• Hilton’s asset ‘sweet spot’

Chris Nassetta, Hilton Worldwide president & CEO, said that the company was not “emotionally tied” to its real estate and would move towards being capital light.

The group did not expect to sell assets immediately, with the Nassetta describing it as being in the “sweet spot” of the ownership cycle, instead looking at “value enhancement opportunities” within the owned estate.

Nassetta said that, having spent around USD175m over the past “five or six” years on the Waldorf Astoria in New York, the company expected to confirm its plans for the hotel by the end of the year, if not sooner. Nassetta said he would update the market “both in terms of what we're going to do with it physically and who we might do it with in order to continue to focus on our being capital light”.

In the group’s first earnings call since going public, Nassetta also confirmed that the group expected to launch its first boutique brand this year, as well as “brand extensions of an existing brand”. In terms of solid news, the company announced that it had made a purchase and sale agreement with a Blackstone-led partnership with third party capital investors for the sale of land and entitlement rights to develop an underused portion of the Hilton Hawaiian Village resort in Waikiki. The company will construct a timeshare property of more than 300 units to be dubbed the Grand Islander.

The CEO said: “We think we're in a sweet spot of the ownership cycle. We like what's going on with those assets, and we've got these value-enhancement opportunities – such as at Hawaiian Village – that we want to mine that we haven't been able to because of our previous debt structure.

“We have a big real estate portfolio. So we have dozens and dozens of opportunities in that portfolio to create value in every way from an operating point of view and smaller value enhancement opportunities.”

As of the year-end the group had net debt of USD11.5bn, with cash and cash equivalents of USD860m. In addition to the USD1.24bn of net proceeds from the IPO, the group closed on the complete refinancing of its prior acquisitions during the fourth quarter, creating, CFO Kevin Jacobs said: “A balance sheet that we believe is a tremendous asset for the company and will provide us with an incredible amount of financial possibility for the future”.

The company’s owned portfolio currently represents 37% of the group’s adjusted Ebitda and includes assets in New York, London, San Francisco, Sao Paulo, and Sydney. Nassetta said: “While we are not activating our real estate segment today in terms of meaningful new unit growth we are extremely active in maximising what we do own.”

He added that the company had seen a “nearly 300 basis point” increase in ownership segment adjusted Ebitda margins in 2013, as group demand drove revenue growth in “our big group boxes”, with margin growth expected to continue.

“At the moment, we believe we can benefit from the upside on these assets operationally and from mining value enhancement opportunities, but if divesting of some or all of the real estate will enhance overall shareholder value in the future, we will actively consider those options.”

In line with the other global operators, Nassetta preferred to look at the long term opportunities in China, rather than its immediate issues, commenting: “Long-term I'm very optimistic about the development opportunities in China. In the short to intermediate term I'm pretty damn optimistic as well, I just think that the makeup of it is increasingly going to be more in the mid-market and less at the upper end of the market.”

For the full year, the group has forecast adjusted Ebitda of USD2.37bn to USD2.44bn. For 2013 adjusted Ebitda came in at USD2.21bn, a 13% increase over 2012. Revpar is expected to increase between 5% and 7% on a comparable currency neutral basis with 60% to 70% of that being driven by rate, against a 5.2% increase last year.

Nassetta said: “On an overall basis, we are optimistic that 2014 will be stronger than '13. There will undoubtedly be ebbs and flows within regions, but generally the macro trend seem to be similar or better than what we saw in 2013.”


HA Perspective [by Katherine Doggrell]: It speaks! It speaks! After years behind the private equity curtain of silence it has been pulled back and, well, it’s not quite a little old man with some big levers, but it’s not quite the mysterious wizard we had imagined. In fact it looks rather similar to some of the other global operators.

The company is not quite in the vein of Starwood Hotels & Resorts, which is anticipating an acceleration of asset sales, nor is it Accor, with its decision to embrace assets. There are echoes of

Marriott International, with its talk of using its balance sheet to aid expansion, but in this case it is growth of profits as well as just portfolio, with more of a real estate play in mind.

The most striking difference between hidden Hilton and public Hilton is this strengthening of the balance sheet. There was no way it could have thrived in the public markets without it and now, after years of comments about the deal to unite the Hiltons being over-leveraged, it is ready to compete and stand up to scrutiny at the same time. It is clearly in no hurry to put this at risk, as the comments about the Waldorf Astoria highlight. They have spent enough, it’s time for someone else to step in.

While the results were strong on confidence, they were scant on future details. The International Hotel Investment Forum passed without the launch of the company’s new boutique brand, but it is expected soon. Given that Orient-Express Hotels went through 650 possible names before coming up with Belmond, one has to respect that launching a new brand takes time.

Most of these questions are expected to be answered by the end of the year. An innovative state for Hilton watchers and a welcome one.

[Additional comment by Andrew Sangster]: Hilton is a changed business from when it went private in 2007. It has grown by 35%, adding 176,000 rooms taking it to a total of 672,000. During this period, close to six years, Marriott grew by 29% and Starwood by 24%, according to numbers from Morgan Stanley. Making this all the more impressive is that Hilton claims to have invested just USD47m to make this happen.

During the conference call CEO Nassetta made a clear statement of intent: “We believe that if we continue to maintain the strongest brands in the industry, we should not have to allocate significant capital to grow.”

So capital is not going to be deployed to grow but Hilton is in no rush to divest its owned hotels either. Morgan Stanley reckons that the owned portfolio is worth about USD12bn with most of that (by value) in the US, including USD2.1bn tied up in the Waldorf-Astoria alone. In addition, Morgan Stanley put a value of USD5bn on Hilton’s leased assets.

So why isn’t Hilton going for an all-out asset light approach to provide a payday for shareholders, of which Blackstone remains the biggest?

It is a question of timing to maximise returns. Blackstone wants to ride the leverage that owning hotels provides in the near term given that the global recovery in the developed world is being led by the US where Hilton has most of its owned hotels and 78% of its rooms overall.

Blackstone has taken Hilton public like an internet firm. It has sold a small portion of shares and is hanging on to the rest in the hope of a continued surge in the price.

The conventional view of a private equity IPO is that a much bigger portion of the company is sold so that the PE firm can get back its capital. But Blackstone is in no hurry for more capital and prefers to hang to maximise its returns.

In its own full-year results presentation in January, Blackstone said it had made a total gain of over USD10bn from its USD6.5bn investment in Hilton. It claimed this was a record for the private equity industry for any investment that has been made. By riding the cycle for a bit longer, Blackstone is betting it can do even better.


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