In addition to an increase in net income and growth in several metrics, HILTON‘s unit growth is going strong, with three brands announced in the past year and a further two new brands on the horizon.
Hilton’s net income rose 20 percent year-over-year to $261 million and its adjusted earnings before interest, taxes, depreciation and amortization climbed 11 percent year over year to $618 million.
A half-percent rise in occupancy and 0.7 percent increase in average daily rate helped push systemwide comparable revenue per available room up 1.4 percent on a currency-neutral basis year over year, just below the midpoint of the company’s guidance range. “RevPAR growth was in line with our expectations,” CEO Chris Nassetta said during a call with investors.
In an email to industry insiders, Nick Wyatt, head of tourism at data and analytics company GlobalData, called Hilton’s Q2 results “very impressive,” noting that they topped Wall Street’s profit estimates and that room demand has boosted occupancy and ADR, leading to RevPAR growth. “RevPAR is a great indicator of pricing power and the fact that systemwide ADR grew 0.9 percent in the first six months of the year without adversely affecting occupancy rates shows that Hilton’s brand equity and service offering allow it to move pricing in its favor,”
The company’s European hotels fared the best regionally with a 2 percent rise in occupancy and 2.4 percent increase in ADR driving a 5 percent leap in RevPAR year over year. Michael Bellisario, VP and senior analyst at Robert W. Baird & Co., attributed the continent’s success to the current exchange rate. As it has driven down traveling costs, he said Baird has noticed a corresponding influx of demand.
Hilton CFO Kevin Jacobs said revenue in the Americas beyond the United States grew 3.3. percent, with South America in particularly benefitting from transient demand in Brazil. For the remainder of the year, he expects RevPAR growth to be between 3 and 4 percent.
In Europe, meanwhile, the company reported revenue growth of 5 percent, which Jacobs noted includes steady demand in London thanks to a favorable exchange rate. For the full year, the company expects its numbers to be at the high end of its previous guidance, although those numbers could be offset by Brexit uncertainty.
Hilton’s hotels in the Middle East and Africa, where a 3.3 percent decline in average daily rate offset a 2.5 percent climb in occupancy, came out the worst in terms of RevPAR, rising only 0.2 percent. During the call, Jacobs said that supply challenges in the region have muted leisure gains, and this is likely to continue. RevPAR growth will be down for the full year, he cautioned, but not by much.
Though Asia Pacific stood in the middle of the pack in RevPAR growth (2 percent), Hilton again lowered its expectations in the region, specifically in China. Bellisario said Baird expected a bit of a slowdown in the region, “but the magnitude of that slowing has been a little bit surprising.” Hotels in China are facing declines that Jacobs credits to softening leisure demands and the ongoing Hong Kong protests. While the forecast is in line with guidance, RevPAR has been “relatively flat,” and this could continue for a while, especially given ongoing arguments over trade agreements.
Bellisario identified Hilton’s more subdued forward-looking outlook as one of the report’s biggest takeaways. The problem is not Hilton’s alone, he cautioned, but “an industry issue.” When other companies and real estate investment trusts begin releasing their quarterly earnings, he predicted their reports would show similar softer-than-expected RevPAR returns and predictions.
Of Hilton’s brands, four ended the second quarter with year-over-year RevPAR growth over 5 percent: Conrad Hotels & Resorts (8.9 percent), Tru by Hilton (5.6 percent), Waldorf Astoria Hotels & Resorts (5.2 percent) and Curio Collection by Hilton (5.1 percent).
This year, Hilton expects to open its 100th Tru (just over two years after the brand launched in Oklahoma City), its 500th Homewood Suites, its 850th Hilton Garden Inn and its 2,500th Hampton hotel. Nassetta expects Tru to eventually become the company’s biggest brand in the coming decades, eventually surpassing the Hampton brand.
Within the past year, Hilton launched three brands—Motto, LXR Hotels & Resorts and Signia—and plans to debut another two in the future. Nassetta sees a “large-scale opportunity” in the global space to develop an upscale lifestyle hotel, a “click above” Hilton Garden Inn in high-end urban and mixed-use developments. “I think that brand has a huge amount of potential,” he said during the earnings call, noting that the company has already soft-launched the brand with some developers. “The reception has been spectacular,” he said. Hilton will hard launch the brand in the coming six months as the company refines the product and brings some development deals to the table.
Farther out, Hilton also is looking to develop a luxury lifestyle brand. “We will eventually be in that space,” Nassetta said, explaining that a brand in this sector would drive engagement, build loyalty and feed the network effect. “There is plenty of brand bandwidth to keep growing indefinitely, given that we are just getting started with these brands in many destinations around the world,” he said of the company’s brand growth.
In Hilton’s ninth consecutive year of record signings, the company approved 28,100 new rooms for development during the second quarter, growing its pipeline to approximately 373,000 as of June 30. More than half of that number, 192,000, were under construction. Its pipeline consisted of nearly 2,490 hotels across 109 countries and territories, including 37 that do not currently have any open Hilton hotels. Of its total pipeline, 201,000 rooms are located outside the United States. Thanks to favorable trends in signings and conversions and no significant brand repositionings, the Hilton team “feels good” about its net unit growth in the long term, Nassetta said.
Notably, Hilton is pushing luxury development, and is on track to open more properties across its luxury brands (Waldorf Astoria, Conrad and LXR) in 2019 than in any previous year, growing the segment 15 percent. Four hotels already have opened, and a further seven are slated to open by year’s end, joining the 65 already operating. Following this year’s openings, Hilton’s luxury pipeline includes more than 30 properties, approximately 25 of which are expected to open by the end of 2025. Luxury rooms under construction account for half of the company’s total pipeline, Nassetta said during the earnings call.
“Since the day I walked in the door 12 years ago, we’ve focused on luxury,” Nassetta said, acknowledging that these deals take a long time to bring to life. The focus is for two reasons, he explained: “First, customers want it, and second, for loyalty. To have [luxury hotels] in our system is important … It is a broad network effect we are creating to allow our loyalty members to get value.” From “nothing” 12 years ago to 110 hotels in the luxury pipeline is “incredible progress,” he added, and the company has a presence in most major urban and resort markets. “We’re working hard to fill the gaps,” he added.
In the long term, Nassetta said, Hilton is differentiating itself with a capital-light business model. “The strength of the brand portfolio is driving owner interest,” he said during the earnings call, adding that the company is on track for record signings, construction starts and openings in the coming years.
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