While Hilton’s Q3 performance numbers continue to trend down compared to 2019, the company gained ground in the quarter thanks to continued leisure business, more hotels coming back online and boosts in conversions.
MCLEAN, Virginia—The third quarter reflected business for Hilton falling in line with global pandemic-related trends, but President and CEO Chris Nassetta* said he’s “encouraged by the progress we’ve made over the last several months.”
“Travel demand is gradually picking up around the world, and occupancy is meaningfully up from the lows we saw in April,” he said, speaking during the company’s third quarter earnings call.
For Hilton, a faster-than-anticipated return to active construction, as well as a pickup in conversion signings, keeps net unit growth a top priority for the company.
“The vast majority of our properties around the world are now open, development deals are picking up and customers are starting to feel more comfortable traveling again,” Nassetta said.
As of 2 November, 97% of Hilton’s hotels around the world were open, and the company reports comparable occupancy levels grew more than 20 percentage points from the second quarter.
Systemwide, occupancy was 42.5% for the quarter (down 36% from the same quarter last year), ADR was $105.87 (down 26%) and RevPAR was $44.95 (down 59.9%), according to the company’s earnings release.
Near-term recovery remains leisure-oriented—a key through line Nassetta referenced throughout the call.
Urban full-service hotels suffering from lack of business and group demand continue to drive the knockdowns, which is universal across the industry, Nassetta said.
Within the quarter, July and August saw the most momentum, followed by slowdowns in September, he said.
The Asia/Pacific region led the company in the quarter in occupancy with 53.1% occupancy (including nearly 70% occupancy in August, Nassetta said), followed by 44.3% occupancy in the U.S. Both regions drove the systemwide number, with the rest of the world posting occupancies for the quarter ranging from 24.8% (Americas excluding the U.S.) to 31.6% (Europe).
The Middle East/Africa region continues to drive systemwide ADR, coming in at $117.71 in the quarter, down only 12.5% from Q3 2019.
The U.S and Asia/Pacific Regions are holding on to the least-bad RevPAR margins; Asia/Pacific reported $45.35 in RevPAR (down 46.4%) and the U.S. reported $48.47 (down 58.6%). The other regions showed between 60% and 70% year-over-year RevPAR losses in the quarter.
Despite fluctuations, Nassetta said that “with more than 97% of our global hotels open and operating, we estimate the vast majority of those hotels are running at either break-even occupancy levels or better.”
Pipeline and conversions
Net unit growth remains a top priority for the company. Nassetta said he’s proud of the fact that since his team took the reins 13 years ago, the company has “doubled our size in number of rooms and number of brands, driven entirely by organic growth.”
He projects net unit growth to be between 4.5% and 5% in 2020—a forecast he said is supported by better-than-expected conversions and construction activity.
Hilton opened 17,100 rooms in the third quarter, representing 4.7% net unit growth from the same period last year. Conversions increased “approximately 50% year over year and accounted for roughly 20% of our signings year to date,” or 1 in 5 deals, Nassetta said.
Conversions drove openings in the Americas in the third quarter, which were up more than 31% year over year, Nassetta said, adding this was better than anticipated.
“While the bulk of that benefit (from conversions) will be seen in 2021 and 2022, we’re seeing more conversions in this year for the year than we’d been anticipating,” he said.
Last year, the portion of the company’s net unit growth that came via conversions was “in the high teens,” and this year and for the next few years, Nassetta said he predicts that percentage will be in the low- to mid-20% range.
Nassetta said more than half of Hilton’s pipeline is under construction right now, and he added that “90-plus percent of what was under construction when we went into this crisis is back under construction, and we’re making really good progress.”
That faster-than-anticipated construction ramp-up, plus faster-than-anticipated conversion activity, is what’s driving net unit growth for the year, he said. Nassetta and CFO and President of Global Development Kevin Jacobs also said they anticipate that growth range of 4% to 5% per year to continue for the next few years.
While it’s no surprise that leisure business drove Hilton’s activity in the third quarter, Nassetta noted a few highlights of that business.
“We thought leisure would be stronger into the fall than it normally is … and that’s exactly what’s happened; we’ve seen continued strength,” he said.
He said the leisure profile for Hilton has been not typical, and more of what he called “rather lower-rated leisure,” and more than normal this year booked through OTA channels.
“That’s what we would have expected, given the non-frequent, non-loyal leisure business gained during the summer, which is more OTA-oriented,” he said.
Overall, however, he said Hilton’s commitment to direct booking channels remains the same.
Another small highlight: Hilton saw a pickup in business travel during the quarter, though again outside the company’s normal profile.
“It’s not the traditional customer we’d typically be housing, but business travel is picking up, and there is group,” he said. “In the quarter we did about 10% group,” primarily from businesses related to the pandemic and/or from companies seeking small meetings with offices closed.
Still, Nassetta doesn’t forecast meaningful return to group levels until the second half of 2021.
Jacobs said the company ended the third quarter with total cash and equivalents of nearly $3.5 billion.
“Our cash-burn rate improved in the third quarter, given gradual recovery in the macro environment, further helped by continued cost discipline and better-than-expected collections,” he said.
Jacobs said third-quarter cash burn “was better than most expectations, including our own,” and added Hilton is approaching a break-even point.
However, Nassetta called a suggestion that the company may reinstate share repurchases in 2021 “a little premature.”
“We have not changed our long-term philosophy on returning capital,” he said. “When we’re back in a more normal environment, we’ll produce gargantuan amounts of free cash flow. … It’s a little premature to say exactly when we get back on that program because obviously our leverage levels have gone up … and we’re going to want to see our EBITDA levels come down before we start back up with a share repurchase program.”
All in all, Nassetta said the company “feels really great about where we are and great about our liquidity.”
As of press time, Hilton’s stock was trading at $93.09, down 16.5% year to date. The NYSE Composite was down 7.3% for the same period.
- Click here for more news about public hotel company performance, including information about the Baird/STR Hotel Stock Index, which tracks 20 of the largest market capitalization hotel companies publicly traded on a U.S. exchange.
*Editor’s note: Hotel News Now is a division of STR, a CoStar Group company. Chris Nassetta serves on CoStar Group’s Board of Directors.