It’s all about NUG. In hospitality parlance, that is net unit growth, which, for hotel franchisors, is what The Street typically puts great emphasis on when judging the health of a company. In Hilton’s case, the company projects full-year net unit growth of approximately 5%, which is about 1.5 percentage points lower than Hilton’s annual average.
It comes as hotel companies are just now getting back to some semblance of post-COVID development normalcy, while simultaneously sideswiped by a less-than-typical financing environment that has made it harder for projects to get started.
Still, Hilton said it’s churning out new hotels and adding to its pipeline. “We believe we have hit an inflection point and expect a meaningful uptick in openings in the fourth quarter, with continued positive momentum into next year, with forecasts for our highest level of signings in the year,” said Hilton President and CEO Chris Nassetta, adding that its nearing its largest under-construction pipeline in its history.
“We are confident in our ability to accelerate net unit growth to 5.5% to 6% next year and to return to our prior 6% to 7% growth rate,” he said.
In the current capital market environment, conversions are the quickest way to add new supply. In Hilton’s third quarter, they accounted for 35% of signings and increased sequentially versus the second quarter, Nassetta remarked, noting that conversion’s have “a super-short gestation period from pipeline into into [net unit growth]” and “those are projects, they’re in the ground, they’re under construction and we have rational timelines for when we think that those will deliver.”
At the beginning of this year, Hilton announced a pure conversion brand named Spark by Hilton, creating a space it calls “premium economy.” Ten months later they opened the first, Spark by Hilton Mystic Groton, in Connecticut. On October 31, it will open its next, Spark by Hilton Germantown, in Maryland. Nassetta said they have more than 400 deals in negotiation for the brand. “We think this is the start of a journey to reshape the premium economy space,” he said.
Meanwhile, Hilton, though it has yet to formally say, this week will announce it is converting the Boston Park Plaza, the third-largest hotel in Massachusetts, with 1,060 rooms, into the Hilton Boston Park Plaza, as first reported by the Boston Business Journal. It’s also rumored that Hilton put in $40 million of key money into the project; however, Nassetta said that less than 10% of its deals have key money associated with them. W
Within the current landscape, key money can be a carrot to owners that brand companies can use to secure deals. “You have to recognize that in a more competitive environment for conversions, those tend to be a little bit more competitive and a little bit more expensive,” Nassetta said.
Nassetta isn’t oblivious to the difficult lending environment that is helping stymie new development deals. He believes that the challenging market can benefit Hilton. “The environment is not great, but not bad,” he said. “Things are getting financed in a really tough environment. We ended up taking share. We’re getting much more than our fair share of the development opportunities and if you talk to a broad base of owners, they would say because our brands perform better, our market share is the highest in the industry and if they’re only going to do a few deals, they want to do them and get the highest returns and so they go to the brands that are going to deliver the best performance.”
The quarter was flush with new openings for Hilton across its brand family. It opened 107 hotels, totaling nearly 16,000 rooms, up 22% year-over-year and 12% versus the second quarter. In the quarter, it opened its 700th hotel in the Asia Pacific region. It also opened its 300th lifestyle hotel, including the global debut of Tempo by Hilton, in the middle of Times Square, in New York, as part of the TSX development. In addition, in August, it opened Canopy by Hilton Cannes, in the south of France.
Forecasting the rest of the year, Nassetta was bullish on international and group business, both segments that took longer to fully return. “We expect continued strength in international markets along with continued improvement in business transient and group demand to drive further acceleration in RevPAR compared to 2019, better than expected third quarter performance and increased expectations for the fourth quarter partially driven by better group bookings,” he said.
On China, Nassetta said there’s a lot of “noise about their economy,” but from a travel and tourism point of view, “China is strong.”
As a result, Hilton expects full-year RevPAR growth of 12% to 12.5% compared to 2022.
In the third quarter, Hilton net income reached $379 million. System-wide comparable RevPAR increased 6.8% compared to the same period in 2022 and 11.4% compared to 2019. It approved 35,500 new rooms for development during the third quarter, bringing Hilton’s development pipeline to a record 457,300 rooms as of September 30, 2023, representing growth of 4% from June 30, 2023, and 10% from September 30, 2022.
Next year, expect Hilton to launch a new brand in the luxury/lifestyle space, a segment being mined by many of its competing companies, like IHG and Accor. It’s a segment Nassetta said 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.”