Hilton Worldwide Holdings is, by almost any measure, the world’s largest lodging company. With its global presence in almost 100 countries, its 12 hotel brands comprising 750,000 rooms that serve almost every price point, its mix of franchised, managed, and owned properties, and its timeshare business, it’s also an extraordinarily complex enterprise.
The company’s CFO, Kevin Jacobs, thrives on the diversity. “There’s no shortage of intellectual stimulation,” he says.
A graduate of Cornell University’s School of Hotel Administration, Jacobs, 42, has spent his entire career in the lodging business. He joined Hilton in June of 2008, just a few months after the company was purchased and taken private by Blackstone, as senior vice president of corporate strategy. It was also about three months before that year’s economic meltdown. As the business faltered, it appeared that for Blackstone, the timing of its purchase was unfortunate, to say the least.
But then Hilton engineered in succession an epic balance-sheet restructuring, a massive business transformation that included switching from a geographic reporting structure to a global financial reporting structure, and several years of strong growth. Hilton went public again in December 2013, and its stock fared so well that Blackstone’s acquisition and disposition of Hilton came to be considered the most lucrative private equity deal ever.
Jacobs, who had been promoted to finance chief four months before the IPO, recently visited CFO’s offices in New York to talk about the company’s continuing impressive growth, its transformation since being acquired by Blackstone, and his job and career. An edited transcript of the conversation follows.
Both the lodging industry in general and Hilton in particular are performing quite well financially these days. But what’s the biggest challenge you’re facing?
I think the biggest challenge is just continuing to stay ahead. We’ve had a lot of success, but the world, what our customers want, and technology are changing rapidly. Our overarching objective is to be the world’s premier lodging company. And we’re at a point where we could say OK, we’ve had the fastest growth rate and have the largest development pipeline, and we’re number one in rooms under construction, so we’re really proud of what we’ve accomplished.
But you can’t stop. You have to keep going. Our business has a large scale, which is a huge competitive advantage, but it can make it hard to manage the business. It’s an extremely complicated business, and it gets more complicated by the day, with the way customers want to use technology to interact with us.
The challenge is in prioritization and time management, understanding that you need to focus on the things that are most important to the business and will move the needle in terms of our strategy.
What did being privately held for six years mean for the company?
The opportunity Blackstone saw in Hilton was a business that had all the pieces it needed for success, which had been accumulated by the prior team through mergers and acquisitions. But it wasn’t optimized or correctly aligned, and it was performing at an average level.
We were sort of quiet for awhile. We were no longer publishing financials, and we needed to do a lot of things within the business. Being private, we were able to execute on a massive transformation and turnaround. I think our competitors had some understanding of what we were doing, but there’s nothing like an IPO and telling your story to Wall Street to have everyone really understand what you’ve accomplished.
So I think we opened some eyes. At the same time, your competitors aren’t going to sit there and just let you be number one. They’re not going to say, “Yeah, nice job Hilton, way to go, you’re No. 1. It’s OK, we’ll be No. 2.” That’s not how it works.
How is Hilton different now from when you joined eight years ago?
We’ve really changed almost everything. We went from a geographic reporting structure to a global functional reporting structure. We went from 9 brands to 12 brands. We moved our headquarters from Beverly Hills to Washington, D.C. We changed a lot of the people. And most importantly we changed the culture of the organization. It’s now a performance-driven culture where people are held accountable for premium performance.
We’ve also deleveraged the company quite dramatically. When Blackstone bought the business it had about $20 billion in debt. When we went public we financed about $13 billion of debt, and we’ve continued to deleverage since then. Our net debt is now down to around $10 billion. By the end of the year our net debt-to-EBITDA ratio will be 3.3 to 1.
Hilton has a much bigger system now than it did a number of years ago. How have you maintained such impressive growth?
We still own a lot of legacy real estate, but almost the entirety of our growth has been in the managed and franchised segment. Right now there is a pipeline of 255,000 rooms for which we have signed deals, and every single one is in that segment. We have allocated next to no capital for them. We estimate that when all of those hotels get built, real estate investors will have invested $40 billion to $50 billion in them. All of our growth is with other people’s money.
How do you leverage your scale?
Our objective is to serve any customer anywhere they might want to be in the world for any travel need that they have. We’re relentlessly dogmatic about making sure that each of our brands has its own unique value proposition. One of our primary competitive advantages is that our system creates a network effect.
A customer might get introduced to our company by staying at a Hampton Inn. Then they might stay at a bunch of Hampton Inns. Then they join our loyalty program and understand that they get a lot of benefits from it. So the next time they stay somewhere else for a different travel need or in a different location, they’re more likely to choose Hilton.
Early this year Hilton sold its flagship hotel, the Waldorf Astoria in New York, to Anbang Insurance Group of China for $1.95 billion. What was behind that?
One objective was to maximize the value of that asset for our shareholders. It’s a full city block in Manhattan, a 1.6 million-square-foot building, one of the best pieces of real estate in the world. For a bunch of reasons, over time the earnings that asset was contributing to our company, at the multiple we were trading at, were not anywhere near what we thought it was worth as a piece of real estate.
Then, we took the proceeds and executed a 1031 exchange, which is like when you sell your house — if you put the money into a new house, you don’t have to pay taxes on the gain. We’d owned that hotel since 1949, so our tax basis was very low. Using the proceeds to pay down debt, for example, would have created a really large tax bill. So instead we reinvested the proceeds in six new hotel assets.
We sold the Waldorf at 32 times EBITDA and bought the six new assets at an average multiple of 13 times EBITDA. The new assets have almost doubled the overall EBITDA contribution.
Anbang has committed to a complete redevelopment of the hotel, which is going to require a lot of capital, and as I said, our strategy is very capital-light. And our deal with Anbang effectively keeps the property in our system forever. We signed a 100-year management agreement.
You’ve been in the CFO role for less than two years. How do you come to terms with the enormity of the job?
I’ve fully bought in to what we’re trying to accomplish. I’m biased, but I think I work for the greatest hotel company in the world, the best CEO in the lodging business, and the best board in the lodging business. And I think we have the best team in the business. This will sound hokey, but I think our company, our customers, our team members, my boss, and our board deserve the best CFO in the lodging business.
I’m not saying I am the best, but that’s what I strive to be every day. It’s a huge challenge, and it’s what keeps me going. But it also can be quite daunting when you put that kind of pressure on yourself to deliver.
When you were at Cornell did you envision yourself on the path that got you where you are now?
Absolutely not. There was never a master plan. If you had said to me when I was a senior in college, or even when I graduated from the hotel school, that I’d wake up 20 years later and be the CFO of the largest hotel company in the world, I’d have said you were nuts.
The way I’d describe my career is that I’ve been falling forward. I’ve been fortunate enough to fall into a series of opportunities that have moved my career forward, built my knowledge base, and exposed me to a number of different mentors.
My boss at [Fairmont Raffles Hotels], the job I left to go to Hilton, told me I couldn’t turn down the opportunity. I was a real estate finance person, and the largest real estate private equity firm in the world had just bought one of the biggest hotel companies in the world, and hired who I thought was the best CEO in the space [Christopher Nassetta, who ran Host Hotels & Resorts when Jacobs worked there from 2000 to 2007]. I had an opportunity to be the project manager of a massive global reorganization of the business.
That’s a once-in-a-career opportunity. Then the economy blew up and we had to do a massive balance sheet restructuring in a capital markets environment the likes of which nobody had ever seen. And then after I was CFO we took the company public in the largest real estate IPO ever. I feel incredibly fortunate.