Hilton’s asset light model can rerate it’s shares
Hilton is one of the world’s preeminent hotel brands but its shares have been a disaster on Wall Street, falling 30 per cent in the past year to a recent $22. Even though Hilton sold its iconic Waldorf Astoria hotel in midtown Manhattan to China’a Anbang Insurance for $2 billion (or 32 times earnings), the stock market believes that global recession risk will gut hotel occupancy rates and average daily revenues (ADR) even as Airbnb expands room supply. Floated on December 2013 as IPO by Blackstone, Hilton Worldwide owns a constellation of hospitality brands: Hilton, Double Tree, Embassy Suites, Hilton Garden Inn as well as Tru Canopy and Curio (boutique brands).
I believe Hilton is a proxy for global business and leisure travel growth in the next decade even as it unlocks shareholder value via the spin off of its owned/time share businesses in an innovative real es- tate investment trust (REIT) structure. Its 721,000 rooms constitute no less than five per cent of global hotel rooms, making Hilton the world’s largest hospitality empire listed on the New York stock exchange. The shares have plummeted from a 52 week high of 31 to a recent 22. I believe downside risk is now minimal and strategic investors should begin accumulating the shares. Why?
One, Hilton has five per cent of global market share now but boasts 20 per cent of the global hotel room pipeline, mainly outside the US. Hilton is still an America centric brand with 80 per cent of its hotel rooms in the US. This will change dramatically in the next decade and its valuation will rerate on Wall Street.
Two, Hilton will spin out 70 of its 120 US owned hotels and its lower margin timeshare business (12 per cent of the bottom line) into a real estate investment trust (REIT). This will boost growth, lower US taxes, increase the share of managed/franchised recurrent revenue hotels in its product mix. This will enable management to optimise capital allocation, nurture new brands and enhance shareholder value.
Three, Hilton wants to embrace a global “asset light” model that enables it to focus on its core competencies as an operator on a global scale. Its pipeline of hotel rooms under planning or construction is now 275,000, up 20 per cent in 2015.
Four, Hilton is one of the world’s savviest buyers and sellers of hotel properties. For instance, its Waldorf deal with the Chinese was a beauty because it negotiated both a 100 year operating contract and renovation commitment from Anbang but also invest the $2 billion in proceeds in six far more profitable hotels in Orlando and Key West, Florida.
Five, Hilton has nurtured a chain of boutique, lifestyle brand hotels. Tru, Curio and Canopy will appeal to younger, millennial travelers. This puppy aint your Daddy’s Cadillac! Tru’s launch in 2016 has been a phenomenal winner.
Six, I believe Wall Street’s pessimism about hotels is misplaced. There is no credible global recession risk on the horizon though I concede Brazil, China, Texas and the world’s oil provinces are in deep economic doo doo. Airbnb is a threat since it increases hotel supply but not to a global brand with the Milky Way galaxy’s strongest loyalty programme.
Seven, Hilton’s 2015 revenues were up seven per cent and earnings were up 13 per cent. Revenue per available room was up four per cent. These are solid, if not spectacular, hotel chain financial metrics.
Eight, Hilton will increase its hotel supply rate at five per cent a year in the next decade, more than double the US long term hotel supply growth rate of 1.9 per cent.
Nine, two thirds of Hilton’s cash flow now derives from high margin, recurrent and predictable fee income on managed/franchised hotels. Management fees, franchise royalties and operator incentives are the lifeblood of the New Hilton.
Ten, Hilton is now dirt cheap at a mere 10 times 2016 EBITDA. This Cinderella valuation spells a money making opportunity to me.
Eleven, CEO Christophe Nasetta is commited to increasing shareholder value, not empire building. He resurrected the Hilton brand, once compared to Coca Cola in the 1960’s but fallen on hard times till the Blackstone takeover in 2007 at the height of the credit bubble. Asset light, global growth is the new mantra at Hilton, a strategy that I believe could lead to a valuation rerating in its shares on Wall Street.