Getting schooled: Hilton acquires Graduate Hotels for $210 million

Hilton is going back to school. The lodging company has agreed to pay $210 million to Chicago-based AJ Capital Partners for the rights to Graduate Hotels, a brand with more than 30 hotels situated in and around college markets.

After the deal closes, which is expected to be in the second quarter, Hilton will enter into franchise agreements for all existing and signed pipeline Graduate Hotels and become responsible for the brand’s future development and growth. According to the terms of the deal, AJ Capital will remain the owner of the current and pipeline Graduate properties, each of which will be operated under long-term Hilton franchise agreements.

Word of a rumored acquisition of the Graduate brand leaked out in early February, shortly before Hilton’s Q4 earnings report, in a Bloomberg article. At the time of the report, Chris Nassetta, president and CEO of Hilton, wouldn’t specifically address the rumor but did say: “Our attitude on M&A is really the same as it’s always been. We haven’t done any, but every time I’ve ever been asked, I’ve said ‘never say never. We have a very tough filtration system: Is something additive from the standpoint of the portfolio brands that we have? Can it be done in a way that’s accretive to the value of the company.”

Hilton said it expects the fee contribution for the first full year of ownership to be approximately $16 million.

Hilton traditionally has grown the company from the inside out, preferring to launch new brands as opposed to acquiring them. However, in a higher interest rate market where launching new development has become costlier and longer to achieve, buying existing product and brands has become a better proposition.

Graduate Oxford on the campus of the University of Mississippi.

Hilton President and CEO Chris Nassetta has always maintained that Hilton has a high filtration system tied to M&A, but that this deal was too good to pass up, especially since the brand operates in the much-coveted lifestyle space. Though not straight-up acquisitions, Hilton has been active tying up with other companies in the past several months. In February, it announced a partnership with Small Luxury Hotels of the World, which could add some 500 hotels to the Hilton system and allow guests to acquire and use Hilton Honors points toward them. Later in the month, it announced a partnership with AutoCamp, a purveyor of outdoor experiences and accommodations, such as Airstream stays.

“Adding Graduate Hotels to our portfolio accelerates our expansion in the lifestyle space by pairing an existing much-loved brand with the power of Hilton’s strong commercial engine to drive growth,” said Nassetta. “We have long had a high bar for adding brands to our portfolio, whether organically or through acquisition, and Graduate will be another driver of growth for us, presenting a unique opportunity to serve more guests in more sought-after destinations. With thousands of colleges and universities around the world, we believe the addressable market for the Graduate brand is 400-500 hotels globally.”

Graduate Hotels is the brainchild of its founder Ben Weprin, who is also CEO of AJ Capital. Graduate Hotels launched in 2014 with two hotels, Graduate Athens in Georgia and Graduate Tempe in Arizona. In 2021, Graduate added its first international locations at Oxford and Cambridge in the UK. Today, the Graduate website counts 32 hotels with four more under development.

The Graduate brand has been heavily tuned in to the college town it is situated within and matches decor to its location through history and nostalgia. For instance, its Chapel Hill property features a palette of Tarheel blue and, at check-in, a scoreboard stands in for a traditional front desk, paying homage to the rich history of basketball greatness at UNC. (The time on the clock is suspended at 17 seconds, signifying when then Tarheel freshman Michael Jordan converted a jump shot that would ultimately be the game-winner versus the Georgetown Hoyas in the 1982 NCAA national championship game.)

The front desk at Graduate Chapel Hill pays homage to Tarheel basketball.

“We’re proud to embark on this new chapter for Graduate Hotels with Hilton, the ideal partner to steer the brand’s continued growth,” said Ben Weprin, founder, Graduate Hotels and CEO, AJ Capital. “Both Hilton and Graduate Hotels are committed to delivering exceptional experiences and making a positive impact on communities. Our shared values and close collaboration will ensure a smooth transition while keeping the Graduate Hotels’ unique brand identity intact. With Hilton’s extensive network behind us, guests can anticipate even more exciting opportunities. We’re certain this partnership will propel Graduate Hotels to even greater heights, while AJ’s ongoing ownership of the real estate assets lays a strong foundation for our future success.”

A note issued by Truist after the Graduate deal was made public estimated that Hilton’s room count would rise by less than 1%; “however, it is transactions like Graduate that will help Hilton get to their long-term net-unit-growth target of 6% to 7% YOY.”

Though the acquisition generates considerable buzz, Truist also pointed out that its Hilton’s lower-segment brands that will likely help it achieve its targeted net unit growth faster and more appreciably, such as its nascent premium-economy brand Spark. “We view it has great earnings importance and NUG relevancy over time.”

Graduate Hotels’ other Oxford hotel. This one in the U.K., at Oxford University.

Hilton is likely not through in either acquiring or launching new brands. It’s made it clear that it intends to launch a new luxury lifestyle brand, potentially this year. On a recent earnings call, Nassetta said that luxury lifestyle is a segment they are losing out on deal wise. “We will come out with a product in the market next next year,” Nassetta said. “What we know is that having more on the high end creates even more of a halo effect. Having more of it is beneficial and it’s why we want to do luxury/lifestyle. We have owners that are super loyal to us and many of them want to build a luxury/lifestyle hotel and we don’t really have a product for them. Literally, they’re doing it with other people just because we don’t have a product and that makes me crazy.”

The Graduate brand will sit aside Hilton’s other lifestyle brands, including Canopy by Hilton, Curio Collection by Hilton, Tapestry Collection by Hilton, Tempo by Hilton and Motto by Hilton—each of which has been launched in the last 10 years.

Hilton said Graduate Hotels are expected to be available for booking via Hilton channels later this year and will participate in Hilton Honors.