we've seen so far this quarter and as a continuation of last year, with the caveats of this being an uncertain world and particularly both the U.S. fiscal and job creation situation, as well as, whether there will be more downstream impact from the transition in China. But I think that we continue to operate in a world that has uncertainty. As we run our business, we do plan for scenarios and recognize that fairly unexpectedly, the picture could change from an overall macro and lodging outlook. We have no reason to believe that anymore or less likely today than otherwise, just by virtue of the fact that these are sometimes strokes literally out of the blue.

Your next question comes from Thomas Allen from Morgan Stanley.

Related to sequestration. Did you feel any impact from the air traffic control furlough issues we saw last week? It seems like the issue has been fixed. But longer term, how should we think about your mix of drive to versus flying customers and benefits and risks associated with that exposure?

I think this was a brief enough situation that there was really no impact to our business. We do operate in gateway cities. So much of the business that comes to us is drive to, but it sort of depends on where in the country you're looking. I don't know, Frits...

Look, I think the reality is any real disruption in the air traffic is cutting off a big source of the oxygen that the hotel business breathes. So I think that's a reality today, as well as any time in the past. This particular hiccup in terms of air traffic didn't amount to much, overall, relative to our earnings. But look, that's just one of those uncertainties in terms of the disruptions that I alluded to in answering the last question from Joe.

Your next question comes from Robin Farley from UBS.

My question is on the management incentive fees. I wonder if you could talk about what percent of hotels are paying that in total and domestic and international as well? And just kind of what percent of those fees overall are coming from international? That was really my question. I also just wanted to clarify something that you gave an answer to a prior question that's sounded different than your introductory remarks about Asia. When you talked about coming in the midpoint of the range and rather than at the high end or above. It had sounded in your opening remarks like that was just Q2. Are you in fact changing that on a full year basis? That's what your Q&A response sounded.

So for incentive fees on same-store basis, if you look at it that way, about 60% -- a little over 60% of our same-store managed properties are paying incentive fees. Outside of the U.S., if you look at it purely in the outside of U.S., that number is about 75%. And it's not that much lower if you look at the all-in taking into account ramping.

Yes. In terms of the expectations for growth on a full year basis, I think the expectations in China are probably more in the middle of the range than they might have been when we last talked to you. And the expectations for the U.S. and North America in general are at the high end of the range than we last talked to you. And those would be sort of the modest changes. Now of course, North America being a larger business, performing better, does help. China is a large business, but North America is in fact our largest business.

Yes. And I know we've said this before, but it's, I think, useful to emphasize this. We make calls like this based on what we're seeing. And the reality of our business is, outside of the group business, our actual specific insight into what will be happening for 2 or 3 quarters from now isn't all that great. And that's a function of the fact that a big part of our business is transient and the booking cycle there is much shorter than the time frame we're talking about as we project. So a lot of this has to do with more qualitative conversations that we're having with our own operating teams, with our sales organizations and with some of our customers. So I want to make sure that there were not implying a greater degree of precision in terms of our outlook than that.

Your next question comes from Ian Rennardson from Jefferies. Ian Rennardson - Jefferies & Company, Inc., Research Division: Talking about the guidance for the year. You beat underlying EBITDA by $22 million in Q1, but your guidance for the year is up $13 million, if we add back the $8 million from disposals. Why the caution? What's stopping you being more positive about the full year?

Well, you mentioned one. Another one I didn't mention in my remarks is, we do have some modest ForEx headwinds. I mean, the move of the yen, as you know, has been quite substantial. And the Australian dollar and the Canadian dollar are also a little weaker than they were earlier in the year. So the exchange rate impacts at another $3 million to $4 million. Beyond that, it's early in the year. We just need to see how the year revolves. While we might not have spent some of the severance expense that we anticipated in Q1, we do have some adjustments that may happen as the year progresses and there could be some more there. So those are some the reasons, and we'll see how the year goes.

SG&A tends to be fairly lumpy in our business, we're still guiding to that 3% to 5% range.

Your next question comes from Ian Weissman from ISI.

Just following up on Robins question about incentive management fees. You mentioned that in the United States, 60% of your hotels are paying fees. How would that compare to the prior cycle at a similar, let's call it, 3 or 4 years into the recovery?

Sorry, did you say inside the U.S., 60% of the increase...

No.

Not what you said.

No, no, no. That's all in. Outside of the U.S., it's 76% are paying fees, the number of incentive fees. I don't have the...

In the U.S., it's probably in the 30% range, if I remember right. On a global basis, it's 60%. As you know, we get 90% of our incentive fees from outside the U.S. Many of our management contracts in the U.S. like the ones that host a fairly recent and they get into incentive fees later in their life cycle. So that's why our incentive fees are lower in the U.S. typically.

Your next question comes from Jeffrey Donnelly from Wells Fargo.

Vasant, I just want to clarify a few points on the dispositions, concerning the $3 billion of assets you intend to sell. Are those asset sales phased because a bid-ask spread exists today that you expect will close in the coming year? And it sounds like you've got hurdle prices for each of those assets that you are targeting to sell. Can you talk about how those prices were determined and is their price today different than maybe the price in 2 to 3 years? I'm just curious maybe what the gap is in those numbers?

You always have a point of view on what price you should yet. The market will tell you what price you can get. You can then make some judgments on whether holding can get you a better price or not. That's a function of a variety of factors like what's the profit trajectory of the hotel and what are your thoughts on what the demand for that kind of asset could be in the future. We are more than willing to adjust our expectations if we decide that on some kind of long-term metric or value, the value we're getting is reasonable and acceptable. So it's not, as you know, an exact science. And it's not like we have a price that we will not budge from. In the end, the market speaks and we have to decide if we will accept it. It's a classic decision of whether you hold or sell. In occasional situations, we may have a preferred time to sell. It may be due to some tax planning we're doing or specific things going on with the hotel, whether it's better to renovate before we sell or not. There could be other issues that may require that we not sell the hotel now rather than later. So those would be considerations that we have.

Your final question comes from Patrick Scholes from SunTrust.

The question is 2 part concerning group and groups in Westin. First on groups, it looks like in the last previous earnings call, you talked about group pace tracking in the mid-single digits for the year. How did that pace performed in the first quarter? Better or worse than you had previously been tracking? And then second one it concerns the Westin REVPAR result in the quarter. It looks like it was definitely underperforming for you, why may that be and is that at all related to higher percentage of group business for that group?

Yes. Group pace has been performing in sort of the low- to mid-single-digit range for quite sometime now. I think it's been relatively steady. So no change that we'd highlight there in terms of Westin.

And Westin, all the data we have at the Westin brand performs from a REVPAR index standpoint. As you know, very often when you look at numbers, you're looking at aggregates that are driven by where the hotels happen to be, and they're in dollars as reported rather than local currencies. So we always tell investors not to focus too much on brand level, REVPAR in any particular quarter because it is very much a function of where the hotels and that brand happen to be. And it doesn't tell you a whole lot about how the brand is really doing.

I think, for us, the more encouraging aspect is that, overall, across the whole portfolio of hotels and brands, we continue to have our REVPAR index grow faster than the marketplace. And that's probably the best like-for-like comparison you see across the business.

Thanks, Frits and Vasant. I want to thank all of you for joining us today for our first 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 First Quarter 2013 Earnings Conference Call. You may now disconnect.