• ‘Caution flags are out’ says Hilton

Hilton CEO Chris Nassetta said that global political uncertainties meant that the ‘caution flags are out’, but that people were still travelling.
The company said that it expected to see revpar growth flatten next year, but said that it anticipated maintaining its net unit growth.
Chris Nassetta, Hilton president & CEO, told analysts: “Businesses don’t like uncertainties when they are trying to make decisions on hiring more people, investing in plant equipment technology, making bigger decisions that drive investment, that drive demand for hotel rooms.
“In this kind of environment, there are caution flags out. Everybody’s reading the papers, watching what’s going on with Brexit, watching what’s going on with the trade wars, not only in the US and China, but Korea and Japan, looking at broader economic issues, an election year coming up in the US and impeachment process going on.
“But trade deals getting done, Brexit getting resolved, impeachment resolution. Any of these could give you a boost.”
The company approved 25,200 new rooms for development during the third quarter, growing its development pipeline to 379,000 rooms as of 30 September, while opening 17,400 rooms in the third quarter, contributing to 15,600 net additional rooms, meaning that the group was on track to deliver approximately 6.5% net unit growth for the full year.
The group said that it expected to grow its luxury portfolio by 17% in 2019, with the re-branding of the Conrad New York Midtown and openings in the third quarter of the Conrad Tianjin, the Conrad Shenyang, the Waldorf Astoria Los Cabos Pedregal and the Biltmore Mayfair, LXR.
Nassetta said that he was confident of maintaining that growth level “even if you go into a much slower environment than we’re experiencing today”. He said: “These hotels that are under construction – which is over half the pipeline – are almost all going to get completed. The only other input is conversion, and in a weaker environment that actually stimulates more activity conversions not less.
“For the few hotels that might fall out that maybe under construction and for some reason don’t complete, I would bet that we would more than compensate for it, with incremental conversion. So that’s why I feel good about our ability to continue for the next few years to drive over 6% net unit growth.”
The CEO described the company as being “in its infancy” in terms of international growth, with “gargantuan opportunity” to expand the reach of its brands, such as Tapestry into Europe and extended stay entering China.
He added: “Even where we’re fully distributed or more fully distributed and we’ve been there a long time, we may have seven to nine brands of our 17 brands. So not only do we have opportunity to grow those brands, but we have the opportunity to double down and add over time and in a sensible way a number of incremental brands in every region of the world.”
Earlier this month saw the company use the Munich real estate Expo to illustrate its plans to expand in Germany, which saw it identify more than 100 potential markets for its focused-service Hampton by Hilton and Hilton Garden Inn brands.
Ulrich Widmer, managing director, development, Central Europe, Hilton, said: “The 2020 focus is to promote Hampton by Hilton and Hilton Garden Inn, and look to introduce to investors our latest product, Motto by Hilton. These properties are ideal for complementing airports, exhibition and events areas, sporting stadiums and other such enterprises. We’ve had great success in Europe partnering with developers to expand their offering through opening a Hilton hotel alongside infrastructure investments.”
Hilton reported Ebitda up 9% on the year to USD605m for the third quarter, with revpar up 40 basis points, below expectations due to softness in US transient business and in Asia. For the fourth quarter, the company expected conditions to remain consistent with these trends, with full-year revpar expected to grow by 1%, followed by flat to 1% growth in 2020. Full-year adjusted Ebitda was forecast to be between USD2.285bn to USD2.305bn, representing a year-over-year increase of roughly 9% at the mid-point.
Nassetta said that during the quarter Hilton Honors members accounted for more than 62% of occupancy, increasing 430 basis points year-over-year. Honors enrolments increased 25% year-over-year in the quarter to reach nearly 99 million members.
The news came as Hyatt described the global operating environment as “challenging”, with Mark Hoplamazian, president & CEO, adding: “We feel confident in our ability to manage through volatility and identify opportunities to strengthen our brands and performance”.
The CEO said that the group’s “strength of brands and the consistent approach we have to operating with excellence and efficiency” were serving Hyatt “in this period of volatile economic conditions”. Hoplamazian described the group’s pipeline as “robust” delivering organic net rooms growth of 7.9% in the third quarter.
As of 30 September, the company had executed management or franchise contracts for approximately 460 hotels and expected to open approximately 85 hotels in the full year.
Adjusted Ebitda fell by 7.3% to USD163m, a decrease of 6.5% in constant currency. Comparable system-wide revpar was flat.

HA Perspective [by Katherine Doggrell]: An unremarkable set of results from Hilton; no M&A, no new brands, but the group’s share price rose 5.6%, as analysts rejoiced in that most simple of things – the promise of growth and the means to support it for the foreseeable. Nothing flashy, just a sticking to your knitting. And in this age of cautious flags, this is what the market wants.
With the company steadfastly refusing to buy in brands, it will now fill in the gaps and we all look to the growth of extended stay in China, following what has been a profitable segment in the wider Asian market.
As for that shot in the arm, at the time of going to press it looked as though resolution in one form or another was likely for Brexit, which should help ease uncertainty, even if the outcome for the UK economy was less clear. At this point, the just removing uncertainty is enough for many observers.

Additional comment [by Andrew Sangster]: There are a few key things to note from Hilton’s results. Firstly, despite revpar flatlining, EBITDA grew 9%. Secondly, despite the downturn, net unit growth is still expected to be in the 6% to 7% range.
Does this mean Hilton has broken free of economic cycles? Not quite, but it does show just how resilient the asset light business model is proving to be.
Globally, Hilton said that new hotel starts were up 5%. But in the US, its most important market by far, signings and starts are forecast to grow nearly 20% in the full year. Given the revpar outlook – largely flat – this is a phenomenal achievement.
So why is revpar so flat and yet profitability is so buoyant? The simple answer is that in the standard equation of how fee income is generated – revpar times system growth times royalty rate – the strength of one variable, system growth, is pronounced while the other two, royalty rate and revpar, are stable.
Analysts at Morgan Stanley speculate that the revpar malaise is being caused by greater price transparency thanks to the internet and the availability of alternative accommodation providers.
At this point of the cycle – the beginning of a downturn – occupancy is normally dropping. But not this time. While this is the good news, the bad news is that we haven’t seen the usual increase in rate as we reached the peak of the cycle.
Nonetheless, the Morgan Stanley analysts point out that absolute revpar in this cycle has reached 33% above the prior peak in the UK and US (against the more usual 20% to 25%). The current downturn can be characterised by weak but not negative revpar.
The big worry on the horizon is what will the downturn be like when it really begins to bite. The last three downturns – 1990s, early 2000s and the late 200s – all saw the depth of the revpar downturn intensifying. In the US this was 2% in the early 2% in the early 1990s, 10% in the early 2000s and 17% in the late 2000s.
Will the trend of intensifying downturns continue or will this time really be different? There are good arguments to make for both sides, unhelpfully.

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