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Hilton

Worldwide Holdings Inc


Derek Chait, Seamus FitzPatrick, Diana Lam
September 13, 2015

Table of Contents
I.
II.
III.
IV.
V.

Investment Thesis
Company Overview
Investment Catalysts
ValuaHon
Conclusion

I.

Investment Thesis

Hilton Worldwide Holdings Inc. (NYSE:HLT)


As of September 11, 2015

Hilton is an industry leader with one of the most powerful brands in the lodging industry. Its shi< to focus on the
franchise model allows the company to be less capital intensive and maintain more predictable cash ows. Con?nued
RevPAR growth will allow Hilton to maintain consistent growth and pay down its debt balance.

RecommendaHon: Buy

Current Price: $25.59

Price Target: $33.41

CATALYSTS
n Launch of its two lifestyle and its new mid-scale brands will expand its already diverse porUolio
n ShiV to capital light business models drives organic growth with minimum capital investment
n Strong cash ow and discipline capital allocaHon will returns greater value to shareholders
n Management indicates potenHal share repurchase program and REIT spin-o next year
RISKS
n Current Debt / EBITDA gures are substanHally higher than that of its peers
n Increased uncertainty in Chinas due to its slowing growth and unstable currency
n Shared economy businesses, such as Airbnb, could potenHally take away market share

II. Company Overview

Hilton Worldwide Historical Timeline


HISTORICAL OVERVIEW

1925

Conrad Hilton opens the high-rise Dallas Hilton, the rst hotel to carry the Hilton name

2007

The Blackstone Group completes $26Bn leveraged buy out of Hilton Hotels CorporaHon in the
fall of 2007 at the height of the real estate bubble

2009

Christopher Nasseca takes over as President and CEO, moving from his posiHon as Chairman and
CEO of Host Hotels & Resorts

2009

Value of Blackstones equity in Hilton had fallen by 70% or roughly $3.9Bn

2013

Hilton Worldwide returns to the New York Stock Exchange, to trade under the Hcker HLT, in
December with its IPO pricing at $20 per share

Sources: Bloomberg, Company Website

Hilton Worldwide Overview


COMPANY OVERVIEW
n One of the largest hotel companies in the world with a
diverse porUolio of world-class brands consisHng of 4,400
properHes and 732,000 room in nearly 100 countries
n Three business segments:
n Management & Franchise
n Ownership
n Timeshare
n Christopher Nasseta President & CEO
n Joined Hilton in 2007
n 1995 2007: Host Hotels & Resorts
n 1991 1995: Bailey Capital CorporaHon, Co-Founder
n Hilton HHonor Loyalty Program
n 46MM members worldwide
n 5MM app downloads
n App has highest average customer raHng out of peers

INDUSTRY OVERVIEW
n Business and leisure travel are the major drivers of
demand in the hotel / motel / resort space
n Large companies have the advantage of economies of
scale in their operaHons as well as strong name
recogniHon
n Rooms revenue per available room (RevPAR) growth is
expected to be remain very strong in 2016 with
esHmates reaching 7.3%

RevPAR Growth (%)


10%
5%
0%
-5%
-10%
-15%
-20%

Source: Company Filings

Recent Pullback Provides a Buying Opportunity


PRICE PERFORMANCE FOLLOWING IPO

CAUSES OF PULLBACK
n Pullback of [16.5%] from high of $31.10 on April 9th

35

n April 13th, 2015: Evercore downgrades Hilton from a


Buy raHng to a Hold raHng
n Worries of interest rate hikes have caused a general
sell-o in stocks, parHcularly in lodging stocks

30

n Concerns for Hilton are exacerbated by the substanHal


debt load currently on their balance sheet as a carry
over from the Blackstone LBO
25

110
105
100
95
90
85
80
75
Apr-15

20

15
Dec-13

Apr-14

Source: Yahoo! Finance

Aug-14

Dec-14

May-15

Sep-15

May-15
HLT

Jun-15
MAR

Jul-15
HOT

Aug-15

Sep-15

III. Investment Catalysts

Growing Diversied PorUolio of Hotels


LARGEST PIPELINE IN THE INDUSTRY
n 250,000 room pipeline is the largest in Hiltons history
and the industry with 54% located internaHonally
n Hiltons room under construcHon makeup 20% of
rooms under construcHon in the industry
n Entering 32 new countries

n Launch of two lifestyle brands Canopy and Curio


n Investment in Chinas rapidly expanding middle class
n Second largest pipeline in China
n 219 Projects 64, 672 rooms in development

n Launch of a new mid-scale brand in mid-2016


n 40% of US overall room demand
n Fragmented mid-scale segment provides meaningful
growth opportunity
n Goal is a system size of thousands of hotels

n 53% - limited service hotels targeHng middle class

ADJUSTED EBITDA BY GEOGRAPHY

CURRENT ROOMS BY CHAIN SCALE

9%

2%

7%

n Hilton expects signings for midscale properHes to


accelerate next year

US
Americas
Non-US
Europe

4%

78%

Source: Company Filings, Investor PresentaHon


Note: (1) LTM 6/30/2015

Middle East
& Africa
Asia
Pacics

3%
1%
29%
35%

Upper
Midscale
Upscale
Upper
Upscale
Other
Luxury

32%

10

ShiV to an Increasingly Capital Light Business Model


PIPELINE TO EXPAND CAPITAL LIGHT MODEL
n Third-party owners and developer provide the capital for
development while Hilton acts as the sales and markeHng agent
and the property manager
n All rooms scheduled to be open in companys pipeline expands
the M&F capital light model
n Recently sold the Waldorf Astoria NY and Hilton Sydney

Adjusted EBITDA by Segment


Ownership

11.5%
34.9%

53.6%

Mgmt. &
Franchise
Timeshare

MANAGEMENT & FRANCHISE DRIVE VALUE WITH MINIMUM INVESTMENT


n M&F units are essenHally 100% margin

$2,000
$1,500
$1,000

$1,180

$1,271

$1,468
971

1078

329
114

360

368

137

145

2013

2014

LTM
6/30/2015

749

828

315
116
2012

$500
$0

IncenHve
Source: Company Filings
Note: (1) LTM 6/30/2015

$1,591

Base Mgmt.

n Expands Hiltons global footprint with licle to no capital


investment
n IniHal terms of management & franchise contracts for
new development are 20 years, with 5-10 year
extensions, providing stable source of cash ow
n 70% of M&F revenue generated by stable franchise fees
n Hilton also set to raise fees for select brands

Franchise
11

Commitment to Returning Value to Shareholders


DISCIPLINED CAPITAL ALLOCATION

POTENTIAL REIT SPIN-OFF

n Aggressively reducing long-term debt through voluntary


incremental debt prepayment
n Debt lowered by $750MM through July, 2015
n $1.1 1.3Bn for debt repayment and shareholders
n Managements goal is to achieve investment grade
by year end
n Expects Net Debt / Adj. EBITDA of 3.4x implying
$200-400MM debt reducHon for 2H2015
n IniHated quarterly dividend of $0.07 in Q2 of 2015
n Intent to grow dividend over Hme targeHng a
payout raHo of 30% - 40% of recurring cash ow

n Company expected to announce at year end the


potenHal spin-o of its Hmeshare business and the 100plus hotels that it owns, leases, or partly owns into a
Real Estate Investment Trust (REIT) structure
n REIT benets:
n Signicant corporate tax savings
n Tax-ecient structure can allow REIT to trade at a
higher mulHple, which can acract new investors
n Two enHHes that can focus on their core businesses
n However, there are considerable requirements that an
enHty has to meet to qualify as a REIT

n AnHcipates iniHaHon of share repurchasing program for


mid-year 2016

12x

10.5x

Net Debt / Adj. EBITDA


Total
Delev
erage
: 6.8x
8.9x

7.7x

8x

5.2x

4x
0x

Shareholders

4.1x

3.7x

OpCo operaHng
business
2010

2011

2012

Source: Company Filings, PWC Research


Note: (1) LTM 6/30/2015

2013

2014

PropCo Real
Estate

LTM
6/30/2015
12

Threat From the Sharing Economy


RISE OF ALTERNATIVE ACCOMODATION
# Rooms

Value ($B)
AirBnB

AirBnB

25

Starwood

Starwood

14

22

Marrioc

Hilton
10

20

Starwood

354,200

714,765

Marrioc

Hilton

715,062

Hilton

30

200,000 400,000 600,000 800,000


1,000,000
1,200,000

INDUSTRY RESPONSE
n Hotel chains have yet to take substanHal acHon to
counter threat from the upstart lodging service
n Serve fundamentally dierent markets and operate in
dissimilar spaces no real eect on pricing power
n Hotels: Business customer for business purposes
n AlternaHves: Casual leisure traveler (80% of lisHngs
are located outside a city's central district)
n Lobbying push for laws requiring Airbnb properHes to
adhere to the same safety standards and tax laws that
hotels do American Hotel & Lodging AssociaHon

190

AirBnB

Marrioc

29
0

1,000,000

# Countries

100

79

94
0

50

100

150

200

HILTON-SPECIFIC RESPONSE
n ModernizaHon iniHaHves to integrate more customizaHon
and eciency into the hotel experience
n Sweet Dreams Bed, new social seaHng areas
n Made Market grab-and-go, eaHng establishments
that celebrate local culture and cuisine
n Hilton HHonors Members
n Care Culture recogniHon of personal preferences
n HHonors App: Digital key/straight-to-room abiliHes
n eCheck-In Add more guest-facing technology
13

IV. Valua?on

Comparable Universe
SELECTED COMPARABLE METRICS
Company

Market Cap
($MM)

1-Yr Revenue
Growth (%)

P / E TTM (x)

EV / TTM
EBITDA (x)

EBITDA Margin
Net Margin (%)
(%)

12,557

(2.2%)

22.6x

12.5x

19.5%

9.8%

7,402

5.5%

70.9x

12.1x

15.5%

6.3%

Marrioj Interna?onal, Inc. (NASDAQ:MAR)

19,412

7.9%

25.1x

16.2x

9.5%

5.9%

Hilton Worldwide Holdings, Inc. (NYSE:HLT)

25,269

7.9%

39.4x

14.2x

22.4%

5.9%

Starwood Hotels & Resorts Worldwide, Inc. (NYSE:HOT)


Hyaj Hotels Corpora?on (NYSE:H)

Company

Number of
Average
Hotel Rooms Occupancy (%)

ADR ($)

RevPAR ($)

Dividend Yield
(%)

Net Debt /
EBITDA (x)

Starwood Hotels & Resorts Worldwide, Inc. (NYSE:HOT)

354,200

70.1%

175.64

123.08

2.08%

1.4x

Hyaj Hotels Corpora?on (NYSE:H)

151,105

76.2%

220.00

168.00

N/A

1.0x

Marrioj Interna?onal, Inc. (NASDAQ:MAR)

714,765

73.7%

178.96

131.83

1.40%

2.6x

Hilton Worldwide Holdings, Inc. (NYSE:HLT)

715,062

74.6%

141.52

105.63

1.10%

4.2x

15
Source: Bloomberg

Price Target and SensiHvity Analysis


As of September 11, 2015

BULL / BASE / BEAR PRICE TARGETS

SENSITIVITY TABLES

45
BASE CASE
$41.24

Discount
Rate
(WACC)

Value Per Share


Terminal EBITDA Multiple
10.0x
11.0x
12.0x
6.9% $30.99
$34.26
$37.54
7.4% $30.20
$33.41
$36.61
7.9% $29.43
$32.57
$35.71

35
$33.41

BULL CASE

Discount
Rate
(WACC)

25

Value Per Share


Terminal EBITDA Multiple
10.0x
11.0x
12.0x
6.9% $38.36
$42.25
$46.15
7.4% $37.43
$41.24
$45.05
7.9% $36.51
$40.25
$43.99

$22.68

BEAR CASE

15
Dec-13

May-14

Source: Yahoo! Finance


Oct-14

Mar-15

Jul-15

Dec-15

Discount
Rate
(WACC)

Value Per Share


Terminal EBITDA Multiple
10.0x
11.0x
12.0x
6.9% $20.89
$23.32
$25.75
7.4% $20.30
$22.68
$25.06
7.9% $19.73
$22.06
$24.39

16

V. Conclusion

Closing Thoughts
POST-DILIGENCE OPINION
n AVer signicant research into Hilton Worldwide Holdings Inc. (NYSE:HLT), we believe that Hilton is undervalued despite
strong underlying fundamentals and a series of internal ini?a?ves poised to promote future growth and an ulHmate
reducHon in debt
n Hilton is vicHm of a recent sell-o in lodging stocks due to largely unsupported speculaHon regarding interest rate hikes
n While the company may currently have a substanHal debt-load, management has iniHated an aggressive, voluntary plan
of incremental debt payments in order to clean up the balance sheet
n Management is also supporHve of returning cash to shareholders through a new quarterly dividend and future
share repurchasing program for mid-year 2016
n The company is looking to expand upon its already industry-leading diversica?on, including through the launch of a
new mid-scale brand in mid-2016 that will target a substanHal porHon of the modern hospitality market
n A considered REIT and/or ?meshare spin-o program will enable Hilton to further return value to shareholders
n A new pipeline to develop a M&F capital light model will allow Hilton to con?nue to expand and deliver the quality
hospitality experience that customers have come to expect while enabling the company to avoid developmental costs
n All rooms scheduled to be open in companys pipeline expand the M&F capital light model
n Although there will be conHnued pressure from the rise of Shared Economy hospitality plaUorms, the correlaHon
between alternaHve accommodaHon and the tradiHonal hotel market is largely overblown in the present ?me
n The hotel industry as a whole experienced a record year with the con?nued up?ck in inbound travel from all
markets The two markets cater to dierent sorts of customers looking for a dierent type of travel experience
n Hilton has promised to explore all possible structural op?ons in order to further promote its growing business
n Increased focus on revamping the lodging experience to provide travelers with a more customizable and
technologically ecient process

18