Hilton Worldwide Holdings, Inc. (NYSE:HLT)
Q4 2013 Earnings Conference Call
February 27, 2014 10:00 am ET
Christian Charnaux - VP, IR
Chris Nassetta - President & CEO
Kevin Jacobs - EVP &CFO
Joe Greff - JP Morgan
Harry Curtis - Nomura
Carlo Santarelli - Deutsche Bank
Steven Kent - Goldman Sachs
Anthony Powell - Barclays
Joshua Attie - Citi
Good morning. My name is Matthew and I will be your conference operator today. At this time, I would like to welcome everyone to the Hilton Worldwide Fourth Quarter and Full Year 2013 Financial Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)
Thank you. Christian Charnaux, Vice President, Investor Relations, you may begin your conference.
Thank you, Matthew. Welcome to the Hilton Worldwide fourth quarter and full year 2013 earnings call. Before we begin we would like to remind you that our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements.
The factors that could cause actual results to differ are discussed in our SEC filings. You can find a reconciliation of the non-GAAP financial measures discussed in today's call in our earnings press release and on our website at www.hiltonworldwide.com.
This morning Chris Nassetta, our President and Chief Executive Officer will provide an overview of our year-end results and will describe the current operating environment, as well as the company's outlook for 2014; Kevin Jacobs, our EVP and Chief Financial Officer will then provide greater detail on our results and outlook. Following their remarks we will be available to respond to your questions.
With that, I am pleased to turn the call over to Chris.
Thanks, Christian, and thank you all for joining us today. We are certainly very excited to be back in the public markets and to be hosting our first earnings call, following our IPO in December. We are also very pleased with our performance for last year, highlighted by our system-wide RevPAR growth of 5.2%, and our full year adjusted EBITDA of $2.21 billion, which is a 13% increase year-over-year.
I'm sure many of you have heard some version of our story on our various road shows. But for those that have not and at the risk of making this call little longer than normal, I thought I briefly highlight our investment pieces before getting into our 2013 performance and our outlook for 2014.
When I joined the company in 2007, at the time of the Blackstone acquisition we were presented with once in a lifetime opportunity to take a nearly 100 year old company that had once been a clear leader in this space but had become complacent and return that company to a leadership position. Many of the pieces were there, including a portfolio of distinct brand, spending all the major customer segments, and strong commercial engines that were delivering good results for owners, but we were an average performer at that on the top-line margins, bottom-line and met unit growth. As an enterprise we certainly were not optimized or aligned strategically.
So the first thing we did was to get intense alignment of our organization around a common vision, mission, values, and set up key strategic priorities. Well our work in this regard will never be done we have successfully transformed our business into what is now a lean and unified organization over the performance driven culture. This has enabled the new Hilton Worldwide to outperform our competition, while executing a transformation during one of the worst economic downturns in history. I also believe that our transformation has set us up extremely well to continue to outperform in the future.
We are in a business where scale and global diversification matter. And today we're a global business with over 4100 properties and 678,000 rooms in 91 countries and territories. We have 10 distinct brands and scaled commercial engines that drive an industry leading global RevPAR index premium of 15%. Tying it altogether is our award winning Hilton Honors Loyalty Program with 40 million members that today makeup more than 50% of total system-wide occupancy.
Our goal is simple. To serve any customer, anywhere in the world through any lodging need they have. By doing so we drive more customer loyalty, higher market share premiums, better returns for our hotel owners, and that in turn drives faster net unit growth, and ultimately premium returns for our shareholders.
By intelligently deploying our brands to different regions around the world and optimizing those brands for local markets, we believe we can continue to grow in all regions and under all macroeconomic condition.
Our development strategy, which I'll get into in a little bit more detail in a few minutes, is based on our goal to win everywhere. We want to be number one in both pipeline and rooms under construction in every region of the world. Today not only do we have the industry's largest pipeline, but we are also number one in rooms under construction in every major region of the world according to Smith Travel Research.
More importantly, our global strategy, growth strategy is built around our capital light management and franchise segment and we've been extremely disciplined with our capital allocation. In this segment, we have added roughly 180,000 net rooms to the system since 2007, which has lead the industry with 37% growth over that time, with an investment of only $47 million. Our pipeline has also been built with the minimus amounts of capital. We believe that if we continue to maintain the strongest brands in the industry, we should not have to allocate significant capital to grow.
Our shareholders should also benefit from the embedded upside in our ownership segment which today represents 37% of our adjusted EBITDA. Our diverse portfolio includes iconic assets in some of those best global lodging markets such as New York, London, San Francisco, Sao Paulo, and Sydney. While we are not activating our real estate segment today in terms of meaningful new unit growth we are extremely active in maximizing what we do own.
We believe we can realize on the embedded value in our real estate in three ways. First, we are in the sweet spot of the cycle with group demand driving premium revenue growth in our big group boxes, which combine with our disciplined approach to managing cost, should allow us to continue to drive premium margin growth. This is evidenced in our nearly 300 basis point increase in ownership segment adjusted EBITDA margins in 2013.
Second, there are a number of significant value enhancement opportunities embedded in our portfolio. A great example of this is that our Hilton Hawaiian Village property, where we recently entered into a transaction to sell the land and entitlements we obtained over the past few years, which will create significant incremental value from what has been a non-income producing part of the reserve, actually a loading dock. Kevin will give you more detail on the transaction in his remarks and we will continue to keep you updated on additional real estate value enhancement opportunities on future calls.
Finally, the third way we could create incremental value from our real estate will be to further our migration to a capital light business model by divesting of some or all of the real estates over time. We are not emotionally tied to our real estate and while we intend to keep the vast majority of these properties in the system, there are ways to accomplish that without owning the hard assets. At the moment, we believe we can benefit from the upside on these assets operationally and from mining value enhancement opportunities, but if divesting of some or all of the real estate will enhance overall shareholder value in the future, we will actively consider those options.
Shifting gears in our timeshare business we have taken what has been an extremely successful business historically, with both sales growth and margins outperforming competition and transformed it to a much more capital light business. Today, our timeshare segment derives a significant and growing portion of its earnings from fees. In 2013, 54% of our interval sales were on behalf of the third-parties and 78% of our year-end inventory was capital light. We believe that by expanding a new capital light deal, combined with continuing to develop additional smaller phases of new developments on our own balance sheet, we can continue to grow our timeshare EBITDA at a steady pace with significantly less capital investments than has been spent historically.
The last part of our investment thesis is the positive fundamentals in the business, both short-term and long-term. On a macro basis, we believe our business currently stands at the intersection of three powerful global trends. Over the past 20 years growth in global tourism as measured by tourist arrivals has doubled, and is forecasted double again over the next 20 years. Driven by a middle class, it has continued to expand from 1 billion people globally 20 years ago to a projected 5 billion in the next 20.
Contrasting net dynamic is the fact that hotel rooms per capita in markets like China and Brazil remains at a small fraction of the level of developed markets like the United States. On a more micro basis, the supply/demand environment of the business remained strong with healthy demand growth outpacing levels of supply growth that are still well below long-term averages. Combined, we believe these trends paid a picture of sustainable growth potential for our business. There will be ups and downs for sure over time but I believe the setup for the next several years and frankly for the long-term growth in our business is as good as I have ever seen.
So shifting to our performance. Our system-wide comp RevPAR growth was 5.2% for the full year 2013 on a currency neutral basis that was driven by a 3.3% increase in average rates and a 1.3 percentage point increase in occupancy.
Our hotels continue to benefit from strong fundamentals in 2013 with transient growth outpacing group, but it was group picking up momentum during the year. Group was particularly strong in our Big Box Hotel with group business at our Big 8 hotels up 10%, helping to drive Big 8 RevPAR growth of 9.2% for the year. Our owned and leased hotels in the U.S. also performed well growing RevPAR 6.8% for the year. On a system-wide basis we continue to grow our RevPAR index premium up nearly a 12 percentage point.
Our strong top-line performance combined with our disciplined approach to managing cost was a significant improvement operating margins in 2013. Our U.S. owned and leased hotels grew operating margins over 250 basis points and globally our owned and operated hotels grew operating margins over a 150 basis points on a currency neutral basis.
This operating margin performance in our hotels combined with our overall management and franchise growth of nearly 8%, strong growth in timeshare EBITDA of 18%, and continued corporate cost discipline led to strong growth in adjusted EBITDA and adjusted EBITDA margins for the year. Full year 2013 adjusted EBITDA came in at $2.21 billion, a 13% increase year-over-year, and overall adjusted EBITDA margins increased over 300 basis points versus 2012.
Turning to development I thought I'd cover some highlights including what we're doing on our brands around the world. For starters, we approved a record 72,000 rooms for development in 2013 including over 37,000 rooms in the U.S. nearly 15,000 rooms in Asia-Pacific and nearly 10,000 rooms in Europe. And end of the year was an industry leading pipeline that includes over 1,100 hotels and 195,000 rooms.
Historically, our pipeline was heavily concentrated in the U.S. When we got to the company over 80% of the pipeline was located in the U.S. Today it is six years later 60% of our pipeline is outside the U.S. and we have very good balance among the region. We've had great success in the Asia-Pacific region growing our pipeline over 55,000 rooms and our Middle East Africa pipeline is the largest in the industry with over 20,000 rooms.
Europe is another great example of the success of our development strategy. In 2007 we knew the European market was likely to be value driven for years to come. By investing in our local commercial capabilities and leading with our conversion of family DoubleTree by Hilton brand and our value oriented Hampton and Hilton Garden Inn brands that we customized for the European markets. We went from three non-Hilton Conrad branded hotels in 2007 to over 200 either open or in the pipeline at the end of 2013. Today, we have nearly 30,000 rooms in our European pipeline and more than 16,000 rooms under construction, which is over as twice as many as our nearest competitor.
Pipelines are great but the first step in the process of converting a pipeline into fee paying rooms is getting shovels in the ground. Over half the rooms in our pipeline well over a 100,000 rooms are under construction, which is more than 21,000 rooms or 25% ahead of our closest competitor. Our share of rooms under construction globally of 18.6% outpaces our global share of room supply by over four times. And like our pipeline the geographic breakup of our rooms under construction has shifted dramatically. Today 77,000 or 76% of our rooms under construction are outside U.S. compared to just 13% in 2007, which has increased our rooms under construction outside the U.S. by 14 times during that period.
This shift in focus to a more geographically diverse development strategy has enabled us to grow significantly outside the U.S. We now have more than 50% more trading rooms outside the U.S. than we did in 2007. But to be clear we have not lost our focus on growth in the U.S. Our category leading focus service brands are in high demand from the development community and in an environment where most new hotel development is being done in those segments.
In our conversion friendly whole service brand led by DoubleTree by Hilton, have enabled us to win more than our fair share of those deals as well. Our approximately 25,000 rooms under construction in the U.S. as of year-end 2013, represents 24% of the total rooms under construction U.S. compared to our 11% share of existing U.S. supply.
We believe we're in a sweet spot for branded hotel development in the U.S. With fundamentals creating an appetite for hotel development and capital markets that are strong enough to support development, but with enough discipline remaining in the market to ensure that only quality projects with a strong experience of task to them are getting done. This dynamics is keeping overall supply growth in U.S well below long-term averages but allowing us to grow at a faster pace than our competitors.
The next step in converting a pipeline to fee paying rooms is of course actually opening hotels. In 2013, we opened 207 hotels with nearly 34,000 rooms. Conversions accounted for 35% of these openings largely in our DoubleTree by Hilton brand. After removals we had net unit growth of more than 25,000 rooms representing growth of over 4% for the year. It's important to note that we achieved this growth with the minimus amount of capital on investment and without any acquisitions.
Given our strong pipeline and our rooms currently under construction, we expect net unit growth to accelerate in 2014 and 2015 which I'll get into a little bit more detail in a couple of minutes.
We currently mentioned our DoubleTree brand a couple of times in the context of our growth strategy. DoubleTree is one of the great brand success stories during the time we've been at the company. It has become, I'd say somewhat quietly, the fastest growing upscale brand in the lodging business, having doubled in size since 2007, even while we removed nearly 10% of the brand to improve overall quality. Roughly 75% of the room additions have come from conversions of non-Hilton Worldwide brands. We accomplished this by updating the brand DNA to make it more relevant to our customers and by better connecting the brand to our commercial engines including honors. This better connectivity combined with the improvement in the quality of the brand's hotels and a refreshed brand identity including by Hilton in the name have created significant improvement in customer satisfaction and helped increase the overall RevPAR index of the brand by over 600 basis points since 2007.
This of course has led to increased owner profitability and presence for the brand, which has enabled it to drive a significant portion of our growth in North America and in Europe, where value conversion plays have been at a premium as well as accelerating its growth in emerging markets through new build.
Last year, we opened our 4000th hotel on the Hubei province of China. China continues to be a strong performing market for us with 6.7% comp currency neutral RevPAR growth in 2013. We now have 43 hotels operating in Greater China that's up from 6 in 2007 and a pipeline of more than 140 hotels with more than 46,000 rooms, the largest in the industry among the global brand.
Overall in Asia-Pacific, we've had a great success in growing our business having doubled the number of hotels in the region since 2007. And our pipeline of over 55,000 rooms in the region more than five times larger than it was in 2007. One of these pipeline hotels is the stunning Waldorf Astoria in Beijing, which opened last week. We continue to build tremendous momentum with the fastest growing luxury brands in the business.
Our luxury portfolio of Waldorf Astoria and Conrad Hotels has more than doubled since 2007 to 47 properties, the 29 hotels in our pipeline will increase our luxury footprint by more than 40% and in some of the most desirable luxury markets in the world such as Jakarta, Bali, Hainan Island, Grand Cayman, Mumbai, Mecca, Suzhou, Doha, Bangkok, Jerusalem, Amsterdam and many more.
Turning to our flagship, Hilton Hotels & Resorts brand we have also had great success by focusing on simplifying the full service operating model particularly in the developed world. The goals to get customers more of what they want and they're willing to pay for and less of what they don't making the brand more relevant to get and more profitable for owners.
Hilton is the number one ranked hotel brand and global awareness and now has 554 hotels opened and the largest development pipeline in its 94-year history with a 150 projects in the pipeline, 95% of which are outside the U.S.
In our focused-service category, are more than 2,800 properties remain a formidable engine of growth, both domestically and increasingly internationally. For example, Hampton continues to expand with more than 350 hotels in its pipeline, including more than 160 open or in the pipeline outside the United States. The brand will open its 2000th hotel early in the second quarter and maintains an unmatched market share premium among midscale brands.
Home2 Suites by Hilton is another great example of our ability to innovate on the product side to better serve customers needs and enhance our growth rate. Home2 has opened 28 hotels since launching three years ago, with nearly a 100 hotels in the pipeline and its tremendous initial growth has been achieved entirely 100% with third-party capital.
Hilton Garden Inn has 581 existing hotels with 214 in its pipeline; more than 50% of the pipeline is located outside the United States. In fact, we recently opened our first Hilton Garden Inn in China introducing our fifth brand to the Chinese market. The response has been very positive and the brand has another 16 hotels in the pipeline in China. Adding Hilton Garden Inn and soon Embassy Suites in China is the result of our belief of having a full portfolio brand with hotels for every type of guest travel need will be as crucial in China as it is in the developed markets.
We firmly believe that our brand lineup is the significant strategic advantage and diverse enough to meet most customer needs in most regions but we are always looking to enhance our ability to serve customers globally. As you've heard from my comments, we continue to expand existing brands geographically and we will continue to explore new brand or brand extension opportunities to serve even more customers and owners in the future, which we look forward to discussing with you in future quarters.
Another aspect of staying ahead in our business and growing our industry leading market share premium is continuing to innovate. That innovation can come in the form of innovation in our brand portfolio as I described but it also needs to come from the ways we interact with our customers. Today's traveler wants an increasing level of both choice and control and we're taking advantage of our scale to design and implement solutions across our portfolio to given just that. We pioneered and launched e-check-in over five years ago and today our gold and diamond honors members can check-in online or on their mobile devices and also choose their preferred room at over 3,000 hotels.
In the not too distant future, we expect to announce significant enhancements and expansion of this service to make all our guests' journey even easier through their digital device. We all know that travels are increasingly mobile and the growth of our mobile bookings continues to explode. Mobile has experienced a more than eight fold increase in revenue since 2010 and has doubled just over the last 12 months. With mobile-enabled booking channels, particularly our enhanced HHonors and Hilton Apps that we launched last year and new apps hitting the market soon mobile certainly a key focus of our digital agenda.
We also continue to focus on driving conversion across all our direct digital channels. Millward Brown Digital for example reports almost having the industry leading conversion and booking share in U.S. Our goal is making our direct channels the preferred channel for our guests.
In 2013, we invested in expanding our digital languages and launched 22 language booking and in covering 79 countries.
Shifting gears back to performance. Let me spend a few minutes on our outlook for 2014. We anticipate system-wide RevPAR growth increase 5% to 7% for the full year obviously showing positive momentum versus 2013. We have a very positive outlook for group business with both rooms on the books and rates up meaningfully versus last year. Our 2014 group revenue position at our Big 8 hotels is up 10%, compared to the same time last year. And group business for the same period for our larger group of managed hotels in the U.S. is up 7%.
As we look at the macroeconomic picture and outlook for lodging performance around the world, we see generally improving conditions and continued optimism for 2014. In U.S. we expect modestly better GDP growth, which should drive modestly better demand growth, and we expect continued momentum in group bookings, especially with much of the government shutdown and debt ceiling noise behind us. We believe that this demand will be paired with needed supply growth leading to a modestly better RevPAR growth picture than last year.
In the Asia-Pacific region, we expect to see continued strong performance again in 2014. Japan was particularly strong as all our hotels delivered double-digit RevPAR growth in 2013. And so far, the outlook for '14 remains very strong as the Japanese government continues to inject liquidity into their markets. China GDP growth is expected to moderate a bit and we expect to see slightly lower RevPAR growth in 2014 of 5.5% to 6%, down from nearly 7% in 2013.
In Europe, we expect the improving economic climate experienced in 2013 to continue into '14 and we expect our RevPAR performance to continue to improve a bit as well.
London, where we have a very large presence in particular continues to pickup. In 2014 group revenue position in the region overall is up significantly a 20%. Overall, Europe RevPAR growth was relatively strong in 2013 with RevPAR growth of 3.9%, as expected to be up in the mid-single-digits in 2014.
The Middle East and Africa region is a tail of individual markets. Our Africa and Indian Ocean, Arabia, Arabian Peninsula, and Kingdom of Saudi Arabia markets have been and are expected to continue to be strong and of course, Egypt remains highly volatile.
For the full year 2014, we expect adjusted EBITDA of $2.365 billion to $2.435 billion. In terms of unit growth, we expect to have 35,000 units to 40,000 units to our managed and franchised segments, on a net basis which would represent 5.5% to 6.5% unit growth in that segment and does not assume any growth from acquisitions.
On an overall basis, we are optimistic that 2014 will be stronger than '13. There will undoubtedly be ebbs and flows within regions, but generally the macro trend seem to be similar or better than what we saw in 2013.
With that, I would like to turn the call over to Kevin Jacobs for a little bit more detail on the fourth quarter and full year results, as well as our 2014 expectations.
Thanks, Chris, and good morning everyone. As Chris suggested, we are very pleased with our results for both the fourth quarter and full year, which exceeded our expectations. We were also thrilled with what we were able to accomplish last year in the capital markets, completing both our debt refinancing and of course our IPO. I will speak in more detail for the refinancing and IPO in a little bit and then we'll get into our 2014 outlook a bit more. But first let's talk about our fourth quarter and full year 2013 results.
Adjusted for special items, EPS was $0.53 for the full year 2013, compared to $0.45 in the prior year, an increase of 18%. Prior to adjustments net income was $415 million for the full year 2013, compared to $352 million for 2012 or $0.45 per share and $0.38 per share respectively.
For the fourth quarter, adjusted for special items, EPS was $0.11 compared to $0.10 in 2012. Prior to adjustments net income was $26 million, compared to $61 million in 2012 or $0.03 per share and $0.07 per share respectively.
Special items that have been adjusted in both our fourth quarter and full year results include a one-time charge of $306 million associated with the conversion of our private company compensation plan for senior management into stock at the IPO, which was paid entirely out of Blackstone's ownership in the company and not dilutive to shareholders.
In the fourth quarter, we recognized a gain on the extinguishment of our prior debt of approximately $230 million and the release of a tax valuation allowance of approximately $90 million net, as low as the GAAP tax benefit on all of those special items.
Adjusted EBITDA for the fourth quarter was $603 million, an increase of 16% over 2012 results. Full year 2013 adjusted EBITDA came in at $2.21 billion, a 13% increase over 2012. System-wide comparable RevPAR increased 4.7% for the fourth quarter and 5.2% for the full year on a currency neutral basis.
Our growth rate for the quarter was a bit lower than we saw in the previous three quarters, which was largely driven by a decrease in government business resulting from the government shutdown.
During the quarter our brands continued to gain overall market share and we also ended the year with a strong December recording RevPAR growth of over 6%.
In terms of our regional performance, in the United States for the year continued economic recovery drove comparable system-wide RevPAR growth of over 5% and comparable U.S. owned and operated hotels were up over 6%. San Francisco and Hawaii remained strong markets for us with comparable RevPAR in those markets up 13% and 12% respectively. The New York market was a bit softer as difficult year-over-year comparisons and the continued absorption of new supply led to RevPAR growth of the market of just 3.5% for the year on a comparable system-wide basis. Our owned hotels in New York were a bit stronger with RevPAR growth of nearly 4%.
In Europe, strong performance in the UK and Ireland, particularly in London, as well as key markets in Continental Europe led to comparable currency neutral RevPAR growth for the full year of 3.9% primarily driven by occupancy. Germany, Amsterdam, and Turkey were also strong performing markets for us in the quarter.
In the Middle East and Africa region comparable currency neutral RevPAR grew 6.4% for the year, even with continued political unrest in Egypt, somewhat hurting our overall results for the region. We saw strength in the Arabian Peninsula, even with a drag from Saudi visa restrictions and the African Indian Ocean market was strong despite softness in Nairobi due to the terrorist attack that happened there in the third quarter.
In the Asia-Pacific region we continued to outperform with strong demand in Japan and China driving comparable currency neutral RevPAR growth of 7% for the full year.
Next I'd like to take you through some highlights of our segment results. Total management and franchise fees were $333 million in the fourth quarter, an increase of 10% over the fourth quarter of 2012. For full year 2013, total management and franchise fees were $1.27 billion, an increase of roughly 8% over the full year of 2012.
In our ownership segment, adjusted EBIDTA for the fourth quarter of 2013 of $254 million was roughly 12% higher than the fourth quarter of 2012, driven by strong RevPAR growth of 5.1% in the U.S. and operating margin growth at our U.S. owned and leased hotels of over 180 basis points.
For full year 2013, adjusted EBIDTA for the ownership segment increased 17% to $926 million, again driven by strong comparable RevPAR growth in the U.S. of 6.1% and cost discipline at our U.S. owned and leased hotels where operating margins increased over 250 basis points.
In the timeshare segment, 2013 adjusted EBIDTA of $297 million was 18% better than the prior year.
As Chris mentioned earlier we recently executed a purchase and sale agreement with a Blackstone led partnership with third-party capital investors for the sale of certain land and entitlement rights at our Hilton Hawaiian Village Resort in connection with the planned timeshare development project to be called the Grand Islander. This transaction is great example of the tremendous momentum we have in moving our timeshare business through a capital light model and the attraction we've gained in the institutional investor community around the tracking product capital for development.
It's also the first step of many and I'm unlocking the embedded value in our real estate portfolio as we expect to generate about $375 million of overall EBIDTA and roughly $180 million of incremental net present value out of what has been historically a non-income producing part of the resort.
We expect to commence sales of the timeshare units of the property in the fourth quarter of 2014, and for construction to be completed in late 2016. We will keep you updated on our progress on this exciting project.
Turning to our balance sheet, in addition to the $1.24 billion of net proceeds from the IPO, we closed on the complete refinancing of our prior acquisitions got in multiple markets during the fourth quarter, creating a balance sheet that we believe is a tremendous asset for the company and will provide us with an incredible amount of financial possibility for the future.
Prior to the IPO, we refinanced a vast majority of our long-term debt through multiple transactions raising $13.1 billion of new debt along with a $1 billion under our revolver. These proceeds along with available cash were used to repay approximately $13.5 billion of debt outstanding, which was the remaining dollars of the loan originated to acquire the company in 2007.
The principal components for the refinancing included a $7.6 billion floating rate, 7-year term loan facility and $1.5 billion of unsecured 5.625% senior notes due 2021, as well as a $3.5 billion 5-year commercial mortgage backed securities loans secured by 23 of our U.S. owned hotels and a $525 million mortgage secured by the Waldorf Astoria in New York.
We also entered into interest rates swaps on a total of $1.4 billion of the term debt, which set our ratio of fixed to floating rate debt at 50:50. Additionally we put in place approximately $700 million of financing against our timeshare receivables in the form of a $450 million conduit and $250 million of asset backed securities, all of which are non-recourse for the company.
Subsequent to this refinancing we made $1.6 billion of voluntary prepayments on the term loan, including $360 million from available cash and the $1.24 billion of net IPO proceeds. As a result the outstanding dollars of the term loan facility at year-end was $6 billion. Additionally subject to the provisions in the loan agreement the margin on the floating portion of this term loan was stepped down by 25 basis points in accordance with the IPO and is now set at 275 basis points.
As of year-end we had net debt of $11.5 billion at a weighted average interest rate of approximately 4.2%, and a weighted average maturity of 6.2 years. We ended the year with cash and cash equivalents of $860 million, including $266 million of restricted cash and we had no borrowings outstanding under our $1 billion revolver.
Finally, let's turn to our outlook for 2014. For the full year, as Chris mentioned, we expect system-wide RevPAR to increase between 5% and 7% on a comparable currency neutral basis with 60% to 70% of that being driven by rate. Ownership segment RevPAR is expected to increase between 4.5% and 6.5% on the same basis.
We expect full year adjusted EBITDA of between $2.365 billion and $2.435 billion. Management and franchise fees are expected to increase between 10% and 12%. In timeshare we expect segment adjusted EBITDA to be between $310 million and $325 million.
We expect CapEx spending, excluding timeshare inventory, to total approximately $350 million, including about $250 million to $260 million in hotel CapEx, which represents roughly 6% of ownership revenue. We expect corporate and other segment expense to increase between 3% and 5% including incremental public company cost. We expect diluted EPS adjusted for special items of between $0.57 and $0.61 for the full year.
For the first quarter of 2014 we expect system-wide RevPAR to increase between 4.5% and 6.5% on a comparable currency neutral basis. In the U.S. and UK we expect the weather we have experienced so far this year to marginally affect Q1 RevPAR growth. However this should be somewhat offset by the lapping of the beginning of the U.S. government sequester during the first quarter of 2013.
We expect adjusted EBITDA for the quarter of between $480 million and $500, which include a one-time benefit of approximately $25 million from the reversals and the accrual related to the conversion of our prior cash based long-term incentive compensation plan into a restricted stock plan for our Vice Presidents and below. That benefit will reverse itself by year-end in the form of share based compensation expense.
Further detail on our fourth quarter and full year guidance can be found in the earnings release we distributed earlier this morning.
This concludes our prepared remarks and we're now interested in answering any questions you may have. Matthew, back to you.
(Operator Instructions) Your first question comes from the line of Joe Greff with JP Morgan.
Joe Greff - JP Morgan
Welcome back. Looking at your 2014 EBITDA guidance and other outlook components how does that translate into free cash flow multiple debt reduction for the year? In other words, it is what other non-cash add-backs or the working capital items are there to drive your free cash beside the simplistic method EBITDA less interest less taxes less CapEx?
I think that gets you pretty close to the right number. I mean I'd say that based on the sort of range of outcomes, it's about $700 million to $900 million, roughly that should be available for debt reduction in the year.
Joe Greff - JP Morgan
And then the upfront cash that you get from monetizing the land and your rights at the Hilton Hawaiian Village how much is that I know Kevin you mentioned what's the net present value of that?
The land sale component of it is $25.4 million and then the rest of the MPV is in the sales and marketing and operating agreements that we're entering into.
Joe Greff - JP Morgan
Chris, earlier you painted a generally optimistic picture for net unit growth. Can you just talk about the mood in the hotel development community specifically in China right now I guess what markets are there with positive momentum and for what demand, how does China generally feel?
Yes, I mean -- I'd say still not withstanding the GDP growth is moderating a little bit and they -- and China is clearly been trying to make sure that they don't end up with a real estate bubble. It's clearly still generally pretty positive. There was a period of time I would say sort of in the first half of last year where China development really slowed down. It picked up pretty materially, it didn't get back to the peak levels but it picked up pretty materially in the second half of last year, and what we see so far in China in the beginning of this year and we said in our Investment Committee Meeting in the last couple of weeks where we review all the deals we're doing. It feels -- it still feels pretty good.
It is changing and so my comments about Hilton Garden Inn and my prepared comments and what we're doing with the launch of Embassy which will occur later in the year would put in those -- would put my comments for a reason and that is definitely to signal that there is change of thought I think. There's no question that full service and luxury we still have pretty good momentum in China, but the pace at which this new development is getting done I think in the market generally at the high end of the business as close somewhat and I think it's picking up in the midscale segment of the business. So we've been very, very focused on Garden Inn. We think Embassy has adapted for that market as a great sort of value play in the full service space that's going to play well.
We haven't done it yet, but we haven't launched it yet, but we've been working on our Hampton launch in the China market. We've done all sort of the background work and research and development work for how we would adapt that product for the market. So I think you're going to look to see that over the next couple of quarters that we will be doing something and what I would describe is sort of the 3.5 star space in China. So I'm -- listen, long-term I'm very optimistic about the development opportunities in China. In the short to intermediate term I'm pretty damn optimistic as well, I just think that the makeup of it is increasingly going to be more in the midmarket and less at the upper end of the market.
We're very focused on, as I said, we think it's really important not just for building our business in China, which is important to serve the billion plus people in China, but China is very rapidly becoming the number one outbound market in the world in the next couple of years will have 100 million outbound travelers and we want to have a very sort of like we do in developed parts of the world Europe and U.S., very broad distribution at all the important price points so that we build mass sort of loyalty to our family brand, both to build our business in China, but as increasingly Chinese travelers leave the market they're going to -- we think they're going to stay with the brands when they're in other parts of the world that they become loyal to in their home market.
So we're focused on that and I think the most important way that that's going to happen meaning broad distribution within China is going to happen in the three-and-a-half to four star space not in the five plus star space.
Your next question comes from the line of Harry Curtis with Nomura. Your line is open.
Harry Curtis - Nomura
Yes, very good. I wanted to just focus on the U.S. for a minute. In the U.S., in 2013 you ended -- your occupancy ended at about 73% and you talked about group business in '14 being pretty strong. You really needed that this level of occupancy, what are your occupancy growth expectations for this year? And then the second part of the question is recently what have you been seeing in, in the quarter for the quarter group demand has that been much of a help or a headwind?
Yes, on the occupancy side listen it's a tail of mortgage and assets. So I think as you look at it 73% might -- we're going to have as Kevin suggested, we would probably have our RevPAR growth, you're going to have somewhere between half a point and a point of occupancy growth. You're certainly getting to the point where you don't need a lot more occupancy broadly in the system and my guess is that 60% to 70% rate growth figure that we get will be even higher next year.
So I think we're getting from a cycle point of view to the point where as you're implying in your question, we want to be and we certain -- don't get me wrong, we're certainly focused on rates and we will be increasingly focused on rates, but there will be a little bit more broad sort of system-wide U.S. occupancy gain this year.
Well that's basically come on the group side, if you look at on average 73% it's great but if you look at it sort of by individual segments particularly looking at the big group hotels, big commercial hotels they still have occupancy to go, because we are mid cycle in my opinion in terms of where we are broadly that is generally when you see the group business come back that's when you see these big hotels really start to perform as a result of building that, that that be.
And I would say from the standpoint of the real big boxes and bigger markets unlike may be sort of the limited service in suburban secondary markets, there is more occupancy there. So you're not going to see a whole lot of occupancy and a lot of markets moving, but you're going to see it disproportionally moving in the bigger market and in these big very large hotels, if that answer the question.
In terms of I would say that group position I gave you in my comments very strong up year-over-year, the way I would describe pace, which means a different timeframe sort of what we are doing in different periods of time booking on a year-over-year basis. You probably wouldn't be surprised that in the fourth quarter we saw some pace declines and that was we can pretty much track if that was the result of a lot of what was going on with the U.S. Government and the government shutdown and the potential throughout of debt ceiling issues and budget debate that had not been solved, and every time that flares up, we've pretty consistently seen people that are making longer lead decisions and that's what's going on with group, start to freeze up. So we had very healthy pace. I would say in the first quarter through third quarter overall, fourth quarter, not as much we think a direct sort of results for that.
And the good news is in terms of what we see thus far this year, we've seen that stabilize and start to pickup. So pace is positive and what we see right now and obviously the position is positive. Now, that we are pretty -- we think certain I mean if not entirely certain that you're not going to have any -- if the budget discussion is done, looks like that everybody has agreed to a increase in the debt ceiling that gets us to the second quarter of next year.
At this point, we think that portends very good things for the group business. We think that the business is there, the demand there and without -- this is technical term without the Psychobabble that has been going on in Washington, we think there is a -- that the business will continue to pickup. We obviously saw a great -- I said we were up 10% group in our Big 8 last year; we were up 10% again this year in terms of position. The Big 8 had great RevPAR growth last year. We expect to have a very good RevPAR growth, higher than the high-end of our guidance driven by these factors, which is building both occupancy but also rate in the group side and providing that strong foundation for us to continue to squeeze out lower price transient business and only take the best transient business.
Harry Curtis - Nomura
And then, just a very quick follow-up on your incentive management fees. There seems to be some headwinds in 2013, the IMS were pretty flat. What are your expectations for '14; it should be a tailwind in '14?
Yes, I think listen what's going on in '13 is just some year-over-year comp issues at the -- we had some contracts that were sort of changed and one in particular, a very big one in Mecca that distorted what was going on with incentive management fees. It obviously -- it's a very positive thing for the company. We restructured an existing agreement and changed the incentive management fee arrangements and returned for I think 4500 new rooms that were doing with this developer in Mecca over the next -- that will be opening over the next three or four years, so a very positive thing, but it distorted the IMS.
This year, IMS growth was going to be sort of in the 8% to 10% range. I'd say that's sort of the beginning of a very nice trajectory in the sense that if we look at what we have under construction around the world a 102,000 room, 75%, 80% of those are international the vast majority of those are sort of in the full service and luxury space, almost every one of those have incentive management fee contracts. For the record they don't stand behind on our priorities, those are the really good kind. And as we deliver those hotels into the system -- and obviously they are under construction, so that will be happening fairly rapidly, you will start to see a very nice trajectory of growth and incentive management fee. So the 8% to 10% that you see this year should be over the next couple years ramping up the 20% plus growth in IMS.
Your next question comes from line of Carlo Santarelli with Deutsche Bank. Your line is open.
Carlo Santarelli - Deutsche Bank
Just a quick follow-up on Kevin's comments earlier. When you talk about the Hilton Hawaiian Village deal, when you think about the broader portfolio, how many more opportunities do you guys think there are that are similar in scope and similar in nature to this?
I'd say listen, we're working on it every day and we -- as you can tell from the Hawaiian Village description it's not like we woke up yesterday and said hey here is an idea, I mean it took us probably three-and-a-half years to get the entitlement, to be able to turn that loading dock into a 400 plus unit tower in on Waikiki Beach. And so we've been working on some of these. I'd say we clearly have a handful of these types of opportunities that are sizeable, I don't want to say it's this -- but that are meaningful sort of NPV value to the company. I mean the truth is we have a big real estate portfolio. So we have dozens and dozens of opportunities in that portfolio to create value in every way from an operating point of view and smaller value enhancement opportunities.
But the big one, there is probably a handful. There is a Hawaiian Village there; a number of things in New York and our biggest assets is the New York Hilton at the Waldorf Astoria, other assets in Hawaii, like Waikoloa potentially in London with the Park Lane and some others. We don't want to get ahead of ourselves. Those know me from my prior days as a Public Committee CEO. We would rather do it and then market it rather than market it and then do it. So we are very pleased to be able to announce the Hawaiian Village deal because it's done. We have got great progress on all of the others that I just mentioned. And I think you should expect to continue to see some good progress from us on all of those.
Carlo Santarelli - Deutsche Bank
And then, if I could just one follow-up. I know you guys mentioned earlier index, RevPAR index, in terms of kind of share in the U.S. not so much from a development standpoint, more so from an operational standpoint, where do you guys see yourself taking it from not may be a specific competitor but within the segments, where do you guys see yourselves most kind of outpacing?
That's always the question that we get and the truth in the matter is we don't ever really know because we know what's happening, otherwise which travel works, right. We know what's happening with us, we don't really know exactly what's happening with anybody else the way the system works. My sense is, and this is going to sound sort of like the obvious answer, it's a little bit of everywhere. I do think that for all the reasons I talked about, when I talked about innovation and I talked about honors and what we're doing in distribution and then what we're doing on online and mobile and e-checking and all these things, I think they suggest that the bigger, more powerful global brand are getting stronger. I'm not saying we're not taking some share from our big global competitors. I hope and my guess is we are a little bit, but I would guess, is sort of, without knowing very specifically, I would guess that more of the share is coming from the independent and the smaller regional and local players. So a little bit everywhere but may be a little bit more from there.
Your next question comes from the line Steven Kent with Goldman Sachs. Your line is open.
Steven Kent - Goldman Sachs
So two questions, first, just on debt any guidance on using free cash flow for may be an accelerated debt paydown in 2014 and linked to that your asset sales, your willingness to sell hotels any additional color on the target, the number of hotels you'd like to sell in 2014. How many are actually actively being marketed? And then, so I think to Carlo's question just a moment ago on timeshare inventory how do you balance selling your own versus selling somebody else's inventory? Obviously selling somebody else's inventory is almost like infinite return on investment or pretty close to it. On the other hand leaving assets on your balance sheet, it leaves your own assets on your balance sheet. So I'm trying to get a sense for how you're balancing that over the next couple of years?
I'll take the second and third and may be ask Kevin to then talk about the debt side of it. So on sales we have -- we do not have a lot that we intend to sell in 2014. We do have a few what I'd describe as dribs and drabs, very small assets, a few in the UK that we've been working on. But would be I'd view it as given our scale the minimus. And the reason for that is I said it in my prepared comments that the short version of it is listen we think we're in a sweet spot of the ownership cycle. We like what's going on in those assets. We love what's going through that that portfolio is really very heavily influenced by the group business which is coming back.
We just invested huge amounts in over $2 billion over a period of time and in the assets we're getting the benefit of that. We got these value enhancement opportunities that we want to mind and we haven't been able to mind, not because we didn't know how to do it but because our debt structure really didn’t allow us. So our attitude right now is other than as I say some very minor sales, which would be immaterial to really try and mind the value of this.
Over time as I said if we believe that there's an opportunity to create incremental shareholder value by doing something with some or all the real estate, we will not be shy about that. The likely way that we would do it would be really more in a sort of structured format, wouldn’t have to be all of it, but it might be in very large chunks of it to make sure that we create tax efficiency. So it's not, as I said we're not in any way emotionally attached to the real estate. Our predecessors may be were, we're not. We're emotionally attached to driving shareholder value rate now. We think the right way to do that is to mind these opportunities and at least the short-term and look at where the market goes and where multiples are and look at whether at some point we think that there is an ARB opportunity where doing something with the real estate would create a greater value preposition for everybody involved.
On the timeshare inventory, listen I think the way to think about that is we're very thoughtful about where we're doing these deal and I think what I would say, it's really driven by the customer, right. So we're trying to do deals in markets with third-parties that are not overlapping with our inventory. So it is really driven and we are actively selling both our own inventory and what's remaining as well as third-party inventory. We have little or no overlap. It's really is where we end seeing the demand coming from a customer point of view, increasingly as you know, I gave the stat at the end of the year we were 78% in terms of inventory for third-parties. If you fast forward and you put the numbers in for the Hawaiian Village deal we're going to do, you're sort of in the low to mid 80s. So as time goes on, the fact of the matter is the vast majority of our inventory is from, is representing third-party. But we're actively selling everything that is on our balance sheet and it gets ultimately sort of driven by customer demand.
Yes, Steve for the debt question, Chris mentioned $700 million to $900 million of cash available or free cash flow. We would use the entirety of that to repay the term loan. The term loan is floating rate. It's fully pre-payable with no questions. So it's our most efficient debt to repay. And our goal would be to continue use the LION share of our free cash flow to repay debt, but with goals of being investment grade and we think we can achieve that over the next two to three years. We finished the year at 5.2 times net debt to EBITDA. We think we will finish -- if we do that $700 million to $900 million we will finish 2014 in about 4.50 times.
Your next question comes from line of Felicia Hendrix with Barclays. Your line is open.
Anthony Powell - Barclays
Hi, good morning it's actually Anthony Powell here for Felicia. How are you?
Hey, Anthony, how are you doing?
How are you doing?
Anthony Powell - Barclays
Doing well. On supply growth there seems to be some supply growth in the focus service segment in the U.S. Do you see hitting the supply impacting some same store RevPAR trends at your focus service hotels in your portfolio?
Not really. I mean, the truth is that that's where all the supply is. I kind of commented on that likely in my introductory remarks. There is very little full service getting done other than few municipal deals that are getting done around the country and almost zero luxury. So it really is all pretty much limited service. Some of that is urban and a few markets like the New York, DC, and other places, most of that is in suburban, secondary, and territory location.
What I would say is, I mean clearly, there is a little bit more supply coming. If last year, really get the aggregate data, it was sort of a little below 1%. We think this year it is going to be over 1%. Next year, probably if you look at all of the lead numbers, what's in the pipeline that will get under construction, it's still probably in our mind 1.5%, that's again a 30-year average of 2.5%. So at least over the next sort of two to three years we think it's very muted. We think really in terms of what we see going on, there is quite a bit of discipline in the market. There is money to develop but there's not a lot and it's only with the best developers that it's really getting done and the best brands.
Thankfully for us, I think we're viewed given the market share premiums we have as being amongst the best if not the best in that category. So as I said, we got 25% of what is under construction, and we only have 10% or 11% of the existing supply. So we feel pretty good. I don't think -- we don't that there is material impact from it until you get much higher in the supply cycle.
So I pick a number, I mean historically, I think you got to get up to 2% or getting up closer to the 30-year average, I think it's probably is the time we have to start to think about it. But we were closer to one then we are two or even one-and-a-half, I think we feel very good about it. And the fact is, demand should be growing and at a little bit faster pace in the U.S. because I think everybody would say -- and now with the government noise behind us at least for this year probably at least a couple of years, that you're going have better GDP growth which is going to drive greater demand growth in an environment where there is still tiny tidy pickup in supply when you look at the aggregate numbers.
Anthony Powell - Barclays
And one follow-up. Do you see any opportunities to add new brands to your portfolio? Thank you.
The answer is yes, I did a very crazy job of alluding to that and I apologize for that. As I said, my sort of style those of you know me know what is like -- we want to do things and then market them for you guys and everybody else. So we do have a bunch of ideas. Right now, we're dealing as we talked about with Garden Inn with Embassy in China and a lot of our brands, the existing brands. We are being very strategic about how we deploy those and how we enter various markets and launch those in various regions of the world.
We do have some things that we are working on in terms of both new brands and potentially what I would describe as brand extensions of an existing brand. And I do expect sort of over the next two or three or four quarters that you're going to hear at least a couple of things from us in that regard. One, which I know everybody, loves to talk about in the boutique space, which I did ask probably more than any other question on earth and even though you didn't ask it, I will certainly answer it. We are definitely working on a concept there.
We have a little different view, which I will wait to explain may be on -- in the next -- a call or two out, but we have had and continue to have a little bit of reviews and our competitors or many of our competitors about how to do that and sort of what exact -- what it looks like, what price point it ends up at. We've done a ton of work, we are getting closer I would hope in the not too distant future we can -- you'll be hearing from us on that. That would probably be the first thing or amongst the first things that you would hear.
Your next question comes from line of Joshua Attie with Citi. Your line is open.
Joshua Attie - Citi
As we think about the 5% to 7% RevPAR guidance, what are the variables that put you at the high and low end? Is it the performance of group business, is it your ability to drive rate or are there markets that are question marks? And I know there are probably multiple items that influence your thinking, but where do you think the main levers are to the upside or downside or the biggest question marks in your mind as you think about this year?
Yes. Listen, I think getting to the higher end would depend on the things you alluded to, that the continued strength that we've seen in transient, which has been strong. But we assume if you want to get to the higher end of that then you would have to have at or maybe even a little bit above sort of where the transient growth was. You need the group to show up, the group business to show up the way that the way that we're hoping and we think there is potential for that.
And probably I'd say you need nothing big to go wrong in the world. Right, I mean the problem whether there is upside and downside of being a very big globally diversified company that ultimately when Egypt is a problem more if when Japan is strong it's great, if Japan is weak they can drag you down. So I think -- I don't listen, I don't think it's -- I believe that we're pretty upset, we gave a range for a reason because it's a big company, a lot of things can happen around the world. We think that at the upper end of that range, it's possible or we wouldn't give you that range and I think it depends on those things. Continued slight uptick in transient, definite uptick in group, and so a nothing major going wrong around the world.
Joshua Attie - Citi
And I know you don't want to give too many details on projects until they're finalized, but can you talk broadly about your thoughts on the Waldorf in terms of a potential redevelopment?
Yes, we have spent a lot of time and some money as you can see if any of you have been to the Waldorf, we've spent over the last five or six years about $175 million and some of that's sort of behind the wall, so you don't see it. Some of it is upfront, I mean, we've been working on the exterior of the building to do the work that needed to be done for about a 100 years. We did -- we have redone the Park Avenue lobby, the motor court. If you haven't seen I mean, amazing progress and done a lot of work to figure out sort of from a rooms point of view what we want to do.
We have not taken that next step, because we've been in the process of doing -- excuse me a whole bunch of work and analysis around what's the highest and best use would be from a -- from standpoint of maximizing the value to the shareholders of the company and there are a bunch of different ways to do that and there a bunch of different people, we could do that with recognizing that not to coy that we talk a lot about capital light, obviously it's really complete what we like to have at the Waldorf, certainly it would require a lot of capital.
So I would say to you by the end of this year hopefully sooner, we will be in a position to layout exactly what we think the plan is to the Waldorf both in terms of what we're going to do with it physically and who we might do it with in order to continue to focus on our being capital light.
And I'm sorry to be coy, again we're just in the middle, we've done a kind of work over a bunch of years, we're sort of in the middle of completing that work and I don't think it's going to be too far out before we can give you good sidelines.
We will fix the Waldorf that I will tell you and there a couple of different sort of major pathways to doing that and we're finishing the work to be able to conclude that.
This concludes today's Q&A session. I will turn the call over to our presenters for any closing remarks.
Well, thanks everybody. Listen, I said a couple of times, it's great to be back, it took us six year hiatus from the public market, but after 50, I think consecutive earnings calls it's nice to be back doing quarterly earnings calls. We are obviously very pleased with our results for 2013, both the fourth quarter full year. We feel great about the environment, very optimistic about 2014, and we will look forward to giving you an update after we complete our first quarter.
Thanks again for spending the time with us today.
This concludes today's conference call. You may now disconnect.
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