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Why Hilton’s Financial Condition Looks Better than Ever

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Aug. 21 2015, Updated 11:07 p.m. ET

Hilton segment performance

As discussed in the previous articles in this series, Hilton (HLT) saw strong revenue growth in 2Q15, which was driven by strong occupancy rates and room rates. These strong metrics drove the company’s RevPAR (revenue per available room) higher. The growth in revenue came as a result of strong business across all its segments. Now let’s look at each segment’s 2Q15 performance in detail.

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Management and franchise

In the management and franchise segment, Hilton doesn’t own the hotels. Instead, the company works on behalf of the owner and handles the management and supervision of the hotels in exchange for a fee or share in revenue. The management and franchise segment saw a strong 17% year-over-year (or YoY) growth in its revenues to $434 million in the second quarter of 2015.

Revenue growth was driven by a strong 5.2% YoY growth in the segment’s RevPAR on a constant currency basis. Other factors that drove growth include strong franchise sales, timing of ownership and termination fees, and fee growth by addition of new units to the segment. Revenue growth was partially offset by weather conditions in the Southern and Central US and lower demand across oil and gas markets.

Ownership

The ownership segment consists of properties that the company owns or leases. The revenue stream consists of room rentals, food and beverage sales, and other ancillary services provided by the company. Hilton historically has had the highest revenue percentage from owned properties among its peers. For the second quarter of the year, the company’s ownership segment revenues stood at $1,141 million, driven by a strong 5.2% growth in the RevPAR. This resulted in a 9% YoY growth in its EBITDA (earnings before interest, taxes, depreciation, and amortization).

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Timeshare

Timesharing is a method of buying the right to use a vacation property like a hotel or a resort. This is advantageous for companies, as they purchase furnished resort accommodations at low costs. The funds are shared by both the owner and the company and they use the property according to the decided timeshare intervals. This segment saw a 16% YoY growth in its revenue for the second quarter of 2015 to $319 million. Adjusted EBITDA stood at $86 million, 21% higher on a YoY basis from the corresponding quarter last year.

Both the management and franchise segment and the timeshare segment showed similar growth of 16% to 17%, while the ownership segment saw a marginal 2% growth. The segments have shown a similar growth trend for the past three quarters. However, the ownership segment’s margins have improved over the past three quarters from 24.5% to 28%. The timeshare segment’s margin has declined from 31% to 27% in the same timeframe.

The company competitors include Marriott (MAR), Starwood Hotels & Resorts Worldwide (HOT), Hyatt Hotels (H), and Wyndham Worldwide Corporation (WYN). HLT and MAR share the same level of profitability with 5% to 6% net margins, while HOT and WYN are both more profitable than the bigger giants with 9% to 11% net margins.

Investors can gain exposure to the Consumer Discretionary Select Sector SPDR Fund (XLY) to invest in these hotel companies. Though XLY does not have any holdings in Hilton, 0.62% of its holdings are in Marriott (MAR), 0.56% of its holdings are in Starwood (HOT), and 0.41% of its holding are in Wyndham (WYN).

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