Just as Hilton Worldwide tries to keep investors sweet and give shares a boost, in have come the Chinese upsetting the rules of the game. Sally White reports

Western hotel groups have been concentrating on consolidating. With more rooms under management they have greater clout against the OTA’s, whose fees have been eating into their margins.

The strategy behind China’s Anbang Insurance’s move to sink the Marriott International bid for Starwood, as for most Chinese purchases, seems a bit different. It could, perhaps, be defined as: capture foreign mega trophy assets. (Anbang has only just picked up Strategic Hotels & Resorts, owners of 16 luxury properties following on from its purchase of New York’s Waldorf Astoria 18 months ago.) Now, as the Chinese hoover up hotel companies, the industry is left wondering who will have the running of them.

What major US-based hotel brands have been doing is focusing on what they see as their most valuable card: the highly profitable brands and management and marketing expertise and splitting out the assets in separate businesses. Hilton Worldwide has only just started the process.

With more rooms under management they have greater clout against the OTA’s, whose fees have been eating into their margins

Hotel groups have been restructuring to sell off assets, trophy or not, charging fees to manage the marketing and running of the hotels. The buildings have been bundled into tax-efficient Real Estate Investment Trusts (REITs), which pass on most of their cash flow to investors in the form of dividends, avoiding corporate taxes.  

Future of hotels in the balance

The attraction for investors is that these moves simplify analysis of the accounts of the huge, multi-national hotel groups. The cost of capital is reduced, too. Subsequently, profits on the money invested in hotel groups that have done this have risen and so have their share prices.  However, so many REITs have been set up in the US leisure industry that Congress has just stopped them, (which raises another question over future hotel industry restructuring).

Marriott has been a good example of the REIT route, having spun off its property and converted it into a REIT called Host Hotels & Resorts back in 1999. Then it split off its timeshare business, Marriott Vacations Worldwide in 2011 (since its debut, the share price more than tripled.)

Hilton Worldwide is going the same route, albeit a little later. It can be no co-incidence that Hilton CEO Chris Nassetta was CEO of Host Hotels & Resorts. He has announced that Hilton Worldwide will restructure into three companies, all with shares listed on US stock markets - a REIT comprising some of the top US hotels, the time share and Hilton Worldwide.

Nassetta succeeded in launching 70 of its hotels, including the upscale US ones (about half the portfolio) in a REIT just before Congress stopped these tax-efficient vehicles. The timeshare company will take about 50 of the properties in the US and Europe, and will be run, as will the REIT, by the existing management. Hilton Worldwide will run as an operating company for its namesake hotels and some other brands, such as Waldorf-Astoria, Conrad and DoubleTree. More details of the spin-offs won’t be out until summer.

With Anbang’s $13 billion cash bid throwing Marriott’s planned take-over of Starwood into disarray, Hilton Worldwide and its 12 brands is left as still the world’s largest hotel group. That has certainly not made it a broker favourite, worrying as they were all last year that hotel business would be depressed by the dismal state of the global economy and terrorism.

Brokers did not find it cheering that Hilton Worldwide is growing at such a rapid rate globally, signing up for 100,000 rooms last year, nearly 20% of all rooms under construction worldwide. Nor that last year it actually added 55,000 rooms. But there was a wake-up call in February when management gave a very positive read on 2016 prospects. Since then the shares have risen by 15%, although that still leaves them over 20% lower than year ago.

Investors also like the sound of a possible new Hilton brand, designed to compete in the Airbnb end of the market

What Hilton Worldwide announced was that sales last year were up slightly to $2.86 billion but it was the net income figure and forecast for 2016 that excited investors. Net income jumped from $159 million to $816 million, though that owed a good deal to a tax benefit. However, management also said that it expected a 3-5% jump in revenue per available room growth in 2016 and a 7%-9% increase in management and franchise fees.

Investors also like the sound of a possible new Hilton brand, designed to compete in the Airbnb end of the market. This would offer ‘hostel-like’ accommodation for millenials, at lower prices and with less service, Chris Nassetta announced early this month. That is a market forecast by youth travel industry group Stay Wyse to be worth $336 billion by 2020. 

But Hilton will not be buying to get into it. Giving a strong message to the market in amid the burst of M&A activity, his press statement added: “Hilton prefers to develop new brands itself, rather than making acquisitions!”