Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
For the discussion of the financial condition and results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022, refer to "Part II—Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC on February 7, 2024, which is incorporated herein by reference.
Overview
Our Business
Hilton is one of the largest global hospitality companies, with 8,447 properties comprising 1,268,206 rooms in 140 countries and territories as of December 31, 2024. Our premier brand portfolio includes luxury, lifestyle, full service, focused service and all-suites hotel brands, as well as timeshare brands. As of December 31, 2024, we had 211 million members in our award-winning guest loyalty program, Hilton Honors, an increase of 17 percent from December 31, 2023.
Segments and Regions
We analyze our operations and business by both operating segments and geographic regions. Our operations consist of two reportable segments that are based on similar products and services: (i) management and franchise and (ii) ownership. The management and franchise segment provides services, including hotel management and licensing of our IP and/or the use of our booking channels and related programs. Revenues from this segment include: (i) management and franchise fees charged to third-party hotel owners; (ii) licensing fees from our strategic partners, including co-branded credit card providers and strategic partner hotels, and HGV; and (iii) fees for managing the hotels in our ownership segment. As a manager of hotels, we typically are responsible for supervising or operating the hotel in exchange for management fees. As a franchisor of hotels, we charge franchise fees in exchange for the use of one of our brand names and/or related commercial services, such as our reservations system, marketing and information technology services, while a third party manages or operates such franchised hotels. The ownership segment primarily derives revenues from nightly hotel room sales, food and beverage sales and other services at our consolidated owned and leased hotels.
We conduct business in three distinct geographic regions: (i) the Americas; (ii) EMEA; and (iii) Asia Pacific. The Americas region includes North America, South America and Central America, including all Caribbean nations. Although the U.S., which represented 65 percent of our system-wide hotel rooms as of December 31, 2024, is included in the Americas region, it is often analyzed separately and apart from the Americas region and, as such, it is presented separately within our hotel operating statistics in "—Results of Operations." The EMEA region includes Europe, which represents the western-most peninsula of Eurasia stretching from Iceland in the west to Russia in the east, and the Middle East and Africa ("MEA"), which represents the Middle East region and all African nations, including the Indian Ocean island nations. Europe and MEA are often analyzed separately and, as such, are presented separately within our hotel operating statistics in "—Results of Operations." The Asia Pacific region includes the eastern and southeastern nations of Asia, as well as India, Australia, New Zealand and the Pacific Island nations.
System Growth and Development Pipeline
Our strategic objectives include the continued expansion of our global hotel network, in particular our fee-based business. As we enter into new management and franchise contracts and enter into strategic agreements to complement our hotel portfolio, we expand our business with limited or no capital investment by us as the manager, franchisor or licensor, since the capital required to build, renovate and maintain hotels is typically provided by the third-party owners with whom we contract to provide management services, license our IP or provide access to our booking channels and related programs. Prior to approving the addition of new hotels to our management and franchise development pipeline, we evaluate the economic viability of the hotel based on its geographic location, the credit quality of the third-party owner and other factors. By increasing the number of management and franchise contracts with third-party owners, over time we expect to increase revenues, overall return on invested capital and free cash flow. See further discussion on our cash management policy in "—Liquidity and Capital Resources." The current economic environment, including elevated levels of inflation and interest rates, has posed certain challenges to the execution of our growth strategy, which in some cases have included and may continue to include delays in openings and new development.
In addition to our current hotel portfolio, we are focused on the growth of our business by expanding our global hotel network through our development pipeline, which represents hotels that we expect to add to our system in the future. The following table summarizes our development activity:
| | | | | | | | | | | |
| As of or for the Year Ended December 31, 2024 |
| Hotels | | Rooms(1) |
| Hotel system | | | |
Openings(2) | 973 | | | 98,400 | |
Net additions(3) | 904 | | | 83,000 | |
| | | |
Development pipeline | | | |
Additions(4) | 1,432 | | | 154,200 | |
Count as of period end(5) | 3,578 | | | 498,600 | |
____________
(1)Rounded to the nearest hundred.
(2)Openings include 411 hotels and approximately 19,500 rooms from strategic partner hotels.
(3)Represents room additions, net of rooms removed from our system. During 2024, 409 hotels and approximately 19,400 rooms added were from strategic partner hotels. Net unit growth for the year ended December 31, 2024 was 7.3 percent.
(4)Additions include 423 hotels and approximately 20,100 rooms from strategic partner hotels.
(5)The hotels in our development pipeline were under development throughout 118 countries and territories, including 25 countries and territories where we had no existing hotels, with nearly half of the rooms under construction and more than half of the rooms located outside of the U.S. Rooms under construction include rooms for hotels under construction or operating hotels that are in the process of conversion to our system. Nearly all of the rooms in our development pipeline will be in our management and franchise segment upon opening. We do not consider any individual development project to be material to us.
Principal Components and Factors Affecting our Results of Operations
Revenues
Principal Components
We primarily derive our revenues from the following sources:
•Franchise and licensing fees. Represents fees earned in connection with licensing our IP, including our brands and/or the use of our booking channels and related programs. Under our long-term franchise contracts with hotel owners, franchisees typically pay us franchise fees that include: (i) monthly royalty fees, generally based on a percentage of the hotel's monthly gross room revenue, and, in some cases, may also include a percentage of gross food and beverage revenues and other revenues, as applicable; and (ii) application, initiation and other fees for when new hotels enter the system, when there is a change of ownership of a hotel or when contracts with hotels already in our system are extended. Consideration provided to incentivize hotel owners to enter into franchise contracts with us is amortized over the life of the applicable contract as a reduction to franchise and licensing fees. Our license agreements, for which we receive licensing fees for the use of our IP and/or the use of our booking channels and related programs, are predominantly with strategic partners, including co-branded credit card providers, strategic partner hotels and HGV.
•Base and incentive management fees. Represents fees earned in connection with the management of hotels. Terms of our management contracts vary, but our fees typically consist of a base management fee, which is generally based on a percentage of the hotel's monthly gross operating revenue and, when applicable, an incentive management fee, which is generally based on a percentage of the hotel's operating profits, normally over a one calendar year period, and, in some cases, may be subject to a stated return threshold to the hotel owner. Outside of the U.S., our fees are often more dependent on hotel profitability measures, either because of a single management fee structure where the entire fee is an incentive management fee, or because our two-tier fee structure is more heavily weighted toward the incentive management fee than the base management fee. Consideration provided to incentivize hotel owners to enter into management contracts with us is amortized over the life of the applicable contract as a reduction to base and other management fees.
•Owned and leased hotels. Represents revenues derived from the operations of our consolidated owned and leased hotels, including hotel room sales, accommodations sold in conjunction with other services, food and beverage sales and other ancillary goods and services. These revenues are primarily derived from two categories of customers:
transient and group. Transient guests are individual travelers who are traveling for business or leisure. Group guests are travelers who are traveling for group events that reserve rooms for meetings, conferences or social functions, and may be sponsored by corporate, social, military, educational, religious or other organizations or associations. Group business usually includes a block of room accommodations, as well as other ancillary services, such as meeting facilities and catering and banquet services. A majority of our food and beverage sales and other ancillary goods and services are provided to customers who are also occupying rooms at our hotels. As a result, occupancy affects all components of our owned and leased hotels revenues.
•Other revenues. Represents revenues primarily generated by our purchasing operations.
•Other revenues from managed and franchised properties. Represents amounts that are contractually reimbursed to us by property owners, either directly as costs are incurred or indirectly through monthly program fees related to certain costs and expenses supporting the operations of the related properties. The direct reimbursements by property owners are primarily for payroll and related costs if the managed hotel employees are legally employed by us. We have no legal responsibility for the employee liabilities related to certain of our managed properties, predominately those located outside of the U.S., where we are not the legal employer, as well as the employees or the liabilities associated with operating franchised properties or strategic partner hotels. Revenues and expenses for these direct reimbursements have no net effect on operating income (loss) or net income (loss). For the indirect reimbursements, Hilton collects monthly program fees from our managed and franchised properties, which are based on the underlying hotel's sales or usage. The program fees serve as reimbursement for the costs related to the operation of our marketing, sales and brand programs and shared services. Hilton collects program fees from strategic partner hotels when a stay that was reserved using our booking channels is completed. Indirect reimbursements also include revenues related to our Hilton Honors guest loyalty program, which are primarily derived from payments from hotel franchisees and third-party owners of hotels we manage that participate in the program, as well as strategic partners, including strategic partner hotels. We are contractually required to use these fees that we collect solely for these programs.
Factors Affecting our Revenues
The following factors affect the revenues we derive from our operations:
•Consumer demand and global economic conditions. Consumer demand for our products and services, as well as the products and services of the third parties from which we earn licensing fees, is closely linked to the performance of the general economy and is sensitive to business and personal discretionary spending levels. Among other factors, declines in consumer demand due to adverse general economic conditions, risks reducing or otherwise negatively affecting travel patterns, lower consumer confidence and adverse geopolitical conditions can reduce the amount of management and franchise fees we are able to generate and/or reduce the revenues and profitability of the operations of our owned and leased hotels. Further, competition for hotel guests and the supply of hotel services affect our ability to sustain or increase rates charged to customers of our hotels. Also, declines in hotel profitability during an economic downturn directly affect the incentive portion of our management fees, which is based on hotel profitability measures. As a result, changes in consumer demand and general business cycles have historically subjected and could in the future subject our revenues to significant volatility.
•Contracts with third-party hotel owners and franchisees and relationships with developers. We depend on our long-term management and franchise contracts with third-party hotel owners and hotel franchisees for our management and franchise fee revenues. The success and sustainability of our management and franchise business depends on our ability to perform under our management and franchise contracts and maintain good relationships with third-party hotel owners and franchisees. Our relationships with these third parties allow us to maintain our current presence as contracts mature and also generate new incremental opportunities for property development that can support our growth. Growth and maintenance of our hotel system and earning fees related to hotels in development are dependent on the ability of developers and owners to access capital for the development, maintenance and renovation of properties. We believe that we generally have good relationships with our third-party hotel owners, franchisees and developers and are committed to the continued growth and development of these relationships. These relationships exist with a diverse group of owners, franchisees and developers and are not significantly concentrated with any one particular third party.
Expenses
Principal Components
We primarily incur the following expenses:
•Owned and leased hotels. Reflects the operating expenses of our consolidated owned and leased hotels, including room expenses, food and beverage costs, other support costs and property expenses. Room expenses include compensation costs for housekeeping, laundry and front desk staff, as well as supply costs for guest room amenities and laundry. Food and beverage costs include costs for wait and kitchen staff and food and beverage inventory. Other support expenses include costs associated with property-level management, utilities, sales and marketing, operating hotel spas, operating telephones, parking and other guest recreation, entertainment and other services. Property expenses include property taxes, repairs and maintenance, rent and insurance.
•Depreciation and amortization. These are non-cash expenses that primarily consist of: (i) amortization of capitalized software costs; (ii) depreciation and amortization of property and equipment, including our finance lease right-of-use ("ROU") assets, such as buildings and furniture and equipment that are used in corporate operations or at our consolidated owned and leased hotels; (iii) amortization of management and franchise contracts acquired from third parties and (iv) amortization of intangible assets that were recorded at their fair value at the time of the 2007 transaction whereby we became a wholly owned subsidiary of affiliates of Blackstone Inc. (the "Merger"). As of January 1, 2022, the only remaining finite-lived intangible assets resulting from the Merger related to leases, international management contracts and our Hilton Honors guest loyalty program. The assets related to the international management contracts and Hilton Honors, which both had useful lives of 16 years, were fully amortized during the year ended December 31, 2023.
•General and administrative. Consists primarily of compensation costs for our corporate employees, including share-based compensation; professional fees, including consulting, audit and legal fees; travel and entertainment expenses; credit losses for estimated uncollectible management, franchise and other fees; and administrative and related expenses.
•Other expenses. Primarily consists of expenses incurred by our purchasing operations.
•Other expenses from managed and franchised properties. Represents certain costs and expenses that are contractually reimbursed to us by property owners, primarily for (i) payroll and related costs for hotels that we manage where the employees are legally employed by us and (ii) expenses related to our marketing, sales, brands and shared services programs. We are contractually required to use these fees solely for these programs. We have no legal responsibility for the employees or the liabilities associated with operating franchised properties, strategic partner hotels or certain of our managed hotels, predominately those located outside of the U.S. Other expenses from managed and franchised properties also includes expenses for the operation of our Hilton Honors guest loyalty program as well as credit losses for estimated uncollectible Hilton Honors and program fees.
Factors Affecting our Costs and Expenses
The following are principal factors that affect the costs and expenses we incur in the course of our operations:
•Fixed expenses. Many of the expenses associated with owning and leasing hotels are relatively fixed. These expenses include personnel costs, rent, property taxes, insurance and utilities. If we are unable to decrease these costs significantly or rapidly when demand for our hotels decreases, the resulting decline in our revenues can have an adverse effect on our net cash flows and profits. This effect can be especially pronounced during periods of economic contraction or slow economic growth. Economic downturns generally affect the results of our ownership segment more significantly than the results of our management and franchise segment due to the high fixed costs associated with operating an owned or leased hotel. Employees at some of our owned and leased hotels are parties to collective bargaining agreements that may also limit our ability to make timely staffing or labor changes in response to declining revenues. In addition, any efforts to reduce costs, including the deferral or cancellation of capital improvements, could adversely affect the economic value of our hotels and brands. Additionally, the general and administrative expenses of operating a global business also include fixed personnel costs, rent, property taxes, insurance and utilities. The effectiveness of any cost-cutting efforts related to owning and leasing hotels or corporate operations is limited by the amount of inherent fixed costs. However, we have taken steps to manage our fixed costs to levels we believe are
appropriate to maximize profitability and respond to market conditions, while continuing to optimize value for the experiences of our customers, owners and Hilton employees, which supports the long-term sustainability of our brands and business.
•Changes in depreciation and amortization expenses. We capitalize costs associated with certain software development projects and, as those projects are completed and placed into service, amortization expense will increase. As the finite-lived intangible assets that were recorded at the Merger become fully amortized, amortization expense will decrease. As of December 31, 2024, the only remaining finite-lived intangible assets that resulted from the Merger were those related to leases, as included in other intangible assets. We capitalize management and franchise contract intangibles acquired from third parties and amortize the amounts over their useful lives. Additionally, changes in depreciation expense may be driven by renovations of existing hotels, acquisition or development of new hotels, the disposition of existing hotels or corporate facilities through sale, closure or lease termination, lease renewals, expenditures related to our corporate facilities or changes in estimates of the useful lives of our assets. As we place new assets into service, we will be required to recognize additional depreciation expense on those assets. If we are required to recognize impairment losses related to our depreciable assets or finite-lived intangible assets, the related depreciation or amortization expense, respectively, will decrease.
Other Items
Effect of foreign currency exchange rate fluctuations
Significant portions of our operations are conducted in functional currencies other than our reporting currency, which is USD, and we have assets and liabilities, including those that are payable or receivable by consolidated subsidiaries, denominated in a variety of foreign currencies. As a result, we are required to translate the results of those operations, assets and liabilities from their functional currency into USD at market-based foreign currency exchange rates for each reporting period. When comparing our results of operations between reporting periods, there may be material portions of the changes in our revenues or expenses that are derived from fluctuations in foreign currency exchange rates experienced between those periods. We hedge foreign currency exchange-based cash flow variability of certain of our fees using foreign currency forward contracts designated as hedging instruments. We also hold short-term foreign currency forward contracts to offset exposure to fluctuations in certain of our foreign currency denominated cash balances and intercompany financing arrangements, and we have not currently elected to designate these forward contracts as hedging instruments.
Seasonality
The hospitality industry is seasonal in nature. The periods during which our properties experience higher or lower levels of demand vary from property to property, depending principally upon their location, type of property and competitive mix within the specific location. Based on historical results, we generally expect our revenues to be lower in the first quarter of each year than in each of the three subsequent quarters.
Key Business and Financial Metrics Used by Management
Comparable Hotels
We define our comparable hotels as those that: (i) were active and operating in our system for at least one full calendar year, have not undergone a change in brand or ownership type during the current or comparable periods and were open January 1st of the previous year; and (ii) have not undergone large-scale capital projects, sustained substantial property damage, encountered business interruption or for which comparable results were not available. We exclude strategic partner hotels from our comparable hotels. Of the 8,342 hotels in our system as of December 31, 2024, 409 hotels were strategic partner hotels and 6,050 hotels were classified as comparable hotels. Our 1,883 non-comparable hotels as of December 31, 2024 included (i) 1,005 hotels that were added to our system after January 1, 2023 or that have undergone a change in brand or ownership type during the current or comparable periods reported and (ii) 878 hotels that were removed from the comparable group for the current or comparable periods reported because they underwent or are undergoing large-scale capital projects, sustained substantial property damage, encountered business interruption or comparable results were otherwise not available.
Occupancy
Occupancy represents the total number of room nights sold divided by the total number of room nights available at a hotel or group of hotels for a given period. Occupancy measures the utilization of available capacity at a hotel or group of hotels.
Management uses occupancy to gauge demand at a specific hotel or group of hotels in a given period. Occupancy levels also help management determine achievable Average Daily Rate ("ADR") pricing levels as demand for hotel rooms increases or decreases.
ADR
ADR represents hotel room revenue divided by the total number of room nights sold for a given period. ADR measures the average room price attained by a hotel, and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels. ADR is a commonly used performance measure in the industry, and we use ADR to assess pricing levels that we are able to generate by type of customer, as changes in rates charged to customers have different effects on overall revenues and incremental profitability than changes in occupancy, as described above.
Revenue per Available Room ("RevPAR")
RevPAR is calculated by dividing hotel room revenue by the total number of room nights available to guests for a given period. We consider RevPAR to be a meaningful indicator of our performance as it provides a metric correlated to two primary and key drivers of operations at a hotel or group of hotels, as previously described: occupancy and ADR. RevPAR is also a useful indicator in measuring performance over comparable periods for comparable hotels.
References to occupancy, ADR and RevPAR are presented on a comparable basis, based on the comparable hotels as of December 31, 2024, and references to ADR and RevPAR are presented on a currency neutral basis, unless otherwise noted. As such, comparisons of these hotel operating statistics for the years ended December 31, 2024 and 2023 use the foreign currency exchange rates used to translate the results of the Company's foreign operations within its consolidated financial statements for the year ended December 31, 2024.
EBITDA and Adjusted EBITDA
EBITDA reflects net income (loss), excluding interest expense, a provision for income tax benefit (expense) and depreciation and amortization expenses. Adjusted EBITDA is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including gains, losses, revenues and expenses in connection with: (i) asset dispositions for both consolidated and unconsolidated investments; (ii) foreign currency transactions; (iii) debt restructurings and retirements; (iv) furniture, fixtures and equipment ("FF&E") replacement reserves required under certain lease agreements; (v) share-based compensation; (vi) reorganization, severance, relocation and other expenses; (vii) non-cash impairment; (viii) amortization of contract acquisition costs; (ix) other revenues from managed and franchised properties and other expenses from managed and franchised properties; and (x) other items.
We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) these measures are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions and (ii) these measures are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry. Additionally, these measures exclude certain items that can vary widely across different industries and among competitors within our industry. For instance, interest expense and income taxes are dependent on company specifics, including, among other things, capital structure and operating jurisdictions, respectively, and, therefore, could vary significantly across companies. Depreciation and amortization expenses, as well as amortization of contract acquisition costs, are dependent upon company policies, including the method of acquiring and depreciating assets and the useful lives that are assigned to those depreciating or amortizing assets for accounting purposes. For Adjusted EBITDA, we also exclude items such as: (i) FF&E replacement reserves for leased hotels to be consistent with the treatment of capital expenditures for property and equipment, where depreciation of such capitalized assets is reported within depreciation and amortization expenses; (ii) share-based compensation, as this could vary widely among companies due to the different plans in place and the usage of them; and (iii) other items that are not reflective of our operating performance, such as amounts related to debt restructurings and debt retirements and reorganization and related severance costs, to enhance period-over-period comparisons of our ongoing operations. Further, Adjusted EBITDA excludes both other revenues from managed and franchised properties and other expenses from managed and franchised properties as we contractually do not operate the related programs to generate a profit and have the contractual rights to adjust future collections to recover prior period expenditures. The direct reimbursements from property owners are billable and reimbursable as the costs are incurred and have no net effect on net income (loss) in the reporting period. The indirect reimbursements from property owners are typically billed and collected monthly, based on the underlying hotel's sales or usage (e.g., gross room revenue or number of reservations processed), while the associated costs are recognized as incurred by Hilton, creating timing differences, with the net effect impacting net income
(loss) in the reporting period. These timing differences are due to our discretion to spend in excess of revenues earned or less than revenues earned in a single period to ensure that the programs are operated in the best long-term interests of our property owners. However, over the life of the operation of these programs, the expenses incurred related to the indirect reimbursements are designed to equal the revenues earned from the indirect reimbursements over time such that, in the long term, the programs will not earn a profit or generate a loss and do not impact our economics, either positively or negatively. Therefore, the net effect of our cost reimbursement revenues and expenses is not used by management to evaluate our operating performance, determine executive compensation or make other operating decisions, and we exclude their impact when evaluating period over period performance results.
EBITDA and Adjusted EBITDA are not recognized terms under U.S. generally accepted accounting principles ("GAAP") and should not be considered as alternatives, either in isolation or as a substitute, for net income (loss) or other measures of financial performance or liquidity, including cash flows, derived in accordance with GAAP. Further, EBITDA and Adjusted EBITDA have limitations as analytical tools, including:
•EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
•EBITDA and Adjusted EBITDA do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;
•EBITDA and Adjusted EBITDA do not reflect income tax expenses or the cash requirements to pay our taxes;
•EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
•EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and
•other companies in our industry may calculate EBITDA and Adjusted EBITDA differently, limiting their usefulness as comparative measures.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business, return to our stockholders through share repurchases and dividends or as measures of cash that will be available to us to meet our obligations.
Results of Operations
The hotel operating statistics by region for our system-wide comparable hotels were as follows:
| | | | | | | | | | | | | | |
| Year Ended | | Change |
| December 31, 2024 | | 2024 vs. 2023 |
| System-wide | | | | |
| Occupancy | 72.1 | % | | 0.8 | % | pts. |
| ADR | $ | 159.55 | | 1.6 | % | |
| RevPAR | $ | 115.09 | | 2.7 | % | |
| | | | |
| U.S. | | | | |
| Occupancy | 72.5 | % | | 0.5 | % | pts. |
| ADR | $ | 167.27 | | 1.0 | % | |
| RevPAR | $ | 121.34 | | 1.8 | % | |
| | | | |
| Americas (excluding U.S.) | | | | |
| Occupancy | 69.0 | % | | 0.8 | % | pts. |
| ADR | $ | 155.88 | | 5.2 | % | |
| RevPAR | $ | 107.50 | | 6.5 | % | |
| | | | |
| Europe | | | | |
| Occupancy | 74.6 | % | | 2.5 | % | pts. |
| ADR | $ | 165.69 | | 3.8 | % | |
| RevPAR | $ | 123.62 | | 7.4 | % | |
| | | | |
| MEA | | | | |
| Occupancy | 73.0 | % | | 2.9 | % | pts. |
| ADR | $ | 180.77 | | 5.3 | % | |
| RevPAR | $ | 131.88 | | 9.6 | % | |
| | | | |
| Asia Pacific | | | | |
| Occupancy | 69.5 | % | | 0.5 | % | pts. |
| ADR | $ | 110.03 | | 0.8 | % | |
| RevPAR | $ | 76.49 | | 1.6 | % | |
System-wide RevPAR increased during the year ended December 31, 2024 supported by improvements in system-wide ADR, which included the impact of inflation, and an increase in occupancy in all regions, which was driven by an increase in group demand, with leisure and business demand also improving modestly. The increase in RevPAR in the U.S. was driven by an increase in bookings due to an increase in weekday travel, primarily for groups, with consistent growth in business demand. The Americas region, excluding the U.S., continued to see improvement resulting from an increase in inbound leisure travel to Mexico and the Caribbean and Latin America. The RevPAR increase in Europe was driven by continued growth in inbound international leisure travel, which increased in several major cities that held large popular sporting events, as well as steady business demand. The RevPAR improvement in MEA was driven by increased demand from special regional events as well as more relaxed travel policies. The increase in Asia Pacific was due to growth in countries and territories outside of China across the region, driven by increased holiday travel, less restrictive tourism policies and special events in the region, partially offset by tougher year-over-year comparisons in China, after the reacceleration in the prior year as a result of the removal of cross-border travel restrictions.
The table below provides a reconciliation of net income to EBITDA and Adjusted EBITDA:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2024 | | 2023 |
| (in millions) |
| Net income | $ | 1,539 | | | $ | 1,151 | |
| Interest expense | 569 | | | 464 | |
| Income tax expense | 244 | | | 541 | |
| Depreciation and amortization expenses | 146 | | | 147 | |
| EBITDA | 2,498 | | | 2,303 | |
Gain on sales of assets, net | (5) | | | — | |
Loss on foreign currency transactions | 12 | | | 16 | |
Loss on investments in unconsolidated affiliate(1) | — | | | 92 | |
Loss on debt guarantees(2) | 50 | | | — | |
| FF&E replacement reserves | 57 | | | 63 | |
| Share-based compensation expense | 176 | | | 169 | |
Impairment losses | — | | | 38 | |
| Amortization of contract acquisition costs | 50 | | | 43 | |
Other revenues from managed and franchised properties(3) | (6,428) | | | (5,827) | |
Other expenses from managed and franchised properties(3) | 6,985 | | | 6,164 | |
Other adjustments(4) | 34 | | | 28 | |
| Adjusted EBITDA | $ | 3,429 | | | $ | 3,089 | |
____________
(1)Amount includes losses recognized related to equity and debt financing that we had previously provided to an unconsolidated affiliate with underlying investments in certain hotels that we manage or franchise; refer to Note 6: "Loss on Investments in Unconsolidated Affiliate" in our consolidated financial statements for additional information.
(2)Amount includes losses on debt guarantees for certain hotels that we manage; refer to Note 20: "Commitments and Contingencies" in our consolidated financial statements for additional information.
(3)Amounts include results from the operation of programs conducted for the benefit of property owners and exclude cash receipts recorded as deferred revenues on our consolidated balance sheets related to these programs. Under the terms of the related contracts, we do not operate these programs to generate a profit and have the contractual rights to adjust future collections to recover prior period expenditures.
(4)Amount for the year ended December 31, 2024 includes losses for the full or partial settlement of certain pension plans and restructuring costs related to one of our leased properties as well as transaction costs incurred for acquisitions. Amounts for the years ended December 31, 2024 and 2023 include transaction costs resulting from the amendments of our credit agreement governing the senior secured term loan facilities ("Term Loans") in June 2024 and November 2023, respectively. Amounts for both periods also include net losses (gains) related to certain of our investments in unconsolidated affiliates, other than the loss included separately in "loss on investments in unconsolidated affiliate," severance and other items.
Revenues
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Percent Change |
| 2024 | | 2023 | | 2024 vs. 2023 |
| (in millions) | | |
| Franchise and licensing fees | $ | 2,600 | | | $ | 2,370 | | | 9.7 |
| | | | | |
Base and other management fees | $ | 369 | | | $ | 342 | | | 7.9 |
Incentive management fees | 290 | | | 274 | | | 5.8 |
| Total management fees | $ | 659 | | | $ | 616 | | | 7.0 |
The increase in both franchise fees and management fees were largely attributable to increases in RevPAR at our comparable franchised and managed hotels. During the year ended December 31, 2024, RevPAR at our comparable franchised and managed hotels increased 1.8 percent and 5.2 percent, respectively, contributing to currency neutral increases in franchise and management fees of $61 million and $37 million, respectively, as a result of increased occupancy of 0.4 percentage points and 2.1 percentage points, respectively, and increased ADR of 1.3 percent and 2.1 percent, respectively.
Further, franchise and management fees included net increases of $57 million and $10 million, respectively, during the year ended December 31, 2024 as a result of net hotel additions and increases of $9 million and $12 million, respectively, in termination fees.
Licensing fees increased $98 million as a result of an increase in fees from our strategic partnerships, primarily resulting from activity under our co-branded credit card arrangements, HGV and branded residential fees. Increased fees from HGV resulted from increased timeshare revenues earned by HGV, inclusive of the impact of adding new timeshare properties to our system during the period, including those acquired by HGV from third parties.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Percent Change |
| 2024 | | 2023 | | 2024 vs. 2023 |
| (in millions) | | |
| Owned and leased hotels revenues | $ | 1,255 | | | $ | 1,244 | | | 0.9 |
The $11 million increase in owned and leased hotel revenues included a currency neutral increase of $23 million, partially offset by a $12 million decrease resulting from unfavorable fluctuations in foreign currency exchange rates.
Revenues from our comparable owned and leased hotels increased $59 million, on a currency neutral basis, due to the increase in RevPAR at our comparable owned and leased hotels of 8.1 percent. The increase in RevPAR was due to increases in occupancy of 2.5 percentage points and ADR of 4.7 percent. Revenues from our non-comparable owned and leased hotels decreased $36 million, on a currency neutral basis, primarily due to hotels undergoing renovations, offset by hotels that underwent renovations in the prior year, hotels that exited our system between the periods and the business disruption, caused by military conflict, that occurred at our leased hotel in Israel.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Percent Change |
| 2024 | | 2023 | | 2024 vs. 2023 |
| (in millions) | | |
| Other revenues | $ | 232 | | | $ | 178 | | | 30.3 |
The increase in other revenues was primarily due to increased procurement volume and associated vendor rebates for purchases made by properties, including properties outside of our system, that participate in our purchasing programs.
Operating Expenses
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Percent Change |
| 2024 | | 2023 | | 2024 vs. 2023 |
| (in millions) | | |
Owned and leased hotels expenses | $ | 1,126 | | | $ | 1,141 | | | (1.3) |
The $15 million decrease in owned and leased hotels expenses included a decrease of $10 million on a currency neutral basis and a $5 million decrease resulting from favorable fluctuations in foreign currency exchange rates.
Expenses from our comparable owned and leased hotels increased $37 million, on a currency neutral basis, as a result of increased occupancy and cost inflation, primarily due to increases in payroll and other compensation costs, as well as rent expense and expenses related to FF&E replacement reserves. Operating expenses from our non-comparable owned and leased hotels decreased $47 million, on a currency neutral basis, primarily due to hotels undergoing renovations, hotels that exited our system and the business disruption, caused by military conflict, that occurred at our leased hotel in Israel.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Percent Change |
| 2024 | | 2023 | | 2024 vs. 2023 |
| (in millions) | | |
| Depreciation and amortization expenses | $ | 146 | | | $ | 147 | | | (0.7) |
| General and administrative expenses | 415 | | | 408 | | | 1.7 |
Impairment losses | — | | | 38 | | | NM(1) |
| Other expenses | 137 | | | 112 | | | 22.3 |
____________
(1)Fluctuation in terms of percentage change is not meaningful.
The decrease in depreciation and amortization expenses was primarily driven by a decrease of $32 million for certain intangible assets that became fully amortized during the year ended December 31, 2023. The decrease was mostly offset by an increase related to software and corporate and leased hotel assets placed in service between the periods.
The increase in general and administrative expenses was primarily due to an increase in costs related to payroll and other compensation costs.
We recognized $38 million of impairment losses during the year ended December 31, 2023 on assets associated with certain leased hotels; see Note 12: "Fair Value Measurements" in our consolidated financial statements for additional information.
The increase in other expenses was primarily due to costs associated with higher procurement volume from our purchasing operations.
Non-operating Income and Expenses
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Percent Change |
| 2024 | | 2023 | | 2024 vs. 2023 |
| (in millions) | | |
| Interest expense | $ | (569) | | | $ | (464) | | | 22.6 |
Loss on foreign currency transactions | (12) | | | (16) | | | (25.0) |
Loss on investments in unconsolidated affiliate | — | | | (92) | | | NM(1) |
Other non-operating income (loss), net | (6) | | | 39 | | | NM(1) |
| Income tax expense | (244) | | | (541) | | | (54.9) |
____________
(1)Fluctuation in terms of percentage change is not meaningful.
In November 2023, we amended the credit agreement governing the Term Loans and increased borrowings by $500 million (the "November 2023 Amendment"). In addition, in both March 2024 and in September 2024 we issued $1.0 billion Senior Notes (collectively, the "March and September Senior Notes issuances") for a total aggregate principal amount of $2.0 billion for the year. See Note 10: "Debt" in our consolidated financial statements for additional information.
The increase in interest expense was primarily attributable to (i) an increase related to the Term Loans of $31 million as a result of the increase in the outstanding borrowings resulting from the November 2023 Amendment and (ii) an increase of $66 million due to the March and September Senior Notes issuances.
The net gains and losses on foreign currency transactions are a result of changes in foreign currency exchange rates, including on certain intercompany financing arrangements, such as short-term cross-currency intercompany loans, as well as transactions denominated in foreign currencies.
The loss on investments in unconsolidated affiliate included: (i) a $44 million other-than-temporary impairment loss on our investment in one of our third-party unconsolidated affiliates (the "Fund"), which has underlying investments in certain hotels that we manage or franchise, and (ii) $48 million of credit losses on financing receivables provided to the Fund. See Note 6: "Loss on Investments in Unconsolidated Affiliate" and Note 12: "Fair Value Measurements" in our consolidated financial statements for additional information.
The net change in other non-operating income (loss), net during the year ended December 31, 2024 was primarily driven by an increase in losses on debt guarantees for certain hotels that Hilton manages. See Note 20: "Commitments and Contingencies" in our consolidated financial statements for additional information.
The decrease in income tax expense was primarily attributable to the $270 million benefit for the tax claim for increased foreign tax basis for certain brand assets, as well as an increase of $64 million in uncertain tax position reserves related to our guest loyalty program in 2023 that did not recur in 2024, partially offset by a $23 million increase to income tax expense attributable to the increase in income before income taxes. For additional information, see Note 14: “Income Taxes” in our consolidated financial statements.
Segment Results
As of December 31, 2024, our management and franchise segment included 831 managed and 7,566 franchised and licensed properties, which included 105 timeshare and 409 strategic partner hotels, consisting of 1,251,068 total rooms, and our ownership segment included 50 hotels consisting of 17,138 total rooms. Refer to Note 19: "Business Segments" in our consolidated financial statements for reconciliations of revenues for our reportable segments to consolidated total revenues and of segment Adjusted EBITDA to consolidated income before income taxes.
Franchise and licensing fees and total management fees including fees charged to our ownership segment and excluding amortization of contract acquisition costs reflects our management and franchise segment revenues and segment Adjusted EBITDA. For the year ended December 31, 2024, refer to "—Revenues" for further discussion of the increase in our franchise and licensing fees and total management fees. For the year ended December 31, 2024, refer to "—Revenues" for further discussion of the primary changes in revenues from our owned and leased hotels, which reflect our ownership segment revenues. Our ownership segment Adjusted EBITDA reflects owned and leased hotels revenues, less (i) owned and leased hotels expenses, excluding FF&E replacement reserves expenses, share-based compensation expenses and certain other items, less (ii) fees charged by our management and franchise segment to our ownership segment, plus (iii) income (losses) from hotels owned or leased by entities in which we own a noncontrolling financial interest. Refer to "—Operating Expenses" for further discussion of the changes in owned and leased hotels expenses.
Liquidity and Capital Resources
Overview
As of December 31, 2024, we had total cash and cash equivalents of $1,376 million, including $75 million of restricted cash and cash equivalents. The majority of our restricted cash and cash equivalents is related to cash collateral and cash held for FF&E reserves.
Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including:
•costs associated with the management and franchising of hotels;
•corporate expenses;
•payroll and compensation costs;
•taxes and compliance costs;
•scheduled debt maturities and interest payments on our outstanding indebtedness, which, excluding finance lease liabilities, are estimated to be approximately $1.1 billion in 2025;
•lease payments under our finance and operating leases, which include minimum lease payments that are estimated to be approximately $42 million and $152 million, respectively, in 2025;
•costs, other than compensation and lease payments that are noted separately, associated with the operations of owned and leased hotels, including, but not limited to, utilities and operating supplies;
•committed contract acquisition costs;
•capital and maintenance expenditures for required renovations and maintenance at the hotels within our ownership segment;
•corporate capital and information technology expenditures;
•dividends as declared; and
•share repurchases.
Our known long-term liquidity requirements primarily consist of funds necessary to pay for:
•scheduled debt maturities and interest payments on our outstanding indebtedness, which, excluding finance lease liabilities, are estimated to total an aggregate of $13.3 billion after December 31, 2025;
•lease payments under our finance and operating leases, which include minimum lease payments that are estimated to total an aggregate of $92 million and $924 million, respectively, after December 31, 2025;
•committed contract acquisition costs;
•capital improvements to the hotels within our ownership segment;
•corporate capital and information technology expenditures;
•dividends as declared;
•share repurchases; and
•commitments to owners in our management and franchise segment made in the normal course of business for which we are reimbursed by these owners through Hilton Honors and program fees to operate our Hilton Honors program, marketing, sales and brand programs and shared services.
During the year ended December 31, 2024, we repurchased approximately 13.3 million shares of our common stock for $2.9 billion. As of December 31, 2024, approximately $4.4 billion remained available for share repurchases under our stock repurchase program.
In circumstances where we have the opportunity to support our strategic objectives, we may provide guarantees or other commitments, as necessary, to owners of hotels that we currently or in the future will manage or franchise or other third parties. See Note 20: "Commitments and Contingencies" in our consolidated financial statements for additional information on our commitments that were outstanding as of December 31, 2024.
We have a long-term investment policy that is focused on the preservation of capital and maximizing the return on new and existing investments and returning available capital to stockholders through dividends and share repurchases. Within the framework of our investment policy, we intend to finance our business activities primarily with cash on our balance sheet as of December 31, 2024, cash generated from our operations and, as needed, the use of the available capacity of our senior secured revolving credit facility (the "Revolving Credit Facility"). Additionally, we have continued access to debt markets and expect to be able to obtain financing as a source of liquidity as required and to extend maturities of existing borrowings, if necessary.
After considering our approach to liquidity and our available sources of cash, we believe that our cash position and sources of liquidity will meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and other compensation costs, taxes and compliance costs, current maturities of long-term debt and other commitments for the foreseeable future based on current conditions. The objectives of our cash management policy are maintaining the availability of liquidity and minimizing operational costs.
We may from time to time issue or incur or increase our capacity to incur new debt and/or purchase our outstanding debt through underwritten offerings, open market transactions, privately negotiated transactions or otherwise. Issuances or incurrence of new debt (or an increase in our capacity to incur new debt) and/or purchases or retirements of outstanding debt, if
any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Sources and Uses of Our Cash and Cash Equivalents
The following table summarizes our net cash flows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Percent Change |
| 2024 | | 2023 | | 2024 vs. 2023 |
| (in millions) | | |
| Net cash provided by operating activities | $ | 2,013 | | | $ | 1,946 | | | 3.4 |
| Net cash used in investing activities | (446) | | | (305) | | | 46.2 |
| Net cash used in financing activities | (1,045) | | | (2,040) | | | (48.8) |
Operating Activities
Cash flows from operating activities were primarily generated from management, franchise and licensing fee revenue and operating income from our owned and leased hotels. The increase in net cash inflows during the period was primarily due to the increase in cash inflows generated from our management and franchise segment, discussed in "—Revenues," largely as a result of an increase in RevPAR at our comparable managed and franchised hotels as well as revenues from net hotel additions and a $128 million decrease in payments of contract acquisition costs due to the timing of certain strategic hotel developments supporting our growth during the year ended December 31, 2023. The increase in cash provided by operating activities was partially offset by an outflow of $77 million for debt guarantee payments and an increase in cash paid for interest of $70 million.
Investing Activities
Net cash used in investing activities primarily included cash flows related to: (i) the acquisitions of (a) the Graduate brand and the associated franchise contracts and (b) a controlling financial interest in Sydell Hotels & Resorts, LLC and Sydell Holding Company UK Ltd, both completed during the year ended December 31, 2024, (ii) capitalized software costs that were related to various systems initiatives for the benefit of both our property owners and our overall corporate operations, and (iii) capital expenditures for property and equipment related to corporate property and the renovation of certain hotels in our ownership segment, which decreased between the periods due to the timing of certain corporate and hotel capital expenditure projects. Additionally, our investing activities include the net cash inflows and outflows related to our undesignated derivative financial instruments that we have in place to hedge against the impact of fluctuations in foreign currency exchange rates on certain of our intercompany loan and cash balances, which were primarily the result of changes in the exchange rates for the Euro for the year ended December 31, 2024 and the Pound Sterling to the U.S. dollar for the years ended December 31, 2024 and 2023.
Financing Activities
The decrease in net cash used in financing activities during the year ended December 31, 2024 was primarily attributable to a $2.0 billion increase in cash inflows from the March and September Senior Notes issuances. This increase in cash inflows was partially offset by a $555 million increase in cash outflows for share repurchases and payment of the related excise taxes and additional borrowings on the Term Loans of $500 million during the year ended December 31, 2023 as part of the November 2023 Amendment.
Debt and Borrowing Capacity
As of December 31, 2024, our total indebtedness, excluding the deduction for unamortized deferred financing costs and discounts, was approximately $11.2 billion. No debt amounts were outstanding under our Revolving Credit Facility as of December 31, 2024, which had an available borrowing capacity of $1,910 million after considering $90 million of outstanding letters of credit. For additional information on our total indebtedness and guarantees on our debt, refer to Note 10: "Debt" in our consolidated financial statements.
If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to reduce capital expenditures or issue additional equity securities. We have $500 million of 5.375% Senior Notes due in May
2025 ("May 2025 Senior Notes") and have no other material indebtedness that matures prior to April 2027. We believe that we have sufficient sources of liquidity and access to debt financing to address the repayment of the May 2025 Senior Notes at or prior to their maturity date as well as all indebtedness that becomes due thereafter. Our ability to make scheduled principal payments and to pay interest on our debt depends on our future operating performance, which is subject to general conditions in or affecting the hospitality industry that may be beyond our control.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in the consolidated financial statements and accompanying footnotes. On an ongoing basis, we evaluate these estimates and judgments based on historical experiences and various other factors that we believe reflect the current circumstances. While we believe our estimates, assumptions and judgments are reasonable, they are based on information available when they are made. Actual results may differ significantly from these estimates due to changes in judgments, assumptions and conditions as a result of unforeseen events or otherwise, which could have a material effect on our financial position or results of operations.
We believe that the following estimates, which are used in conjunction with our significant accounting policies, are critical because they involve a higher degree of judgment and are based on information that is inherently uncertain; refer to Note 2: "Basis of Presentation and Summary of Significant Accounting Policies" in our consolidated financial statements for information on our significant accounting policies. Management has discussed the development and selection of the following critical accounting estimates with the Audit Committee of the board of directors:
Impairment of Goodwill and Brands Intangible Assets
We evaluate goodwill and brands intangible assets for potential impairment on an annual basis or at other times during the year if indicators of impairment exist. Our reporting units are the same as our operating segments as described in Note 19: "Business Segments" in our consolidated financial statements.
As part of the evaluation of goodwill and brands intangible assets for potential impairment, we exercise judgment to:
•perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit or brand intangible asset is less than its carrying value. Factors we consider when making this determination include assessing historical trends and the overall effect of current trends in and future expectations of the hospitality industry and the general economy and regional performance;
•decide whether to bypass the qualitative assessment and perform a quantitative assessment. Factors we consider when making this determination include negative changes in the Company or general economic conditions since the previous quantitative assessment was performed, the amount by which the fair value exceeded the carrying value at the time of the previous assessment and the period of time that has passed since such quantitative assessment; and
•perform a quantitative analysis to identify both the existence and the amount of an impairment loss. The estimated fair value is based on internal projections of expected future cash flows and operating plans, discount rates and market conditions relative to the operations of the reporting unit or brand, as applicable.
Changes in the estimates and assumptions used in our impairment analysis, or changes in the factors that we consider that would affect these estimates and assumptions, such as those described above, could result in impairment losses, which could be material.
Impairment of Certain Finite-Lived Assets
We evaluate the carrying value of our specifically identifiable lease intangible assets, operating and finance lease ROU assets and property and equipment for indicators of impairment. As part of the process, we exercise judgment to:
•determine if there are indicators of impairment present. Factors we consider when making this determination include assessing historical trends and the overall effect of current trends in and future expectations of the hospitality industry and the general economy and regional performance, capital costs and other asset-specific information;
•determine the projected undiscounted future cash flows when indicators of impairment are present to determine whether an asset group is recoverable by comparing the expected undiscounted future cash flows to the net carrying value of that asset group. Judgment is required when developing projections of future revenues and expenses to determine the undiscounted cash flows, which are based on estimated performance over the expected useful life of the asset group. Forward-looking estimates of performance are based on historical operating results, adjusted for current and expected future market conditions, as well as various internal projections and external sources; and
•determine the asset group fair value when an asset group is determined not to be recoverable. In determining the fair value, we often use internally-developed discounted cash flow models, appraisals, recent similar transactions in the market and, if appropriate and available for a specific asset group, current estimated net sales proceeds from pending offers. The discounted cash flow models include the undiscounted cash flows, as discussed above, which may require us to adjust for specific market conditions, and a discount rate to determine the present value of those cash flows. The discount rate applied to forward-looking projections takes into account market-specific considerations.
Changes in the estimates and assumptions used in our impairment analysis, or changes in the factors that we consider that would affect these estimates and assumptions, such as those described above, could result in impairment losses, which could be material.
Hilton Honors
We record a point redemption liability for amounts received from properties participating in our Hilton Honors guest loyalty program and from strategic partners affiliated with the loyalty program, in an amount equal to the estimated cost per point of the future redemption obligation. We engage third-party actuaries annually to assist in determining the fair value of the future reward redemption obligation using a discount rate and statistical formulas that project future point redemptions based on factors that require judgment, including: (i) an estimate of the number of points that will eventually be redeemed, which includes an estimate of breakage (i.e., points that will never be redeemed); (ii) an estimate of when such points will be redeemed; and (iii) an estimate of the cost of reimbursing managed and franchised properties and other third parties for redemptions. The cost of the points expected to be redeemed includes further estimates of available room nights, occupancy rates, room rates and any changes to the Hilton Honors program, including devaluation or appreciation of points based on changes in the number of points required to redeem a reward. Any amounts received related to the issuance of points that are in excess of the cost per point, as determined with assistance from an actuary, are recorded as deferred revenue in our consolidated balance sheet and recognized as revenue upon point redemption. We recognize revenue for point redemptions in the amount we expect to retain in excess of the cost per point, inclusive of estimated breakage, and limit the revenue recognized to an amount that is probable to not result in a significant reversal in the cumulative revenue recognized when breakage occurs.
In addition to the Hilton Honors fees we receive from property owners to operate the program, we earn fees from strategic partnerships, including co-branded credit card arrangements, for a license to use our IP and the issuance of points. The allocation of the overall fees from the strategic partnerships between the IP license and the points is based on their estimated standalone selling prices. The estimated standalone selling price of the IP license is determined using a relief-from-royalty valuation method incorporating statistical formulas based on factors that require significant judgment, including estimates of the usage of the strategic partner's goods or services, an appropriate royalty rate and a discount rate applied to the projected cash flows. The estimated standalone selling price of the future reward redemptions of points under the strategic partnerships is calculated using a discounted cash flow analysis with the same assumptions as the point redemption liability discussed above, adjusted for an appropriate margin.
Changes in our estimates and assumptions that are used to determine our estimated cost per point and the allocation of fees from strategic partnerships between the IP license fee and the points could result in material changes in the balances of our liability for guest loyalty program and deferred revenues in our consolidated balance sheet. Further, the estimates and assumptions used for the allocation of fees could result in material changes to our licensing fees and other revenues from managed and franchised properties recognized in our consolidated statement of operations.
Income Taxes
We regularly review our deferred tax assets to assess their potential realization and establish valuation allowances for portions of such assets that we believe will not be ultimately realized. In performing this review, we consider all positive and negative evidence available, including, but not limited to, estimates and assumptions regarding projected future taxable income, the expected timing of reversals of existing temporary differences and the implementation of tax planning strategies, all of which require significant use of judgment. A change in these assumptions may increase or decrease our valuation allowances
resulting in an increase or decrease in our effective tax rate, respectively, which could materially affect our consolidated financial statements. Refer to Note 14: "Income Taxes" for information on the balances of our deferred tax assets and respective valuation allowances as of December 31, 2024.
We record the benefits of income tax positions by recognizing the largest amount of income tax benefit more-likely-than-not to be realized upon resolution. Estimating this benefit involves, but is not limited to, interpreting complex tax laws in the multiple jurisdictions where we operate, evaluating the technical merits of each tax position and assessing amounts we would ultimately accept in a negotiated settlement with the tax authorities, if applicable. The complexities and judgment involved in estimating the Company's income tax positions could result in payments materially different than the liabilities previously recognized for such expected payments. Additionally, as new information becomes available (e.g., legislative changes or administrative rulings) changes in the Company's judgment and assumptions could result in adjustments to our existing income tax position recognition. Changes to these assumptions and estimates may increase or decrease our existing liabilities, resulting in additional income tax expense or benefit, respectively, which could materially affect our consolidated financial statements.
Legal Contingencies
We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. An estimated loss from a loss contingency will be accrued as a charge to income if it is probable and the amount of the loss can be reasonably estimated. Significant judgment is required when we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss in determining whether an accrual of an estimated loss is appropriate. Changes in these factors could materially affect our consolidated financial statements.
