The higher cost of capital has made it tougher on new hotel development and led to lodging companies cultivating new ways to reach growth goals, chiefly through conversion projects.
It’s become a hallmark of Hilton, which, during its second-quarter call, it was noted that conversions accounted for roughly half of openings in the quarter, much driven by the addition of Graduate Hotels and on the strength from DoubleTree by Hilton and Spark by Hilton, the latter a pure-conversion brand Hilton launched in early 2023.
Hilton added 22,400 rooms to its system in the second quarter, resulting in 18,000 net additional rooms, and contributing to net unit growth of 6.2% from June 30, 2023. This included the debut of Spark by Hilton in Europe with the opening of Spark by Hilton London Romford, nine months after the first property opened in the U.S. in Mystic, Conn.
Expectations are that net unit growth, or NUG, will be in the range of 7% to 7.5% for the full year.
In July, Hilton surpassed 8,000 hotels globally.
Conversions not only helped lead Hilton’s openings, they also accounted for more than half of the signings in the quarter.
Global RevPAR increased 3.5% in the quarter compared to the same time a year ago, with strength in group RevPAR that rose more than 10% year-over-year, led by strong demand for corporate and social meetings and events, as booking windows continued to expand due this increased demand for rooms that has shrunk the amount of overall space available at any given moment.
Regionally, U.S. RevPAR was up 3%, driven by strong group performance, particularly in urban markets. In the Americas outside the U.S., Q2 RevPAR increased 7% YOY, driven by strong results in leisure markets, while in Europe, RevPAR grew 7% with continued strength from international inbound travel. In the Middle East and Africa region, RevPAR increased 11% YOY, with growth in both average rates and occupancy.
Overall RevPAR growth was tempered by China, where RevPAR declined 5% in the quarter with what Kevin Jacobs, Hilton’s CFO and president of global development, called “difficult year-over-year domestic travel comparisons and limited international inbound travel negatively affecting results.”
Hilton competitor Marriott International saw its China RevPAR decline 4% in the quarter.
Removing China from the overall Asia Pacific region and RevPAR increased 11%, but because China is such a large market, it has a disproportionate effect on overall performance numbers.
Hilton President and CEO Chris Nassetta called China a “complex story” and said the expectation was for China to be down around 5% for the full year. It’s not, however, because the Chinese aren’t traveling; they are traveling—just outside the country. “The Chinese love to travel,” he said, cajoled by open corridors for inter-Asia travel that is visa free. “There’s just not enough inbound travel yet into China, just not enough flights from Europe and the U.S. and other parts of the world to compensate for that,” Nassetta said. “It’s going to take some time,” which is also compounded by a slowing Chinese economy.
Beyond China, lodging companies across the industry spectrum have resigned themselves to the notion that travel patterns have now normalized coming off the post-COVID highs. “Business transient is still grinding up, just not at a rapid pace,” Nassetta said. “Leisure transient has been normalizing after very elevated rates, particularly on weekends. We’re just getting back to a more normal life.”
But a weaker jobs report in the U.S. augurs tighter spending by consumers at the lower end, especially on travel, something Nassetta alluded to. “Checking accounts were full of money coming out COVID,” he said. “Well, they’ve spent all that money and now they’re borrowing more. They have less disposable income and capacity to do anything, including travel.”
At the upper end, Nassetta said people still have “pretty fat bank accounts,” though the continued normalization on leisure transient is there, too. In sum, travel is not cratering, he said, “It’s just soft.” Nassetta did remark that he expects RevPAR to pick up going in the fourth quarter, noting the historical jump in business travel in those months, especially in the U.S.
Full year 2024 system-wide RevPAR is projected to increase between 2% and 3% compared to 2023. Net income for the quarter was $422 million.
Building Up
On the development end, Hilton approved 62,700 new rooms for development during the second quarter, achieving a record development pipeline of 508,300 rooms as of June 30, 2024, growth of 15% from the same time a year ago. Meanwhile, don’t expect Hilton to be profligate with key money—around 7% of deals in the second quarter included key money incentives.
Nassetta’s and Hilton’s rather bullish 7% NUG expectation for the full year is based on its ability to convert other flags to its own. “We are getting a hugely disproportionate share of conversions and think that will continue,” Nassetta said.
Added Jacobs, “This is the part of the cycle where capital gets more constrained and more expensive for new builds. This is the part of the cycle where you typically lean into conversions because they’re easier to finance.”
They also come to market quicker and with cash flow in place. “You’ve already got a trading hotel,” Jacobs said.
In other cases, Hilton is converting its own hotels to other of its 24 brands. Consider the former Waldorf Astoria Edinburgh, which converted to The Caledonian Edinburgh, Curio Collection by Hilton this summer, after a £35-million investment. Hilton won’t be long without a Waldorf Astoria property in the U.K.: the Waldorf Astoria Admiralty Arch in London is slated to open in 2025. Likewise, the Arizona Biltmore in Phoenix recently exited the Waldorf Astoria brand and converted to Hilton’s LXR brand.
“Those properties that that left Waldorf are terrific properties that just weren’t meeting the mark on Waldorf, but they met the mark on other brands,” Nassetta said.
Though conversions continue to grab the headlines, Nassetta noted that construction starts in the quarter were up 160% versus last year and up 37% excluding acquisitions and partnerships. “We remain on track to exceed prior peak levels of starts by year end,” he said.
Jacobs noted that developers are becoming more bullish on new construction since capital is a little bit less expensive than it was. “It’s coming off of peaks,” he said. “There’s still capital available for good projects, which is why you’re seeing our construction starts go up.”
Other milestones in the quarter included the announcement that nearly 400 hotels within Small Luxury Hotels of the World agreed to join the Hilton system, adding an expected 18,000 rooms. Hilton and SLH announced a strategic partnership earlier this year.