Why Hilton’s move to enroll Graduate Hotels gets top marks

Earlier this month, Hilton finalized an agreement with Adventurous Journeys Capital Partners (AJ Capital) to acquire Graduate Hotels. The Graduate brand will be incorporated into Hilton’s burgeoning lifestyle portfolio. According to the press release announcing the transaction, Hilton will pay $210 million to acquire all rights to the Graduate brand worldwide, enter into franchise agreements for existing and signed pipeline Graduate Hotels, and become responsible for the brand’s future growth. AJ Capital will remain the owner of the more than 35 operating and pipeline Graduate properties, each of which will be operated under long-term Hilton franchise agreements. Graduate Hotels will be available for booking via Hilton channels later this year and will participate in the Hilton Honors loyalty programme.

The Graduate CV

Founded in 2014, Graduate Hotels is a collection of hand-crafted hotels that reside in university towns in the United States and the United Kingdom. Graduate curates its hotels to match the atmosphere of the college campuses by which they exist.

The brand has developed into a strong niche player due to its commitment to a college town strategy. When it started, the founders discovered that many of those markets had very limited hotel product, and almost nothing in the lifestyle or boutique segments.

Furthermore, research was showing that market volatility is low in university towns. John O’Neill, director of Penn State’s Hospitality Real Estate Strategy Group, said his research shows that hotels in university towns have more stable occupancy rates and average daily rates than similarly sized towns, and compared to national averages. “That means,” he says, “that hotel investment in university towns is relatively low risk, all things considered.”

There are a few competitors focusing on university towns, but they are very small compared to Graduate. Study Hotels has four properties and Scholar Hotel Group has eight (including Hyatt and Marriott franchises). Meanwhile,the new Sports Illustrated Resorts concept is designed to be built near universities with strong athletic programs. The first is scheduled to open Tuscaloosa, Alabama late in 2025.

Buying the Brand

JLL Hotels & Resorts, a global commercial real estate and investment management company, forecasts that, as global hotel development slows, brand acquisitions and consolidation will become an increasingly appealing way to drive shareholder value and to boost customer loyalty.

“Organic supply growth will be at an all-time low for the next two years,” according to Zachariah Demuth, global head of hotels research for JLL, “between rising construction costs, the challenges of getting financing, and supply chain delays. Because development is so slow right now, there’s a growing appetite for the big brands to acquire small to medium-size brand platforms to support rapid room growth.” Demuth says brands with between five and forty properties with some level of existing brand recognition are the most likely acquisition targets.

“Growing by acquisition is becoming very common, especially among public companies that have to demonstrate growth,” according Eric Rubino, principal of Extreme Hospitality, an asset management and consulting firm. It’s also less risky than building a new brand from scratch. “Companies take on less risk in the growth process because they can see how an existing brand has performed,” he says.

In addition to the risk factors, developing a brand from the ground up comes with other challenges. “You have to create something the consumer can understand that is different from what exists,” notes Demuth. “Then you have to market and to build, which can be very expensive. Plus, you risk cannibalizing customers from your other brands.” On the other hand, “Graduate has already developed a really strong following in a unique niche–an upscale product in university towns.  Hilton is acquiring something with such a strong affinity and acquiring customers they wouldn’t have otherwise gotten, so they can also grow their loyalty program.”

The Lifestyle Space

Socioeconomic market trends are supporting growth in the lifestyle and boutique segments, according to Makarand Mody, associate professor of Hospitality Marketing at Boston University’s School of Hospitality Administration. “There’s a growing appetite for upscale experiences, so this is where lifestyle hotels are making a play.” Adding Graduate is a Grade A opportunity for the company to expand its lifestyle hotel offerings.

During the past 10 years, Hilton has launched several soft brand collections and new brand products, including Canopy by Hilton, Curio Collection by Hilton, Tapestry Collection by Hilton, Tempo by Hilton and Motto by Hilton brands. Graduate is the first brand acquisition in that portfolio.

“It fits well with where Hilton is going with its new brands in lifestyle and boutique space,” according to Demuth. “If you look at the Hilton portfolio, there’s been growth in limited and select-service, and there’s been a focus on luxury. But it has lacked in the lifestyle area, whereas IHG and Marriott are pretty strong in that segment. So, acquiring a brand like Graduate makes perfect sense.”

What’s Next

“With thousands of colleges and universities around the world,” says Chris Nassetta, Hilton’s president and CEO, “we believe the addressable market for the Graduate brand is 400 to 500 hotels globally.”

“I don’t know if they can get to that forecast,” says Mody. But he does think Graduate Hotels has significant growth potential outside of college towns alone, particularly outside of the United States. “They are called Graduate Hotels, but really, the brand is in the lifestyle space,” says Mody. “Because it’s a lifestyle brand, it doesn’t necessarily have to be associated with the college business. The product really transcends the college town market. As long as Graduate Hotels are located in vibrant social and economic hubs, they can succeed.”