Hilton HHonors Liability On Hilton Worldwide’s Book?

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On a process of writing a piece about Hilton Worldwide’s going public, I was reading though the S-1 filing (you can access it here) that the company had filed with the SEC (Securities and Exchange Commission).

hilton-worldwide-guest-loyalty-liability

I had to browse/read through to the page 88 of this prospectus before getting to the the value:

Hilton HHonors

Hilton HHonors defers revenue received from participating hotels and program partners in an amount equal to the estimated cost per point of the future redemption obligation. We engage outside actuaries to assist in determining the fair value of the future award redemption obligation using statistical formulas that project future point redemptions based on factors that require judgment, including an estimate of “breakage” (points that will never be redeemed), an estimate of the points that will eventually be redeemed, and the cost of the points to be redeemed. The cost of the points to be redeemed includes further estimates of available room nights, occupancy rates, room rates, and any devaluation or appreciation of points based on changes in reward prices or changes in points earned per stay.

We had $796 million of guest loyalty liability as of June 30, 2013. Changes in the estimates used in developing our breakage rate could result in a material change to our loyalty liability. Currently, a 10% decrease to the breakage estimate used in determining future award redemption obligations would increase our loyalty liability by approximately $28 million.

So, the guest loyalty liability stood at $796 million as of June 30, 2013. The total debt on Hilton Worldwide’s books is around $15 billion.

When Hilton did the last great devaluation of the program early this year, this was likely done to bring the guest loyalty liability down.

This future liability is estimated based on how Hilton HHonors members are using the points that have been issued to them, the future ADR’s (Average Daily Rates), occupancy rates (very expensive for program if the points are redeemed when the occupancy rate is at or greater than 95%), and breakage.

breakage means points that expire or never gets used. Hilton Worldwide estimates certain breakage rate and if the actual rate differs from the estimate, the can be changes in future liability.

Conclusion

So, Hilton Worldwide estimates that all the current future liability of the Hilton HHonors points issued as of June 30, 2013, is $796 million. As you can see, this is not pocket change. Any change in prediction, how the points are used in the future or breakage, can lead to write downs or profits.

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