Hilton Optimistic Hotel Boom Will Roll On Into Next Year

Third-quarter results at Hilton Worldwide suggest the pent-up demand for travel after the pandemic still has room to run. Most hotels will have pricing power through at least the rest of the year, and probably longer, according to Hilton’s executives on Wednesday.

Hilton — which owns several brands including Waldorf Astoria — raised its profit forecast for 2022 after seeing a surge in earnings. In the third quarter, the company generated a net income of $347 million on revenue of $2.37 billion. It predicted that the rest of the year would also be strong as the company runs the highest margins in its history.

“While we’re not naive to what’s going on with the Fed here and with central banks in other parts of the world in trying to tame inflation by slowing economies, we do think we have a reasonably unique setup that is maybe different than some other industries for a period of time that is going to benefit us, not just in the fourth quarter, but into next year,” said Christopher Nassetta, president and CEO, during a call with analysts.

In the third quarter, a stronger dollar relative to the euro led many Americans to fly to Europe in droves, helping to boost Hilton’s overall revenue. Hilton boosted its system-wide revenue per available room — a key industry metric — by 5 percent over the comparable period in 2019. That was the first time the metric had exceeded the prior peak since the pandemic began.

The rest of the year looked promising for the McLean, Virginia-based company. In the fourth quarter, revenue per available room will be between 2 percent and 6 percent above the comparable period in 2019, executives forecasted.

Nassetta pointed out that the hotel sector was hurt more by the pandemic than other industries and it makes sense that its recovery would be more robust. Mega-events such as large international conferences are continuing to return, and consumers are shifting from spending on things to experiences, he said. Meanwhile, the supply of lodging remains low relative to historical trendlines.

“At the moment, those tailwinds are stronger than the headwinds,” Nassetta said. “And I would say meaningfully stronger. My own belief is we have enough wind in our sails to go for a while.”

In the decade before the pandemic, supply wasn’t high but it was above 30-year averages. More importantly, demand wasn’t increasing rapidly as gross domestic product was only growing in the low single digits a year. Those factors denied hoteliers pricing power.

Today, supply will be higher for an extended period of time because of many hotel closings during the pandemic. Demand has surged because of a post-pandemic ramp-up in travel. Inflation is also playing a role.

Shovels in the Ground

In the third quarter, Hilton added 12,100 net rooms. It okayed 19,900 new rooms for development, bringing its development pipeline to 416,000 rooms — half of which are under construction — as of September 30.

Conventional wisdom in the hotel industry is that it has gotten harder this year to get developers to put shovels in the ground because of rising interest rates and portfolio disruptions for financial institutions. Yet Hilton’s executives haven’t experienced that. In the U.S., its signings for the year will be over 2019 levels, and roughly 25 percent of the rooms it brings on board are conversions.

Hilton’s ownership base comprises mostly small- and medium-sized businesses, most of which do hotel development full-time. The current boom in hotel demand is letting these owners and investors make “gobs of money in most of their hotels,” Nassetta said. So that boom is motivating them to sign for more properties.

While big banks may be pulling back on lending, Hilton’s owners tend to get financed in local and regional banks where they established track records with lenders for reliability. And as other forms of construction drop off, subcontractors become more available.

Some analysts like what they call Hilton’s quality versus quantity approach to hotel development.

In a report, JP Morgan Research analysts Joseph Greff, Omer Sander, and Ryan Lambert said they “remain very impressed” with how Hilton’s “strong brands” produce “above-peer third-party network growth” and that the brands have “durable and sustainable competitive advantages.” They alluded to Hilton’s brands often claiming some of the highest shares in their markets on average and across each of their segments, such as leisure versus business.

Hilton referred to data from STR, the market research firm, that its year-to-date net additions were higher than all of its major branded rivals.

Strength in Conversions

Conversion of independent brands to Hyatt brands has been higher than usual this year. Was that more than the market could sustain given long-term trends?

“If you get a little bit of a reset in people’s outlook in a downturn, then the outlook [for conversions] gets better, as capital costs sort of adjust, rates come down, and spreads [between the bid and ask in pricing] tighten,” Nassetta said. “You actually then see a pickup in transaction activity.’

In today’s booming market, independent hoteliers can hold their own in performance without the safety of global brands and marketing. But if economies worsen, that might change the dynamics, leading to continued strength in conversions.

Group Business Rebound

In the quarter, Hilton saw group revenue per available room reach roughly 93 percent of prior peak levels. Executives expected the group business to lap the previous high watermark by end of the year or early next.

“When we sit here and talk to our sales teams, across the world, the biggest issue is just having enough people to keep up with all the demand,” Nassetta said.