Starwood 2004 Annual Report Download - page 26

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. We manage hotels worldwide, usually under a long-term agreement with the hotel
owner (including entities in which we have a minority equity interest). Our responsibilities under hotel
management contracts typically include hiring, training and supervising the managers and employees that
operate these facilities. For additional fees, we provide reservation services and coordinate national advertising
and certain marketing and promotional services. We prepare and implement annual budgets for the hotels we
manage and are responsible for allocating property-owner funds for periodic maintenance and repair of
buildings and furnishings. In addition to our owned and leased hotels, at December 31, 2004, we managed
283 hotels with approximately 101,000 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 our 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
our 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 we fail to meet established performance criteria. In addition,
many hotel owners seek equity, debt or other investments from us to help Ñnance hotel renovations or
conversions to a Starwood brand so as to align the interests of the owner and the Company. Our ability or
willingness to make such investments may determine, in part, whether we will be oÅered, will accept, or will
retain a particular management contract. During 2004, we signed management agreements for 29 hotels with
approximately 9,000 rooms, and 15 hotels with approximately 3,000 rooms left the system.
Brand Franchising and Licensing. We franchise our Sheraton, Westin, Four Points by Sheraton and
Luxury Collection brand names and generally derive 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. We approve certain plans for, and the location of, franchised hotels and review
their design. At December 31, 2004, there were 310 franchised properties with approximately 80,000 rooms
operating under the Sheraton, Westin, Four Points by Sheraton and Luxury Collection brands. During 2004,
we signed franchise agreements with 35 hotels with approximately 7,000 rooms, and 16 hotels with
approximately 4,000 rooms left the system.
We have also entered into arrangements with several owners for mixed use hotel projects that will include
a residential component. We entered into licensing agreements for the use of our W, Westin and St. Regis
brands to allow the owners to oÅer branded condominiums to prospective purchasers. In consideration, we will
receive a licensing fee equal to a percentage of the gross sales revenue of the units sold. The licensing
arrangement terminates upon the earlier of sell-out of the units or a speciÑed length of time.
Vacation Ownership and Residential Business
We develop, own and operate vacation ownership resorts, market and sell the VOIs in the resorts and, in
many cases, provide 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 stays at
Starwood properties. From time to time, we securitize or sell the receivables generated from our sale of VOIs.
At December 31, 2004, we had 19 vacation ownership resorts in our portfolio with 12 actively selling
VOIs, two expected to start construction in the future and Ñve that have sold all existing inventory. During
2004 and 2003, we invested approximately $162 million and $140 million, respectively, for capital expendi-
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