Starwood Hotels & Resorts Worldwide Inc (HOT) is on track to go asset-light, with a goal to have 80% of EBITDA managed and franchised, as the company sees tremendous system growth in emerging international markets, says Simon Yarmak, CFA, Vice President at Stifel, Nicolaus & Co., Inc.
“Back in 2000, about 80% of HOT’s EBITDA came from their owned portfolio, and 20% came from managed and franchised income. Today, about 40% of its EBITDA is derived from its owned portfolio, and 60% from the management and franchise business. As HOT goes through the cycle, they hope to sell $3 billion of real estate and to shift the owned portion of its portfolio to 20.0% of EBITDA, so about 80% of EBITDA will come managed and franchised. The shift in HOT’s revenue structure will coincide with investors favoring the operators over the owners,” Yarmak said.
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Additionally, 90% of Starwood‘s growth is coming from international efforts, primarily in emerging markets and particularly in Asia, Yarmak says. He expects HOT to generate a significant amount of free cash flow over the next several years, which will be returned to shareholders via buybacks and dividends.
“About 90% of HOT’s system growth is international, primarily in emerging markets, with about 80% of in Asia. They have one of the largest pipelines in China and in India, and we believe going forward a lot of the growth for hotels internationally is going to be in Asia. They’ve a pretty good footprint there and an excellent pipeline,” Yarmak said. “Lastly, the last couple of years they have sold real estate, paid down debt and pushed their balance sheet into the best shape it has ever been. Therefore the significant amount of free cash flow that they are going to be generating over the next couple of years will be returned to shareholders in the form of dividends and share buybacks.”
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