Hilton was the first of the major publicly traded lodging companies to report second-quarter earnings on Wednesday and from the strong data and sanguine executive speak, all things being equal, the broader industry could announce similar performance success as more earnings reports unfold.
Revenue per available at Hilton kicked up 12.1% globally versus the same period a year ago, driven, in part, by the further reopening of China and higher sustained rates across all segments of the industry.
Full-year 2023 system-wide RevPAR is expected to increase between 10% and 12% compared to 2022.
Net income was $413 million for the quarter, which exceeded the high end of guidance, while adjusted EBITDA was a record $811 million.
As Chris Nassetta, president and CEO of Hilton put it, “We exceeded expectations,” a post-pandemic hurrah in this business amid continued vacillation in capital markets and downward economic pressures. Consider Hilton’s hotel occupancy in June: At 77%, it was the highest month its been post-pandemic.
In what Nassetta had previously remarked as operating in a “bizarro world,” a term he alluded to again on the Q2 earnings call, things and trends, he said, were starting to normalize, with performance levels across all business segments showing positive gains. Business transient RevPAR was up 11% in the quarter, group RevPAR up 19% and 9% versus the same time in 2019. Stable demand mixed with rising rates drove leisure RevPAR growth of 26% versus 2019.
“We are pushing hard on price to make hotel owners the most money,” Nassetta said. “We drive it because flow through on rate is better than on occupancyā€”a better outcome for us and owners.”
All of this coming amid a resurgence in international markets. “Leisure is growing at a slower pace because of the comps, but still is way over the watermarks and in business and group, we are not seeing weakness,” Nassetta said. “It’s been a wildly strong summer.”
Nassetta said the only real areas of leisure softness were in South Florida, some parts of Hawaii and southern California.
DRIVING DEVELOPMENT
Despite a challenging debt market, where it’s more expensive to get development deals done, Hilton said it approved 36,000 new rooms for development during the second quarter, bringing its development pipeline to 440,900 rooms as of June 30, 2023, representing growth of 7% from June 30, 2022. Of its total pipeline, Nassetta said that half of it is under construction, “more than anyone else,” he said, adding that “once they start, they almost always finish.”
Hilton in the second quarter added its 600th Home2 Suites and the Conrad Shenzen.
New development is coming at a time when new supply is at anemic levels of growth, well below the 2% historical average. Nassetta said it was closer to 0.8%. “Demand is good against historically low supply; it will sustain performance and rate integrity,” he said.
Nassetta said he expected openings to accelerate given the stronger international and conversion trends and forecasted net unit growth between 5% and 6% next year, and increasing over the next couple of years, as more projects get underway that stalled during COVID.
Net unit growth, or NUG for brevity, is a typical Wall Street gauge of performance. Nassetta said that it began to see a surge in starts in the second half of last year, but that U.S. credit conditions have made it more challenging.
Hilton, like many of its peers, has leaned into the mid-market space because, as Nassetta pointed out, that’s where the spend is. “The mid-market is where the people are; that’s the demographic trend. There are growing middle classes and that’s what they can afford,” he said.
In just this past year, Hilton has launched two new brands: Spark by Hilton, in the “premium economy” space, and Project H3, the placeholder name for a brand in the extended-stay space, but which Nassetta referred to as leaning more “apartment-like” in its style and offerings. Spark is a 100% conversion opportunity that will open 20 this year while H3, Nassetta said, is a high-margin and low-cost-to-build product that is already gaining institutional interest. Of Spark, Nassetta said the strategy was to take existing branded stock and convert them over. “The quantum of money to do it is low and the ramp up is fast.”
“Spark doesn’t need a lot of financing, same as H3,” said Hilton CFO and President of Global Development Kevin Jacobs. “We launched these brands because there is product demand.”
Half of all Spark owners are new to the Hilton system, in what Jacobs called “diversifying the owner base,” where “capital follows the opportunities.”
Nassetta added that Hilton would soon take the Spark brand to Europe.
BRAND AWARENESS
In the 16 years that Nassetta has been at the helm of Hilton, he’s overseen the addition of 12 brands to a portfolio that now numbers 22, in what he calls a “culture of innovation,” with a stable of brands built up organically rather than through M&A. “It’s a winning strategy,” Nassetta said, “and better from a return; not investing capital.”
The focus at Hilton and other competitors, from Hyatt to Marriott, has shifted to lower echelons of the business, but Nassetta did note that the company had something being cooked up in the “luxury lifestyle” space and that it would launch something next year.
The morning earnings call gave way to an afternoon that saw the Federal Reserve lift interest rates a quarter percentage point, an increase that brings them to a 22-year high. It marks the 11th increase since March 2022, when rates were lifted from near zero in an attempt to bring inflation down by cooling the economy. The Fed gave little guidance on future policy plans.
“We know what the Fed is trying to do,” Nassetta said. “We are getting to the end of the tightening cycle. We are not seeing cracks anywhere and places that had lagged are now producing, like China. Not to be a Pollyanna, but it all feels good.”