Hilton Hotel – making room for a hedge fund

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| The European | 2nd November 2018
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Hilton Worldwide International Holdings LLC (USA) is one of the largest names in the hospitality industry. Conrad Hilton, the founder of Hilton, started the business in 1919 by buying “The Mobley”, a hotel in Cisco, Texas. Hilton Worldwide serves its clients under different brand names; each brand name is associated with a different class of hotels providing unique services.

 

Hilton Worldwide – Facts and Figures

 

Hotel Brands:                                               14

Presence in:                                                106 Countries

Worldwide Properties:                              5400+

 

3rd Quarter (2018) results showed that system-wide comparable revenue per available room (RevPAR), a performance metric used in the hotel industry, which is calculated by multiplying a hotel’s average daily room rate (ADR) by its occupancy rate, increased 2.0 percent on a currency neutral basis from the same period in 2017.

 

The third quarter result summary also announced the launch of “lifestyle micro-hotel brand”, Motto by Hilton.

 

Motto by Hilton

 

Tripp McLaughlin, global brand head for Motto by Hilton, told CNBC (23 October 2018),

 

“Our research shows that 40 million US adults are traveling to urban destinations and that 70 percent are looking for a more affordable way to travel to these destinations. A good proportion of these guests are willing to trade off room size to be in the very best locations with great local design, and a strong food and beverage offering”.

 

Hilton has announced that Motto brand’s first hotel will be a 100-bed Motto by Hilton in Marylebone, London. Construction (by a UK-based developer, Dominvs Group) will start in January 2019 and the opening is targeted for 2020.

 

CNBC reports that shares of Hilton have fallen more than 13 percent this year. C. Patrick Scholes (Managing Director of lodging and gaming at Sun Trust Robinson Humphery, a USA Corporate and Investment bank) says,

 

“(Launching of Motto) probably does not do too much for the stock”.

 

Hospitality Industry – RevPAR

 

STR Global (an American company that tracks supply and demand data for multiple market sectors, including the global hotel industry) reported last week that US revenue per available room (RevPAR) was “negative” for the month of September (for the first time since 2010).

 

Latest News

 

Reuters (25 October 2018) reports:

 

“Billionaire investor William Ackman (of Pershing Square Capital Management hedge-fund) has taken a stake in hotel operator Hilton Worldwide Holdings for the second time in two years after earning a 32 percent profit on his investment in 2017”.

 

Pershing Square Capital Management on its website published an announcement:

 

“Pershing Square Capital Management has acquired 10.9 million shares of Hilton, representing a 3.7% stake in the company.  At its current market value, this investment represents approximately 13.9% of the Net Asset Value of Pershing Square Holdings, Ltd. and a substantially smaller percentage of the Pershing Square Capital Management private funds’ portfolios”.

 

Reuters report says:

 

“Ackman is one of the few activist investors delivering top returns this year, with results up by double digits before this month’s market sell-off”.

 

Analysis

 

The economists warn that a global economic recession is around the corner. Tourism industry thrives on an ample supply of money in the market. The political and geopolitical factors of the Middle East are keeping away the tourists from what was once the “shopping bazaar” of the world. Europe has its own troubles. Italy is in the cross-hairs of the European Union regulators for its high-cost budget and rising debts.

 

Motto by Hilton will be the 15th brand of Hilton Worldwide International Holdings LLC. The RevPAR of Hilton increased only by 2 percent (third quarter comparison). The RevPAR data provided by STR Global presents a grim picture of the near-term future of the hospitality industry.

 

Travellers can be broadly classified into three types; brand conscious, professionals and common tourists. The first two types will be attracted to Motto by Hilton due to its affordable room rates. Common tourists will prefer booking with hospitality service providers like Airbnb.

 

Airbnb is a No-fuss approach for short-term rentals. In these uncertain economic times, hospitality service providers like Airbnb can not only sustain but also can grow their businesses as they have a simple business model.

 

Hilton has not disclosed the average room rates for its Motto brand. However, the initial investment outlay will be high. London is a good choice for launching the Motto by Hilton. London is home to many travellers and tourists.

 

The slump in the tourism sector will continue, at least for the remaining part of this year. The share prices of Hilton have not touched the bottom yet. The current stock market meltdown might drag down the share prices further. The 2020 results of Pershing Square Capital Management will give a glimpse of how the hedge-fund is performing with Hilton in its investment suitcase.

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