2009 PROXY STATEMENT & 2008 ANNUAL REPORT Designed by Curran & Connors, Inc. / www.curran-connors.com Dear Fellow Shareholders: If we learned one thing in 2008, it was to expect the unex- costs and lay the foundation for future growth. Through AVA, pected, to prepare for the worst and to keep our nerve. we eliminated costs by streamlining activities and removing Business trends deteriorated throughout the year and this overlaps in our organization. negative momentum has continued into 2009. As part of our ongoing efforts to prepare for a worsening macro environ- Let me take a step back to explain why this was needed. ment, we began a rigorous cost-cutting program early in Remember that Starwood came together in the late 1990s as 2008, including a review of our spending with a focus on a patchwork of organizations—a small lodging REIT acquired reducing costs, improving productivity and reinvesting against Westin, ITT/Sheraton, Vistana and, most recently, Le Meridien. our growth priorities. I am pleased to report that we have This resulted in a large organization with multiple offices and been successful in this task. In fact, our cost discipline helped duplicate functions. While Starwood has performed well in us achieve strong results in each quarter of 2008 despite a spite of its complex structure, we saw the opportunity to save rapid deterioration in lodging demand. In 2009, we will con- even more money and become more agile. Equally important, tinue to focus on managing our costs without compromising we wanted to ensure our corporate structure was positioned our long-term growth plans for the company. to best support our properties and owners. I would like to take this opportunity to thank Starwood’s For example, through the AVA process we eliminated almost talented team of Associates for delivering excellent results in 100 positions in our North American Division alone. In addition 2008, despite the weakening environment and the to focusing on cost cutting, as we went through the process Company’s focus on dramatically reducing overhead and we also looked at identifying areas that could be strength- property-level costs. ened to better meet the needs of our owners. This resulted in reorganizing some parts of the owner relations team to • We grew our managed and franchised revenues by improve communication and support. over 5% despite flat worldwide RevPAR. We also centralized many activities such as legal functions, • We added a record 87 hotels to Starwood’s global created a single service center for human resources, and are platform, representing 10% gross unit additions dur- consolidating certain accounts payable and payroll functions ing the year. in the United States. We also better aligned our development, architecture and design, and hotel opening teams to streamline • We increased our guest satisfaction scores across all the process from signing a contract to opening a property. of our brands, including strong debuts for aloft and Element. In total, the AVA process to date has generated a 30% reduction in personnel costs across many of our corporate • We sold six assets for cash proceeds of $320 million. and divisional functions. At Starwood’s Vacation Ownership business, we were able to reduce G&A by 45% and eliminate • We realigned our corporate and divisional struc- 35% of our sales force. In addition to the AVA process, our tures, resulting in annual run-rate savings of over overhead cost reduction efforts also focused on compensa- $100 million. tion. This included benchmarking most positions, allowing us to re-band jobs and make sweeping changes in equity compen- • We implemented top-down and bottom-up initiatives sation. Like many companies, we have also frozen salaries for to significantly reduce property-level costs. 2009. As mentioned earlier, the net result will be a run-rate savings of $100 million, and this includes only those savings Looking ahead, the good news is that we remain strongly already implemented. positioned for one of the most challenging demand environ- ments the lodging industry—and the global economy—has The second area of our cost cutting focused on the property ever experienced. In addition to working toward the Five level. We began two major initiatives in 2008—one is bottom- Essentials that will drive our success over the long term, we up and the other is top-down. Between them, we should be are continuing to reduce our cost base. Cost control enabled able to offset inflationary pressures, significantly helping our us to weather the deteriorating fundamentals that accelerated results in 2009. To be clear, this is before the impact of any throughout 2008. To put the operating environment into variable cost savings associated with lower occupancy. perspective, worldwide owned RevPAR grew 5% in the first quarter, but declined 16% in the fourth quarter. While the Our bottom-up approach is called ‘lean operations’ and severity and breadth of the slowdown surprised us, we were involves using our talent to reduce work and waste. For well ahead of the curve from a cost reduction perspective example, we refined our staffing model to better match work which helped drive our better than expected results. demand, outsourced bakery and butcher positions, and expanded spans of control for managers and supervisors. Starwood’s efforts to reduce corporate overhead have created The lean operations team is working closely with our Six immediate savings as well as lasting changes to our way of Sigma team to implement these productivity enhancements doing business. We are using what we call Activity Value across our hotels. Analysis, or AVA, which is a rigorous process to address our Starwood Hotels & Resorts Worldwide, Inc. Our top-down approach is known as normative modeling, 5. The fifth essential, generating ‘Market-Leading Returns,’ which employs analytics to ‘normalize’ hotel cost performance- hinges on our ability to realize global growth, unlock real based structural variables, such as room size and configura- estate value, and carefully manage costs. While we are tion, number of service elevators, and unionization. Normalizing waiting for capital markets to recover, selective sales of further assists us in identifying top performing hotels and per- real estate and prudent allocation of capital will advance formance gaps. As with lean operations, best practices are our transformation to an asset-light model. then rolled out to under-performers. Examples of this include reducing the number of housekeepers per occupied room We have often described the branded global hotel fee business and simplifying food and beverage concepts. At the same as one of the most attractive business models in the world— time, we are working with our owners to share these savings and we continue to believe this is true. The contracts are across the managed and franchised system. stable, capital-efficient and long-term. Fee growth is driven by three factors: RevPAR growth, unit additions, and incen- Procurement is the third area where we are reducing costs tive escalation. across the system. This includes introducing more categories to our buying programs, vendor consolidation, SKU rational- We have made substantial progress over the last few years in ization and improved compliance. These efforts have resulted growing our managed and franchised business and reducing in the ability to negotiate better contract terms for items such the size of our owned portfolio. Today, 53% of our EBITDA as food, flat screen TVs and laptops. Given our success from contribution is from fee income, up from 18% five years ago. recent negotiations, we anticipate additional direct savings of Our goal is to be over 80% fee-driven in the coming years. By $35 million in 2009. itself, this focus on the fee business will result in a sustainable growth engine that throws off significant free cash flow. At the While the current environment has created intense pressure same time, our balance sheet holds more opportunities to for us to manage costs, controlling our costs is just one of generate cash, in the form of real estate at our owned hotels four financial levers we have at our disposal to create share- and inventory at the vacation ownership business. holder value over the long-term. The other three levers are: Reducing the size of our owned portfolio and vacation own- • Driving RevPAR premiums ership business will take time. These initiatives—combined with the growth in our managed and franchised business— • Growing our pipeline will result in an increasingly capital-efficient business model. • Unlocking real estate value To summarize, we are prepared for a variety of potential sce- narios in 2009. We have been aggressive in our cost contain- Our ability to pull these financial levers relies on our team’s ment efforts and dramatically scaled back our capital plans, execution against the five essentials of “The Starwood Journey.” but are prepared to do more if needed. We have been con- servative in our approach to managing our balance sheet and 1. ‘Starwood Class Brands’ is our first essential, and our will explore all options to maintain maximum balance sheet brand teams are hard at work on the innovations that will flexibility and liquidity. Our efforts thus far have resulted in an drive RevPAR outperformance and propel our pipeline. increasingly efficient cost structure that should position us to not just survive this economic downturn but allow us to cap- 2. The brand teams are also better aligned than ever with our italize on the upswing in the future. We continue to build, Operations team as we work towards ‘Brilliant Execution,’ open, renovate and innovate for recovery and beyond, and our second essential. Brilliant execution means consistently remain focused on our long-term strategy to generate mar- creating brand-relevant guest experiences while being ket-leading returns for our shareholders.