In spite of growing economic concerns, Hilton Worldwide Holdings had a good third quarter, with tentative growth in a range of verticals. With a brand-new brand just announced and organic growth driving the pipeline, the company has good reason to be cautiously optimistic for the remainder of 2018 and into 2019.
Net income for the third quarter was $164 million, a modest increase from the same period last year, while adjusted EBITDA for the third quarter was $557 million, a 9-percent increase from the year-ago period. Systemwide comparable RevPAR increased 2 percent on a currency-neutral basis for the third quarter from the 2017 period, primarily driven by increased ADR.
“Calendar shifts and weather impacts tempered reported RevPAR growth, but fundamentals remain strong,” said Christopher Nassetta, Hilton president and CEO.
$HLT Q3 FY18 highlights: We announced strong Q3 results, achieving the high end of adjusted EBITDA guidance and exceeding adjusted diluted EPS guidance. #HLTearnings https://t.co/bHB8HQKCpi pic.twitter.com/7IQ9k66dVO— Hilton (@HiltonNewsroom) October 24, 2018
U.S. RevPAR grew 1 percent for the quarter, which CFO Kevin Jacobs blamed on softer leisure transient occupancy.
International hotels benefited in both the Q3 2017 and 2018 periods, particularly in Europe and Asia Pacific. RevPAR grew 5 percent for the quarter, Jacobs said, thanks to a good balance of leisure and group demand.
Management- and franchise-fee revenues increased 10 percent and 11 percent during the three and nine months ended September 30, respectively, as a result of RevPAR growth of 1.8 percent and 3.2 percent, respectively, at comparable managed and franchised hotels, increased license and other fees and the addition of new properties to Hilton's portfolio
During the quarter, Hilton opened 113 new hotels representing 16,100 rooms and achieved net unit growth of 14,800 rooms, a 24-percent increase from the same period in 2017. In terms of unit growth, the company approved 29,200 new rooms for development during the quarter, growing its development pipeline to more than 371,000 rooms as of September 30, representing 11 percent growth from the same day last year.
$HLT Q3 FY18 highlights: Our development remained robust with net unit growth of 14,800 rooms, up 24% year-over-year and a pipeline that now totals 371,000+ rooms. #HLTearnings https://t.co/bHB8HQKCpi pic.twitter.com/YcQqHxOSSl— Hilton (@HiltonNewsroom) October 24, 2018
Notably, conversions from non-Hilton brands represented more than 20 percent of the new rooms opened during the quarter and Nassetta expects this to continue. "Conversion activity will accelerate," he said, predicting the 20-percent figure will remain consistent through the end of 2018. "When things get tough, conversion activity goes up." Regarding the outlook for the coming year, Nassetta does not expect to see "a whole lot" of conversions.
During the quarter, Hilton added two notable properties to its luxury portfolio, with the completed conversion of the Waldorf Astoria Las Vegas and the opening of the Waldorf Astoria Bangkok. It also formed an alliance with Playa Hotels & Resorts, which will double its all-inclusive portfolio in the coming years.
The biggest buzz was the recent launch of Motto, Hilton’s new urban, lifestyle micro-hotel brand, announced the day before the Q3 numbers were released. When the Tru by Hilton brand was announced in early 2016, the first options went to existing Hampton owners, and Nassetta plans to sign Motto deals in much the same way. “Our existing owner base has been very loyal to us and we want to be loyal to them,” he said, noting that a “cadre” of owners has been involved with the development of the brand as part of a focus group. “We’re working very closely with owners to handle the cost to build and the cost to operate to be sure [the hotels] deliver returns,” he said. “Otherwise, we’ll have a great product for the customer, but no hotel for the customer to stay in.”
Hilton does not expect Motto to have the same growth trajectory that Tru had, Nassetta cautioned, noting Motto is geared toward urban markets as opposed to the more suburban Tru. As such, Motto hotels will have a longer gestation and a “higher degree” of complexity in their development. “Tru will be thousands of hotels,” Nassetta said. “It will be the biggest brand we have based on the price point. Motto will be very big, but it will be in the hundreds. It will be a better way to serve our existing cust base—a great product that we can use to attract customers who want to be in an urban environment and need a product at a price point they can afford.” More important, he added, Motto will help attract new customers to the overall Hilton family of brands.
Six Motto deals have been signed, and 20 more deals are cooking, he said, many of them with existing owners. The first properties are expected to be in Lima, Peru; London; Dublin; Savannah, Ga.; San Diego; Boston; and Washington, D.C.
With a strong presence in the midscale and upscale segments, Hilton is now casting its eyes on the luxury end of the industry, where it already has a presence with its Conrad and Waldorf Astoria brands. “Luxury will not be a huge part of our EBITDA or cash flow, but it is important for our loyalty system,” Nassetta said. The company has more than 100 hotels either open or in the pipeline for the two brands, and has removed some properties that “didn’t fit the bill.” Still, Nassetta expects net unit growth in the segment to be positive in the long run. “We’re making a tremendous amount of progress,” he said.
Looking ahead, Hilton plans to launch two new brands to fit in the “soft luxury” and “lifestyle luxury” segments. Nassetta expects these brands to be smaller, filling niches rather than gaining a dominant foothold in the coming years. “We have a really good trajectory on luxury,” he said. “We have enough scale and presence, and we will see some important advances in the upper end of the business.”
While unit growth and brand growth are in the pipeline, Nassetta doubts Hilton will rely on mergers and acquisitions to gain market share. “We’ve looked at a lot of things, but they don’t make sense compared to what we’re doing,” he said. “We can create growth without having to buy growth.”
Next Year’s Growth
“We continue to feel optimistic about overall demand trends for the balance of the year and into 2019,” Nassetta said.
Still, he acknowledged, interest rates “moving in the wrong direction” are driving down supply in the U.S., which will make it harder to get deals done, even though Hilton is “getting more than our fair share. We will hit a record in deals done this year, but signings in the U.S. will go down and the nut will go down because it’s harder to get deals done.”
But, he added, the world is large and the company has anticipated economic ebbs and flows. “While one market slows, another picks up,” he said, noting the international markets have shown resilience. “We’ll continue to be in a slowing pattern until [the] system resets itself," he said.
Overall, full-year 2018 systemwide RevPAR is expected to increase between 3 percent and 3.5 percent on a comparable and currency-neutral basis compared to 2017. Full year 2018 Adjusted EBITDA is expected to be between $2,075 million and $2,095 million. For the full year, Jacobs expects U.S. RevPAR growth of 2 percent to 2.5 percent, given good fundamentals.
Farther out, full-year 2019 systemwide RevPAR is expected to increase between 2 percent and 4 percent on a comparable and currency-neutral basis compared to 2018, and net unit growth is expected to be approximately 6 percent to 7 percent.