Cash flow at Caesars Palace rises, helping Starwood earnings

Starwood Hotels & Resorts Worldwide Inc. today reported fourth-quarter net income of $142 million, or 75 cents per diluted share, on revenue of $1.27 billion.

Fourth-quarter funds from operations (FFO) totaled $279 million, or $1.40 a share, the real estate investment trust said. The per-share FFO figure matched the average estimate from analysts polled by First Call Corp.

Full-year net income was $1.3 billion, or $6.47 a share, on revenue of $4.71 billion, Starwood said. Funds from operations totaled $979 million, or $4.73 a share, the company said.

The 1998 fourth-quarter and full-year results assume the acquisition of ITT Corp., which closed last Feb. 23, had occurred last Jan. 1.

For the 1997 fourth quarter, Starwood posted a $622 million net loss on revenue of $813 million. For all 1997, the REIT's net loss was $298 million on revenue of $3.02 billion.

Starwood said its Caesars World casinos in Las Vegas and Atlantic City showed strong fourth-quarter and full-year improvements.

Fourth-quarter cash flow at Caesars Palace rose 11 percent, to $30 million, helped by an 11 percent increase in average daily room rate to $139, a 78 percent jump in hotel-room revenue and a 36 percent increase in occupied room nights due to an expansion at the Las Vegas resort.

The table game win at Caesars Las Vegas rose 8 percent to $33 million despite a 22 percent decline in baccarat business, Starwood said.

The quarterly and full-year results don't reflect the operations of the Desert Inn, which Starwood classifies as an asset held for sale. The resort has posted negative cash flow despite a recent renovation and Starwood executives have offered it to several potential buyers for between $325 million and $375 million.

"Caesars Palace had very good numbers, despite the decline in baccarat play," Bear Stearns & Co. analyst Jason Ader said today.

"Yes, they were down in baccarat play, but business was tough with the Bellagio opening because they lost some customers who wanted to try the new place in town.

"Table-game win at Caesars was up and slot win was up 18 percent. And despite the bad baccarat results, Caesars Las Vegas had strong cash flow growth because of the room additions. All in, the Caesars numbers in a difficult environment were quite respectable.

"The Desert Inn, meanwhile, will be disposed of and they seem to be at a more advanced stage in the process of selling that asset. It seems that they have a couple of assets they are looking to sell before coming to market with an equity offering, and I'd be surprised if they owned the Desert Inn by the summer," Ader said.

At Caesars Atlantic City, cash flow rose more than 60 percent in the fourth quarter, to $26 million, aided by expanded room inventory and casino space. An increase in baccarat play and higher slot win and table-game win helped results.

During the quarter, Caesars' Indiana riverboat, the Glory of Rome, began operating and, according to Starwood, is expected to be the "only operator in the Louisville market for the foreseeable future." Because of regulatory delays, the boat didn't contribute meaningfully to quarterly results, though it is now fully operational, Starwood said.

Caesars also opened a temporary casino in Johannesburg, South Africa, in which it holds a 25 percent interest.

Higher average daily rates offset flat occupancy rates at Starwood's hotel operations in the latest quarter, leading to higher cash-flow margins for the division. Strong performances in Europe and North American countered weak Asian and Latin American results, Starwood said.

"We were able to achieve full-year earnings growth ... despite turbulent debt markets, significant downturns in a number of Asian economies in which we operate, a cutback in acquisitions and a challenging integration task," Starwood Chairman Barry Sternlicht said in a statement.

As of Dec. 31, Starwood had total debt of about $8.8 billion and $290 million in cash. Sales of certain assets last month netted the company $335 million that was used to reduce the debt.

Last week, the company completed $540 million of long-term mortgage financing at a fixed rate of 6.95 percent, and used proceeds to retire a bridge loan due this month.

But unfavorable debt markets prompted Starwood to postpone plans to sell $1 billion of bonds it had planned to issue to refinance increasing-rate notes. Starwood said it expects to complete an offering when bond-market conditions improve.

Starwood warned investors in January its 1999 earnings will be less than expected, partly because it couldn't refinance $3.5 billion of debt last summer.

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