Transient corporate down but Hilton sees opportunities
Transient corporate down but Hilton sees opportunities
28 JULY 2016 9:05 AM

Despite softening in corporate transient growth in the quarter, Hilton Worldwide Holdings executives said the company is seeing many positives, particularly in results from new loyalty pricing models and brand growth. 

MCLEAN, Virginia—Softer corporate transient growth in the second quarter hit Hilton Worldwide Holdings performance, leading the company to revise some of its expectations down for the remainder of the year.

Despite that, Hilton posted systemwide comparable revenue-per-available-room gains of 2.9% in the second quarter compared to the same quarter last year. The results were bolstered by overall average-daily-rate gains and continued strength in leisure travel, according to company President and CEO Chris Nassetta, who spoke with analysts during Hilton’s earnings conference call Wednesday.

The company also notched several brand wins recently with the opening of the company’s first Canopy property and accelerated growth of its Tru by Hilton brand.

On the topic of corporate transient demand, Nassetta attributed softening numbers to economy-related demand shifts.

“Corporate America, whether it’s big companies, medium companies or small companies, we’re just seeing lower demand,” he said. “We’re still getting rate, so volumes are relatively flat and rates are up a little bit.”

He said that in general, he expects corporate transient demand to firm up a bit in the second half of the year, following a pickup in overall economic growth.

Still, Nassetta said the company hasn’t seen that yet, so Hilton is tempering its RevPAR expectations for the full year.

“We now expect 2016 comparable systemwide RevPAR growth on a currency neutral basis of 2% to 4%, and would highlight that growth above the midpoint would require pickup in corporate transient demand from what we've seen,” he said.

As of press time, Hilton Worldwide Holdings’ stock was up 8.3% year to date. The Baird/STR Hotel Stock Index was up 6% for the year.

Expansion and brand highlights
Hilton is on track to add 45,000 to 50,000 net units to its global portfolio this year, which would be an increase of 7% compared to last year, Nassetta said. That number is especially concentrated in the United States, where Nassetta said Hilton accounts for nearly 25% of U.S. rooms under construction.

“45% of (Hilton’s) growing pipeline and nearly 30% of (its) net unit growth over the last five years has been from the layering of existing brands internationally and from new brands like Curio and Home2,” Nassetta said.

Among Hilton’s brand growth highlights, the company currently has 122 Tru by Hilton hotels in its pipeline totaling more than 11,000 rooms.

“In the quarter, we averaged five Tru approvals per week and we’re just getting started opening up deals to owners outside of our system,” Nassetta said. “We expect the first Tru to open early next year.”

Hilton’s first Canopy property opened in July in Reykjavik, Iceland, and Nassetta said there are 33 Canopy hotels in various stages of development.

Rewards pricing results
Nassetta said the company has garnered “significant incremental revenue” from its February launch of preferential pricing for Hilton HHonors members.

In the second quarter, enrollment in the program was up nearly 80% year over year, adding 2.4 million new members, for a total membership of more than 55 million.

“Guests are also responding by shifting business to our direct channels with revenue growth from our web channels outpacing (online travel agencies) by a factor of nearly 5% in the quarter,” Nassetta said. The company’s HHonors app is its lowest-cost channel, and now accounts for 23% of all direct web traffic.

Nassetta was quick to point out to analysts that the company’s push to boost direct bookings “is a long-term strategy,” not just a quick campaign, and said the sky is the limit in terms of how much overall share of occupancy HHonors could contribute.

“On a net-rate basis, our owners are making out in a big way,” he said. “The net-rate benefit is going to accelerate, and that is the objective. Our owner community is very supportive.”

External issues
Chief financial officer and EVP Kevin Jacobs pointed out a few region-specific performance issues in the quarter, starting with impacts from the Zika virus.

“Brazil remained under pressure given political and economic instability, while Zika virus fears also weighed on regional results, meaningfully affecting leisure demand in Latin America and Puerto Rico,” he said.

Terrorist attacks and other geopolitical concerns led to softer performances in Turkey and Belgium. Going forward, Jacobs said the company expects “Brexit and other recent events in Europe to increase uncertainty and potentially hurt demand across the broader region.”

Spinoff details
The company’s two spinoffs in the works—timeshare business Hilton Grand Vacations and real estate investment trust Park Hotels & Resorts—are both on track to be completed by the end of the year, Nassetta said.

“As the purest large-cap lodging brand company, the new Hilton will have a simpler, highly resilient fee-based business model with significantly lower operating leverage, and therefore, lower bottom line volatility,” he said. “We expect Hilton's fee business will generate over 90% of its total pro forma adjusted EBITDA, of which more than 90% will come from top line-driven franchise and base management fees.”

Additionally, he said under the new structure, management fees are expected to be “meaningfully less volatile.”

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