Marriott International, Inc. (MAR) Q1 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to Starwood Hotels & Resorts First Quarter 2014 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 2014 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.

Thank you, Stephen and welcome, everybody, to our Q1 earnings call. For my prepared remarks, I'll follow my usual format and cover 4 main topics. First, I'll look at the business climate and our results in the quarter; second, some further comments on our business in China; third, a few observations on rising travel in emerging markets; and finally, our approach to global growth in cities around the world. Turning now to my first topic, the quarter. Overall, the global economy generally and the lodging recovery in particular continued to bounce along, with once again some markets doing better and others doing worse. This year's begun pretty much along the same trend line that we've been seeing since the end of the economic crisis. Across mature markets, namely North America, Japan and Europe, growth and demand showed a steady improvement on last year and from what we can see, conditions are set to stay along that same trajectory. What our customers are telling us jives with the macro view that rising productivity and low inflation have set the stage for more steady growth. That bodes well for our business in mature markets. But that same positive outlook also prompted the Fed start tapering QE, which had ripple effects across the fast-growing or emerging markets around the world. The drop in liquidity came hand-in-hand with concerns about economic and political risk in some emerging economies. And as we've said before, if you're casting about the world looking for things to worry about, there's plenty to find, whether its China's tighter credit markets and lower growth rates, political turmoil in Thailand, or Argentine currency devaluation, or most ominously, unrest in the Ukraine and Russian actions in Crimea. Looking ahead this year, we'll also see some milestone elections in places like Brazil, Egypt, Indonesia, Thailand, Turkey, and most notably, India. So with this as a backdrop, we could see further gyrations in financial markets. The implications for Starwood is that our worldwide presence makes us more susceptible to these uncertainties. And in fact, global uncertainty may have been a factor in our stock underperforming in the first quarter after a terrific 2013. Nonetheless, our view remains that despite the ups and downs, the long-term growth trends in these markets remain a huge opportunity. It's also important to note that despite investor concerns about emerging markets, our business did just fine. And point of fact, we had a great quarter at the high end of expectations. Worldwide REVPAR was up over 6% and adjusted EBITDA was $281 million. Here's a look at how our business performed around the world. Starting with North America, REVPAR was up over 7%. This came despite lower REVPAR growth in the East region, thanks to a harsh winter and new supply in New York. By contrast, the south and west regions were strong, with some markets showing double-digit REVPAR growth. Across North America, occupancies once again were pushed to record highs. At this point, you'd expect late-cycle market dynamics in North America with REVPAR growth predominantly coming through higher rates, which is generally what we're seeing. Yet despite this, we're still several years away from seeing any real increase in supply in most markets. At the upper end, new supply is especially scarce, so as long as the U.S. continues its even modest economic growth, it seems likely that high occupancy and rising rates are here to stay for a while. The situation in Europe is not so different, although REVPAR was up a more modest 2.5%. For those of you who follow our business closely, you know that the first quarter in Europe is the off-season and as such, doesn't say much about the rest of the year. REVPAR growth in Africa and the Middle East was a mixed bag. Egypt, with 11 hotels for us, continues to be a drag on the region. We're hopeful that this year's elections will bring stability, but our outlook for the year does not reflect a dramatic change there. Elsewhere in the region, we saw improved performance in Saudi Arabia and strength in Qatar offset by mixed results in the Emirates. In Latin America, up nearly 3%, performance was also mixed. For a while, we've been describing Latin America as behaving like a diverse collection of countries. What's emerging now is 2-tier region. On the bright side, Mexico and Central America, along with other members of the Pacific Alliance are promoting growth, integrating into world markets and supporting travel and trade. Our results in Mexico this quarter and in Central America would suggest that these policies are faring well with combined REVPAR up 14%. The second tier of Latin America would include the MERCOSUR countries, not to mention Venezuela. Both the Argentine and Brazilian economies continue to struggle. Turning now to Asia Pacific. REVPAR across China was up nearly 12%. Part of this was the incredible growth of the Sheraton Macao, now in its second year operation. In the first quarter, its 4,000 rooms ran at nearly 90% occupancy. But even factoring out the Sheraton Macao, China REVPAR grew nearly 6%. I'll come back to our business in China shortly. Across the rest of Asia Pacific, REVPAR grew nearly 6% as well. In the face of unrest in Thailand and a weakening economy, that growth speaks to the resilience of our business. Excluding Thailand, REVPAR was up more like 9%. Resorts in Asia continue to perform well with REVPAR up over 12%. In summary, the performance of our managed and franchised hotels around the world drove up core fees by 9% over last year. Our owned hotels also did well with total EBITDA up, thanks to better margins and some hotels coming off renovation. As a note, total owned revenue was down versus last year, but that's because we sold 7 hotels since the first quarter last year. This quarter also saw good sales trends of SVO, especially at The Westin St. John, which we're converting entirely to vacation ownership. We continue to manage SVO with an eye toward return on investment, non-GAAP [ph] earnings growth. Overall, Starwood's business has continued to generate cash. Since our last call, we announced both our first quarterly dividend and the first installment of our special dividend tied to the successful completion of Bal Harbour. In total, these dividends will return over $750 million to shareholders this year. And as a reminder, over the last 10 years, we've returned nearly $10 billion to shareholders in the form of dividends, special dividends and share repurchases. As many have noted, we have great flexibility in our balance sheet and we'll continue to work to find ways of returning cash to shareholders. Vasant will give you a more detailed view of next quarter and the rest of the year, but in general, terms, we'll keep playing it safe in an uncertain world. As I mentioned earlier, the recent sell-off in emerging markets and the tension in Russia and Ukraine are but 2 examples of how fortunes could change. Thailand, Argentina and Egypt, to name a few, are markets where local events are disrupting our business as well. But I'll conclude this topic by saying again that despite the worldwide volatility, the long-term trends point to sustained growth in demand for high-end lodging brands. This leads me to my second topic, a closer look at our business in China. For this first time in over a year, performance was stronger than we expected. As I noted earlier, REVPAR to hotels in mainland China was up over 6%. The quarter also represents our ninth consecutive quarter of REVPAR index gains. Our result was especially good in light of government austerity, not to mention a slight drop in inbound travel to China. We've also improved our profit margins despite rising costs. We've been working hard to bring high-end Chinese travelers our hotels. In fact, occupancy, even excluding the Sheraton Macao, was up over 5 percentage points. This is a result of our efforts to leverage SPG and our Chinese language Web and mobile channels, as well as the strength of our brands, our hotels and our teams. We mobilized our call center and sales teams that target many smaller corporate accounts. We also promoted leisure, weddings, in particular, and we're using SPG for local SMB [ph] promotions. I should add that these promotions also provide a value touch point with SPG members in their home markets. The upshot of all this work is that our business is even more Chinese than ever. At this point, well over 70% of our occupancy are PRC nationals. Moreover, our ability to deliver value is resonating with developers, with our signing pace in owner relations as strong as ever. So those are the positives about China. Now for the challenges. We've maintained for some time that an economy as large and rapidly changing as China's will see some fits and starts. And while we agree with our owner partners that the Chinese economy has many years left to grow, we also recognize that China will need to make significant structural changes along the way. In the near term, we don't have much visibility into where the business is headed as transient booking windows are short, and we also have fewer large customers from whom to get a general read on business, let alone a commitment to meetings and conventions with long lead times. What we can see in China remains -- that it remains a relatively low occupancy market. So it's likely that our growth will be driven more by occupancy than rising rates. Wages have also been rising faster for some time now, so we're adapting our staffing levels to maintain our margins. On the development front, our view is the tighter liquidity has tempered the pace of real estate development. Many of our new hotels are slated for Tier 2 and Tier 3 markets and are part of mixed-use developments. As a result, the time it takes between signing and opening new hotels has become longer. But even taking this into account, we believe there's more risk in being timid in China and missing out on future growth. China's undergoing a transformation on a scale and at a rate never seen before in history. Hundreds of millions of people are still projected to move to cities in the next 20 years, and demand for high-end hotels per capita among current city dwellers still has a long way to grow. And China's not the only market where this transformation is playing out, and this brings me to my third topic, rising demand for travel in emerging markets. I've alluded a couple of times to the recent emerging market selloff. We've read and heard lots of talk about instability and uncertainty. But when we look at our business, we're reminded time and again to focus on the long-term trend lines, not the day-to-day headlines. And by trend lines, I mean the steady growth that we've seen in our Emerging Markets business. The secular growth in travel demand around the world is something that we've been talking about for some time, and it continues to play out. In 2008, 1/3 of all SPG members were based outside of the U.S. Today, non-U.S. members outnumber U.S. members, with China our second largest market. Also, across emerging markets, where affluence has risen dramatically, SPG membership has increased up by more than 460% since 2008. The number of Indian and Russian SPG members has tripled. In the Emirates, it's gone up by 150%, and Brazilian membership is nearly doubled. And of course, SPG membership is growing in parallel with travel. We've talked about the 21% increase in Chinese SPG outbound travel in 2013. But this is not just about China. Outbound travel from Korea is up 32%; Russia, 20%; India, 12%; and Mexico, up 7%. This all translates into an SPG Member base that's growing even faster than our footprint. While our room count has increased over 20% since 2008, the number of guests who stay with us more than 10 nights a year has nearly doubled. This is the result of targeted investments in growing the same base of high-end frequent travelers that we've historically had in North America. Our Ambassador Program is a good example. We established personal relationships with our highest-value guests and helped our properties make sure that these guests feel special and recognized, securing their loyalty and repeat business. We're now putting technology to work to find new ways to deliver that touch to a broader base of guests. Simply put, our business model is to make global guests happy so we can deliver great returns to our owners. That virtuous circle ultimately brings more and better high-end fee generating hotels into our system, making our brands that much more valuable to our loyal guests. Which brings me to my fourth topic, a look at how the secular growth story is playing out in cities around the world. Stepping back, it used to be that businesses were considered global if they were represented in North America, Japan and Europe, along with a few key cities in the rest of the world. For that matter, a couple of generations ago, New York and London were far and away the world's premier cities. Today, there are 100 big cities around the world that account for nearly 40% of global GDP. And we have a presence in nearly all of those cities. As they grow, they can support more hotels across our brands. Jakarta is a great example. We already have a Sheraton and Le Méridien and we recently opened a Luxury Collection hotel. And in the next 3 years, we'll add another Sheraton, a Westin, a St. Regis, a W and 2 Alofts. Looking around the world at large cities, we still have a long way to go before we reach saturation. Take Dubai, where we now have 15 hotels and another 5 on the way or Shanghai, where we have 11 open and 4 on the way. And now global growth is reaching well beyond those top 100 cities. The next 500-or-so cities, which McKinsey has called the middleweights, are set to contribute almost as much to global growth as the top 100. These middleweight cities make sense for a few reasons. First, many of the top cities have become expensive, congested and polluted. So increasingly people and businesses that have the option to move are choosing to go elsewhere. Second, technology is making it easier to relocate as connectivity allows businesses to operate in multiple locations. Third and perhaps most significantly, middleweight cities are growing faster as the sheer number of people moving to cities accelerates. As the global middle class rises from 2 billion to 5 billion people in the next 20 years, millions of people per month are coming to cities. So here are some examples of our growth in middleweight cities where we're adding to Sheraton's existing presence. Panama City, where we recently opened 2 Westins and an Aloft, and we're soon to add a W; Cheung Sha, where we'll open a W, a St. Regis and a Westin; and Bahrain, where we'll add a Westin and Le Méridien. And growth in the new middleweight cities is also the latest era in the first mover strategy that's fueled growth for Sheraton and Le Méridien. On previous calls, we've talked about our move in second and third tier cities in China, but once again, this is not just the case there. Looking at Sheraton's pipeline, nearly 1/3 of the hotel's -- of the brand's new hotels will be in markets where we don't yet have -- that don't yet have a high-end hotel. These are cities like Aktobe in Kazakhstan, Nouakchott in Mauritania, Erbil in Kurdistan. Around the world, we estimate, in fact, that there are about 200 cities that could support one or more Sheratons that don't yet have one, and there's, of course, great potential for the rest of our brands as well. So I want to close by reminding you that we're careful about managing our growth. It's one thing to sign a deal in many locations around the world, it's quite another to sign a good deal. We've remained focused on the 3 pillars of our development strategy: right place, right property and right partner, because we know that the hotels that come into our system need to stand the test of time and meet the expectations of our SPG loyal members. So let me wrap up by saying simply this: Despite the gloom about emerging markets, we had a strong start to 2014. And for that, we can thank our associates who work hard to give our guests a better way to experience the world. And as a result, our distinctive and compelling brands continue to be favorites among travelers everywhere. And so with that, I'll turn it over to Vasant.

Thank you, Frits, and good morning to you all. We've had a good start to the year. We exceeded our expectations for the first quarter with great revenue momentum, strong margin performance and profits ahead of forecast. Driving these results were our 2 largest businesses, the U.S. and China, which fired on all cylinders. Helped by Macau, China grew REVPAR in the double-digits, which we have not seen in a while. The U.S, helped by the Easter shift delivered REVPAR growth at the high end of the range. Asia, x China, was also strong despite sharp declines in Thailand. Europe remains stable but sluggish. Elsewhere, there were the usual pluses and minuses. All in all, the first quarter sets up well to meet or exceed our goals for the year. As always, we'll take a quick trip around the globe. I'll finish with some comments on asset sales and capital allocation. North America delivered 7% REVPAR growth in Q1 despite the harsh weather. Adjusting for the Easter shift into April, this momentum has continued into Q2. Driving growth is very strong corporate demand. Corporate business, both transient and group, is robust and shows no signs of slowing down. As we anticipated, the corporate traveler is back on the road trying to drive sales growth. Professional services and technology, 2 of our largest segments, grew double-digits in the quarter. Group business continues to pace in the mid-single-digits with smaller group corporate business especially strong while larger group association business remains weak. Due to weather, the Northeast, Midwest and Eastern Canada were weak in Q1. With the winter behind us, we hope to see improvement in these regions. The West and South grew double-digits in cities like San Francisco, Seattle, Phoenix and Los Angeles. Occupancies have continued to climb past prior peaks. With low supply, this sets up well for healthy rate gains in the months and years ahead. We expect North American REVPAR growth to continue to pace in the upper half of our outlook range of 5% to 7%. Perhaps a big positive surprise for many of you was the return of double-digit same-store growth in China. Frits gave you a fair amount of color on what we're seeing and doing. Our 4,000-room Sheraton Macau is in the same-store set [ph] now and clearly helped the reported numbers since it is still ramping up. The Macau effect will fade as we go through the year. But even without Macau, China was up 6%, a better trend than recent quarters, with cities like Shanghai, up 8%; Shenzhen, up 9%; and Hainan, up 14%. There continues to be weakness in the North and West due to government's focus on ensuring officials curtail spending at luxury hotels. Beijing and Tianjin were both down and Tier 2 and 3 cities in the West were also hurt. As Frits indicated, we have moved very fast to adapt to changing conditions. Our corporate business grew double digits, our occupancies were up 8 points and we gained share again. We expect the rate of growth to slow some in Q2 versus the Q1 trend, but still come in above the high end of our REVPAR outlook range. Across the rest of Asia, growth was sustained despite Thailand. REVPAR in Thailand declined 13% due to the protest in Bangkok. Indonesia, on the other hand, was up 34%. Bali is booming as some demand shifts from the Thai resorts to Bali. The recent event surrounding the Malaysian jetliner are affecting travel into Malaysia and further helping Bali. Japan continues to show strength, and Australia is also thriving. India remains sluggish. People are hopeful that the elections currently underway will allow growth to resume. All in all, the only issue for us in this part of the world is exchange rates. Even though REVPAR grew 5.6% in local currencies, it was down 4.7% as reported in dollars. We expect Asia, x China, to sustain its growth trend. In Europe, the first quarter is a small contributor and does not tell as much about how the year might shape up. We were hopeful that Europe may surprise to the upside in 2014. That may yet happen but it did not in Q1, and so far, Q2 looks to be more of the same. U.K. and Italy are doing well. France and Spain are sluggish. Eastern Europe could be hurt by events in the Ukraine. Greece is on a strong recovery track. Occupancies continue to climb. Supply remains dormant. We need to see better rate gains in Europe, and for that, we need somewhat more robust demand. Until that happens, Europe growth will stay in the 2% to 4% range we have experienced for the past few years. Meanwhile, surprisingly strong euro is helping profits as reported in dollars. In Africa and the Middle East, the story remains country-specific. Egypt is hurting as it laps the recovery we saw in the first half of last year before political uncertainty returned. Saudi and the Gulf are doing well. South Africa was up double-digits while Nigeria was flat with little or no inbound travel due to instability. Similarly in Latin America, Mexico continues to boom. Mexican resorts are very popular destinations again, whereas in the South, Brazil was down, hurting most of the region since it is also a major source of regional travel. Problems in Argentina continue. The devaluation helps our margins in the short term till local costs catch up. While Q2 will benefit from the World Cup in Brazil, these regions will likely continue in this mode for the next few quarters. SVO continued to be stable with sustained improvement in default trends. There are only 2 condos left to sell at Bal Harbour. In summary, we felt good about how the quarter is shaping up. We have left the major components of our outlook range for the year largely unchanged. We're raising our full year EBITDA outlook range modestly to $1.21 billion to $1.23 billion. We now [ph] expect a 50-basis points lower tax rate, which takes our full year EPS outlook range to $2.76 to $2.83. SG&A growth in the second quarter as reported may be higher than you might expect since we will be lapping the recognition last year of $7 million in state tax incentives derived from our headquarters move to Stanford. As we indicated, we have recurring annual benefits in the $3 million to $4 million range, which will most likely be recognized in Q3 this year. Moving on to asset sales. We continue to believe the market for hotel sales is becoming deeper with a larger pool of buyers and more buyers looking for portfolio deals. We have a significant number of assets on the market in North America, Europe and Asia. Our intention is to get transactions completed on acceptable terms as fast as we can. As is our practice, we will announce transactions as we get them done. We just closed on the sale of the Aloft in Tucson, a conversion that we had done ourselves. And now to capital allocation. With the announcement of our quarterly special dividend, we have opened up the third front, so to speak, to return cash to shareholders. This year, our special dividend is a return of approximately $500 million in net cash we realized from Bal Harbour. We can and will consider sustaining the special dividend depending on our cash generation from asset sales, other avenues to return to cash to shareholders and other uses for the cash to drive growth in our business. The special dividend adds on to the adjustments we had made to our regular dividend a couple years back, moving to a better yield and higher payout ratio. We have over $600 million in stock buyback authorization we can deploy, and we'll do so as opportunities present themselves. With a healthy regular dividend, quarterly special dividend and a big stock buyback authorization, we have all the levers we need to return significant cash back to shareholders as we have done over the past 10 years when we returned $10 billion through all 3 avenues. We know that many of you would like us to step up our stock buybacks, adopt a less opportunistic and more programmatic approach. You would like to see us borrow more at current rates and reset our capital structure. We want to assure you that your views have been heard by Frits and I, as well as our board. It is important that we remind everybody that while there may not have been stock buybacks in Q1, we returned $190 million to shareholders through our quarterly regular and special dividends. You have the cash and the flexibility to reinvest in our stock or redeploy this capital as you see fit. Our return of capital strategy is neither inflexible, nor inviolate. We're always calibrating what we do based on new facts, and we'll continue to do so. In the end, we are clear that any cash we cannot productively deploy to grow our business will be returned to shareholders. It is not a question of if; it is purely a question of how and when. 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 Carlo Santarelli from Deutsche Bank.

So guys, I obviously respect your views on the buyback, and clearly that the capital return story has been present in different forms. But Frits, I believe, in your prepared remarks, you did highlight how Starwood has tried to focus on the long-term and long-term trends as they relate to the growth potentials for your brands. And I think obviously, as you identified one of the major controversies right now and potentially one of the reasons for the underperformances as some investors would call out is the clarity of the buyback story relative to some of your peers. Do you feel at any point where you start to look at the ROI implied by maybe a more aggressive buyback as a way of manifesting that long-term view in the near term and buying more of a company that you're bullish on longer-term?

Yes, Carlo, thanks for the question. And I think that you among others have been vocal in calling this out. I do want to go back, though, and clarify a statement I made. The reason for our underperformance in the first quarter, if I were to hazard a guess, had more to do with the emerging market selloff than lack of clarity around buybacks. I don't think that our buyback strategy in fact got suddenly less clear in the first quarter after a great performance of our stock over the course of 2013. Then I haven't even [ph] said, and I don't mean to be snarky in that answer, but the other aspect of the short-term versus the long-term piece is that as the world zigs and zags, we believe we will come into some opportunities or potentially could based on what's happened historically where our stock may trade at more of a discount to its intrinsic value. So that's something that we're going to continue to work on. And as Vasant said, we're going to keep recalibrating both that view into valuation, as well as the outlook to determine what our level of buybacks are going to be. So we're going to continue to look at this, and we're well aware of the question based on what you said among others.

The only thing I would add, Carlo, is that you shouldn't forget we returned $190 million back in the first quarter and, given what we've said about our quarterly dividend and our quarterly special dividend, that is a pretty reliable amount of cash you're going to get back each quarter this year, and it's a nontrivial amount and we still have flexibility to deploy more cash in terms of returning it to shareholders through buybacks, and so we have $600 million in authorization. So again, 1 or 2 quarters don't tell you what the long-term game plan is in terms of returning cash to shareholders.

Your next question comes from Thomas Allen from Morgan Stanley.

So since announcing your disposition strategy early last year, you sold about $500 million of real estate in about a year. Would you be surprised to do less than that in the year ahead? And then just second part of this question is kind of should we read your recent actions suggesting that as you sell your hotels, you prefer to use that capital to pay special dividends than buying back stocks, kind of assuming your stock price appreciates in a reasonable fashion?

Yes. So in answer to your first question around -- and obviously, we knew that people would do something like what you just did, which is, gosh, if you're going to sell $4 billion -- or $3 billion over 4 years, that means $750 million a year. The first year, you're at $500 million, you're behind. And, of course, I think we were pretty clear that we were going to be subject to what the marketing conditions look like and whether we could find both the right owners to work with and the right agreements to manage our hotels on their behalf. The good news, I think, is and this isn't to speculate that we'd sell more, although I think the indications would suggest that, is that we have more hotels on the market now than we've had at in any time since the crisis, and that's in response to what we see to be a deeper and broader market in terms of hotel asset sales, as Vasant referred to, as well as strong performance of our properties. So the likelihood is, if that situation persists for 12 months, that we would sell more than we did over the last 12 months, but do please keep in mind that there were couple ifs in that statement. In terms of preference for special dividend versus buyback, I think, again, we're going to keep recalibrating how we want to return cash to shareholders depending on the situation as we see it. I think what we've been very clear about is the fact that we do intend to use all 3 levers, a consistent dividend, a special dividend and a buyback, as we see fit at any given moment. So -- and Vasant, you may want to add something.

I think what we've done is we've tried to create maximum flexibility both for us and you, our shareholders. We have maximum flexibility because we have all 3 avenues. We have said that we have a very healthy regular dividend, one of the best yields in our sector. We now have a special dividend that is quarterly, that gives us a structure that can be continued if it makes sense. And we've said that we will consider continuing it as a way to return cash from asset sales or other sources. And we have the ability to do buybacks at whatever level we want. So that gives us a lot of flexibility and it gives you, our shareholders, a lot of flexibility, too because you get a significant amount back in cash that you can deploy based on your own assessments, as well as when we do buybacks, you get reductions in share counts. So I think what you should view our approach as being -- as one that offers flexibility. Maybe it doesn't give you the quarterly predictability that some of you might want.

Your next question comes from Steven Kent from Goldman Sachs.

Just -- I'm sorry to ask 2 questions. But North America systemwide REVPAR grew 7.1%, but the owned portfolio grew 5.5%. Could you just give us a little bit of color on that, why there's that discrepancy? And then just from a strategic perspective, you just noted that the buyers of assets in the market is very deep, getting deeper, it sounds very strong there, but you also said that you may want to buy your own stock at a different point because there could be volatility in the broader global environment. Is your view that the buyers of hotels would have a different view than you? So what I'm saying is, if the market or the economy were to decline significantly over the next 2 years, wouldn't those same people who were going to buy a hotel also be hesitant? That's where I'm having trouble understanding the 2 strategies at the same time.

I'll take the first one on your North American owned hotels. Our owned hotels, as you know, is a fairly small portfolio right now. I think we're down to less than 20 hotels in North America, if I remember right. There's a heavy skew towards Canada. There's a skew towards New York. And so when you throw that in, you can see why they would underperform, the country as a whole, given what the first quarter was like in the North. So I don't think our North American owned hotels are representative anymore of what the country, as a whole, is doing and it's purely geographic. On your second question, I'm not sure I fully understood what you were getting at. Clearly, our view is the long-term opportunities in our business are very attractive and we remain very bullish. We are returning $800 million roughly back to shareholders this year, which is effectively committed and reliable and you can count on it, and that cash is available to our shareholders to -- if they want to redeploy it back into our stock, which, of course, we think is a good investment. In terms of buybacks, we have an authorization, and we will use it whether that is in one particular quarter or not, that depends on circumstances. I don't think it says anything about our long-term views of the business. I don't know. I'm not exactly sure, Steve, if there was something I was missing, but I don't know, Frits, do you want to add?

Yes, I might try to clarify both. First of all, with respect to the first question, our owned REVPAR is -- now reflects a handful of properties versus several hundred that are otherwise in our system. And I think you would understand that in some quarters, that would shift one way or the other. In fact, that's been the case for some time as you've been watching our company. With respect to the second part, I didn't say the market was very deep, so let's just be really clear again. I said that the market is deeper and broader than it has been for some time and we have more assets on the market than we have before. And I think you're trying to play games with words in terms of the rest of your question. I think what you mean is are we somehow missing the point that if we can't sell our hotels for great prices, our stock will be lower. The reality is we're going to sell hotels when we have partners and when we have situations where that makes sense, and we've been very clear about that over time. We've also been very clear about the fact that we'll continue to look at where our stock is trading relative to value as we look at buybacks.

Your next question comes from Ryan Meliker from MLV. Ryan Meliker - MLV & Co LLC, Research Division: Just a question I had with regards to the Aloft Tucson transaction, I guess, any implications from it. It looked like, and correct me if I'm wrong or maybe provide a little detail, that you guys incurred about a $36 million write-down in the first quarter. How much of that was associated with that Aloft in Tucson? And obviously, you guys sold it for $19 million, so I'm wondering if there was a substantial write-down with regards to the cost you incurred for the acquisition and then redevelopment of that asset. And then are there any implications with regards to the write-down of the costs that it might take to convert one of these assets that might be limiting your Aloft growth across the U.S.? Obviously, you guys are still only around 80 hotels now 10 years after the inception of the brand in 2005.

Yes. No, I think there's a lot of misconceptions in that question. And if there are those out there, it's good that we have the opportunity to answer that. The impairment was not related strictly to the Aloft. There was a small impairment on that particular asset, but that's because of historical considerations. That was a very old hotel that was on that location that went back to days prior to the current version of Starwood. As you know, Starwood originated as a hotel REIT. There were some assets that predated the acquisition of ITT Sheraton. There were a variety of step-ups along the way, so there were book values that went back awhile. We did spend money to convert it to an Aloft. If you look at the ROI on the conversion and what the realistic sort of market value of the land was and all that, we got a good return. The impairments were other things, including a transaction that is close to completion where we're converting a leased hotel to a long-term management contract, which we hope will get done in the next week or 2, and we can tell you more about it on our next call, and then a couple of other things. So it was not linked to that particular sale. Alofts are doing well. We have a good pipeline of Alofts around the world, and in the U.S., they continue to increase their REVPAR index. And if you speak to owners, I think you'll get a very positive response from them.

Yes, this is Frits, I'm just going to add a couple of things to what Vasant said to reinforce the point. The first is that both with the Tucson redevelopment, as well as the San Francisco Airport redevelopment for Aloft, we did that to be able to prove the case and understand for ourselves what the economics would be to make substantial conversions like those 2 projects were. And if we look at both of those projects as though we were a real estate investor, we would have been happy with the return that we got there, which was in fact the point of doing the project. The second piece is, just to be clear, the Aloft brand first opened its doors, I want to say 5 years ago, not 10. And to get to 80 hotels in 5 years and to be on track to get to 100 hotels in the next year or so, I think it would be a short list of hotel brands that have been launched in the last decade that in their first 6 or 7 years of operation would have gone to 100 properties with a worldwide footprint. And as Vasant said, in terms of REVPAR index, the ramping up of the pipeline and then the performance of the brand, we're actually quite happy with how it's doing.

Your next question comes from Felicia Hendrix from Barclays.

Vasant, you gave us some good color on the strength of the corporate and group bookings. I was wondering if you could give us some more detail on rate there. What are you seeing for this year and next year, and I are you seeing an increased appetite for spending on F&B. And also, if I may just weigh in on the capital allocation subject here, I think the other side of the question that investors have is, and have it for us a lot is, what are you doing with the other balance sheet? I mean, it's clearly not additive to value, so folks are definitely wondering why you're not being more aggressive there.

Yes, in terms of corporate business, obviously, in the U.S., for sure, and generally around the globe, corporate transient is a huge bright spot. I mean, we've said for a long time that our business is driven very much by the global corporations, and global corporations are doing very well and that is evident in their spending. Overall, rates are in the mid-single-digits in some of these corporate negotiated rates. Certainly, corporate groups are the healthiest of all the group business. Corporate group business does tend to be booked with shorter lead times, but the trends are all very strong, and not just in the U.S., they're strong in Europe and they're strong in Asia, so it's a global phenomenon. In general, we see no change in that trend. And if you look across segments we've talked about, we tend to be high-end, and so we get a lot from professional services, very strong, and these would be the consulting/accounting firms, high-tech, very strong. Pharmaceutical is doing okay. Finance is okay. But overall, in terms of F&B, yes, there continues to be a desire on parts of corporate accounts to manage F&B spending, but it's not a significant issue. So net-net, it's all plus. The second question was, I missed that one. We'll move to the next one.

Your next question comes from Joseph Greff from JPMorgan. Joseph Greff - JP Morgan Chase & Co, Research Division: Before I ask my question, I just want to make a comment. Frits, you said twice that you believe that your share price underperformance is a function of geography in emerging markets. I would say it's the lack of capital return in the form of buyback that's caused underperformance relative to other stocks, and we're hearing it from investors. You guys should hear that and be appreciative of that. And you've talked about your capital allocation. I guess, my question on the capital allocation from here and incremental discussion on special dividend is, when you think about special dividends, do you think about spreading out each special dividend, much like what you announced a couple of month ago, or would you look at it as more onetime in nature?

I think in terms of special dividends, by creating a quarterly structure, we give ourselves the flexibility to either adjust the quarterly dividend, but we're not averse to doing onetime special dividends, too, if it makes sense. As you know, we did that when we did the Host transaction. We returned, I think, $2.8 billion to you in the form of stock, as well as some cash as a special dividend. Again, you shouldn't suggest -- you shouldn't see special dividends as our only approach to returning cash. We do believe in buybacks. We do believe that reducing our share count is a valuable thing to do, so we will calibrate between the 2 and we're not wedded to special dividends per se as the only way to return cash to shareholders.

Your next question comes from David Loeb from Baird. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: My first question, and then I'll give you the follow-up. We've been hearing that you had been marketing a group of 6 North American hotels. Are you also marketing a large number of international hotels? You did mention that you were marketing hotels in Asia and Europe. We've only heard about one larger asset in Asia. And then as a follow-up to Ryan's question, Lightstone actually reported an 8.8% to 2014 expected cap rate on that Aloft Tucson transaction. Do you think that valuation reflects the brand, or is it more related to the market?

On the second one, it's -- there are different ways in which people can look at this, and it reflects potentially the market. It's Tucson, it's not a major market. In terms of your first question...

David, it's our practice not to comment on anything, rumors in the market related to transactions, one way or another. When we get to the point when we're ready to talk to you about something, we'll let you know.

Yes, but the fact is, as I said in my comments, we have assets on the market in Asia. We have assets on the market in Europe, and not individual assets, but multiple assets -- not single assets, but multiple assets. And yes, we have a lot of hotels that are in the market in the U.S. But again, I mean, there are all kinds of rumors out there. There've been various press reports. It's not our practice to comment on individual things, but we will announce these sales as they happen.

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

So just -- I'm going to avoid the obvious question on capital returns. But I actually wanted to turn to something else. Frits, last quarter, you talked some about technology and in the last month or so, the topic of Airbnb has become one that -- we've actually gotten a number of kind of longer-term investor questions about. So I'd like to turn the question over to you and get your thoughts on how disruptive do you think a technology like Airbnb is to the hotel industry? And kind of what segments of your business do you think that you could see an impact from a technology like this, whereas other segments that you think might be a lot more protected?

Yes. Look, I think that the growth in Airbnb is a real phenomenon. I think the perspective that anything that reflects on more healthy demand for travel and encouraging people to get out, just like discount airlines as well, is generally a good thing for travel, not the other way around. The reality is that our focus in terms of technology is on the loyalty of the guests that we've been talking about for a while. And as you get to the high end and as you get to people who want to be taken care of when they travel, that's the segment that we compete in, and that's the one that continues to grow around the world. I do think there will continue to be disruptive technologies in different ways that people both buy and deliver lodging. But in some respects, if you go back 10 years to the rise of the OTAs and how I think there was a great deal of concern or question about whether that was going to disrupt the industry, OTAs, to us, are a very steady single-digit percentage of our revenue overall systemwide. What's really growing for us is our own Web and mobile channels. And when it comes to technology, our ability to know what people's preferences are, to be able to make our hotels more able to deliver on those preferences, and to give people offers that are targeted to their behavior and what they've expressed, either through their behavior or by telling us, I think are some incredible opportunities for companies like ourselves to leverage technology to deliver better experiences to our brand. So net-net, I see technology as increasing the opportunity for our business. And if you look at the travel intensity of the world today and the growth in travel, I think that's the most important driver. If the only thing that were happening in the world were the expansion of Airbnb, you might be concerned, but it's happening concurrent with a whole bunch of other things, many of which I think are extraordinarily favorable to our business model.

Your next question comes from Robin Farley from UBS.

Great. I wanted to ask about the pace of management fees through the year, because it looks like in Q1, it was helped by termination fees. And so first of all, I guess I wanted to ask if that was in your guidance when you gave it. And then -- and it didn't raise your full year guidance. Your full year guidance is unchanged. But excluding the termination fees, your other management incentive fee growth was kind of below that 10% to 12% guided range. So I'm wondering if you could just comment on sort of how you see the pace of that in the rest of the year?

Robin, we, in fact, anticipated that. It was not entirely certain, but we knew that it was likely in the first quarter, which is why our first quarter, I think, guidance range for fee growth was in the 10% to 12%, whereas, our full year range was 8% to 10%. So it was not a surprise. It does reflect what happened in the first quarter. Our full year range is still 8% to 10%. Our second quarter range is also 8% to 10%, and that is the rate that we see as one that's sustainable, and you're right about your question.

Your next question comes from Smedes Rose from Evercore.

Frits, in your opening remarks, you said you, for now, wanted to play it safe. And I just wanted to ask you, is that kind of pertain to the kind of balance sheet that I think most people would argue as kind of underlevered, here with low debt and high cash balance, or is it more a comment on reinvesting in the hotel business now through a brand acquisition or things that you've maybe done in the past. Just wanted a little more clarity on that.

Yes, yes. Good question, thank you, Steve. I think the reality is this, that over the long term, and I think this is something that we've been trying to emphasize now for some time as we talk about our business. Over the long term, we see extraordinary continued growth in demand for high-end travel in the particular for our brands. Quarter-to-quarter, as sentiment among investors and travelers changes, we see a great deal more volatility. And so what we've said all along is that we want to be aggressive in investing in technology and investing in building a platform by which we build loyalty among high-end travelers and also customers that -- for whom many of those high-end travelers work. Where we want to play it safe are on areas like maintaining a cost structure so that if the world turns upside down we don't have costs that we need to go back and cut in a significant way. We've talked about playing it safe more specifically as it relates to our balance sheet. And then, I think the question about investing back into the hotel business, if by that you mean investing in hotels, I think, again, over the long term our strategy is pretty clearly stated, is that we want to become asset lighter and have 80% of our earnings driven by fees. At the same time, and I think again, we've been pretty clear about this for the last few quarters, we have invested in our existing properties in a pretty significant way, believing that as the world improves and as the asset sale market improves, having hotels that are in good shape that don't have, as people say, any significant hair on them, makes them more sellable and easier to sell to a broader pool of buyers, and we've certainly been willing to invest in that direction. In terms of investing, though, in the fee part of the business, most of that's going into demand creation in the form of building out the attractiveness of SPG and in making sure that we can be better at tracking and delivering on people's preferences and make our brands, brands that resonate with people with a solid, distinct and compelling positioning. So a bit of a multi-faceted answer, though, to a question, I think, that was pretty sweeping.

Yes, I think there's no holding back on investment in terms of future growth. So our infrastructure spending in the growth parts of the world like Africa and the Middle East and like Asia continues at double-digit levels. You've seen us invest quite heavily in our technology platform that Frits referred to, which is creating new capabilities that we think create a lot of value for our guests. We've definitely invested whatever we need to, to create the pipeline, which is very healthy, especially in international markets. So as Frits said, where we play it safe is in places where there isn't a lot of growth. We've, in fact, scaled back where we can on our infrastructure in the, let's call it, the mature markets, but there's absolutely no holding back on investment in where we see long-term growth.

Your next question comes from Kevin Varin from Citi.

Can you just comment on the investor demand for international hotels specifically? What does the buyer pool look like?

Well, it's specific to the nature of our hotels. So as you know, in Europe, a lot of our hotels would fall into what you might call one-of-a-kind trophy-type hotels. The buyer for those hotels is typically not an institutional buyer. It tends to be a private ultra-high-net-worth buyer, so that's what you would see in Europe. In Asia, certainly, there's a lot of money in certain parts of Asia. So even though our hotel may be in Australia, for example, the money would come from outside Australia for deployment into Australia. Certainly, in the U.S. the buyer base is institutional. And what we're seeing in the U.S., as we said on our last call is for the past several years, we were only able to sell hotels in ones and twos because the primary buyer was public REITs who would buy a hotel, issue some stock and then come back for another hotel. What we're seeing now, of course, is much more private equity money and, therefore, a greater interest in portfolio sales. So we would be more interested in now looking at portfolio sales to private equity or other institutional buyers in the U.S. So it varies by region.

Yes. I think just to amplify on that, in terms of international demand, the 2 big geographic pools of money would be the Middle East and then the other would be China, although I would say broadly speaking, not just PRC China, but ethnic Chinese in other markets throughout Asia. And aside from that, you do have some sovereign wealth money, although we haven't seen a lot of that in discussions around asset sales. And then, of course, as Vasant mentioned, you do see some firms throughout markets outside of the U.S. but not as many as you would in the U.S., certainly.

Your next question comes from Joel Simkins from Crédit Suisse. Joel H. Simkins - Crédit Suisse AG, Research Division: You spoke a little bit earlier about Europe and what you're seeing there. It seems like gradual, albeit a bit modest improvement. I guess, what would sort of change your -- or would you sort of see that improve from these levels? And then as you look at sort of the recovery in Europe right now, what's sort of the composition between business versus leisure at this point?

Yes. So as you know, Joel, our business worldwide is 70% to 75% B2B. And so clearly, sort of corporate confidence is really important to us. Europe is slightly different in that we have a number of destination hotels, particularly in Italy, but also across France, Spain, U.K. and so forth. And so some of the outbound demand among affluent leisure travelers is important for Europe as well. So in that respect and, of course, the summer will tell us a lot more. A particularly strong market for us right now is London. But things do vary a bit quarter-to-quarter. And I guess, the real question is whether we -- what would it take for us to see a real bounce back in Europe. I'm not sure that that's even something that we would plan on in terms of the overall economy. I think what we can hope for is steady improvement in local European demand for European properties, and then the continued growth in inbound travel from North America, Latin America, Middle East and Asia, so -- and I think that would be the real driver of demand, particularly given the destination properties we have in the gateway cities across the region.

Your next question comes from Harry Curtis from Nomura.

Just going back to the pool of buyers for some of your European assets. How many swimmers do you see in the shallow end of the pool if, in fact, there aren't that many folks seeking those kinds of assets, and really, has it changed over the last 12 months? And then the second question is really more of a comment. Again, it's -- you guys are among the best managers in the lodging industry that we know. What do you see out there that we don't see that causes this divide between our perception that you ought to be using your under-levered balance sheet, particularly during periods of time when your stock does get lower? In the first quarter, the stock got down to 73. What are you seeing that makes you more nervous than us?

I think in terms of buyers, on the second question, there's nothing we're seeing that makes us more nervous than you, and I think you're interpreting too much into some of this, and perhaps overstating the case. But we get it. We understand where some investors are coming from on this topic. But in terms of buyers, our European hotel base has always been of a trophy variety, so if you go back in time, you'll see what we've done. The buyer base has changed over time, so in the last cycle, we sold the hotels, like the Danieli, that was an Italian buyer. We sold Danbury, that was a Middle Eastern buyer. We sold a couple hotels on Lido island in Venice, that was also an Italian buyer. Today, we would say that the base of buyers for our Italian hotels tends to be more from outside Europe. It's Middle Eastern, generally, in origin. So it varies. It varies on where money is being deployed. And yes, it's always been fewer buyers than large pools, and these are not auctioned largely -- these are not big auctions. These are very selective -- we think of them very much like collectibles that you would find at a Christie's [ph]. So we're not too surprised by the fact that these would be a small buyer base.

Your final question comes from the line of Nikhil Bhalla from FBR. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Just a very simple question here on the group distribution in your portfolio. If you could just remind us how much of that is in the U.S., what it looks like internationally, that would be great?

In terms of group business, it tends to be more in the U.S. The U.S. may be 1/3, group; 2/3, non-group and non-U.S. is probably more like 1/4 group and 75% nongroup. So clearly, group is more important in the U.S. and U.S. group also tends to have longer lead times.

Thanks, Frits and Vasant. I want to thank all of you for joining us today and 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 2014 Earnings Conference Call. You may now disconnect.