Starwood Hotels to Sell Portfolio of Real Estate Assets to Host Marriott

Starwood Hotels & Resorts Worldwide has reached a definitive agreement under which Host Marriott Corporation (Host) will acquire 38 properties from Starwood - including hotels under the Sheraton, W, Westin, St. Regis and Luxury Collection brands - in a stock-and-cash transaction valued at approximately $4.1 billion, including debt assumption. As part of the agreement, Starwood will generally continue to manage the properties under their current flags for up to 40 years.

Host is acquiring 38 hotels, including 20 Sheratons, 13 Westins, one St. Regis, two W's, one Luxury Collection and one non-branded hotel. The portfolio includes 28 hotels in North America, six hotels in Europe and two each in Asia and Latin America. Total rooms in the portfolio are 18,964. Total EBITDA pre-management fees for total year 2005 for the portfolio are expected to be approximately $376 million, and $315 million post-management fees. Therefore, Host will be acquiring approximately $315 million in EBITDA. 54% of the post fee EBITDA in the portfolio is derived from Sheraton, 35% from Westin with the remainder coming from the other brands. 81% of post fee EBITDA is from North American hotels.

Host will be paying $4,096 million in cash and stock based on Host's closing stock price on Friday, November 11th of $17.44. $2,329 million or 57% will be in the form of 133.5 million shares of Host stock which will be distributed directly to Starwood holders of record at closing. $1,767 million will be in the form of cash and assumed debt including $104 million in property specific debt and, subject to bondholder consent, approximately $600 million in Sheraton Holding Corp. debt. The remaining $1,063 million will be paid in cash to both Starwood and its shareholders. 

Under the terms of the sale, a subsidiary of Host will be acquiring, among other assets, all the stock of Starwood's real estate investment trust in a transaction that will be taxable to shareholders. In this transaction, Starwood's shareholders will receive $11.18 in value for each share of class B stock they own (based on Host's Friday closing price). This consideration will be in the form of 0.6122 shares of Host stock and 50.3 cents in cash for each Class B share. As a result $2,451 million in cash and stock proceeds from the transaction, or 60% of total proceeds, will flow directly to Starwood shareholders. Starwood will receive $941 million in cash and transfer $704 million in debt to Host.

The $11.18 of value that the Class B shareholders will receive on a per share basis will represent taxable proceeds on the exchange of their Class B shares and will be offset by the shareholder's cost basis in the Class B shares producing a net capital gain or loss on the transaction.

The hotels sold will generally be encumbered by license and management agreements with a 20 year initial term and two 10 year extension options exercisable at Starwood's discretion. The license agreement defines Starwood's rights and obligations as a brand owner and pays a license fee of 5% of Gross Room Revenue and 2% of Food and Beverage revenue. The management agreement defines Starwood's rights and obligations as a manager and pays 1% of Gross Operating Revenue and Incentive fee which is a share of profits in excess of a return on the owner's investment. This unique structure provides enhanced influence to ensure continued brand innovation, quality and consistent and differentiated guest service experience. Under the agreements to be entered into with Host total fees for the portfolio in 2005 would have been $61 million.

Steven J. Heyer, Starwood Chief Executive Officer, said, "This transaction puts a strategic stake in the ground, accelerating Starwood's transformation from a real estate company with some hotel brands to a consumer lifestyle company with a branded hotel portfolio at its core. This well timed sale commits Starwood to an 'asset right' strategy, shifting our revenue and profit mix to place greater emphasis on successfully developing and leveraging our renowned brands. As a result, Starwood will be increasingly focused on driving top line growth and profitability through marketing, branding, development and, above all, providing superior experiences to our guests. At the same time, we will benefit from having Host, an extremely high-quality company with a solid leadership team, as our long-term partner." 

Mr. Heyer continued: "This transaction enables us to orient the company toward fee-based revenues and profits, while gaining additional resources to increase investment in our hotel brands, Starwood Vacation Ownership properties, new category-killer initiatives, such as aloft in the select serve market and developing a 'by Westin' extended stay product, as well as international growth. In addition, it provides increased opportunity to use our hotel network as a powerful distribution channel for related products and services, such as Bliss and the Heavenly Bed. The sale will increase Starwood's growth rates and return on capital, diminish the impact of cyclical fluctuations in the real estate market on our business, reduce overhead costs and strengthen our balance sheet to fund further expansion and allow us to return value to our shareholders."

Following the close of this transaction and other transactions previously signed or closed, Starwood will continue to own 93 properties with 28,432 rooms that produce more than $500 million in annualized EBITDA.

Mr. Heyer said: "Even after this significant transaction, Starwood will remain, and intends to remain, one of the largest owners of hotel and vacation properties. This remaining portfolio will include properties that serve to facilitate innovation speed and proof of concept for our system, support our vacation ownership business and provide significant upside potential through re-branding or redevelopment. We will seek new opportunities to maximize our return on invested capital through continued effective management of our assets and the continued purchase and churn of hotel real estate as opportunities emerge."

The transaction is subject to the approval of Host Marriott shareholders and to customary closing conditions, including necessary regulatory approvals. The transaction is expected to be completed in the first quarter of 2006.

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