Management and franchising fees
Hilton (HLT) had 3,198 hotels under the Management and Franchising segment. This was nearly 95% of the total number of hotels run by the company in fiscal year 2013. Out of the 610,413 rooms—90% of the total rooms—under this segment, ~69% were franchised and ~21% managed. Revenue from this segment accounted for only ~19%—compared to Marriott’s (MAR) ~62%, Starwood’s (or HOT) ~28%, Wyndham’s (WYN) ~62%, and Hyatt’s (H) ~14%.
However, the segment has the highest share in earnings before interest, taxes, depreciation, and amortization (or EBITDA) because the property owners cover all the operating expenses. We’ll provide a segment-wise breakdown of EBITDA in Part 11 in this series. Hilton charges fees for properties that are managed or franchised.
The management fee includes:
- A base fee that’s a percentage of each hotel’s gross revenue
- In some cases an incentive fee that’s based on gross operating profits or cash flow
- For timeshare properties, the management fee is the fixed amount that’s stated in the agreement
The franchise fees include:
- Application and initiation fees for new hotels entering the system
- Monthly royalty fees—a percentage of room revenues, food and beverage revenues, and other revenue
- A monthly program fee that covers marketing and advertising costs—apart from internet, technology and reservation system, and quality assurance program costs
Breaking revenue down by segment varies slightly between companies in the hotel industry. However, the demand for hotel accommodation depends on the economy’s health.
Investors can reduce their investment risk by investing in a well-diversified portfolio. They can gain exposure to the industry through exchange-traded funds (or ETFs) like the Consumer Discretionary Select Sector SPDR Fund (XLY). XLY invests in various other sub-sectors apart from Hotels Restaurants & Leisure.