UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 1-7959

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

(Exact name of Registrant as specified in its charter)

Maryland
(State or other jurisdiction
of incorporation or organization)

52-1193298
(I.R.S. employer identification no.)

1111 Westchester Avenue
White Plains, NY 10604
(Address of principal executive
offices, including zip code)

(914) 640-8100
(Registrant’s telephone number,
including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     Indicate the number of shares outstanding of the issuer’s classes of common stock, as of the latest practicable date:

     189,496,668 shares of common stock, par value $0.01 per share, outstanding as of April 30, 2010.

 

 

TABLE OF CONTENTS

		Page
PART I. Financial Information
Item 1. Financial Statements			2
Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009			3
Consolidated Statements of Income for the Three Months Ended March 31, 2010 and 2009			4
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2010 and 2009			5
Consolidated Condensed Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures about Market Risk			32
Item 4. Controls and Procedures			32
PART II. Other Information
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 6. Exhibits			33
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements

     The following unaudited consolidated financial statements of Starwood Hotels & Resorts Worldwide, Inc. (the “Company”) are provided pursuant to the requirements of this Item. In the opinion of management, all adjustments necessary for fair presentation, consisting of normal recurring adjustments, have been included. The consolidated financial statements presented herein have been prepared in accordance with the accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 filed on February 25, 2010. See the notes to consolidated financial statements for the basis of presentation. Certain reclassifications have been made to the prior years’ financial statements to conform to the current year presentation. The consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this filing. Results for the three months ended March 31, 2010 are not necessarily indicative of results to be expected for the full fiscal year ending December 31, 2010.

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
		2010				2009
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	91			$	87
Restricted cash			67				47
Accounts receivable, net of allowance for doubtful accounts of $45 and $54			503				447
Securitized vacation ownership notes receivable, net of allowance for doubtful accounts of $8 and $0			50				—
Inventories			723				783
Prepaid expenses and other			157				127
Total current assets			1,591				1,491
Investments			307				344
Plant, property and equipment, net			3,390				3,350
Assets held for sale			71				71
Goodwill and intangible assets, net			2,050				2,063
Deferred tax assets			995				982
Other assets			437				460
Securitized vacation ownership notes receivable			378				—
		$	9,219			$	8,761
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings and current maturities of long-term debt		$	5			$	5
Current maturities of long-term securitized vacation ownership debt			106				—
Accounts payable			143				139
Accrued expenses			1,182				1,212
Accrued salaries, wages and benefits			301				303
Accrued taxes and other			353				368
Total current liabilities			2,090				2,027
Long-term debt			3,042				2,955
Long-term securitized vacation ownership debt			300				—
Deferred income taxes			32				31
Other liabilities			1,899				1,903
			7,363				6,916
Commitments and contingencies
Stockholders’ equity:
Common stock; $0.01 par value; authorized 1,000,000,000 shares; outstanding 189,124,688 and 186,785,068 shares at March 31, 2010 and December 31, 2009, respectively			2				2
Additional paid-in capital			588				552
Accumulated other comprehensive loss			(307	)			(283	)
Retained earnings			1,557				1,553
Total Starwood stockholders’ equity			1,840				1,824
Noncontrolling interest			16				21
Total equity			1,856				1,845
		$	9,219			$	8,761

The accompanying notes to financial statements are an integral part of the above statements.

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF INCOME

		Three Months
		Ended
		March 31
		2010				2009
Revenues
Owned, leased and consolidated joint venture hotels		$	381			$	380
Vacation ownership and residential sales and services			133				135
Management fees, franchise fees and other income			153				144
Other revenues from managed and franchised properties			520				468
			1,187				1,127
Costs and Expenses
Owned, leased and consolidated joint venture hotels			329				327
Vacation ownership and residential			101				106
Selling, general, administrative and other			76				73
Restructuring, goodwill impairment and other special charges, net			—				17
Depreciation			66				68
Amortization			10				7
Other expenses from managed and franchised properties			520				468
			1,102				1,066
Operating income			85				61
Equity (losses) earnings and gains and losses from unconsolidated ventures, net			3				(5	)
Interest expense, net of interest income of $1 and $0			(62	)			(43	)
Gain (loss) on asset dispositions and impairments, net			1				(5	)
Income from continuing operations before taxes and noncontrolling interests			27				8
Income tax benefit (expense)			1				(1	)
Income (loss) from continuing operations			28				7
Discontinued operations:
Income (loss) from operations, net of tax (benefit) expense of $0 and $0			—				(2	)
Gain (loss) on dispositions, net of tax (benefit) expense of $0 and $1			—				(1	)
Net income			28				4
Net loss (income) attributable to noncontrolling interests			2				2
Net income attributable to Starwood		$	30			$	6
Earnings (Losses) Per Share — Basic
Continuing operations		$	0.16			$	0.04
Discontinued operations			—				(0.01	)
Net income		$	0.16			$	0.03
Earnings (Losses) Per Share — Diluted
Continuing operations		$	0.16			$	0.04
Discontinued operations			—				(0.01	)
Net income		$	0.16			$	0.03
Amounts attributable to Starwood’s Common Shareholders
Income (loss) from continuing operations		$	30			$	9
Discontinued operations			—				(3	)
Net income		$	30			$	6
Weighted average number of shares			181				179
Weighted average number of shares assuming dilution			187				181

The accompanying notes to financial statements are an integral part of the above statements.

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

		Three Months Ended
		March 31,
		2010				2009
Net income		$	28			$	4
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments			(24	)			(46	)
Less: Recognition of accumulated foreign currency translation adjustments on sold hotels			—				(13	)
Change in fair value of derivatives			1				2
Reclassification adjustments for gains included in net income			—				(1	)
Change in fair value of investments			(1	)			—
			(24	)			(58	)
Comprehensive income (loss)			4				(54	)
Comprehensive loss attributable to noncontrolling interests			2				2
Comprehensive income (loss) attributable to Starwood		$	6			$	(52	)

The accompanying notes to financial statements are an integral part of the above statements.

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

		Three Months Ended
		March 31,
		2010				2009
Operating Activities
Net income		$	28			$	4
Adjustments to net income:
Discontinued operations:
(Gain) loss on dispositions, net			—				1
Depreciation and amortization			—				2
Depreciation and amortization			76				75
Amortization of deferred gains			(20	)			(20	)
Non-cash portion of restructuring and other special charges (credits), net			—				1
(Gain) loss on asset dispositions and impairments, net			(1	)			5
Stock-based compensation expense			17				11
Excess stock-based compensation tax benefit			(1	)			—
Distributions in excess (deficit) of equity earnings			(1	)			11
(Gain) loss on the sale of VOI notes receivable			—				(1	)
Non-cash portion of income tax (benefit) expense			1				1
Other non-cash adjustments to net income			—				7
Decrease (increase) in restricted cash			(1	)			14
Other changes in working capital			(93	)			(115	)
Securitized VOI notes receivable activity, net			25				—
Unsecuritized notes receivable activity, net			(26	)			(19	)
Accrued and deferred income taxes and other			9				(9	)
Cash (used for) from operating activities			13				(32	)
Investing Activities
Purchases of plant, property and equipment			(24	)			(62	)
(Issuance) collection of notes receivable, net			(1	)			—
Proceeds from investments, net			2				5
Other, net			(4	)			(6	)
Cash (used for) from investing activities			(27	)			(63	)
Financing Activities
Revolving credit facility and short-term borrowings (repayments), net			83				(47	)
Long-term debt repaid			(5	)			(2	)
Long-term securitized debt repaid			(32	)			—
Dividends paid			(37	)			(164	)
Proceeds from employee stock option exercises			17				—
Excess stock-based compensation tax benefit			1				—
Other, net			(8	)			(3	)
Cash (used for) from financing activities			19				(216	)
Exchange rate effect on cash and cash equivalents			(1	)			(2	)
(Decrease) increase in cash and cash equivalents			4				(313	)
Cash and cash equivalents — beginning of period			87				389
Cash and cash equivalents — end of period		$	91			$	76
Supplemental Disclosures of Cash Flow Information
Cash paid (received) during the period for:
Interest		$	20			$	23
Income taxes, net of refunds		$	17			$	16

The accompanying notes to financial statements are an integral part of the above statements.

Notes to Consolidated Financial Statements

Note 1. Basis of Presentation

     The accompanying consolidated financial statements represent the consolidated financial position and consolidated results of operations of Starwood Hotels & Resorts Worldwide, Inc. and its subsidiaries (the “Company” or “Starwood”).

     The consolidated financial statements include the accounts of the Company and all of its controlled subsidiaries and partnerships. In consolidating, all material intercompany transactions are eliminated. We have evaluated all subsequent events through the date the consolidated financial statements were filed.

     Starwood is one of the world’s largest hotel and leisure companies. The Company’s principal business is hotels and leisure, which is comprised of a worldwide hospitality network of approximately 1,000 full-service hotels, vacation ownership resorts and residential developments primarily serving two markets: luxury and upscale. The principal operations of Starwood Vacation Ownership, Inc. (“SVO”) include the acquisition, development and operation of vacation ownership resorts; marketing and selling vacation ownership interests (“VOIs”) in the resorts; and providing financing to customers who purchase such interests.

Note 2. Recently Issued Accounting Standards

     Adopted Accounting Standards

     In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-16, “Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets (formerly Statement of Financial Accounting Standards” (“SFAS” No. 166), and ASU No. 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (formerly SFAS No. 167).

     ASU No. 2009-16 amended the accounting for transfers of financial assets. Under ASU No. 2009-16, the qualifying special purpose entities (“QSPEs”) used in the Company’s securitization transactions are no longer exempt from consolidation. ASU No. 2009-17 prescribes an ongoing assessment of the Company’s involvement in the activities of the QSPEs and the Company’s rights or obligations to receive benefits or absorb losses of the trusts that could be potentially significant in order to determine whether those variable interest entities (“VIEs”) will be required to be consolidated in the Company’s financial statements. In accordance with ASU No. 2009-17, the Company concluded it is the primary beneficiary of the QSPEs and accordingly, the Company began consolidating the QSPEs on January 1, 2010 (see Notes 7 and 10). Using the carrying amounts of the assets and liabilities of the QSPEs as prescribed by ASU No. 2009-17 and any corresponding elimination of activity between the QSPEs and the Company resulting from the consolidation on January 1, 2010, the Company recorded a $417 million increase in total assets, a $444 million increase in total liabilities, a $26 million (net of tax) decrease in beginning retained earnings and a $1 million decrease to stockholders equity. The Company has additional VIEs whereby the Company was determined not to be the primary beneficiary (see Note 21).

     Beginning January 1, 2010, the Company’s balance sheet and statement of income no longer reflect activity related to its retained economic interests (“Retained Interests”), but instead reflects activity related to its securitized vacation ownership notes receivable and the corresponding securitized debt, including interest income, loan loss provisions, and interest expense. Interest income and loan loss provisions, associated with the securitized vacation ownership notes receivable are included in the vacation ownership and residential sales and services line item resulting in an increase of $14 million in the three months ended March 31, 2010 as compared to the same period in 2009. Interest expense of $6 million was recorded in the three months ended March 31, 2010. The cash flows from borrowings and repayments, associated with the securitized vacation ownership debt, are now presented as cash flows from financing activities. The Company does not expect to recognize gains or losses from future securitizations as a result of the adoption of this new guidance.

     The Company’s statement of income for the three months ended March 31, 2009 and its balance sheet as of December 31, 2009 have not been retrospectively adjusted to reflect the adoption of ASU Nos. 2009-16 and 2009-17. Therefore, current period results and balances will not be comparable to prior period amounts, particularly with regards to:

	•		Restricted cash
	•		Other assets
	•		Investments

	•		Vacation ownership and residential sales and services
	•		Interest expense

     In January 2010, the FASB issued ASU No. 2010-06 “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”, which amends certain guidance of FASB Accounting Standards Codification (“ASC”) 820-10. The amendment requires enhanced disclosures about valuation techniques and inputs to fair value measurements. This topic is effective for interim and annual Reporting periods beginning after December 15, 2009. The Company adopted this topic on January 1, 2010 and it had no material impact on the Company’s consolidated financial statements.

     In February 2010, the FASB issued ASU No. 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements.” The amendments remove the requirement for an SEC registrant to disclose the date through which subsequent events were evaluated as this requirement would have potentially conflicted with SEC reporting requirements. Removal of the disclosure requirement is not expected to affect the nature or timing of subsequent events evaluations performed by the Company. The ASU became effective upon issuance.

     Future Adoption of Accounting Standards

     In October 2009, the FASB issued ASU No. 2009-13 “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements”, which supersedes certain guidance in ASC 605-25, Revenue Recognition — Multiple Element Arrangements. This topic requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. This topic is effective for annual reporting periods beginning after June 15, 2010. The Company is currently evaluating the impact that this topic will have on its consolidated financial statements.

Note 3. Earnings per Share

     Basic and diluted earnings per share are calculated using income from continuing operations attributable to Starwood’s common shareholders (i.e. excluding amounts attributable to noncontrolling interests).

     The following is a reconciliation of basic earnings per share to diluted earnings per share for income from continuing operations (in millions, except per share data):

		Three Months Ended March 31,
		2010												2009
										Per												Per
		Earnings				Shares				Share				Earnings				Shares				Share
Basic earnings from continuing operations		$	30				181			$	0.16			$	9				179			$	0.04
Effect of dilutive securities:
Employee stock options and restricted stock awards			—				6								—				2
Diluted earnings from continuing operations		$	30				187			$	0.16			$	9				181			$	0.04

     Approximately 5,114,000 shares and 12,894,000 shares were excluded from the computation of diluted shares for the three months ended March 31, 2010 and 2009, respectively, as their impact would have been anti-dilutive.

Note 4. Dispositions

     During the first quarter of 2010, the Company recorded a net gain of approximately $1 million related to the sale of its minority interest in a joint venture that owned one hotel and the sale of a non-core asset, partially offset by losses on the termination of two management contracts.

     During the first quarter of 2009, the Company sold a wholly-owned hotel in exchange for a long-term agreement to manage the hotel. The Company recorded a loss of approximately $5 million on the sale.

Note 5. Assets Held for Sale

     During the fourth quarter of 2009, the Company entered into purchase and sale agreements for the sale of two wholly-owned hotels for total expected cash consideration of approximately $78 million. The Company received an $8 million non-refundable deposit from the prospective buyer during that quarter. As the Company will not have any continuing involvement in these hotels, it classified these assets, and the estimated goodwill to be allocated, as assets held for sale, ceased depreciating them and reclassified the operating results to discontinued operations. On April 15, 2010, the Company completed the sale of the two wholly-owned hotels.

Note 6. Other Assets

     Other assets include the following (in millions):

		March 31,				December 31,
		2010				2009
VOI notes receivable, net		$	175			$	222
Other notes receivable, net			41				34
Prepaid taxes			103				103
Deposits and other			118				101
		$	437			$	460

Note 7. Securitized Vacation Ownership Notes Receivable

     The Company has variable interests in the QSPEs associated with its five outstanding securitization transactions. The Company applied the variable interest model and determined it is the primary beneficiary of these VIEs. In making this determination, the Company evaluated the activities that significantly impact the economics of the VIEs, including the management of the securitized notes receivable and any related non-performing loans. The Company also evaluated its retention of the residual economic interests in the related QSPEs. The Company is the servicer of the securitized mortgage receivables. The Company also has the option, subject to certain limitations, to repurchase or replace VOI notes receivable, that are in default, at their outstanding principal amounts. Such activity totaled $8 million during the three months ended March 31, 2010. The Company has been able to resell the VOIs underlying the VOI notes repurchased or replaced under these provisions without incurring significant losses. The Company holds the risk of potential loss (or gain) as the last to be paid out by proceeds of the VIEs under the terms of the agreements. As such, the Company holds both the power to direct the activities of the VIEs and obligation to absorb the losses (or benefits) from the VIEs.

     The securitization agreements are without recourse to the Company, except for breaches of representations and warranties. Based on the right of the Company to fund defaults at its option, subject to certain limitations, it intends to do so until the debt is extinguished to maintain the credit rating of the underlying notes.

     Upon transfer of vacation ownership notes receivable to the VIEs, the receivables and certain cash flows derived from them become restricted for use in meeting obligations to the VIE creditors. The VIEs utilize trusts which have ownership of cash balances that also have restrictions, the amounts of which are reported in restricted cash. With the exception of the seller’s interest in trust receivables, the Company’s interests in trust assets are subordinate to the interests of third-party investors and, as such, may not be realized by the Company if needed to absorb deficiencies in cash flows that are allocated to the investors in the trusts’ debt (See Note 10). The Company is contractually obligated to receive the excess cash flows (spread between the collections on the notes and third party obligations defined in the securitization agreements) from the QSPEs. Such activity totaled $10 million during the three months ended March 31, 2010 and is classified in Cash and cash equivalents when received.

     The carrying values of the securitized vacation ownership notes receivable consolidated on the Company’s balance sheet as of March 31, 2010 relating to securitization activities, are as follows:

Securitized vacation ownership notes receivables		$	495
Allowance for loan losses			(67	)
Net notes receivable			428
Less: current notes receivable			(50	)
Carrying value of long-term securitized vacation ownership notes receivable		$	378

     Additionally, restricted cash of $19 million and deferred financing fees, net of $8 million related to its VIEs are recorded as restricted cash and other assets, respectively on the Company’s balance sheet.

     With respect to balances outstanding at December 31, 2009 and activity for the three months ended March 31, 2009, prior to the adoption of ASU Nos. 2009-16 and 2009-17, the Company’s Retained Interests had the following impacts on the financial statements:

     Gross credit losses for all VOI notes receivable that have been securitized totaled $9 million during the three months ended March 31, 2009.

     The Company received aggregate cash proceeds of $5 million from the Retained Interests during the three months ended March 31, 2009 and aggregate servicing fees of $1 million related to these VOI notes receivable in the three months ended March 31, 2009.

     As of December 31, 2009, the aggregate net present value and carrying value of the Retained Interests for the Company’s three outstanding note securitizations was approximately $25 million, with the following key assumptions used in measuring the fair value: an average discount rate of 7.8%, an average expected annual prepayment rate including defaults of 15.8%, and an expected weighted average remaining life of prepayable notes receivable of 86 months.

Note 8. Fair Value

     The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2010 (in millions):

		Level 1				Level 2				Level 3				Total
Assets:
Forward contracts		$	—			$	1			$	—			$	1
Interest rate swaps			—				11				—				11
		$	—			$	12			$	—			$	12
Liabilities:
Forward contracts		$	—			$	4			$	—			$	4

     The forward contracts are over-the-counter contracts that do not trade on a public exchange. The fair values of the contracts are based on inputs such as foreign currency spot rates and forward points that are readily available on public markets, and as such, are classified as Level 2. The Company considered both its credit risk, as well as its counterparties’ credit risk in determining fair value and no adjustment was made as it was deemed insignificant based on the short duration of the contracts and the Company’s rate of short-term debt.

     The interest rate swaps are valued using an income approach. Expected future cash flows are converted to a present value amount based on market expectations of the yield curve on floating interest rates, which is readily available on public markets.

     The following table presents a reconciliation of the Company’s Retained Interests measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from December 31, 2009 to March 31, 2010 (in millions):

Balance at December 31, 2009		$	25
Adoption of ASU No. 2009-17			(25	)
Balance at March 31, 2010		$	—

Note 9. Debt

     Long-term debt and short-term borrowings consisted of the following, excluding securitized vacation ownership debt (in millions):

		March 31,				December 31,
		2010				2009
Senior Credit Facilities:
Revolving Credit Facility, interest rates ranging from 2.80% to 4.25% at March 31, 2010, maturing 2011		$	200			$	114
Senior Notes, interest at 7.875%, maturing 2012			609				608
Senior Notes, interest at 6.25%, maturing 2013			501				498
Senior Notes, interest at 7.875%, maturing 2014			486				485
Senior Notes, interest at 7.375%, maturing 2015			449				449
Senior Notes, interest at 6.75%, maturing 2018			400				400
Senior Notes, interest at 7.15%, maturing 2019			244				244
Mortgages and other, interest rates ranging from 5.80% to 9.00%, various maturities			158				162
			3,047				2,960
Less current maturities			(5	)			(5	)
Long-term debt		$	3,042			$	2,955

     On April 20, 2010, the Company entered into a new $1.5 billion senior credit facility (“New Facility”). The New Facility matures on November 15, 2013 and replaces the existing $1.875 billion revolving credit agreement, which would have matured on February 11, 2011.

     A wholly-owned subsidiary of the Company currently has an outstanding loan of $36 million, which is collateralized by two of its owned hotels. A breach of its loan-to-value-ratio covenant specified in the debt agreement existed as of March 31, 2010. The Company has received an extended remedy date through May 14, 2010 to modify the loan and cure the breach. The Company and the financial institution are currently negotiating a modification to cure the breach. If the modification is not executed by the extended remedy date, $14 million of the debt could become immediately due and payable. The debt is classified as noncurrent as completion of the loan modification is probable and compliance with the covenants in the next twelve months is expected.

Note 10. Securitized Vacation Ownership Debt

     As discussed in Note 7, the Company’s VIEs associated with the securitization of its vacation ownership notes receivable were consolidated following the adoption of ASU Nos. 2009-16 and 2009-17. As of March 31, 2010, long-term and short-term securitized vacation ownership debt consisted of the following (in millions):

2003 securitization, interest rates ranging from 3.95% to 6.96%, maturing 2019		$	25
2005 securitization, interest rates ranging from 5.25% to 6.29%, maturing 2023			72
2006 securitization, interest rates ranging from 5.28% to 5.85%, maturing 2019			52
2009 securitizations, interest rates ranging from 5.78% to 5.81%, maturing 2014 and 2016			257
			406
Less current maturities			(106	)
Long-term debt		$	300

Note 11. Deferred Gains

     The Company defers gains realized in connection with the sale of a property that the Company continues to manage through a long-term management agreement and recognizes the gains over the initial term of the related agreement. As of March 31, 2010 and December 31, 2009, the Company had total deferred gains of approximately $1.1 billion included in accrued expenses and other liabilities in the Company’s consolidated balance sheets. Amortization of deferred gains is included in management fees, franchise fees and other income in the Company’s consolidated statements of income and totaled approximately $20 million in the three months ended March 31, 2010 and 2009, respectively.

Note 12. Restructuring and Other Special Charges

     During the three months ended March 31, 2009, the Company recorded restructuring charges of $19 million in connection with its initiative of rationalizing its cost structure in light of the decline in growth in its business units. The charges in the three months ended March 31, 2009 were partially offset by the $2 million reversal of accruals related to expected severance costs recorded at the time of the Le Méridien acquisition in 2005.

     Restructuring costs and other special charges, net, by segment are as follows: (in millions):

		Three Months
		Ended
		March 31,
		2010				2009
Hotel		$	—			$	9
Vacation Ownership & Residential			—				8
Total		$	—			$	17

     The Company had remaining accruals of $23 million and $26 million as of March 31, 2010 and December 31, 2009, respectively, which are primarily recorded in accrued expenses and other liabilities related to the Company-wide restructuring that took place in 2008 and 2009. The following table summarizes activity in the restructuring and other special charges related accruals:

		December 31,				Expenses								Non-cash				March 31,
		2009				(Reversals)				Payments				Other				2010
Impairment of land, inventory and construction in progress		$	15			$	—			$	—			$	—			$	15
Consulting fees associated with cost reduction initiatives			1				—				—				—				1
Severance			4				—				3				—				1
Closure of vacation ownership facilities			6				—				—				—				6
Total		$	26			$	—			$	3			$	—			$	23

Note 13. Derivative Financial Instruments

     The Company, based on market conditions, enters into forward contracts to manage foreign exchange risk. The Company enters into forward contracts to hedge forecasted transactions based in certain foreign currencies, including the Euro, Canadian Dollar and Yen. These forward contracts have been designated and qualify as cash flow hedges, and their change in fair value is recorded as a component of other comprehensive income and reclassified into earnings in the same period or periods in which the forecasted transaction occurs. To qualify as a hedge, the Company needs to formally document, designate and assess the effectiveness of the transactions that receive hedge accounting. The notional dollar amounts of the outstanding Euro and Yen forward contracts at March 31, 2010 are $19 million and $3 million, respectively, with average exchange rates of 1.4 and 90.4, respectively, with terms of less than one year. The Canadian forward contracts expired during the second quarter of 2009. The Company reviews the effectiveness of its hedging instruments on a quarterly basis and records any ineffectiveness into earnings. The Company discontinues hedge accounting for any hedge that is no longer evaluated to be highly effective. From time to time, the Company may choose to de-designate portions of hedges when changes in estimates of forecasted transactions occur. Each of these hedges was highly effective in offsetting fluctuations in foreign currencies. During the three months ended March 31, 2010, eight forward contracts matured.

     The Company also enters into forward contracts to manage foreign exchange risk on intercompany loans that are not deemed permanently invested. These forward contracts are not designated as hedges, and their change in fair value is recorded in the Company’s consolidated statements of income during each reporting period.

     The Company enters into interest rate swap agreements to manage interest expense. The Company’s objective is to manage the impact of interest rates on the results of operations, cash flows and the market value of the Company’s debt. At March 31, 2010, the Company has six interest rate swap agreements with an aggregate notional amount of $500 million under which the Company pays floating rates and receives fixed rates of interest (“Fair Value Swaps”). The Fair Value Swaps hedge the change in fair value of certain fixed rate debt related to fluctuations in interest rates and mature in 2012, 2013 and 2014. The Fair Value Swaps modify the Company’s interest rate exposure by effectively converting debt with a fixed rate to a floating rate. These interest rate swaps have been designated and qualify as fair value hedges and have met the requirements to assume zero ineffectiveness.

     As a result of the adoption of ASU No. 2009-17 (see Note 2) the Company was required to consolidate a balance guarantee interest rate swap derivative that was executed by the QSPE in connection with the Company’s June 2009 securitization transaction. The purpose of the swap is to mitigate the variability in cash flows associated with the underlying variable interest rate debt. In connection with the adoption of ASU No. 2009-17, at January 1, 2010, the fair value of the derivative was recorded as a reduction to beginning retained earnings and a liability on the Company’s consolidated balance sheet. This interest rate swap is designated as a cash flow hedge.

     The counterparties to the Company’s derivative financial instruments are major financial institutions. The Company evaluates the bond ratings of the financial institutions and believes that credit risk is at an acceptable level.

     The following tables summarize the fair value of our derivative instruments, the effect of derivative instruments on our Consolidated Statements of Comprehensive Income, the amounts reclassified from “Other comprehensive income” and the effect on the Consolidated Statements of Income during the quarter.

Fair Value of Derivative Instruments
(in millions)

March 31,

December 31,

2010

2009

Balance Sheet

Fair

Balance Sheet

Fair

Location

Value

Location

Value

Derivatives designated as hedging instruments

Asset Derivatives

Forward contracts

Prepaid and other current assets

$

1

Prepaid and other current assets

$

—

Interest rate swaps

Other assets

11

Other assets

7

Total assets

$

12

$

7

		March 31,						December 31,
		2010						2009
		Balance Sheet		Fair				Balance Sheet		Fair
		Location		Value				Location		Value
Derivatives not designated as hedging instruments
Asset Derivatives
Forward contracts		Prepaid and other current assets		$	—			Prepaid and other current assets		$	—
Total assets				$	—					$	—
Liability Derivatives
Forward contracts		Accrued expenses		$	4			Accrued expenses		$	7
Total liabilities				$	4					$	7

Consolidated Statements of Income and Comprehensive Income
for the Three Months Ended March 31, 2010 and 2009
(in millions)

Balance at December 31, 2009		$	—
Mark-to-market gain on forward exchange contracts			(1	)
Reclassification of gain from OCI to management fees, franchise fees, and other income			—
Balance at March 31, 2010		$	(1	)

Balance at December 31, 2008		$	(6	)
Mark-to-market gain on forward exchange contracts			(2	)
Reclassification of loss from OCI to management fees, franchise fees, and other income			1
Balance at March 31, 2009		$	(7	)

Derivatives Not		Location of Gain		Amount of Gain
Designated as Hedging		or (Loss) Recognized		or (Loss) Recognized
Instruments		in Income on Derivative		in Income on Derivative
				Three Months Ended
				March 31,
				2010				2009
Foreign forward exchange contracts		Interest expense, net		$	(18	)		$	(10	)
Total loss included in income				$	(18	)		$	(10	)

Note 14. Discontinued Operations

     During the three months ended March 31, 2009, the operations from the Company’s former Bliss spa business, which was sold at the end of 2009, and the revenues and expenses from two hotels were recorded in discontinued operations, resulting in a loss of $2 million ($2 million pretax). Additionally, the Company recorded a $1 million tax charge in discontinued operations related to a liability recorded by the Company in 2008.

Note 15. Pension and Postretirement Benefit Plans

     The following table presents the components of net periodic benefit cost for the three months ended March 31, 2010 and 2009 (in millions):

		Three Months Ended March 31,
		2010												2009
						Foreign												Foreign
		Pension				Pension				Postretirement				Pension				Pension				Postretirement
		Benefits				Benefits				Benefits				Benefits				Benefits				Benefits
Service cost		$	—			$	—			$	—			$	—			$	1.2			$	—
Interest cost			0.2				2.5				0.2				0.2				3.1				0.3
Expected return on plan assets			—				(2.6	)			—				—				(2.2	)			—
Amortization of:
Actuarial loss			—				0.3				—				—				1.4				—
Prior service income			—				—				—				—				(0.1	)			—
Net period benefit cost		$	0.2			$	0.2			$	0.2			$	0.2			$	3.4			$	0.3

     During the three months ended March 31, 2010, the Company contributed approximately $8 million to its pension and postretirement benefit plans. For the remainder of 2010, the Company expects to contribute approximately $7 million to its pension and postretirement benefit plans. A portion of this funding will be reimbursed for costs related to employees of managed hotels.

Note 16. Income Taxes

     The total amount of unrecognized tax benefits as of March 31, 2010, was $998 million, of which $75 million would affect the Company’s effective tax rate if recognized. The amount of unrecognized tax benefits includes approximately $499 million related to the February 1998 disposition of ITT World Directories which the Company strongly believes was completed on a tax deferred basis. In 2002, the IRS proposed an adjustment to tax the gain on disposition in 1998, and the issue has progressed to litigation in United States Tax Court. In January 2009, the Company and the IRS reached an agreement in principle to settle the litigation pertaining to the tax treatment of this transaction. In 2010, the Company expects to finalize the details of the agreement and obtain a refund of approximately $200 million for previously paid tax. As a result, the Company expects to decrease its unrecognized tax benefits by approximately $499 million within the next 12 months. It is reasonably possible that zero to substantially all of the Company’s other remaining unrecognized tax benefits will reverse within the next twelve months.

     The Company recognizes interest and penalties related to unrecognized tax benefits through income tax expense. As of March 31, 2010, the Company had $236 million accrued for the payment of interest and no accrued penalties.

     The Company is subject to taxation in the U.S. federal jurisdiction, as well as various state and foreign jurisdictions. As of March 31, 2010, the Company is no longer subject to examination by U.S. federal taxing authorities for years prior to 2004 and to examination by any U.S. state taxing authority prior to 1998. All subsequent periods remain eligible for examination. In the significant foreign jurisdictions in which the Company operates, the Company is no longer subject to examination by the relevant taxing authorities for any years prior to 2001.

Note 17. Stockholder’s Equity

     The following table represents changes in stockholders equity that are attributable to Starwood’s stockholders and non-controlling interests.

		Equity Attributable to Starwood Stockholders
														Accumulated								Equity
		Common								Additional				Other								Attributable to
		Shares								Paid-in				Comprehensive				Retained				Noncontrolling
		Shares				Amount				Capital				Loss				Earnings				Interests				Total
Balance at December 31, 2009			187			$	2			$	552			$	(283	)		$	1,553			$	21			$	1,845
Adoption of ASU No. 2009-17			—				—				—				—				(26	)			—				(26	)
Net income (loss)			—				—				—				—				30				(2	)			28
Stock option and restricted stock award transactions, net			2				—				35				—				—				—				35
ESPP stock issuances			—				—				1				—				—				—				1
Dividends			—				—				—				—				—				(3	)			(3	)
Other comprehensive loss			—				—				—				(24	)			—				—				(24	)
Balance at March 31, 2010			189			$	2			$	588			$	(307	)		$	1,557			$	16			$	1,856

Share Issuances and Repurchases. During the three months ended March 31, 2010, the Company issued approximately 1 million Company common shares as a result of stock option exercises. During the three months ended March 31, 2010, the Company did not repurchase any shares and no repurchase capacity remained available under the Share Repurchase Authorization.

Dividends. On January 14, 2010, the Company paid a dividend of $0.20 per share to shareholders of record on December 31, 2009.

Note 18. Stock-Based Compensation

     In accordance with the Company’s 2004 Long-Term Incentive Compensation Plan, during the first quarter of 2010, the Company completed its annual grant of stock options, restricted stock and units to executive officers, members of the Board of Directors and certain employees. The Company granted approximately 562,000 stock options that had a weighted average grant date fair value of $14.73 per option. The weighted average exercise price of these options was $38.24. In addition, the Company granted approximately 1,905,000 restricted stock and units that had a weighted average grant date fair value of $36.82 per stock or unit.

     The Company recorded stock-based employee compensation expense, including the estimated impact of reimbursements from third parties, of $17 million and $11 million, in the three months ended March 31, 2010 and 2009, respectively.

     As of March 31, 2010, there was approximately $28 million of unrecognized compensation cost, net of estimated forfeitures, related to non-vested options, which is expected to be recognized over a weighted-average period of 1.83 years on a straight-line basis.

     As of March 31, 2010, there was approximately $111 million of unrecognized compensation cost, net of estimated forfeitures, related to restricted stock and units, which is expected to be recognized over a weighted-average period of 1.74 years on a straight-line basis.

Note 19. Fair Value of Financial Instruments

     The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments (in millions):

		March 31, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Assets:
Restricted cash		$	6			$	6			$	7			$	7
VOI notes receivable			175				198				222				253
Other notes receivable			42				42				36				36
Securitized vacation ownership notes receivable			378				438				—				—
Total financial assets		$	601			$	684			$	265			$	296
Liabilities:
Long-term debt		$	3,042			$	3,197			$	2,955			$	3,071
Long-term securitized vacation ownership debt			300				300				—				—
Other long-term liabilities			8				8				8				8
Total financial liabilities		$	3,350			$	3,505			$	2,963			$	3,079
Off-Balance sheet:
Letters of credit		$	—			$	162			$	—			$	168
Surety bonds			—				21				—				21
Total off-balance sheet		$	—			$	183			$	—			$	189

     The Company believes the carrying values of its financial instruments related to current assets and liabilities approximate fair value. The Company records its derivative assets and liabilities at fair value. See Note 8 for recorded amounts and the method and assumption used to estimate fair value.

     The carrying value of the Company’s restricted cash approximates its fair value. The Company estimates the fair value of its VOI notes receivable and securitized VOI notes receivable using assumptions related to current securitization market transactions. To gain additional comfort on the value, the amount is then compared to a discounted expected future cash flow model using a discount rate commensurate with the risk of the underlying notes, primarily determined by the credit worthiness of the borrowers based on their Fair Isaac Corporation (“FICO”) scores. The results of these two methods are then evaluated to conclude on the estimated fair value. The fair value of other notes receivable is estimated based on terms of the instrument and current market conditions. These financial instrument assets are recorded in the other assets line item in the Company’s consolidated balance sheet.

     The Company estimates the fair value of its publicly traded debt based on the bid prices in the public debt markets. The carrying amount of its floating rate debt is a reasonable basis of fair value due to the variable nature of the interest rates. The Company’s non-public, securitized debt, and fixed rate debt fair value is determined based upon discounted cash flows for the debt rates deemed reasonable for the type of debt, prevailing market conditions and the length to maturity for the debt. Other long-term liabilities represent a financial guarantee. The carrying value of this liability approximates its fair value based on expected funding under the guarantee.

     The fair values of the Company’s letters of credit and surety bonds are estimated to be the same as the contract values based on the nature of the fee arrangements with the issuing financial institutions.

Note 20. Business Segment Information

     The Company has two operating segments: hotels and vacation ownership and residential. The hotel segment generally represents a worldwide network of owned, leased and consolidated joint venture hotels and resorts operated primarily under the Company’s proprietary brand names including St. Regis^®, The Luxury Collection ^®, Sheraton^®, Westin^®, W^®, Le Méridien^®, Aloft^®, Element^®, and Four Points^® by Sheraton as well as hotels and resorts which are managed or franchised under these brand names in exchange for fees. The vacation ownership and residential segment includes the development, ownership and operation of vacation ownership resorts, marketing and selling VOIs, providing financing to customers who purchase such interests and the sale of residential units.

     The performance of the hotels and vacation ownership and residential segments is evaluated primarily on operating profit before corporate selling, general and administrative expense, interest, gains and losses on the sale of real estate, restructuring and other special (charges) credits, and income taxes. The Company does not allocate these items to its segments.

     The following table presents revenues, operating income, capital expenditures and assets for the Company’s reportable segments (in millions):

		Three Months Ended
		March 31,
		2010				2009
Revenues:
Hotel		$	1,016			$	955
Vacation ownership and residential			171				172
Total		$	1,187			$	1,127
Operating income:
Hotel		$	95			$	87
Vacation ownership and residential			24				21
Total segment operating income			119				108
Selling, general, administrative and other			(34	)			(30	)
Restructuring and other special charges, net			—				(17	)
Operating income			85				61
Equity earnings (losses) and gains and (losses) from unconsolidated ventures, net:
Hotel			2				(5	)
Vacation ownership and residential			1				—
Interest expense, net			(62	)			(43	)
Gain (loss) on asset dispositions and impairments, net			1				(5	)
Income from continuing operations before taxes and noncontrolling interests		$	27			$	8
Capital expenditures:
Hotel		$	17			$	37
Vacation ownership and residential			4				18
Corporate			3				7
Total		$	24			$	62

		March 31,				December 31,
		2010				2009
Assets:
Hotel(a)		$	5,932			$	5,924
Vacation ownership and residential(b)			2,088				1,639
Corporate			1,199				1,198
Total		$	9,219			$	8,761

Note 21. Commitments and Contingencies

     Variable Interest Entities. The Company has evaluated 15 hotels in which it has a variable interest, generally in the form of investments, loans, guarantees, or equity. The Company determines if it is the primary beneficiary of the hotel by primarily considering the qualitative factors. Qualitative factors include evaluating if the Company has the power to control the VIE and has the obligation to absorb the losses and rights to receive the benefits of the VIE, that could potentially be significant to the VIE. The Company has determined it is not the primary beneficiary of these VIEs and therefore these entities are not consolidated in the Company’s financial statements. See Note 7 for the VIEs in which the Company is deemed the primary beneficiary and has consolidated the entities.

     The 15 VIEs associated with the Company’s variable interests are hotels for which the Company has entered into management or franchise agreements with the hotel owners. The Company is paid a fee primarily based on financial metrics of the hotel. The hotels are financed by the owners, generally in the form of working capital, equity, and debt.

     At March 31, 2010, the Company has approximately $72 million of investments and a loan balance of $9 million associated with 12 VIEs. As the Company is not obligated to fund future cash contributions under these agreements, the maximum loss equals the carrying value. In addition, the Company has not contributed amounts to the VIEs in excess of their contractual obligations.

     Additionally, the Company has approximately $6 million of investments and certain performance guarantees associated with three VIEs. The performance guarantees have possible cash outlays of up to $68 million, $53 million of which, if required, would be funded over several years and would be largely offset by management fees received under these contracts.

     At December 31, 2009, the Company had approximately $81 million of investments associated with 18 VIEs, equity investments of $11 million associated with one VIE, and a loan balance of $5 million associated with one VIE.

     Guaranteed Loans and Commitments. In limited cases, the Company has made loans to owners of or partners in hotel or resort ventures for which the Company has a management or franchise agreement. Loans outstanding under this program totaled $38 million at March 31, 2010. The Company evaluates these loans for impairment, and at March 31, 2010, believes the net carrying value of these loans is collectible. Unfunded loan commitments aggregating $18 million were outstanding at March 31, 2010, $1 million of which is expected to be funded in the next twelve months and in total. These loans typically are secured by pledges of project ownership interests and/or mortgages on the projects. The Company also has $75 million of equity and other potential contributions associated with managed or joint venture properties, $39 million of which is expected to be funded in the next twelve months.

     Surety bonds issued on behalf of the Company as of March 31, 2010 totaled $21 million, the majority of which were required by state or local governments relating to our vacation ownership operations and by our insurers to secure large deductible insurance programs.

     To secure management contracts, the Company may provide performance guarantees to third-party owners. Most of these performance guarantees allow the Company to terminate the contract rather than fund shortfalls if certain performance levels are not met. In limited cases, the Company is obligated to fund shortfalls in performance levels through the issuance of loans. Many of the performance tests are multi-year tests, are tied to the results of a competitive set of hotels, and have exclusions for force majeure and acts of war and terrorism. The Company does not anticipate any significant funding under performance guarantees in 2010. In connection with the acquisition of the Le Méridien brand in November 2005, the Company assumed the obligation to guarantee certain performance levels at one Le Méridien managed hotel for the periods 2007 through 2013. This guarantee is uncapped; however, the Company has estimated its exposure under this guarantee and does not anticipate that payments made under the guarantee will be significant in any single year. The Company has recorded a loss contingency for this guarantee of $8 million, reflected in other liabilities in the accompanying consolidated balance sheets at March 31, 2010 and December 31, 2009, respectively. The Company does not anticipate losing a significant number of management or franchise contracts in 2010.

     In connection with the purchase of the Le Méridien brand in November 2005, the Company was indemnified for certain of Le Méridien’s historical liabilities by the entity that bought Le Méridien’s owned and leased hotel portfolio. The indemnity is limited to the financial resources of that entity. However, at this time, the Company believes that it is unlikely that it will have to fund any of these liabilities.

     In connection with the sale of 33 hotels to a third party in 2006, the Company agreed to indemnify the third party for certain pre-disposition liabilities, including operations and tax liabilities. At this time, the Company believes that it will not have to make any significant payments under such indemnities.

     Litigation. The Company is involved in various legal matters that have arisen in the normal course of business, some of which include claims for substantial sums. Accruals have been recorded when the outcome is probable and can be reasonably estimated. While the ultimate results of claims and litigation cannot be determined, the Company does not expect that the resolution of all legal matters will have a material adverse effect on its consolidated results of operations, financial position or cash flow. However depending on the amount and the timing, an unfavorable resolution of some or all of these matters could materially affect the Company’s future results of operations or cash flows in a particular period.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

     This report includes “forward-looking” statements, as that term is defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission in its rules, regulations and releases. Forward-looking statements are any statements other than statements of historical fact, including statements regarding our expectations, beliefs, hopes, intentions or strategies regarding the future. In some cases, forward-looking statements can be identified by the use of words such as “may,” “will,” “expects,” “should,” “believes,” “plans,” “anticipates,” “estimates,” “predicts,” “potential,” “continue,” or other words of similar meaning. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in, or implied by, the forward-looking statements. Factors that might cause such a difference include, but are not limited to, general economic conditions, our financial and business prospects, our capital requirements, our financing prospects, our relationships with associates and labor unions, and those disclosed as risks in other reports filed by us with the Securities and Exchange Commission, including those described in Part I of our most recently filed Annual Report on Form 10-K. We caution readers that any such statements are based on currently available operational, financial and competitive information, and they should not place undue reliance on these forward-looking statements, which reflect management’s opinion only as of the date on which they were made. Except as required by law, we disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur.

RESULTS OF OPERATIONS

     Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those relating to revenue recognition, bad debts, inventories, investments, plant, property and equipment, goodwill and intangible assets, income taxes, financing operations, frequent guest program liability, self-insurance claims payable, restructuring costs, retirement benefits and contingencies and litigation.

     We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions and conditions.

CRITICAL ACCOUNTING POLICIES

     We believe the following to be our critical accounting policies:

     Revenue Recognition. Our revenues are primarily derived from the following sources: (1) hotel and resort revenues at our owned, leased and consolidated joint venture properties; (2) management and franchise revenues; (3) vacation ownership and residential revenues; (4) revenues from managed and franchised properties; and (5) other revenues which are ancillary to our operations. Generally, revenues are recognized when the services have been rendered. The following is a description of the composition of our revenues:

•

Owned, Leased and Consolidated Joint Ventures — Represents revenue primarily derived from hotel operations, including the rental of rooms and food and beverage sales from owned, leased or consolidated joint venture hotels and resorts. Revenue is recognized when rooms are occupied and services have been rendered. These revenues are impacted by global economic conditions affecting the travel and hospitality industry as well as relative market share of the local competitive set of hotels. Revenue per available room (“REVPAR”) is a leading indicator of revenue trends at owned, leased and consolidated joint venture hotels as it measures the period-over-period growth in rooms’ revenue for comparable properties.

	•		Management and Franchise Revenues — Represents fees earned on hotels managed worldwide, usually under long-term contracts, franchise fees received in connection with the franchise of our Sheraton, Westin, Four Points by Sheraton, Le Méridien, St. Regis, W, Luxury Collection, Aloft and Element brand names, termination fees and the amortization of deferred gains related to sold properties for which we have significant continuing involvement, offset by payments by us under performance and other guarantees. Management fees are comprised of a base fee, which is generally based on a percentage of gross revenues, and an incentive fee, which is generally based on the property’s profitability. For any time during the year, when the provisions of our management contracts allow receipt of incentive fees upon termination, incentive fees are recognized for the fees due and earned as if the contract was terminated at that date, exclusive of any termination fees due or payable. Therefore, during periods prior to year-end, the incentive fees recorded may not be indicative of the eventual incentive fees that will be recognized at year-end as conditions and incentive hurdle calculations may not be final. Franchise fees are generally based on a percentage of hotel room revenues. As with hotel revenues discussed above, these revenue sources are affected by conditions impacting the travel and hospitality industry as well as competition from other hotel management and franchise companies.
	•		Vacation Ownership and Residential — We recognize revenue from Vacation Ownership Interests (“VOIs”) sales and financings and the sales of residential units which are typically a component of mixed use projects that include a hotel. Such revenues are impacted by the state of the global economies and, in particular, the U.S. economy, as well as interest rate and other economic conditions affecting the lending market. Revenue is generally recognized upon the buyer’s demonstration of a sufficient level of initial and continuing involvement. We determine the portion of revenues to recognize for sales accounted for under the percentage of completion method based on judgments and estimates including total project costs to complete. Additionally, we record reserves against these revenues based on expected default levels. Changes in costs could lead to adjustments to the percentage of completion status of a project, which may result in differences in the timing and amount of revenues recognized from the projects. We have also entered into licensing agreements with third-party developers to offer consumers branded condominiums or residences. Our fees from these agreements are generally based on the gross sales revenue of units sold.
	•		Revenues From Managed and Franchised Properties — These revenues represent reimbursements of costs incurred on behalf of managed hotel properties and franchisees. These costs relate primarily to payroll costs at managed properties where we are the employer. Since the reimbursements are made based upon the costs incurred with no added margin, these revenues and corresponding expenses have no effect on our operating income or our net income.

     Frequent Guest Program. Starwood Preferred Guest (“SPG”) is our frequent guest incentive marketing program. SPG members earn points based on spending at our properties, as incentives to first time buyers of VOIs and residences and through participation in affiliated programs. Points can be redeemed at substantially all of our owned, leased, managed and franchised properties as well as through other redemption opportunities with third parties, such as conversion to airline miles. Properties are charged based on hotel guests’ qualifying expenditures. Revenue is recognized by participating hotels and resorts when points are redeemed for hotel stays.

     We, through the services of third-party actuarial analysts, determine the fair value of the future redemption obligation based on statistical formulas which project the timing of future point redemption based on historical experience, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed as well as the cost of reimbursing hotels and other third parties in respect of other redemption opportunities for point redemptions. Actual expenditures for SPG may differ from the actuarially determined liability. The total actuarially determined liability as of March 31, 2010 and December 31, 2009 is $697 million and $689 million, respectively. A 10% reduction in the “breakage” of points would result in an estimated increase of $89 million to the liability at March 31, 2010.

     Long-Lived Assets. We evaluate the carrying value of our long-lived assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net book value of the assets if certain trigger events occur. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value is charged to current earnings. Fair value is based upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, appraisals and, if appropriate, current estimated net sales proceeds from pending offers. We evaluate the carrying value of our long-lived assets based on our plans, at the time, for such assets and such qualitative factors as future development in the surrounding area, status of expected local competition and projected incremental income from renovations. Changes to our plans, including a decision to dispose of or change

the intended use of an asset, can have a material impact on the carrying value of the asset.

     Assets Held for Sale. We consider properties to be assets held for sale when management approves and commits to a formal plan to actively market a property or group of properties for sale and a signed sales contract and significant non-refundable deposit or contract break-up fee exist. Upon designation as an asset held for sale, we record the carrying value of each property or group of properties at the lower of its carrying value which includes allocable segment goodwill or its estimated fair value, less estimated costs to sell, and we stop recording depreciation expense. Any gain realized in connection with the sale of properties for which we have significant continuing involvement (such as through a long-term management agreement) is deferred and recognized over the initial term of the related agreement. The operations of the properties held for sale prior to the sale date are recorded in discontinued operations unless we will have continuing involvement (such as through a management or franchise agreement) after the sale.

     Loan Loss Reserves. For the vacation ownership and residential segment, we record an estimate of expected uncollectibility on our VOI notes receivable as a reduction of revenue at the time we recognize profit on a sale of a vacation ownership interest. We hold large amounts of homogeneous VOI notes receivable and therefore assess uncollectibility based on pools of receivables. In estimating our loss reserves, we use a technique referred to as static pool analysis, which tracks uncollectible notes for each year’s sales over the life of the respective notes and projects an estimated default rate that is used in the determination of our loan loss reserve requirements. As of March 31, 2010, the average estimated default rate for our pools of receivables was 9.7%. Given the significance of our respective pools of VOI notes receivable, a change in the projected default rate can have a significant impact to our loan loss reserve requirements, with a 0.1% change estimated to have an impact of approximately $3 million.

     For the hotel segment, we measure the impairment of a loan based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or the estimated fair value of the collateral. For impaired loans, we establish a specific impairment reserve for the difference between the recorded investment in the loan and the present value of the expected future cash flows or the estimated fair value of the collateral. We apply the loan impairment policy individually to all loans in the portfolio and do not aggregate loans for the purpose of applying such policy. For loans that we have determined to be impaired, we recognize interest income on a cash basis.

     Legal Contingencies. We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. An estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or our results of operations.

     Income Taxes. We provide for income taxes in accordance with principles contained in FASB ASC 740, Income Taxes. Under these principles, we recognize the amount of income tax payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. We also measure and recognize the amount of tax benefit that should be recorded for financial statement purposes for uncertain tax positions taken or expected to be taken in a tax return. With respect to uncertain tax positions, we evaluate the recognized tax benefits for derecognition, classification, interest and penalties, interim period accounting and disclosure requirements. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns.

RESULTS OF OPERATIONS

     The following discussion presents an analysis of results of our operations for the three months ended March 31, 2010 and 2009.

     As discussed in Note 2 of the financial statements, following the adoption of ASU Nos. 2009-16 and 2009-17 on January 1, 2010, our statement of income beginning with the three months ended March 31, 2010 no longer reflects securitization income, but instead reports interest income, net charge-offs and certain other income associated with all securitized loan receivables, and interest expense associated with debt issued from the trusts to third-party investors in the same line items in our statement of income as debt. Additionally, we will no longer record initial gains or losses on new securitization activity since securitized vacation ownership notes receivable no longer receive sale accounting treatment. Finally, we no longer recognize gains or losses on the revaluation of the interest-only strip receivable as that asset is not recognized in a transaction accounted for as a secured borrowing.

     Our statement of income for the three months ended March 31, 2009 and our balance sheet as of December 31, 2009 have not been retrospectively adjusted to reflect the adoption of ASU Nos. 2009-16 and 2009-17. Therefore, current period results will not be comparable to prior period amounts, particularly with regards to:

	•		Vacation ownership and residential sales and services
	•		Interest expense

     Business conditions in the global lodging industry remain difficult. However, after several challenging quarters, the first quarter in 2010 offered some relief. REVPAR began to increase year-over-year and ahead of the fourth quarter of 2009. These gains have resulted from better than expected occupancy primarily related to our three main classes of customers: business, leisure and group travelers. As the largest operator of upper upscale and luxury hotels in the world, we believe luxury travel is leading the increases with occupancy up 20% in certain markets. However, prices have not recovered and continue to lag behind 2009. With the global economy strengthening, we expect pricing to eventually follow the growth in occupancy as demand increases. We have instituted rigorous policies to control costs. This allows us to maintain the benefit of the savings that we achieved.

     Historically, we have derived the majority of our revenues and operating income from our owned, leased and consolidated joint venture hotels and a significant portion of these results are driven by these hotels in North America. However, since early 2006, we have sold a significant number of hotels in connection with our strategy of reducing our investment in owned real estate and increasing our focus on the management and franchise business. As a result, our primary business objective is to maximize earnings and cash flow by increasing the number of hotel management and franchise agreements. In 2009 and the first quarter of 2010, we sold or closed seven owned hotels, further reducing our revenues and operating income from owned, leased and consolidated joint venture hotels. Three of these hotels were sold subject to long-term management or franchise contracts. Total revenues generated from these sold hotels were $0 million and $28 million for the three months ending March 31, 2010 and 2009, respectively.

     Beginning in the latter part of 2008, we have had less success in selling assets at acceptable prices, primarily due to depressed market conditions and the inability of potential buyers to obtain financing. To date, where we have sold hotels, we have not provided seller financing or other financial assistance to buyers.

     At March 31, 2010, we had approximately 350 hotels in the active pipeline representing approximately 85,000 rooms, driven by strong interest in all Starwood brands. Of these rooms, 69% are in the upper upscale and luxury segments and 70% are outside of North America. During the first quarter of 2010, we signed 13 hotel management and franchise contracts representing approximately 3,000 rooms of which nine are new builds and four are conversions from another brand and opened 14 new hotels and resorts representing approximately 2,600 rooms. During the first quarter of 2010, seven hotels left the system, representing approximately 4,200 rooms.

     An indicator of the performance of our owned, leased and consolidated joint venture hotels is REVPAR, as it measures the period-over-period change in rooms revenue for comparable properties. This is particularly the case in the United States where there is no impact on this measure from foreign exchange rates.

     We continually update and renovate our owned, leased and consolidated joint venture hotels and include these hotels in our Same-Store Owned Hotel results. We also undertake major repositionings of hotels. While undergoing major repositionings, hotels are generally not operating at full capacity and, as such, these repositionings can negatively impact our hotel revenues and are not included in Same-Store Hotel results. We may continue to reposition our owned, leased and consolidated joint venture hotels as we pursue our brand and quality

strategies. In addition, several owned hotels are located in regions which are seasonal and therefore, these hotels do not operate at full capacity throughout the year.

     The following represents our top five markets in the United States by metropolitan area as a percentage of our total owned, leased and consolidated joint venture revenues for the three months ended March 31, 2010 (with comparable data for 2009):

Top Five Metropolitan Areas in the United States as a % of Total Owned
Revenues for the Three Months Ended March 31, 2010
with Comparable Data for the Same Period in 2009(1)
		2010				2009
Metropolitan Area		Revenues				Revenues
New York, NY			12.1	%			12.3	%
Phoenix, AZ			7.9	%			7.0	%
Hawaii			7.0	%			6.9	%
Atlanta, GA			4.4	%			4.3	%
San Francisco, CA			3.9	%			6.2	%

     The following represents our top five international markets as a percentage of our total owned, leased and consolidated joint venture revenues for the three months ended March 31, 2010 (with comparable data for 2009):

Top Five International Markets as a % of Total Owned Revenues for
the Three Months Ended March 31, 2010
with Comparable Data for the Same Period in 2009(1)
		2010				2009
International Market		Revenues				Revenues
Canada			10.0	%			8.9	%
Italy			5.6	%			5.4	%
Mexico			4.9	%			6.9	%
Australia			4.2	%			4.8	%
Spain			3.9	%			1.7	%

     The following table summarizes REVPAR⁽¹⁾, Average Daily Rate (“ADR”) and occupancy for our Same-Store Owned Hotels for the three months ended March 31, 2010 and 2009. The results for the three months ended March 31, 2010 and 2009 represent results for 58 owned, leased and consolidated joint venture hotels (excluding 7 hotels sold and closed and 5 hotels undergoing significant repositionings or without comparable results in 2010 and 2009).

		Three Months Ended
		March 31,
		2010				2009				Variance
Worldwide (58 hotels with approximately 19,000 rooms)
REVPAR		$	125.22			$	118.48				5.7	%
ADR		$	196.76			$	198.71				(1.0	)%
Occupancy			63.6	%			59.6	%			4.0
North America (31 hotels with approximately 12,000 rooms)
REVPAR		$	133.61			$	127.77				4.6	%
ADR		$	197.95			$	204.81				(3.3	)%
Occupancy			67.5	%			62.4	%			5.1
International (27 hotels with approximately 7,000 rooms)
REVPAR		$	111.88			$	103.71				7.9	%
ADR		$	194.53			$	187.77				3.6	%
Occupancy			57.5	%			55.2	%			2.3

     The following table summarizes REVPAR, ADR and occupancy for our Same-Store Systemwide Hotels for the three months ended March 31, 2010 and 2009. Same-Store Systemwide Hotels represent results for same store owned, leased, managed and franchised hotels.

		Three Months Ended
		March 31,								Variance
		2010				2009
Worldwide
REVPAR		$	97.85			$	92.05				6.3	%
ADR		$	158.18			$	162.47				(2.6	)%
Occupancy			61.9	%			56.7	%			5.2
North America
REVPAR		$	91.02			$	88.54				2.8	%
ADR		$	147.10			$	154.95				(5.1	)%
Occupancy			61.9	%			57.1	%			4.8
International
REVPAR		$	107.17			$	96.83				10.7	%
ADR		$	173.31			$	172.95				0.2	%
Occupancy			61.8	%			56.0	%			5.8

Three Months Ended March 31, 2010 Compared with Three Months Ended March 31, 2009
Continuing Operations

		Three Months				Three Months				Increase /				Percentage
		Ended				Ended				(decrease)				change
		March 31,				March 31,				from prior				from prior
		2010				2009				year				year
		(in millions)
Owned, Leased and Consolidated Joint Venture Hotels		$	381			$	380			$	1				0.0	%
Management Fees, Franchise Fees and Other Income			153				144				9				6.2	%
Vacation Ownership and Residential			133				135				(2	)			(1.5	)%
Other Revenues from Managed and Franchised Properties			520				468				52				11.1	%
Total Revenues		$	1,187			$	1,127			$	60				5.3	%

     The increase in revenues from owned, leased and consolidated joint venture hotels was primarily due to improved results at our existing owned, leased and consolidated joint venture hotels, offset in part by lost revenues from seven owned hotels that were sold or closed in 2009. These sold or closed hotels had revenues of $0 million in the three months ended March 31, 2010 compared to $28 million in the three months ended March 31, 2009. Revenues at our Same-Store Owned Hotels (58 hotels for the three months ended March 31, 2010 and 2009, excluding the seven hotels sold or closed and five additional hotels undergoing significant repositionings or without comparable results in 2010 and 2009) increased 4.9%, or $17 million, to $345 million for the three months ended March 31, 2010 when compared to $328 million in the same period of 2009 due primarily to an increase in REVPAR.

     REVPAR at our worldwide Same-Store Owned Hotels increased 5.7% to $125.22 for the three months ended March 31, 2010 when compared to the corresponding 2009 period. The increase in REVPAR at these worldwide Same-Store Owned Hotels resulted from an increase in occupancy rates to 63.6% in the three months ended March 31, 2010 when compared to 59.6% in the same period in 2009 partially offset by a 1.0% decrease in ADR to $196.76 for the three months ended March 31, 2010 compared to $198.71 for the corresponding 2009 period. REVPAR at Same-Store Owned Hotels in North America increased 4.6% for the three months ended March 31, 2010 when compared to the same period of 2009. REVPAR growth was particularly strong at our owned hotels in New York, New York, Scottsdale, Arizona and Toronto, Canada. REVPAR at our international Same-Store Owned Hotels increased by 7.9% for the three months ended March 31, 2010 when compared to the same period of 2009. REVPAR for Same-Store Owned Hotels internationally increased 0.8% excluding the favorable effects of foreign currency translation.

     The increase in management fees, franchise fees and other income was primarily a result of an $8 million increase in management and franchise revenues to $151 million for the three months ended March 31, 2010 compared to $143 million in 2009. The increase was due to growth in REVPAR of existing hotels under management as well as the net addition of 40 managed and franchised hotels to our system since the first quarter of 2009.

     As a result of applying ASU No. 2009-17, vacation ownership revenues in the first quarter 2010 increased $14 million compared to 2009. This increase was more than offset by lower originated contract sales of VOI inventory, timing of adjustments for percentage of completion accounting and other deferrals, and higher loan loss provisions. Originated contract sales of VOI inventory decreased 4.9% in the three months ended March 31, 2010 when compared to the same period in 2009 primarily due to the closure of fractional sales centers in 2009. Excluding fractional, originated contract sales decreased 0.8% compared to the same period of 2009. This decline is primarily driven by a 7.5% decrease in the average contract amount per vacation ownership unit sold to approximately $16,800, partially offset by a 3.6% increase in the number of contracts signed. The average contract amount per vacation ownership unit sold decreased primarily as a result of price reductions and a higher percentage of lower-priced biennial inventory. The number of contracts signed increased 3.6% when compared to 2009 due to higher closing efficiency partly offset by lower tour flow. The decrease in vacation ownership and residential sales and services was partially offset by a $1 million increase in residential revenue. Residential revenue in 2010 included $2 million of license fees in connection with four properties.

     Other revenues from managed and franchised properties increased to $520 million for the three months ended March 31, 2010 compared to $468 million in 2009, primarily due to an increase in the number of managed and franchised hotels. These revenues represent reimbursements of costs incurred on behalf of managed hotel and vacation ownership properties and franchisees and relate primarily to payroll costs at managed properties where we are the employer. Since the reimbursements are made based upon the costs incurred with no added margin, these revenues and corresponding expenses have no effect on our operating income and our net income.

Three Months

Three Months

Increase /

Percentage

Ended

Ended

(decrease)

change

March 31,

March 31,

from prior

from prior

2010

2009

year

year

(in millions)

Selling, General, Administrative and Other

$

76

$

73

$

3

4.1

%

     The increase in selling, general, administrative and other expenses was primarily a result of higher incentive compensation expense in 2010 when compared to 2009.

Three Months

Three Months

Increase /

Percentage

Ended

Ended

(decrease)

change

March 31,

March 31,

from prior

from prior

2010

2009

year

year

(in millions)

Restructuring and Other Special Charges, Net

$

—

$

17

$

(17

)

n/m

     During the three months ended March 31, 2009, we recorded restructuring charges of $19 million in connection with our initiative of rationalizing our cost structure in light of the decline in growth in our business units. This initiative was substantially completed in 2009. The charges in the three months ended March 31, 2009 were partially offset by the reversal of $2 million of accruals related to expected severance costs recorded during the Le Méridien acquisition that are no longer needed.

Three Months

Three Months

Increase /

Percentage

Ended

Ended

(decrease)

change

March 31,

March 31,

from prior

from prior

2010

2009

year

year

(in millions)

Depreciation and Amortization

$

76

$

75

$

1

1.3

%