Hilton CEO champions tax reform as boost for hotel industry

The re-imagined property is scheduled to officially rebrand as a Conrad hotel within 18 months, and will be known as the Conrad New York Midtown.
The London NYC is set to become Hilton's second Conrad hotel in New York.

Chris Nassetta, the CEO of Hilton, has a particular vantage point when it comes to the machinations of Washington, D.C. Hilton's Northern Virginia headquarters provides him that. "I'm inside the Beltway. We've got a heavy dose of politics here," he said during his company's third-quarter earnings call.

With healthcare on the shelf for the time being, President Trump and Congress are shifting to tax reform, which Nassetta alluded to on multiple occasions during the call as something that could be a boon for the broader hotel industry.

"We care about taxes and I think there is a real opportunity to get tax reform through," Nassetta said, offering that he was more optimistic of it passing this quarter than he was last. "And, for the industry, it's a good thing."

He pointed to two major implications of tax reform. 1) Psychology. "That matters for the business community; it makes them feel better." 2) Cash flow. "With more free cash flow to play with, it means businesses will hire more and invest more. That clearly benefits the industry and helps drive demand. It's about 'My business will benefit so I can loosen the purse strings a bit."

Other economic drivers, according to Nassetta, include nonresidential fixed investment, expenditures by firms on capital such as commercial real estate, tools, machinery and factories. "If you see growth in nonresidential fixed investment you’ll see that flow into hotel demand," he said. "There's a strong correlation."

In regard to the quarter, net income totaled $181 million and revenue per available room rose 1.3 percent. Full year 2018 system-wide RevPAR is expected to increase between 1.0 percent and 3.0 percent. Hilton added 12,000 net rooms in the quarter and approved 23,400 new rooms for development, growing Hilton's development pipeline to a record 335,000 rooms, representing 13-percent growth from September 30, 2016. 

Nassetta called Asia Pacific Hilton's biggest growth opportunity. It represents a quarter of Hilton's global pipeline.

In New York, Hilton will add its second Conrad when the current London NYC converts over to the brand within the next 18 months. Hilton Management Services has already taken over operation of the hotel. 

In other news, Hilton announced that London's Admirality Arch will become Hilton's first Waldorf Astoria-branded hotel in the city. The 96-room hotel should open in 2022. Prime Investors Capital paid nearly $80 million for a 250-year lease on the property in 2015, and is spending around $130 million to now renovate it into a luxury hotel.

While the hospitality industry has been atop the proverbial peak for some time now, there doesn't appear to be a precipitous drop on the horizon. Nassetta cited supply growth in line with the 30-year average and looking ahead to 2019, said he believed it would be similar to this year.

"We are in the later stages of budget season now and have a good sense of the top line," he said. "The demand growth environment is steady to better and we believe that GDP growth will tick up. The supply side is stable. Put those together and our [2019] assessment is a lot like this year."

One continued obstacle for hotel development that may stifle supply is access to financing. Kevin Jacobs, Hilton's CFO, said there are indications that new projects are getting increasingly more difficult to finance. "Certainly new projects getting signed up in urban environments are more difficult to finance and you've had a bunch of markets where supply has become a little bit of a problem," he said. "Obviously developers are looking elsewhere. You're still seeing deliveries in markets like New York and Chicago, but if you look at projections more broadly outside of urban, you're starting to see that forecasts are starting to level off."

Future of Hilton

Hilton has taken the tack to grow organically rather than by turning to M&A. It's something Nassetta promulgates and wears as a badge of honor, calling it "thoughtful" and an approach that "will enhance our network effect," the idea that a product or service gains additional value as more people use it. 

Hilton currently has 14 brands in its portfolio, but it's fair to assume that number will grow by at least two or three by next year. Hilton is currently at work developing four new brands, Nassetta said. They include what he said Hilton "affectionately" calls Hilton Plus, an urban micro brand, a luxury soft brand brand and a luxury lifestyle brand. "The first three are well down the development path, but we are not rushing luxury lifestyle," he said. "We'll probably launch two or three in 2018."

The idea by organic growth, Nassetta said, is it to be thoughtful but also not hurried. Hilton launched its Tru by Hilton midscale brand almost two years ago and is just not starting to see the fruits of that with a spate of openings and a large development pipeline. It's also putting concerted effort behind its Home2 Suites extended-stay brand and the newly launched Tapestry Collection soft brand.

The future of Hilton, the future of the hospitality industry, is rooted in technology. Around $40 million of Hilton's annual CapEx spend is toward technology. Some of the results include the connected or smart room, which Hilton will formally launch next year. The idea of the guestroom is that guests can control it from an app—things like air conditioning, lighting and entertainment. 

Other initiatives that are already in the market include the Live Chat function for Hilton Honors members. Through the Hilton Honors app, guests can request services such as housekeeping or a late check-out by sending a chat message as early as a day before check-in and up to a week after for any follow-up needs.

On the loyalty front, Nassetta said Hilton adds around 1 million loyalty members per month to its already 70 million current member. 

Nassetta concluded by adding that the company is constantly tinkering with programs and services. One of which is its cancellation policy. In July, the company recommended a new policy to its owners that would enforce a 48-hour advance notice on cancellations, with some locations requiring 72-hour advance notice. Prior to that it was the normal 24 hours advance notice without penalty. Under the new policy, travelers who failed to submit a cancellation within 48 (or 72) hours will be charged for one night of the booking. This policy will be implemented at the hotels currently managed by Hilton, while Hilton franchises and properties run by other management companies will be able to determine their own cancellation policy.

During Hilton's Q3 call, Nassetta floated the possibility of extending the cancellation window to seven days. 

"The early returns are that those are helping stem the tide of really short-term cancellations," Jacobs said, referring to the changes not just about cancellations but new pricing models centered around flexibility.

"We like what we see and I think it has an opportunity to incrementally make customers happier by giving them more choice," Nassetta said.