Description

After spinning out the timeshare and REIT the remainco is a phenomenal business, with a long growth runway, led by best-in-class management, and is trading at an attractive valuation. We think investors can make 20% a year over a multi-year view.

• Industry Background

• Over last 5 decades the US lodging industry has grown revenue at a 6.6% CAGR

• Economy shifting to service jobs, increasing air travel, and increasing emphasis on experiences driving growth

• Globally, similar drivers and rise of a middle class will drive travel and tourism spending at a 4% real CAGR over the next decade

• Hotel brands had historically focused on building in the US but have been shifting focus outside the US

• In the US 70% of hotels are branded however outside the US most countries are under 25%

• For every 1000 people the US has 16 hotel rooms, Europe has 6, Asia Pacific has 1, and Middle East & Africa have .6

• Remainco is a High Quality Business

• 90% of EBITDA from franchising, management, and incentive fees

• Franchise contracts are 10-20 years with 5% royalties plus 3% of food and beverage revenue

• Hotel management contracts are typically 20 years with royalty type economics

• 8% of EBITDA tied to incentive fees which are tied to managed hotel EBIT  

• Hilton is a Phenomenal Brand

• One of the best hotel networks and loyalty programs with 51 million members providing greater than 50% occupancy at HLT branded properties

• Scale players (HLT & MAR) provide a better loyalty value proposition which improves developer economics which drives additional scale in a virtuous cycle

• Hotel owners make more money with HLT

• Joining the HLT network results in HLT honors members seeking out your property

• Hotel owners we spoke with who converted properties to the HLT flag saw 10%-20% increases in revpar

• Developers and lenders indicate that lenders prefer to finance HLT and MAR projects

• Much more difficult and/or expensive to get financing for an independent hotel

• Compelling Unit Growth Story

• HLT currently has 5% of global hotel rooms but 20% of global construction is under the HLT flag

• HLT should grow units 6%+ a year and given the franchising model growth is funded by 3rd party capital

• Best-in-class Management

• Chris Nassetta started out in the industry cleaning toilets at the Holiday Inn

• Background as a hotel developer, distressed real estate investor, and CEO of Mariott’s REIT spin where he made investors 17% a year

• Blackstone recruited him to lead HLT

• When Chris joined the executives worked from an office next to a Beverly Hills shopping center

• Relocated the company to Virginia and made senior execs spend time at the front desk, cleaning rooms, etc.

• Prior to the spins owned $200 mil of stock and has never sold a share

• Attractive Valuation

• Assuming revpar grows 1.5% a year, units grow 6% a year, franchise royalties increase 5 bps per year, and HLT maintains 3x leverage buying back stock then FCF grows at a high teens CAGR

• Trading at 18x 2018 FCF

• Would benefit from corporate tax reform, 39% tax rate

• Risks

• Cyclical business and will be impacted in a recession

• New HLT is the least cyclical name in lodging given their franchising business model and unit growth story

• Hotels under construction open even in a downturn so they should be able to grow FCF through a msd revpar decline

• Big difference between a drawdown and permanent capital impairment

• Internet/Airbnb Disrupts the Industry

• Airbnb is great for certain trip occasions but is struggling/has inherent challenges in trying to go after business customers which are the majority of HLT’s business

• Airbnb’s growth rate has meaningfully decelerated the last couple years which is somewhat reassuring given they still a small are a small % of overall room nights

• Starting to run into regulatory issues as many cities begin to ban, and get better at catching, professional hosts (someone taking 50 apartments off market and turning them into Airbnb’s)

• Airbnb appears to be pivoting to the experience based OTA and has been trying to get the major brands to put their hotels on the platform

• Overall Airbnb is negatively impacting the industry but I don’t think it’s going to disrupt the hotel industry

• Can also short lodging names against HLT

• Developers and investors become less interested in HLT projects

   

Catalyst

No hard catalysts, for long term investors I think you get an opportunity to buy a high quality franchising business, with best-in-class management, and a long growth runway at a modest premium to the market