Hilton Worldwide said that it would be looking to growth in conversions to drive expansion as development activity slowed in the group’s domestic market.
The company said that it expected to maintain its net unit growth targets, aided by the buoyant transactions market.
Chris Nassetta, president & CEO, said that, in the US “supply numbers are going down in the next couple of years. But the good news is the world’s a big place. As much as things are slowing down here, there’s still tremendous opportunity for us in other parts of the world, notably in Europe, the Middle East, and Africa and clearly in Asia Pacific”.
The company said that total signings were on pace to increase more than 40% year-on-year for the full year in the EMEA region, with conversion signings up across the globe up more than 60% on the year. The group’s pipeline totalled over 360,000 rooms at the end of the quarter, representing 9% year-over-year growth and 41% of existing room base. Hilton remained on track to deliver roughly 6.5% net unit growth for the full year.
Feeding into this was the busy transactions driving a better environment for conversions, with Nassetta describing the debt markets for existing assets as “incredibly fluid”. He added: “Debt markets for new construction are much more limited. Cost to build has gone up at a high rate. So, what do people do? They want to be active transactionally.”
Nassetta said: “Conversions are a big focus in a tightening lending environment. Year-to-date construction costs have gone up 7% or 8%, so, you have cost going up in an environment where lending standards have tightened, and while revpar is growing, it’s not growing enough to keep up with that.
“The whole market’s going to go down in terms of signings, so we’re going to be relatively flat in the US. I think this year will be the peak in supply in the US, so we’re benefiting from the laws of economics when demand is growing better than supply. I think that’s going to continue for a period of time. How long? We don’t know, but certainly we feel confident about this year. And honestly, we feel confident about the setup going into next year.”
Nassetta described the US as “still benefiting from post-Tax Reform world where a lot of cash is going back into the system, a lot more investment is occurring, corporate profitability is growing, and companies are spending more money”.
Nassetta’s comments were supported by HotStats’ figures for June, which reported an 8.5% increase in profit per room, due to an increase in revenue as well as a reduction in costs. This was the fifth consecutive month of profit growth at hotels in the US and the year-on-year increase in GOPPAR was second only to April, when profit increased by 9.1%.
Rooms revenue was fuelled by a 0.7-percentage point increase in room occupancy, to 83.3%, as well as a 3.2% increase in achieved average room rate, which hit USD210.45.
Pablo Alonso, CEO, HotStats, said: “The Federal Reserve raised its outlook for economic growth in the USA in 2018 in June, to 2.8%, from 2.7%, as economic activity has been rising at a solid rate this year.
“This has been reflected in the performance of hotels in the US, which have had an excellent period of trading in H1 2018, with the market seemingly going from strength to strength. Hotel owners and operators will be keen to see such growth continue for the remainder of the year and beyond.”
Looking ahead, Hilton forecast system-wide revpar growth of 3% to 4% for the full year across its portfolio. In the US it forecast revpar growth of 2.5% to 3.5% for 2018, against 3.5% in the second quarter. Revpar in Europe grew 6.3% in the quarter, around 100 basis points ahead of our expectations, with full year revpar growth in the mid-single-digit range “as strong trends across Continental Europe are somewhat tempered by softer transient performance in the UK”.
Full year adjusted Ebitda was expected to reach USD2.07bn to USD2.1bn, representing a year-on-year increase of 9% at the midpoint.
HA Perspective [by Katherine Doggrell]: And so President Trump’s tax cuts are continuing to provide a fillip to the economy, despite the clouds gathering on the debt-laden horizon and this has kept performance trickling along – even if other of Trump’s actions have meant an increase in construction costs.
Nassetta confirmed that the “bulk” of the conversion deals would of course be franchises, and the CEO made much of the distribution cost efficiencies hotels would get in return for their franchise fees, “because the traditional independent hotel becomes very, not all, but most, very heavily reliant on OTA business, and they pay a lot higher exchange rate than we do”.
Analysts were less inclined to share the thrill of cheap pipeline expansion and raised concerns over how many conversions were being done. With fees lighter than management contracts, volume would be required, raising competition with groups such as Marriott International with 30 brands (we continue to await Hilton’s new urban micro-brand).
Nassetta said that conversions as an overall percentage of net unit growth were still towards the lower end of the range, looking back to 2009 and 2010, coming out of “the Great Recession”, where conversions were around 40%.
Nassetta agreed that more conversions were more likely in a downturn “because when times get much tougher, people look for shelter”. He reassured analysts that the group had a more mature development strategy than in latter years and he didn’t expect conversions to go above 30%.
The good news for Hilton is that President Trump is reportedly planning another round of tax cuts, as the mid-terms loom, which may not be any good for long-term debt, but might just keep the froth intact.
Additional comment [by Andrew Sangster]: There is little doubt that Hilton has one of the strongest growth engines out there. Its Net Unit Growth (NUG – who doesn’t like a new acronym?) is a robust 6.5% and set to stay in the target range of 6% to 7%.
The conference call with analysts became bogged down with discussion on pipeline and in particular the level of conversions. But in mature markets, conversions are going to be a big source of growth.
Hilton is right to point out that its ability to grab market share in the key area of new development is second to none and maintaining leadership here is going to ensure it is an attractive prospect for conversions.
So why are owners and developers picking Hilton? Nassetta said the first reason is market share: Hilton has the scale to truly drive the top line. The second reason, described by Nassetta as “a very close second”, is distribution costs. This latter is in turn also a function of size.
Given the importance of scale, Hilton cannot afford to let Marriott get too far ahead. While Hilton is more than adequately holding its own in organic growth, it is going to need M&A to catch-up with Marriott.
Nassetta confirmed on the call that he now has both Blackstone and HNA off his share register. This presents the opportunity to mount a significant takeover. For the full year, Hilton is expecting to hand back to shareholders between USD1.8bn and USD1.9bn. This is already some firepower. Plug in a rights offer for the right deal and Hilton can take out one of its global major rivals.
Hyatt would be perhaps the most logical move but IHG must also be tempting.