Share Price: $122 Target Price: $150
Position Size: 2% 1 Yr. Return: +70%
Key takeaways:
- Missed on revenue and EPS as current trends are tied to vaccine rollouts and changing travel restrictions and thus still highly uncertain. Owned hotels (higher op leverage) are performing worse due to their disproportionate exposure to Europe & later lockdowns, which negatively impacted earnings.
- Recovery uneven, but progressing. US is seeing inflection – April bookings for the summer exceeding 2019 peak levels, by nearly 10%. Europe is emerging from lockdowns more slowly and China is back to 2019 levels.
- Solid net unit growth and a stable pipeline – China development activity is particularly strong.
- CEO Chris Nassetta said, “We do expect this momentum to continue. Vaccine distribution, coupled with relaxed travel restrictions, and increasing consumer confidence, should drive further RevPAR improvements in the coming months, and quarters. In fact, we are on pace to see record leisure demand in the US over the summer months.”
Highlights:
- Quotes from the call…
- “since we had our last call, the slope of the recovery’s been steeper than what we would have thought in all regards.”
- “We expect continued corporate office re-openings to drive a meaningful pick up in business transient demand, towards the back, half of the year. Based on what we’ve seen in China and pockets of the US, once restrictions are lifted and offices reopen, business travel returns.”
- “as kids in the fall, go back to school. Which at this point I think is very highly likely, you are going to see a step change into the third and fourth quarter in business transient.”
- “there’s 3 million industry folks still out of work. I think by the time you get to September/October, I think the vast majority of those could easily be re-employed given what I think demand will be.”
- Promising demand trends:
- System-wide occupancy reached 55% by the end of the month, driven by strong leisure demand.
- Leisure is strongest, but corporate and group are steadily improving correlated w/ re-opening.
- In the US, leisure demand is already at 90% of 2019 levels and business is at ~50%. However, in states that were further along in their reopening process business transient revenue was roughly 75% of 2019 levels for the quarter. They think business transient occupancy will be ~70% of 2019 levels by Q4. Rate will be weaker. That puts full year RevPAR exiting 2021 at ~70% of 2019 levels.
- Group bookings made in the first quarter for the back half of the year were roughly flat with 2019 booking activity. For 2022, next year, their group position is roughly 85% of peak 2019 levels, with rate increases versus 2019. And Group bookings were up in the mid-teens for 2023 versus 2019. Bigger meetings require greater lead time to plan and are benefiting 2022/23 booking trends.
- China is running in the low 70s occupancy. Leisure and business transient demand, rebounded quickly as restrictions eased, with March occupancy in China exceeding 2019 levels (occupancy in China was at~70% pre-pandemic).
- Stable unit growth underpins the story – unit growth was 5.8% YoY and the pipeline increased to a total of approximately ~400K rooms. That represents 40% room growth from their current installed base of rooms. More than half of their pipeline is located outside the US (mid-tier focus tied to growing global middle class) and more than half are under construction (helps underpin several yrs. of predictable growth). Tightening restrictions and lockdowns across Europe delayed openings in the region. They expect an uptick in development activity as countries continue to reopen. Maintained guidance of net units in the mid-single digit range for the next several years and continue to expect growth in the 4.5% to 5% range in 2021.
- Continued strength in their market leading RevPAR index. RevPAR index is their RevPAR premium/discount relative to peers adjusted for chain scale. They are the market leaders – this is helpful because it’s what leads to pipeline growth (hotel operators want to associate w/ the brand that yields the best rates and occupancy) and is helpful in a macro downturn because it’s even more crucial for a developer to be associated with a market leading brand to get financing. i.e. they would likely take more pipeline share if lending standards tighten. The other countercyclical aspect of their pipeline growth is conversions (an existing hotel changes their banner to Hilton). I.e. Hampton Inn (35 year old brand) has a RevPAR index of 120.
- Loyalty members hit 115m (+8% YoY) and account for >60% of system-wide occupancy. Loyalty members continues to grow and % penetration continues to improve – both of which bode well for LT RevPAR trends as they typically see a doubling of wallet share once a customer signs up for the loyalty, and share improves w/ status level. They get 75-80% share of hotel wallet from Diamond Honors customers.
- Shareholder returns should improve w/ recovery – dividends and buybacks are still halted but as the recovery progresses, they should return to historical levels – likely won’t resume until the beginning of next year. In 2019 they returned more than 8% of their market cap to shareholders in the form of buybacks and dividends.
If anyone is eager to book some travel, they have some nice new hotels opening…😊
https://lxrhotels3.hilton.com/lxr/mango-house-seychelles/
https://www.waldorfastoriamonarchbeach.com/
$HLT.US
[category earnings]
[tag HLT]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109