Starwood 2005 Annual Report Download - page 24

During the years ended December 31, 2005 and 2004, we invested approximately $369 million and
$299 million, respectively, excluding the inventory expenditures at the St. Regis Museum Tower in
San Francisco, California discussed below, for capital improvements at owned hotels and capital expenditures
on technology development. During 2005 and 2004, these capital expenditures included the renovation of the
Sheraton Hotel & Towers in New York, New York, the St. Regis Hotel in New York, New York and the
Sheraton Centre Toronto Hotel in Toronto, Canada.
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. 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, 2005, we managed 378
hotels with approximately 121,000 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. We added 103 Le Mπeridien hotels during 2005 in connection with
our acquisition of the Le Mπeridien brand and management business. We also opened 13 additional managed
hotels with approximately 3,000 rooms, and 15 hotels with approximately 5,000 rooms left the system. In
addition, during 2005, we signed management agreements for 40 hotels with approximately 15,000 rooms, a
portion of which opened in 2005 and a portion which will open in the future.
Brand Franchising and Licensing. We franchise our Sheraton, Westin, Four Points by Sheraton,
Luxury Collection, Le Mπeridien and aloft 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 interna-
tional 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, 2005, there were 337 franchised properties with
approximately 90,000 rooms operating under the Sheraton, Westin, Four Points by Sheraton, Luxury
Collection and Le Mπeridien brands. We added 19 Le Mπeridien hotels during 2005 in connection with our
acquisition of the Le Mπeridien brand and management business. We also opened 18 additional franchised
hotels with approximately 4,000 rooms, and 24 hotels with approximately 6,000 rooms left the system. In
addition, during 2005, we signed franchise agreements for 59 hotels with approximately 15,000 rooms, a
portion of which opened in 2005 and a portion which will open in the future.
20