• Hilton commits to growth as it becomes asset light

Hilton is promising to have sold its Scandic brand and 17 owned hotels by the middle of next year as it pushes forward with its focus on fees.

It is then turning its attention to another 30 hotels with 10,000 rooms between them as the asset light strategy is further chased.

Hilton told attendees at last week's investor conference in New York that in the long-term it intends to hang on to just 10 hotels with a total of 13,000 rooms representing about a quarter of total company EBITDA.

These properties were described as \brand builders\ and were irreplaceable assets. Locations included New York, Hawaii and Chicago.

The journey undertaken by Hilton in the past few years has, as with the other companies comprising the Big Five (Marriott, InterContinental, Accor and Starwood), has been dramatic.

Following the spin-off of its gaming division in 1999, the then just US Hilton derived 83% of its EBITDA from owned hotels. This shrunk back to 65% a year later after the acquisition of Promus.

This year, owned hotels will account for 36% of EBITDA, managed and franchised 37%, leased 19% and timeshare 8%.

While Hilton has around a quarter less hotel properties than a couple of its peers in the Big Five (it has 2,895 against 4,085 atAccor and 3,680 at InterContinental), it is currently the biggest earning hotel group, expecting to deliver $1.74bn in EBITDA this year compared to $1.46bn at Accor, $1.4bn at Marriott, $1.3bn at Starwood and $0.57bn at InterContinental.

The Hilton strategy is to grow, and grow faster. It says that \bigger is better\ as economies of scale kick in, particularly with technology and marketing.

It reckons its big opportunities are: international branding, reigniting the Hilton brand and luxury development. With the first of these three, it lags its competitors and still derives 70% of EBITDA in the Americas but more crucially, the bulk of its pipeline also still inside the Americas.

While Accor leads the way for growth outside of America it is Starwood that has the next most international pipeline with half of its projects outside of the Americas. InterContinental's pipeline is, according to Hilton, 24% outside of the Americas and Marriott's 20%. Hilton's is just 11%.

Given that less than a third of the world's room stock lies inside the US and Canada, Hilton understands that there is much to play for.

It has targeted four European countries for growth: the UK, Germany, Italy and Spain. Russia is the link across Europe and Asia with both India and China designated as key Asian markets alongside Japan.

Earlier in December Hilton announced a deal with RREEF and H&QAP to develop 20 Hilton Garden Inns with 5,000 rooms in China, its first select service properties in that country. It currently has five full service hotels there.

RREEF is the property wing of Deutsche Bank and H&Q is a private equity firm. Among the locations planned for the Garden Inns are Shanghai, Beijing, Tianjin and urban centres within the Yangtze river delta and Bohai Bay regions.

The China deal follows on from the arrangement with DLF struck in November (see HA Perspective Online Issue 45).

Hilton says more than $1.2bn is being spent renovating over 145 core brand hotels between 2005 and 2007. The portfolio will have grown via 35 new hotels but 18 hotels have not been re-licensed.

The effort to create the Waldorf=Astoria brand was also emphasised, despite luxury development accounting for just 4% of the current pipeline being luxury hotels, a pipeline that is the largest ever with a total of 110,000 rooms.

The pipeline represents gross unit growth of 7% a year of which 40% is full service.

The plan is to see four-fifths of the new Waldorf=Astorias coming from independent luxury hotels, possibly on a co-branding basis and just a fifth being new-builds.

The first Waldorf=Astoria outside the US is to be the Qasr Al Sharq in Saudi Arabia, a 48 suite property that opened in June this year.

Hilton put up figures showing how poorly the rate of expansion of its Conrad brand fared against these stronger rivals.

One way to redress this balance, signalled Hilton, was to take on representation companies such as Leading Hotels and Preferred Hotels by offering its sales, reservations, loyalty scheme, management and technology through an affiliate programme.

The value of the sales of 31 owned hotels, one leased, 12 JVs and the LivingWell health club chain, made in 2005 and 2006, comes to around $2.6bn. The net present value of the management contracts on these hotels is $400m and the new owners are making $380m worth of capital improvements.

Analysts at Citigroup estimate that the already flagged asset sales to come will bring in $2.1bn, comprising $1.2bn for the 17 owned hotels being sold and $880m for Scandic. A further $1bn could come from the sale of half of the other 30 hotels over the next one to three years. The other half are encumbered by securitised debt or they are on ground leases.
HA Perspective: Hilton is playing catch-up with its Big Five rivals in two key areas: international growth and asset sales. It has been weak in both areas but is now moving rapidly to address the situation.

The progress on asset sales has been significant, with both Hilton International and the US wing playing their parts. It remains somewhat confusing, however, why hotels are deemed \brand builders\ if they are in key US cities but not if they are in London, Paris or Hong Kong.

If a case for \brand builders\ can be made, it must surely also apply in international markets, particularly as this is where future growth is expected to be more rapid. But perhaps property is being retained in the US because this is where the company feels it has enough real estate experience to comfortably combine hotel operations with running a property business.

Also somewhat perplexing is Hilton's determination to build the Waldorf=Astoria brand given the problems it encountered with Conrad. Most likely it views the representation of independent luxury hotels as a way into management contracts.

The real challenge for Hilton, as for its Big Five rivals, is delivering on its system growth ambitions. This will be a theme for the next few years.

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