Starwood 2003 Annual Report Download - page 28

Managed and Franchised Hotels. Hotel and resort properties in the United States are often owned by
entities that do not manage hotels or own a brand name. Hotel owners typically enter into management
contracts with hotel management companies to operate their hotels. When a management company does not
oÅer a brand aÇliation, the hotel owner often chooses to pay separate franchise fees to secure the beneÑts of
brand marketing, centralized reservations and other centralized administrative functions, particularly in the
sales and marketing area. Management believes that companies, such as Starwood, that oÅer both hotel
management services and well-established worldwide brand names appeal to hotel owners by providing the full
range of management and marketing services.
Managed Hotels. Starwood manages hotels worldwide, usually under a long-term agreement with the
hotel owner (including entities in which Starwood has a minority equity interest). The Company's
responsibilities under hotel management contracts typically include hiring, training and supervising the
managers and employees that operate these facilities. For additional fees, Starwood provides reservation
services and coordinates national advertising and certain marketing and promotional services. Starwood
prepares and implements annual budgets for the hotels it manages and is responsible for allocating property-
owner funds for periodic maintenance and repair of buildings and furnishings. In addition to the Company's
owned and leased hotels, at December 31, 2003, Starwood managed 286 hotels with approximately
98,000 rooms worldwide.
Management contracts typically provide for base fees tied to gross revenue and incentive fees tied to
proÑts as well as fees for other services, including centralized reservations, sales and marketing, public
relations and national and international media advertising. In the Company's experience, owners seek hotel
managers that can provide attractively priced base, incentive, marketing and franchise fees combined with
demonstrated sales and marketing expertise and operations-focused management designed to enhance
proÑtability. Some of the Company's management contracts permit the hotel owner to terminate the
agreement when the hotel is sold or otherwise transferred to a third party, as well as if Starwood fails to meet
established performance criteria. In addition, many hotel owners seek equity, debt or other investments from
Starwood to help Ñnance hotel renovations or conversions to a Starwood brand so as to align the interests of
the owner and the Company. The Company's ability or willingness to make such investments may determine,
in part, whether Starwood will be oÅered, will accept, or will retain a particular management contract. During
2003, the Company signed management agreements for 27 hotels with approximately 10,000 rooms.
Brand Franchising and Licensing. Starwood franchises its Sheraton, Westin, Four Points by Sheraton
and Luxury Collection brand names and generally derives licensing and other fees from franchisees based on a
Ñxed percentage of the franchised hotel's room revenue, as well as fees for other services, including centralized
reservations, sales and marketing, public relations and national and international media advertising. In
addition, a franchisee may also purchase hotel supplies, including brand-speciÑc products, from certain
Starwood-approved vendors. Starwood approves certain plans for, and the location of, franchised hotels and
reviews their design. At December 31, 2003, there were 312 franchised properties with approximately
81,000 rooms operating under the Sheraton, Westin, Four Points by Sheraton and Luxury Collection brands.
During 2003, the Company signed franchise agreements with 21 hotels with approximately 4,000 rooms.
Starwood also entered into management contracts with several owners in 2003 for mixed use hotel
projects which include a residential component. To facilitate the sale of the residential units, Starwood entered
into licensing agreements for the use of its W, Westin and St. Regis brands to allow the owners to oÅer
branded condominiums to prospective purchasers. In consideration, Starwood will receive a licensing fee equal
to a percentage of the gross sales revenue of the units sold. The licensing arrangement terminates upon sell-out
of the units or upon termination of the management contract.
Vacation Ownership Business
The Company develops, owns and operates vacation ownership resorts, markets and sells the VOIs in the
resorts and, in many cases, provides Ñnancing to customers who purchase such ownership interests. Owners of
VOIs can trade their interval for intervals at other Starwood vacation ownership resorts, for intervals at certain
vacation ownership resorts not otherwise sponsored by Starwood through an exchange company, or for hotel
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