Starwood earnings flap overshadows growth projections

Gary Thompson

Friday, Oct. 30, 1998 | 11:49 a.m.

A flap over Starwood Hotels & Resorts' latest quarterly financial report overshadowed predictions of growth from that company and Hilton Hotels Corp. Thursday.

"Certain people in the media have an axe to grind," Starwood Vice President Daniel Gibson told investors at a Salomon Smith Barney leisure industry conference in Las Vegas.

He was responding to questions about an article in Thursday's Wall Street Journal that said Starwood's latest financial report didn't disclose the company had posted a $77 million third-quarter loss.

The loss compared with net income of $58 million, or 45 cents a share, in the year-earlier quarter.

"The Wall Street Journal said we weren't forthcoming," Gibson complained. Reporter Christina Binkley, who covers the gaming industry for the Journal, told the Sun, "I have no axe to grind. I'm just doing my job, reporting the news."

Starwood had excluded an income statement, which would have reflected the loss, from its Wednesday news release.

Instead, the Starwood announcement said the company's adjusted pro forma cash flow had jumped 36 percent to $427 million.

Starwood told the Journal it had excluded the profit-and-loss statement -- used by investors to assess a company's performance -- because it could be misleading.

It said the latest-quarter's loss resulted from $235 million in acquisition-related charges and to a $70 million writeoff due to settlement of interest-rate hedging contracts.

Gibson said Thursday he had made the decision to exclude certain information from the previous day's announcement, but insisted it was because he'd been besieged with phone calls from investors confused over the second-quarter results a few months ago.

He also defended Starwood's practice of excluding the results from certain assets that are performing poorly, such as the Desert Inn hotel-casino, from its financial reports. Starwood has said that such assets are being "held for sale" and don't fairly reflect the company's performance.

"I didn't want you guys worrying about how the Desert Inn is performing if we're going to sell it," he told the Salomon Smith Barney group, which was made up of representatives from several big institutions, hedge funds and other sophisticated investors.

Gibson said Starwood has discussed the Desert Inn sale with "several interested buyers," but declined to identify them. He said one buyer had submitted a formal offer, but was unable to finance the deal.

He said Starwood expects to get $350 million from a sale of the Strip resort, which has posted negative or break-even cash flow for several quarters despite a $200 million renovation.

Starwood hopes to sell about $3.7 billion of assets it bought over the past two years as part of the ITT Corp. and Westin acquisitions.

Gibson and three Hilton executives who spoke separately were upbeat about future prospects for their respective companies.

Gibson said Starwood's cash flow from gaming operations, which include the Caesars World casinos acquired in last year's ITT purchase, have risen 20 percent in the first nine months of this year.

Gibson said Caesars' Indiana riverboat, the "Glory of Rome," is a $300 million investment "that has the potential to earn $100 million in EBITDA" -- earnings before interest, taxes, depreciation and amortization -- "per year once the 500-room hotel adjoining it is completed in 2000."

With Caesars Palace, he said, "We're right in the middle of the Las Vegas Strip. We're seeing higher occupancy rates than ever and a higher cash-to-comp ratio on rooms." Caesars has often given free rooms to high-rollers, but that business has tailed off in recent months due to global economic turmoil.

But Gibson said Starwood's Las Vegas EBITDA will decline next year, though, "We're not forecasting any huge negative there."

Overall, he said, Starwood's luxury lodging business should help propel a 15-20 percent gain in cash flow and, with interest expense stable at $600 million, a 25-50 percent jump in per-share earnings next year.

"Why doesn't anyone in the industry believe Starwood can do what you say?" asked one investor, referring to more modest growth predictions from other big lodging companies.

"We're starting from a low base of occupancy and believe we can achieve the numbers," Gibson said.

He said Starwood expects to generate $3 billion of free cash flow over the next three years, but will probably use the funds for strategic acquisitions or share buybacks before opting to prepay long-term debt, which stood at $8.4 billion at the end of the latest quarter.

Hilton Senior Vice President Marc Grossman said his company is proceeding with plans to split into separate gaming and lodging entities and for the gaming spinoff, Park Place Entertainment, to acquire Grand Casinos' three Mississippi resorts by year-end.

The split will enable investors to select between "pure" gaming or lodging investments, allow them to focus on the companies' performance within those industries, and allow for aggressive acquisition strategies, "especially in gaming," he said.

Hilton Hotels and Park Place will each have about $2.3 billion of debt. The lodging company will post about $625 million of cash flow for 1998 on a pro forma basis, according to Matt Hart, the company's chief financial officer.

He said Hilton expects 4-5 percent growth in revenue per available rooms in 1999 and an 8-10 percent rise in cash flow due to operating leverage.

Hilton will spend about $500 million a year on select hotel acquisitions, Hart said. The company will fund those through cash flow and a $1.75 billion revolving line of credit, which may also be used for stock buybacks, he said.

Hilton Treasurer Scott LaPorte, who will become CFO of Park Place Entertainment, said that company will have $700 million of pro forma EBITDA for 1998 and $400 million of free cash flow.

He said Park Place is negotiating a $2.5 billion credit facility and "will be very aggressive in making acquisitions in 1999."