Jonathan Gray
The Blackstone Group last year acquired Hilton Hotels Corp. in a $26 billion deal. At the time, Jonathan Gray, senior managing director and co-head of Blackstone's real estate group, said the company was "committed to investing" in Hilton. Gray this month participated in the New York University International Hospitality Industry Conference and was interviewed by Laila Rach, divisional dean for the NYU Tisch Center for Hospitality, Tourism and Sports Management. An excerpt follows.
Why did you buy Hilton?
Hilton is an amazing company with terrific growth prospects and, for whatever reason, the stock market didn't seem to appreciate that. This company always traded [at] a couple multiple-point discount to Marriott [International] and Starwood [Hotels & Resorts] despite owning amazing and irreplaceable real estate and despite the tremendous growth they have started here in the U.S. To give you a sense of that, one out of every four hotels in the United States today carries one of the Hilton brands. Outside the United States, the company had just bought back Hilton International ... creating a huge new opportunity not only for the core Hilton brand but also for the whole universe of brands. Today, the opportunities outside of the U.S.--particularly in the emerging markets--are enormous. So we saw huge growth for this company, and we had a strategic benefit as well. Hilton really had the opportunity in the upper end, and we owned a large luxury portfolio focused on resorts, so we thought we could add Hilton's offering in the luxury resorts and bring these two together.
Did you overpay?
We bought nine public lodging companies in the last 10 years and in each transaction people have told us that we have overpaid. So far we have done OK. The good news we can report specifically on this company is that the performance has greatly exceeded our expectations since we have committed to the transaction. That's a function of the great momentum in the franchise business here in the U.S., strong international growth and very solid revenue per available room night [figures]. The company's own real estate here, particularly in the gateway cities, has really benefited from the weak currency. For example, RevPar in New York is up in double digits. And the overall pipeline ... the company's total unit volume--between new units in the system plus the pipeline--is up almost 50,000 rooms in the last year. So [we've seen] tremendous growth exceeding our expectations [and] great financial performance, despite the fact that we are in a very difficult time.
How many Waldorf Astoria's are you looking for?
We would like to aggressively grow. Clearly, Waldorf Astoria is underpenetrated. I think there is an opportunity, particularly given Hilton's scale. It operates in almost 80 countries. I think that number could be substantial, but it's going to take time.
[What about] a hip hotel chain? You don't really think of Hilton when you think of hip.
I agree with that. Changing a company is something you have to do, and that started today with some of the key new hires the company announced [including new global heads of luxury and lifestyle brands]. I think that is going to continue, and maybe working with some outside players to accelerate this 'hip' growth. I think the hip thing can be larger than people expect. It has gotten drawn into luxury, and there is clearly room in the luxury boutiques, but the value-oriented product can be in a lot of markets. Not only the super tier-one markets where you can charge $400 to $500 a night, but a lot of smaller cities around the globe where you can charge a couple hundred dollars. So I think it is a much larger opportunity, and in an environment that is capital-constrained, you can go into urban centers and convert other assets into these hotels.
What's left for you to do?
One of the very exciting things is to look overseas. We have expanded our footprint. We have opened offices now in Mumbai and Tokyo and Hong Kong. There's clearly a bigger global platform. We have a lot of investment opportunities around Hilton where we can co-invest in the company. I think there are still a lot of great companies out there and great asset bases in the real estate world that we can buy, fix up and sell. I'm always optimistic that there is always something new to do--particularly in this environment, where it is difficult to get your hands on capital. If you have a large, committed capital base, you have a competitive advantage. I'm bullish on the opportunities. We may be in a very difficult economic time for some period of time over the next year or two, but that will create new investment opportunities. The lodging business for us on the real estate side has been synonymous. We have been doing this now for 16 years. Lodging represents almost half of our investment dollars over that time. We have played in this business throughout, and I would be shocked if we didn't stick with lodging because for us it is not only an area where we have been successful, but an area where we have developed a bit of an expertise. So to exit this business does not make a lot of sense. Other institutional investors are scared by lodging because of the cyclicality, and that has resulted in a little less capital chasing the opportunities, and that has resulted in us being able to make quite a bit in returns.