• Hilton and Starwood keep it asset right

Hilton might talk about asset-light while Starwood Hotels emphasises a closer connection to property by hailing asset right but both companies are embarked on essentially the same course.

Driving Hilton’s emphasis on asset reduction is its need to regain investment grade status on its debt while Starwood is happy to talk about the opportunities through selective investment in property development.

What neither company is about to do, however, is rush out buying operating companies. Starwood CEO Steve Heyer made this explicit in the group’s fourth quarter conference call last week, stating emphatically that Starwood was “not looking to buy operating companies”.

Instead, Starwood is intent on rolling out its new Aloft and Elements brands. To these ends it anticipates growth in overheads (selling, general and administrative expenses) but is capping this at just 5% in the current year.

Currently, Starwood actually derives more EBITDA from management and franchise than Hilton. Citigroup analysts forecast 2008 numbers for Starwood’s owned hotels, including Ciga, to come in at $682m, prior to any sales out of total EBITDA of $1.523bn.

Hilton, by contrast, is forecast to generate $1.261bn from owned and leased hotels out of total EBITDA of $2.046bn, again prior to sales.

Hilton is planning on selling around $2bn of assets, most of them in the first half of this year, but Starwood too is continuing its disposal programme and said in its results announcement that 14 owned hotels and eight JVs would be sold this year, mostly by the summer, bringing in $475m to $500m.

The Hilton disposals include 17 owned properties (10 in continental Europe, the Caledonian in Edinburgh and six in the US) and Scandic, the chain that accounts for much of the leased revenue. The net effects of the two companies’ proposed asset sales will be to bring them pretty much level pegging when it comes to where EBITDA is generated: the biggest portion will be fees from management and franchising but a significant chunk – around a third – will still be from owned and leased hotels.

These businesses will retain a distinct property flavour, marking them apart from pure-play managers and brand owners such as Marriott International and, increasingly, InterContinental.

Where Starwood does seem to have more of a taste for property than Hilton, however, is with development opportunities. Rather than flip as many hotels as possible into the currently bullish market, Starwood is hanging on to those properties where it believes there are big opportunities for timeshare, residential and other development. Examples include the Sheraton in Bal Harbor, Florida, and the Sheraton in New York. In Europe, Starwood has development opportunities at Turnberry in Scotland, where it has 35 acres, and in Sardinia, where it has a half-share in 6,000 acres along the coast.

Debt levels at Starwood are low and it has pulled back on its share repurchase programme buying just $342m in the final quarter of last year. This fuelled speculation that Starwood was looking at making an acquisition but it may just be that the company is building up capacity to exploit its development opportunities: while timeshare and residential pay back far quicker than hotels they still eat cash in the short-term.

What both Starwood and Hilton very much share, however, is that they are potential prey for private equity buyers. As strong cash businesses with a still significant element of asset backing, they appear ripe targets.

The results out last week will only whet appetites further. Hilton doubled its net income in the fourth quarter to $207m from $105m a year earlier. A particular boost came from the beneficial exchange rates in favour of money earned outside of the US. The Scandic chain alone contributed $731m out of the total of $2.23bn totted up by the whole group.

Revpar in the fourth quarter was up 10.7% on a worldwide basis, with Scandic up 18.1%, the strongest performance. Worldwide revpar in 2007 is forecast to grow by between 9% and 11%.

While Hilton added 9,040 rooms in the fourth quarter it lost 4,066 out of the system, a net gain of just less than 5,000, which is an annualised growth rate of 4%. It claims to have the largest development pipeline of any US-based hotel group at 110,000 rooms of which 90% are in the US.

Hilton has also announced that Tom Keltner is to become executive vice president and CEO for the Americas and Global Brands. Ian Carter is to remain executive vice president and CEO of Hilton International.

What is unclear is how Keltner, who was previously president for brand performance and the franchise development group, will work alongside Carter in rolling out Hilton’s brands internationally.

Keltner is operationally responsible for his territory, as is Carter, but Keltner also has the opportunity to interfere in Carter’s international domain. Both men now report into COO Matt Hart who will have to act as referee.

Starwood increased fourth quarter profit by 28% to $203m from $159m. It did not have the boost enjoyed by Hilton thanks to its $5.7bn buy of Hilton International and Starwood also owned 50 less hotels thanks to sales, including the big disposal to Host.

Worldwide revpar at Starwood was up 11.4% in the fourth quarter, on a like-for-like basis. Revpar in 2007 is forecast to grow by between 8% and 10% on a worldwide basis for owned and managed hotels.

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