Hilton's focus on luxury pays off in Q2 results

Summit the Rooftop at Conrad debuts in Washington, DC.
Of Hilton's brands, Conrad Hotels & Resorts, which includes the Conrad Washington, DC, posted the highest YOY growth in RevPAR, 8.9 percent. Photo credit: Conrad Washington, DC

Releasing the company's second-quarter results today, Hilton shared some reasons for optimism in the second half of the year and into 2020. In addition to an increase in net income and growth in several metrics, the company's unit growth is going strong, with three brands announced in the past year and a further two new brands on the horizon.

By the Numbers

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 Hilton’s guidance range, according to the company. "Overall our system-wide RevPAR index increased 230 basis points year-to-date with gains across all regions and all brands," CEO Chris Nassetta said during a call with investors. The RevPAR growth, he added, was "largely in line with our expectations as our market share gains offset broader choppiness in the U.S. and Asia-Pacific."

Hilton’s management- and franchisee-fee revenue grew 8 percent in Q2, which the company attributes to growth in RevPAR, increased licensing and fees and the addition of new properties to its portfolio.

Looking ahead, forecast for GDP, non-residential fixed investment and corporate profit growth remain positive, but incrementally a bit lower than previous estimates. "Consistent with these trends, we are modestly adjusting our full year RevPAR guidance to 1 percent to 2 percent," Nassetta told investors during the call.

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 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," Wyatt said, singling out Hilton's investment in technology as a differentiator that is paying dividends. “In fact, systemwide occupancy grew 0.6 percent compared to H1 2018, meaning that Hilton has been able to raise prices while improving occupancy rates. Attracting more customers while getting them to pay more is a recipe for success.”

Regional Strengths

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 particular benefitting from transient demand in Brazil. For the remainder of the year, he expects RevPAR growth to be between 3 percent 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 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.  

Brand Growth

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 the company already has 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 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.  

Unit 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, or more than 40 percent of its existing base. 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.

Hilton opened 123 new hotels with a total of 17,100 rooms and achieved net unit growth of 15,700 rooms in the second quarter. The company experienced 7 percent net unit growth since June 30, 2018, and predicted 6.5 percent net unit growth for the full year. This comes on the heels of 450 hotels that opened in 2018, 75 percent of which have reached a RevPAR index of 100 or greater. 

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 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 our brand portfolio continues to drive owner profitability and therefore greater owner interest," he said, adding the company is on track for record signings, construction starts and openings for the full year. "This supports continued growth in our development pipeline, which we expect to increase in the low to mid-single digits for the full year."