• Hilton boosts forecast, cuts debt

Hilton Worldwide raised its profit forecast as it, like rivals Starwood Hotels & Resorts and Marriott International, benefitted from limited supply in the US and a recovery in the business travel market.

The company said that strong performance meant it would deleverage more quickly and start to consider returning cash to shareholders.

The group said that, the light of its positive outlook, it had raised its Ebitda forecast for the year to between USD2.43bn to USD2.48bn, an increase of USD10m at the midpoint. Earnings per share guidance for the year increased to a range of USD0.67 to USD0.70 or an increase of USD0.03 a share.

Total management and franchise fees for the second quarter were USD371m, up 14% on the year, encouraging the group to increase full year management and franchise fee growth estimates by 100 basis points to 11% to 13%.

The group said that, with strength in the Americas and Asia Pacific region, and business rebounding in Europe, it would maintain its forecast of revpar growth between 5.5% and 7.0% for the full year. President & CEO Chris Nassetta told analysts that the return of group business meant that the company could push rates up. He added: “I think 2015 is going to be another very, very good year because you’ve got a lot more business coming in the funnel to manage. We are going to be able to be much more aggressive on mix.”

Nassetta said that the company had increased its debt prepayment range by USD100m to between USD800m and USD1bn for the year as it worked towards its objective of achieving investment grade status. During the second quarter, it made voluntary prepayments of USD250m, with an additional payment of USD150m in July, which brought its total debt prepayments to USD600m, year-to-date. As of 30 June, the company had USD11.3bn of outstanding debt.

In line with the current sector trend towards returning capital, Nassetta told analysts that, once the group had achieved its investment grade, “we’re not in the business of hoarding capital … we would give it back to shareholders in the way we think that they wanted back … through buybacks or dividends”.

To drive this, the company is continuing to push expansion, with Nassetta describing last year as “the nadir”, with “a big pickup” from last year in the range of 4% to 6% in terms of net unit growth, with acceleration forecast.

The group’s pipeline increased by 18% over the 12 months to 30 June, with 1,230 hotels in 75 countries and territories. During the quarter the group added over 7,000 net rooms, all, Nassetta said, “with the minimum amounts of capital investment by us and without any acquisitions”.

Nassetta identified the US as leading growth, commenting: “That’s because the US story right now is almost entirely a limited service story”, adding that the company was getting over 20% of the deals and was 10% of the market.

Nassetta drew attention to its recently-launched Curio brand, describing developer response as “extraordinary”. The group has reached agreement on nine properties comprising more than 4,100 rooms, including the SLS Las Vegas Hotel & Casino and a project in Doha, Qatar, with more than 75 Curios globally in various stages of discussion.

Nassetta said that the company’s 12th brand “in a space we call accessible lifestyle” was on track to be launched by the end of the year, with owner interest “very strong” but commented that the gestation period of the brand would be a little longer than Curio because of the heavier proportion of new build and major renovation against Curio’s conversion-driven structure.

The CEO said that the company would take the same view when considering investing key money to push the new brands’ expansion as the rest of its stable, commenting “we have a lot to offer to owners and that we should not have to deploy our balance sheet to make these things happen”. Nassetta said that, looking at the current pipeline, less than 5% by number of deals had seen any contribution of key money. The group would, he said, considering discounting fees as a strategic option, in the short term.

 

HA Perspective [by Chris Bown]: Hilton appears to be a company in a hurry. It is ramping up its pipeline, launching new brands and paying down its debt ahead of schedule. Yet these results did not impress analysts overly, with Morgan Stanley calling them “mixed”. In its Middle East and Africa region, for example, revpar was down 3.4% in the second quarter as occupancy numbers drifted lower.

A debt load of USD11.3bn is plenty, so a market running ahead of expectations is helping Hilton making early progress on reducing it. Yet it still has some way to go to hit the investment grade status already enjoyed by Starwood and Hyatt. And surely Nassetta is getting a little ahead of himself in talking so soon about returning cash to shareholders. 

Nassetta’s assertion that Hilton will not put capital in, and rarely pay key money means he must have a compelling pitch. But, as witnessed in London, where he has just dislodged IHG’s InterContinental flag to put a Conrad in the capital, he appears to be winning over landlords.

 

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