Having shed its property ownership by spinning off a new real estate investment trust last year, Hilton is moving forward in generating franchise fees while growing its footprint around the world.
MCLEAN, Virginia—With Hilton now operating as a fee-driven business since spinning off Park Hotels & Resorts and Hilton Grand Vacations, President and CEO Chris Nassetta touted the company’s strong performance in the first quarter, which has led the company to revise its full-year outlook.
Speaking during his company’s first-quarter earnings call, Nassetta said systemwide revenue per available room came in at the top end of the guidance range at 3%. As a result, the company will raise its full-year earnings before interest, taxes, depreciation and amortization guidance range to $1.86 billion to $1.9 billion, up from $1.83 billion to $1.89 billion.
Management and franchise fees grew 7% year-over-year to $429 million, EVP and CFO Kevin Jacobs said, which was well above the company’s 2% to 4% guidance range. Half of that increase was due to timing, he said, and the rest to pure performance.
“RevPAR came in at the high end of the guidance, so that’s going to push fees to the high end,” he said. “(Incentive management fees) was a little bit better, and then franchise sales, which is a combination of change of ownerships and new deals, was better than we thought. Some of that’s timing, some of that was just better than we thought, so it was pretty broad based on the fee side.”
Hilton’s stock was up 9.1%* year to date as of press time. The Baird/STR Hotel Stock Index was up 21.6% for the same time period.
Hilton’s development pipeline increased 16% year over year, adding 27,000 new rooms for a total pipeline of 325,000 rooms, Nassetta said, as hotel owners continue to invest in the company’s growth at a record pace. The company added a net 7,800 rooms in the first quarter, a 20% year-over-year increase, he said.
As development is almost entirely financed by third parties, he said, it generates a substantial amount of returns with minimal capital investment. This also generates leading returns on owners’ investments, he said, which enables Hilton to grow franchise rates. The effective franchise rate is 4.8% systemwide, he said, and the company forecasts reaching 5.6% as contracts continue to step up, increasing at roughly 10 basis points per year.
Tru by Hilton went from being announced in January 2016 to full development 18 months later, he said, with the first property to open in Oklahoma City. There are 425 Tru properties in various stages of development, he said, and 90% are with current Hilton owners.
The company is also having great success with its conversion brands. Hilton’s Curio Collection continues to attract both domestic and international attention, he said, citing the opening of the first Curio in the Middle East and several across continental Europe.
Hilton’s newest conversion brand, the Tapestry Collection, had 60 projects signed and in various stages by the end of the quarter, he said. The first is scheduled to open in the second quarter, he added.
In April, the company celebrated its 100th hotel in China, where a decade ago it had only five hotels. An additional 275 hotels are in the pipeline for China, making Hilton No. 1 in rooms under construction in the country, Nassetta said.
Nassetta also touted the opening of the Hilton Rio de Janeiro Copacabana Hotel. The company has a supply of more than 17,000 rooms across nine brands in the region, he said, and there are another 70 properties in the pipeline.
Having a broader distribution means benefitting more from the network effect, Nassetta said. While Hilton receives some of those benefits in different regions where it has developed more, he said, it’s not to the same degree as in the U.S. The company is just at the tip of the iceberg in terms of international growth, he said, and as he’s overseen the growth of market share across the world, he’s been pleased with the development over the past two to three years.
Group and transient
Everyone is wondering about how group and transient business will turn out this year under President Donald Trump’s administration, Nassetta said, adding it’s still early in the year and with the new administration, and only time will tell.
There’s a great deal of uncertainty over foreign policy, health care, tax reform, regulations and infrastructure, he said. Of those, tax reform is the most important, he said, and there’s potential to see incremental increases if it is carried out.
Looking at transient, the leisure segment remains relatively healthy pre- and post-election, he said. Business transient guests slowed leading up to and immediately following the election, he said, but it has since stepped up a bit and has remained consistent since.
“My opinion is, there’s potential to see further pickup,” he said. “The (gross domestic product) print in the first quarter was quite weak; there’s certainly, I think, still an expectation that GDP growth … will be better this year than last.”
Nassetta said he’s feeling good about the group side, which performed better than expected systemwide in the first quarter. Nearly 85% of group business for the year is already on the books, he said.
“If we look at the full-year forecast for group at the moment, it’s a bit better than it would have been a quarter ago or two quarters ago, so we feel good about that,” he said.
*Correction 3 March 2017: A previous version of this story incorrectly stated the year-to-date stock price change.