Hilton Worldwide told analysts as its investor day that it would not be “buying” its growth but would look to launch at least three brands, including an “economy, urban, micro” flag.
The company outlined its planned three-way split, with the core management and franchise business to continue its “capital lite” growth plan, with the Reit mooted brands outside the Hilton stable.
CFO Kevin Jacobs told analysts: “We’re going to continue to focus on growing our capital lite management franchise business. We expect to maintain net leverage in the range of 3 to 3.5 times net debt to adjusted Ebitda. And then anything, any cash flow we generate in excess of that we intend to return to shareholders.”
Looking over the next three years, Jacobs forecast 1% to 3% revpar growth on net unit growth of 6% per year, meaning around 160,000 net room additions over the period. Adjusted Ebitda per year, with a CAGR of 5% to 8% per year, would mean USD2bn to USD2.2bn of adjusted Ebitda in 2019.
Chairman & CEO Chris Nassetta described the growth structure, commenting that the run-rate Ebitda for the pipeline of 300,000 rooms was around USD640m, adding that, at a multiple of 13.5 times, “that’s USD8.6bn billion in theoretical value. The entire investment that we’re making to make that happen is USD140m. Every 10,000 rooms is USD20m more Ebitda growth”.
With the company split into three, Nassetta focused on the “resilient, fee-based” core Hilton business, where 90% of Ebitda was from fees and 90% of that revenue driven. Seventy per cent of total fees are franchise fees.
The new Reit, Park Hotels & Resorts, will hold 67 hotels – making it the second-largest of the lodging Reits – of which the top 10 assets account for 70% of the Ebitda in the segment and would, the group said: “Want and need to be Hiltons forever”.
The Reit confirmed that it would look at single-asset acquisitions, focused on upper upscale, luxury, top 25 markets, premium resort destinations, assets over USD100m. Park CEO Tom Baltimore said: “We do not want to be chasing small assets. We want deals of scale that are going to move the needle”. While this will focus on the US, it will not be exclusively Hilton brands.
Looking ahead at the branded business, Nassetta said: “As we think about what’s next in our brand bar, the brand which we see is next front and centre is a three to four-star soft brand. Our ownership community has a lot of these kinds of assets and this is a real opportunity to get the benefit of our great commercial engines. That’s the next step, in the next quarter or so.
“Doing something in the economy, urban, micro space is another opportunity that customers would love to see us do. We could attract younger customers and with a product at scale that hasn’t been done.”
The company is also looking at a possible luxury lifestyle brand.
Nassetta added: “The white spaces are opportunities, but there are no gaps in our system which are holding us back. The math never pans out [on buying in a brand]. I like the idea of growth at 100% margin and infinite yields and I think it’s hard to beat that maths.”
Ian Carter, head of development, reaffirmed the message of business as usual, with 95% of the current pipeline involving no investment from the group. He added: “Key money is very much for strategic deals. We know that we’ve been able to grow through a very targeted approach and we don’t see that changing.
“We’ve only spent about USD200m in key money in the past five years, meaningfully less than our major competitors especially when you factor in acquisitions that they use to grow their systems.”
Since the IPO three years ago, the company has grown its systems size by 17% to almost 790,000 rooms, with the pipeline up 60% to 300,000 rooms and rooms under construction up over 50% to150,000 rooms. Sixty per cent of the pipeline is with limited service brands and almost completely under franchise contracts. The share of rooms under construction is up 16%, representing 22% of all rooms under construction globally. Net unit growth is up 44% at 6.5%.
Driving the addition of new brands is the need to fulfil the desires of the company’s loyalty members. Hilton Worldwide was one of the first of the global operators to offer discounts for loyalty club members and the company confirmed that they were driving 55% of occupied rooms, up 7% on the year.
Nassetta added: “What it all boils down to in the end is what owners again want is net profitability. Our owners are better off as a consequence of what we’ve done.”
Commenting on the impact of the president elect, Nassetta said: “There’s no question that sentiment changed. If the markets are being efficient they’re saying that the market is going to be a bit better than it was. We are starting to see that show up, particularly with corporate travel, but time will tell and we’ll have to see what happens in reality. The trend line from a hospitality business point of view is quite positive.”
Nassetta concluded: “We’re at the beginning of the next leg, which allows us to fully maximise value in ways that as a combined company we just couldn’t do.”
HA Perspective: [by Katherine Doggrell]: The investor day was billed as a chance for analysts to get into the nitty gritty of the split and see how the new companies would fit into the sector and, of the analysts we spoke to, the air was one of ‘ho hum’ at the lack of exciting detail.
The revpar guidance was already known to the market, there was nothing forecast for Park – although the brand agnostic comment sparked a frisson – and the luxury lifestyle brand has been in the works since the days of Denizen. The lack of detail on Park was the greatest disappointment, given comparisons with the moves seen at AccorHotels, where the company is determined to be a major player in Europe and has been nimble and confident in making that so.
What Nassetta painted was a company under its own steam, not participating in the M&A frenzy which has us phoning Paris every other week. The new brands will fill in gaps required by the ever-growing loyalty members and, in the case of the soft brands, owners and growth is likely to continue, with the US election fears behind the country’s business travellers, for the moment at least.
The exciting news of the split now behind us, it will be suck-it-and-see.
Additional comment [by Andrew Sangster]: There was a lot of information about strategy in the 70-page presentation about the fee-income business that will be the new Hilton. Much of it was an impressive retelling of the value creation machine that Hilton has been under the stewardship of Nassetta. Hilton has probably been the best company, and certainly among the best companies, at the fee income model.
The model is relatively simple: drive revpar, crunch franchise and management contract deals which enables you to charge the highest fees as your system becomes irresistible to owners and guests alike. Hilton said it had enhanced equity value by USD2.6bn since its IPO.
Hilton bragged that its 300,000-room pipeline was set to create a further USD8.6bn of equity value for a capital investment of just USD140m. This looks a compelling proposition.
The challenge, of course, is determining if the future is going to look like the recent past. The big threat here is the digitisation of the hotel industry. The investor day was, understandably, focused on the near-term spin-offs and celebrating existing achievements. Next time though Hilton will have to articulate more about its digital strategy. With Marriott absorbed in integrating Starwood, there is clearly an opportunity to steal a march on its biggest rival.