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The Honolulu Advertiser
Posted on: Sunday, February 3, 2002

Starwood tries to stay afloat in '1,000-year flood'

By Jeannine DeFoe
Bloomberg News Service

WHITE PLAINS, N.Y. — Barry Sternlicht, chairman of Starwood Hotels & Resorts Worldwide Inc., took over a near-bankrupt hotel real estate investment trust in 1994 and in four years turned it into the largest U.S. hotel company.

The 41-year-old financier built Starwood through the purchase of the Westin hotel chain, and by fending off Hilton Hotels Corp. to buy ITT Corp. and its Sheraton unit. Now he has to contend with a recession and the steepest drop in hotel demand since 1971.

If Sternlicht can manage the company through his first industry downturn, it will go a long way to proving he can do more than make acquisitions, investors said.

"It's paramount that he effectively manage," said Chandler Spears, senior analyst with the Davis Real Estate Fund, which owns 500,000 Starwood shares. "If he's successful, the capital markets will reward them with a higher stock price."

Starwood last week reported a loss of $54 million, or 28 cents a share, compared with profit of $131 million, or 64 cents, a year earlier. Revenue fell 21 percent to $878 million. Results for the latest quarter include charges of $52 million to write down the value of certain assets and for debts considered no longer collectible.

White Plains, New York-based Starwood owns 209 hotels and manages or franchises 540 properties. Besides Westin and Sheraton, the company owns the Ciga group of European hotels, including Venice's Hotel Danieli and Hotel Gritti.

Cutting costs

When it appeared business and leisure travel wouldn't rebound soon after Sept. 11, Sternlicht moved to cut costs. Two weeks after the attacks, Starwood announced it was firing 10,000 workers, or 12 percent of its work force, delaying renovations and cutting its advertising to conserve cash.

Sternlicht, who said at the time the industry was facing the "1,000-year flood," also changed the company's dividend payment to an annual one instead of quarterly to improve cash flow. He shut wings of hotels that had unoccupied rooms and cut service hours for gyms and other hotel amenities.

Some analysts said Sternlicht may have gone too far. Hilton Hotels Inc. hasn't fired workers or reduced the number of hotels it plans to open to gain an advantage on competitors when travel rebounds.

"The fourth-quarter earnings will be very telling," said John Arabia, an analyst with Green Street Advisors. "The hardest part of being an analyst is determining whether these expense cuts could cost the company in the long run by alienating guests. Those are the questions that we won't be able to answer for some years to come."

Sternlicht declined to comment. In 2000 he was paid $4.63 million, plus $1.08 million of restricted stock and options to buy 1.5 million shares of stock for $21.81 each, according to Securities and Exchange Commission filings.

Thinking differently

If anything, Sternlicht has shown he can think differently from his peers, many of whom spent their whole careers in the hotel business.

The collapse of the World Trade Center forced the evacuation of lower Manhattan office buildings, including the headquarters of Lehman Brothers Holdings Inc., Starwood's investment banker.

With nowhere to go, Sternlicht offered to rent the company's Sheraton Manhattan hotel in midtown to the securities firm.

"He was probably the first executive to line up alternative uses of his properties, which is smart, creative thinking," said Judson Brooks, an analyst for the Oakmark Fund, which owns 3 million Starwood shares.

Starwood's shares have risen 53 percent to $32.58 since September as investors anticipate a recovery in hotel room demand in 2003. The share price is down from a 52-week high of about $41 in May.

Sternlicht has also created a chain of hotels called W catering to celebrities and the wealthy that he has expanded across the United States. He has also taken the company's St. Regis hotel and franchised it to upscale resorts.

High-end hurting

Starwood's highest-end hotels have been hurt the most since the attacks. Nightly rates for Sheratons and Westins are down about 20 percent since September, compared with a 5 percent decline for mid-priced hotels, said analysts. Overall, revenue per available room, a measure of demand, fell 6.9 percent in 2001, according to Smith Travel Research.

Compounding Sternlicht's troubles is $1.9 billion of debt Starwood has coming due within the next 18 months, according to Securities and Exchange Commission filings.

With lenders reluctant to finance hotel companies, Starwood may be forced to borrow at higher rates, Arabia said. Starwood is already paying more interest on $1.8 billion in debt after its lenders agreed to relax some terms to keep the company from falling into default.

To pay down debt, Starwood is trying to sell the Ciga chain of 25 hotels. The company first announced it wanted to sell the hotels in late 2000. At the time, the company estimated they were worth $1.7 billion. Now analysts said they may only fetch about $1.2 billion.