At Investor Day, Hilton shows Street its value, hints at more brands

(Hilton Istanbul exterior)

Marriott International's acquisition of Starwood Hotels & Resorts dominated 2016, but Hilton Worldwide's disclosure that it was spinning off into three distinct companies—a REIT (Park Hotels & Resorts), Hilton Grand Vacations and it's fee-based Hilton business—was conspicuous, too.

And at the company's recent Investor Day, it offered a rundown of what's to come, including floating the possibility of new brands.

“It's been, as you might imagine, a pretty busy time here at Hilton, particularly as we get to the end of this year and we are getting ready to complete the spins that we've been working on for quite some time,” Hilton Worldwide President and CEO Christopher Nassetta told the attendees, assembled in New York. “We're at the beginning of the next leg in the journey—which is really the leg that allows us, through three independent companies, to fully maximize value in ways that as a combined company we just couldn't do.”

Nassetta offered several reasons for the split. “We want to have each of these businesses be able to have dedicated shareholder bases,” he said. Because the REIT, the vacation-ownership side and the main company are all very different businesses, he said, “people want to have the opportunity to self-select.” Secon, dedicated management teams will let each division “fully activate” in ways that they have not previously been able to do. Third, Hilton is looking to “create capital market efficiency and tax efficiency opportunities,” he said. “And as a consequence of how we're doing it with the tax-free spin and the REIT conversion with the Park assets, we're creating a tremendous amount of efficiency in that regard.”  

Rob Tanenbaum, EVP of asset management at Park Hotels & Resorts, said that the REIT’s asset-management program is for an active asset-management platform that will be distinct from in the past when the team focused mainly on capital projects. “While we will certainly have our eye on maintaining our capital plans, we're pivoting to a traditional owner-operator asset-management program,” he told investors.

A key focus of Park Hotels & Resorts will be on the “continuous improvement” of property-level operating performance, Tanenbaum said. “We're looking at 65 cents of every incremental dollar coming down to the bottom line as compared to the traditional 50/50,” he said. “We're going to understand our profitability by business segment and source. And most importantly, we're going to develop very thoughtful cost-containment plans.”

Steady Growth

Since Hilton Worldwide went public three years ago, the company's room inventory has grown 17 percent to almost 790,000. “We've grown our pipeline by 60 percent at 300,000 rooms—the largest pipeline in the history of the company,” Nassetta said, noting that the number of rooms under construction has grown by more than 50 percent to 150,000 rooms. Ultimately, he said, Hilton has 22 percent of all hotel rooms currently under construction globally. “Every one of our brand segments is setting records in terms of pipeline, and we're in our sixth consecutive year of growth in signings,” he said.

Nassetta stressed that the company’s plans for China are also vital—not just to open properties in the country, but to build brand awareness for outbound Chinese travelers. “Right now, China is the largest outbound market in the world and it is growing leaps and bounds,” he told investors. “We have to be successful there. And we are on a great path, particularly with our Plateno relationship as well as some others and our new relationship that we're building with HNA. We have some distinct competitive advantages there that are going to allow us to win in China, and as a result really build loyalty with Chinese customers around the world.”

On the timeshare side, Mark Wang, president of Hilton Grand Vacations, called this a “new era” for branded timeshare companies. “Since the industry peak in 2007, contract sales have grown at an 8 percent [compound annual growth rate], and we've doubled our owner base,” he said. “In the last three years, we generated over $500 million in free cash flow, and in the last five years, over $1 billion in free cash flow. Our return on invested capital has moved up three times to just over 40 percent. And despite lower margin fee sales, our EBITDA has increased 75 percent since 2011.” 

Looking ahead, HGV will keep a careful eye on opportunities to gain traction in Japan. “Roughly a third of the Japan population lives within two hours of one of our seven sales galleries there,” Wang said. “We've grown our members in this market at an 11-percent CAGR since 2011. They make up 20 percent of our member base. They're our most-profitable and fastest-growing customer. And we own this market. We believe further expansion in [Asia Pacific] is achievable.”

Brand Strength

Hilton currently has 13 brands in its portfolio covering almost 5,000 hotels across 105 countries and to hear it from Jim Holthouser, EVP of global brands, there could be room for more . “Unlike a lot of our competitors, we don't have brands that sit right on top of each other or that share the same position, that are fighting each other for the same customers,” Holthouser said. “The Hilton portfolio, while it's broad, has a lot of coverage. It's clean, it's rational, it's easy to understand.” 

Having launched four brands over the last six years (Home 2, Curio, Canopy and Tru), Hilton is contemplating developing additional soft brands and other niche brands, Holthouser said. “Potentially something below Curio, kind of at that DoubleTree level. Maybe something above Curio at the luxury level.” Soft brands, he continued, are a “very attractive proposition” for owners of independent hotels looking for the support of a major brand.

“The second thing we're contemplating right now is potentially something in the luxury lifestyle space,” Holthouser said. “We think there might be an opportunity with a Hilton Plus product, probably a line expansion or maybe it's a separate brand. We haven't really decided yet.”

Finally, Hilton is also looking at the economy space with what Holthouser called “an urban Microtel kind of concept, urban lifestyle economy.” The economics for this concept, he said, are “pretty compelling.” But don’t expect any of these developments right away. “We have to be very, very purposeful and strategic in terms of how we roll things out based on the cycle and other things,” Holthouser said. 

Going Forward

Now three separate business units, Nassetta sees several drivers of value for Hilton’s investors. “One is same-store growth,” he said. “One point in systemwide [revenue-per-available-room] growth is $20 million to $25 million in [earnings before interest, taxes, depreciation and amortization] growth. The second is new-unit growth. We talked about the 300,000-room pipeline—it's worth $640 million—but to get it to be more granular, every 10,000 rooms is $20 million more EBITDA growth.” 

Increasing franchise fees can also help boost revenue. “Every five basis points is another $8 million or $10 million,” Nassetta said. “Every one of these levers that we are pulling going forward is just going to increase the free cash flow of the business and what our intention is then is to return capital to shareholders.

“So how are we going to do that?” Nassetta asked. “We're going to do it with a dividend that will be quite modest and then programmatic and opportunistic buybacks.”

In the next three years, he predicted, Hilton will be able to return $3.5 billion to $4 billion to shareholders—“which would, assuming a modest dividend, be reducing shares outstanding by 13 percent to 21 percent.”