Hilton Gives Investors a Hotel Business Without All Those Hotels

Investors are eager to book a reservation in the upcoming initial public offering of Hilton Worldwide. The lodging giant on Monday added some fairly luxurious share prices to its Wall Street pitch. At $18 to $21 a share, Hilton is poised to secure a value of about $19 billion and pull off the second-biggest initial stock sale of the year.

Those are heady figures for a hotel company still in the shadow of a massive, real-estate-related recession. But Hilton isn’t really a hotel company anymore—“consultancy” or “ad shop” are arguably more accurate descriptions.

Of the 4,080 properties in Hilton’s empire, less than 4 percent are owned or leased by the company. The rest are simply managed by Hilton or part of its network of franchisees. At any given lodging these days, Hilton may be only one of three companies involved.

The shift from ownership to service—from landlord to super—was accelerated by private-equity giant Blackstone, which bought Hilton in 2007. The company has added 176,000 rooms to its empire since that deal, hardly any of which are owned or leased by Hilton. It has an additional 187,000 rooms in development, almost all of which will be titled to another company.

In other words, Hilton executives don’t have to worry nearly as much as they used to about property values and levering massive piles of capital into buildings. They can focus on burnishing company brands, honing customer service, and pinpointing the continually shifting sweet spot at the intersection of occupancy and room rates. Meanwhile, they can continue to pop into properties where Hilton simply flies one of its flags—including DoubleTree, Conrad, and Embassy Suites—to collect franchise fees and make sure the rooms are still up to snuff.

The strategy is a cushion against the kind of macroeconomic shocks we saw in 2008. Here’s how Hilton (read: Blackstone) described the strategy in its pitch to investors: “Our business has grown during times of economic expansion, as well as during global economic downturns.”

Nikhil Bhalla, an analyst with FBR Capital Markets, said the shift reduces real-estate risk. “Investors really like that because there’s less volatility in earnings overall,” he said.

It’s also an increasingly common business model in the big hotel game. Marriott International, for instance, owns less than 1 percent of the almost 300,000 rooms that it helps rent. Starwood, meanwhile, has been selling off its in-house hotels since 2006.

The drawback is that when things are good—when households are stuffing vacation funds and road-warrior expense accounts runneth over—a hotel company focused on management and franchise fees stands to capture less of the upside. Hilton has ceded part of its bull market potential to Excel jockeys at real-estate investment trusts. “You get some of the rewards, but not all of the rewards,” Bhalla said. That’s one of the reasons such holding companies as Host Hotels & Resorts have richer values at the moment than companies like Marriott.

Still. some soft spots persist in the lodging industry, says Telsey Group analyst Christopher Jones. While big cities such as New York and San Francisco are dotted with “No Vacancy” signs, the recovery has been slower in secondary markets like Denver. “There’s still some meat on the bone in the lodging cycle,” Jones said.

Blackstone, meanwhile, seems to like the current version of Hilton. It doesn’t plan to sell any shares in the upcoming IPO.

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