Hilton, Nassetta deliver Q1 results, short on REIT, pricing structures

Hilton

Pretty much everyone in the collective hotel industry sat back and marveled at the soap opera-like drama that was the battle over control of Starwood Hotels & Resorts. Now that the fray is over, attention turns back to the business of running hotels.

The Q1 earnings season is upon us, with big gun Hilton Worldwide leading off.

Some highlights: net income for the quarter was up $159 million over the same time last year; RevPAR increased 2.1 percent; management and franchise fees for the first quarter increased 5 percent over the same period last year to $409 million; Net unit growth was 6,500 rooms in the first quarter, a 16-percent increase from the same period in 2015; and the company approved 26,000 new rooms for development during Q1, a 14-percent increases over the same time last year.

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Before Hilton and CEO Chris Nassetta started the Q1 call, news broke that it had named a CEO to lead its Hilton REIT, which, together with its time-share unit, is being spun off from the company's core business.

Tom Baltimore, the former CEO of RLJ Lodging Trust, will lead the new REIT. According to Nassetta, who has known Baltimore for 30 years, Baltimore was the "number 1 person on the list."

What the Hilton REIT will look like is still under wraps until Hilton files its Form 10, a filing with the SEC used to register a variety of securities for trading on U.S. exchanges, this quarter. Nassetta said the spins will be executed by the end of the year. 

Scaling Up

Now that the Starwood smoke has cleared, Nassetta offered some color on it. The CEO has been clear from the get-go of Hilton's non-involvement in the pursuit, preferring to grow organically, though he does admit that scale has never been more important.

"We have chosen a path different than others including [Marriott]," he said. "We chose not to have the distractions. We are focused on purebred brands that are market segment leaders or category killers. "We are in a business where scale matters. We think we have enough scale.

"We will continue to see more consolidation," Nassetta added, but that there are "not a ton of logical combos. People are taking deep breaths and saying, 'What can we do to get some of that scale?'"

Q1 Earnings

Hilton's January launch of the Tru by Hilton brand is one example of Hilton's organic growth. There are now 48 Tru hotels in the pipeline and another 170 deals committed to or in the process of being. When Tru was first launched, it was open only to developers of previous Hilton products. Nassetta said this will now change. "It soon will be opened to developers not already in the Hilton network," he said.

The growth of Hilton's new brands is having an impact. "Twenty-five percent of hotels will fly flags of brands that didn’t exist seven years ago," he said.

Direct Drive

Another initiative Hilton undertook in Q1 was its "Stop Clicking Around" campaign, designed to educate and cajole customers to book directly with Hilton, skipping over intermediaries, such as Expedia and Priceline. "It's about offering customers the best value and experience," Nassetta said. "The early results are positive." According to Hilton, HHonors members are up 90 percent since the campaign launched. "The business we have received through web direct is the highest it's ever been," Nassetta said. "Business  generated through the mobile app is up 150 percent YOY."

Nassetta said that OTAs account for plus or minus 10 percent of Hilton's business.

Another detail Nassetta touched on, but was reticent to reveal too much on, was the idea of new pricing structures, something that Hilton floated last year and includes items like a $50 cancellation fee

"How do we come up with a better way to price our product," Nassetta said, casually mentioning that it had "scientists working on it." He added: "There are ways to look at pricing for less or more flexibility—different pricing structures that can benefit customers and [hotel] owners.

On Business

Globally, it was a mixed bag for Hilton in Q1.

Europe saw strong transient and group demand, especially in Germany and the Czech Republic. Hilton also said that the terrorism in Brussels had a local effect on business, but not meaningful impact on regional performance.

In the Middle East and Africa, there was weakness, especially in Egypt, due to uncertainty in the region. RevPAR growth was flat.

Asia Pacific was a different story. RevPAR was up 7 percent with strong business in Japan, where there was little impact on business from the earthquakes.

Nassetta continually referenced the phrase "The Great Thaw," to define the state of the industry. He said markets are getting back to stable levels and that financing for projects is easier, and, for their business, is coming especially from local and regional banks. "Financing is reasonably steady," he said. "Most are getting financed by local and regional banks with a decent chunk of equity, and full recourse on the debt."

Nassetta said that Hilton-brand owners have told him that debt is a little more expensive, but nothing they viewed as material. "The best developers are still getting projects done," Nassetta said. "It's Main Street where the lion's share of development is getting done."

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