14 BARRON’S February 8, 2021
T
o an infrequent traveler,
hotel chains can look pretty
much the same, with their
various rewards, loyalty
programs, and more re-
cently, virtual check-ins.
There is a credible in-
vestment case, however, thatHilton
Worldwide Holdings(ticker: HLT)
stands out among the chains for its
ability to weather the pandemic and
emerge in good shape—and that its
shares should have more upside.
With a relatively small number of
owned hotels in its portfolio, Hilton
runs a so-called asset-light portfolio
and relies heavily on recurring, long-
term franchise fee agreements. The
company is a little less tethered to lux-
ury brands, overseas locations, and big
cities than its rivals—and favorably
positioned to ride out a storm. And its
hotel development pipeline, though
slowed by Covid-19, should fare well
versus its peers.
“It’s an extraordinarily well-man-
aged global franchise company with
top-notch brands at the very, very early
stages of what should be a multiyear
recovery in the hotel industry,” says
Bill Crow, managing director of real
estate research at Raymond James.
Crow has rated Hilton a Buy for a
while now, but in January he raised his
price target to $125 from $105. Although
Hilton’s stock has rallied recently to
about $110, it is still roughly 5% below
its 52-week high set in November, and
down a bit over the past 12 months.
Still, the stock looks pricey com-
pared with its historical valuation,
and it has a lot of Hold ratings. Lodg-
ing fundamentals still remain weak,
and business travel in particular.
While the company has taken a big
hit from the pandemic—it’s expected
to post a loss for 2020 of $1.92 a share
based on generally accepted accounting
principles, according to FactSet—the
vast majority of its global hotel proper-
ties were open at year end.
Before the pandemic, Hilton was
a fee-generating machine. But it’s the
composition of those fees that sets it
apart and bolsters the bull case for the
stock.
In 2019, for example, Hilton gener-
ated some $2.2 billion in fees, with
about three-quarters coming from
franchising agreements. Franchisees
pay a royalty fee that is generally based
on a percentage of the hotel’s gross
room revenues and, in some cases,
gross food and beverage revenues.
Some 15% of that $2.2 billion are
what’s known as base management
fees, typically a percentage of the
hotel’s monthly gross revenue. The
remaining 10% are incentive manage-
ment fees, which are usually calculated
as a percentage of the hotel’s operating
profits and can be more volatile,
depending on the environment.
In contrast,Marriott Interna-
tional’s (MAR) 2019 fees totaled
about $3.8 billion, roughly half from
franchising. “The Street tends to put
a greater multiple on franchise-fee
income than it does on the manage-
ment business,” says Crow. “Managing
a hotel is a very difficult process.”
Hilton’s road to becoming an asset-
light company—it owns only about 60
hotels worldwide—didn’t occur over-
night.Blackstone Group(BX) took
Hilton private in 2007, made changes,
and spun it off in 2013. Although there
continues to be demand for Hilton to
manage properties, especially overseas,
it has steadily expanded its franchise
business.
In 2017, Hilton spun offPark Hotels
& Resorts(PK) as a real estate invest-
ment trust, and its timeshare business,
which now operates asHilton Grand
Vacations(HGV).
Jefferies analyst David Katz gives
plaudits to Hilton Worldwide’s “man-
agement team just in terms of overall
execution and of creating value,” avoid-
ing unnecessary acquisitions, and
“growing its footprint.”
As of Sept. 30, Hilton’s footprint
consisted of 18 brands stretching
across more than 6,300 properties
with nearly one million rooms in 118
countries and territories. Marriott In-
ternational recently said it had a port-
folio of more than 7,500 properties
under 30 brands in 132 countries and
territories.
Despite a smaller footprint than
Marriott’s, Hilton enjoys several mar-
ginal advantages, at least for now. One
is that Hilton is less exposed to luxury
properties than some of its peers.
As of Feb. 3, first-quarter revenue
per available room, or revpar, for the
U.S. luxury hotel segment was down
69.3% compared with a year earlier,
versus a 35.5% decline for upper-mid-
scale properties, according to hotel-
industry tracker STR and Raymond
James.
Although Hilton operates several
luxury brands, including Waldorf As-
toria Hotels & Resorts, it has greater
exposure to upper-midscale brands,
including Hampton by Hilton and
Home2 Suites by Hilton, as well as
other market tiers.
Michael Bellisario, an analyst at
Baird who has Hilton at Outperform,
says the company is “a lot more ex-
posed to Hilton Garden Inns [and]
Hampton Inns” in smaller markets.
Another advantage, at least during a
time of international travel restrictions
stemming from the pandemic, is that
Hilton is more domestically focused
and less dependent on big cities. For
the 12 months ended on Sept. 30, 84%
of Hilton’s adjusted earnings before
interest, taxes, depreciation, and amor-
tization, or Ebitda, came from the U.S.
Hilton earned six cents a share on
an adjusted basis in the third quarter,
down from a profit of $1.05 a year
earlier, as revenues fell about 60%, to
$933 million. However, the company
doesn’t have any big debt maturities
until 2024 and no plans to add more
debt, Chief Financial Officer Kevin
Jacobs tellsBarron’s.
As of Dec. 31, Hilton held nearly
Hilton’s ‘Asset Light’ Focus
Primes Shares for Upside
By the
Numbers
Key figures for
Hilton Worldwide
60
Rough number of
company-owned
hotels
75%
Rough share
of Hilton fees
that come from
franchise deals
$1.
Estimated
per share loss for
2020, according
to FactSet
By LAWRENCE C. STRAUSS
Checking In
Hilton Worldwide shares have retraced
most of their early pandemic losses, and
some analysts think there is room to run.
Source: FactSet$10080604020
2017 2020Illustration by Adam Simpson