Executives at Hilton see clear evidence of the return of business travel and are pushing development to get back to the global hotel branding company’s historical annual growth targets.
During a conference call with analysts to discuss Hilton’s first quarter earnings, President and CEO Chris Nassetta said the McLean, Virginia-based hotel franchise company expects business-transient demand in 2022 to be “roughly back to 2019 levels by year end,” and revenue per available room for group business bookings should achieve 90% of 2019 levels by the end of the year.
“I’ve been saying this pretty much for two years; you know, in the beginning people maybe thought I was crazy,” Nassetta said. “But when we wake up and this sort of flushes through the system and we get fully on the other side of it, that business mix is going to look an awful lot like it did pre-COVID. And I think we’re on our way to that.”
Nassetta added that he is not concerned to see leisure’s share of demand shrinking as long as business transient and group business continue to recover.
“Leisure transient will probably remain elevated for a while, but I think it is regressing to the mean” in 2023 and 2024, he said.
Leisure demand should stay elevated through this summer as more travelers venture out after holding off taking their vacations, he added.
“Consumers still have $2.5 trillion of excess savings that they accumulated during the pandemic in their pockets,” Nassetta said. “While people have been out traveling a lot more than they had maybe a year ago, there’s still a lot of people that haven’t and a lot of people that really want to get out and have experiences.”
Industrywide, hoteliers have benefited from surges in demand and have kept rates high, but Nassetta warned there’s an inflection point of high rates and guest expectations of service that could threaten rate gains.
“The reality is, the demand is there and we’re charging for it,” he said. “So we have to deliver the experience, or ultimately we’re going to impair our ability to continue to drive rate if we don’t deliver the basic experience.”
Outside of the U.S., Hilton executives are monitoring the latest COVID-19 lockdowns in China and their effect on the company’s hotels there. Nassetta said he is optimistic that China will come back strong in the second half of the year.
“China is going to reopen for China at a minimum, not necessarily China opening for international arrivals,” he said. “But as we saw in the early stages of the pandemic, when China got way ahead of the rest of the world, when China opens for China — ‘in-China business’ — our business does quite well and can recover very, very rapidly.”
Development Outlook and Unit Growth
In the first quarter, Hilton opened 76 new hotels with a total net unit growth of 7,800 rooms. Among its development milestones, Hilton opened its 500th Homewood Suites in the U.S. and the 1,080-room Hilton Singapore Orchard, which is now Hilton’s largest hotel in the Asia-Pacific region.
As of March 31, Hilton’s pipeline included 2,730 hotels and more than 410,000 rooms worldwide. A total of nearly 200,000 rooms are already under construction.
Kevin Jacobs, chief financial officer and president of global development, said Hilton is on track to deliver 5% net unit growth in 2022, but the company hopes to return to 6% to 7% net unit growth annually over the next several years.
“Getting back to 6% to 7% is going to mean that [construction] starts need to start getting back to where they were,” Jacobs said. “Now starts this year we think will be about flat. They may be slightly down — that will be down in the U.S., up in international — which is consistent with what we’ve been saying.”
When asked about inflation and supply-chain disruptions delaying construction projects, Jacobs said those factors are at play, but they won’t stop Hilton from achieving 5% net unit growth.
“The factors are well-known, right? Input costs are up, you’ve got tightness in the labor markets, you’ve got input prices, in terms of commodities, you’ve got financing, all of which has been the case for a while,” Jacobs said. “Believe it or not, despite what you read, it’s actually easing a little bit at the moment, but it’s still elevated. And that’s all baked into the guidance. That’s why construction starts we’ll be flat to slightly down this year.”
Jacobs added that these strains on development won’t last forever, either.
“Those factors are there; they’ll probably be there for some period of time,” he said. “And we think like all things, they are cyclical, they will ease over time. The fact that our signings are up is what gives us the confidence to believe that our starts will go back to where they were roughly in 2019 and that our [net unit growth] will go back to 6% to 7%.”
First Quarter Performance and Guidance
Hilton reported net income of $211 million during the first quarter, and adjusted earnings before interest, taxes, depreciation and amortization was $448 million, according to its earnings release.
Hilton’s systemwide occupancy in the first quarter was 58.1%, a 14.6 percentage point increase over the year prior. Average daily rate across Hilton’s portfolio was $139.17, up 35.2% year over year. Revenue per available room was $80.84, up 80.5% year over year. When compared to the first quarter of 2019, Hilton’s RevPAR was down 17%.
As part of Hilton’s full-year 2022 guidance, the company projects systemwide comparable revenue per available room to increase between 32% and 38% year over year, and lag 2019 levels between 5% and 9%. Hilton estimates 2022 net income between $1 billion and $1.07 billion, and anticipates adjusted EBITDA between $2.25 billion and $2.35 billion.
At press time, Hilton’s stock was trading at $149.48 per share, down 4.17% year to date. The NYSE Composite Index was down 9% for the same period.
Editor’s note: Chris Nassetta serves on the board of directors of CoStar Group, Hotel News Now’s parent company.