Hilton 2Q21 Results – Crestwood Advisors

Share Price: $126 Target Price: $150

Position Size: 2% 1 Yr. Return: +71%

Key takeaways:

Performance was driven by strong leisure demand and rate growth
Expect return of capital program in early 2022
Solid unit growth (+7% YoY) and additions to pipeline, come in ahead of mgmt. guidance. Provides key support to LT growth story as industry leading RevPAR premiums continue to drive a high quality pipeline.
CEO Chris Nassetta said, “things have been coming back more quickly, then we would have thought. We knew they’d come back, obviously you all know, I’ve been optimistic about the recovery, but it’s even better than our thought”…”when we look back on this recovery, the most unusual thing relative to any other period in my for almost 40 years of doing this will be just the rapid return of rate.”

Highlights:

While limited international travel weighed on overall performance, strong leisure demand and rate recovery drove improving trends. In Q2 systemwide RevPAR was down 36% from 2019. This continues to improve…w/ June RevPAR down 29% from 2019. China has rebounded with RevPAR now trending above 2019 levels
In the 7 trailing days prior to the earnings call, system-wide occupancy was running at 74%. This is a very short term data point, but it’s a very positive one. It’s similar to pre-Covid and implies very strong mid-week travel which requires meaningful business demand especially in certain markets.
Leisure is leading the recovery w/ record performance

For the quarter, US leisure demand exceeded prior peak levels with rates at 90% of prior peaks.
In July system wide leisure room nights and rate exceeded 2019 levels

Recovery driven by small and medium-sized businesses. Pre-COVID, 80% of their business travel was SMBs.
In June Business transient room night demand was 70% 2019 levels with rate over 80% of 2019 levels. In July rates were at 90% of 2019 levels.

Group performance driven primarily by social groups given seasonally higher leisure demand and ended June at more than half of 2019 levels
Planning lead times for large business conferences means it takes longer to recover
They think 2022 will be a “barn burner” year for their group business
Group bookings for next year are at rates above 2019 peak.
“Rates are up because we’re being super disciplined recognizing that there is a limited amount of meeting space is going to be a gargantuan amount of demand and we can be a bit patient.”

For 2021, expect net unit growth in the 5% to 5.5% range, above prior expectations given the pace of openings year-to-date.
Unit growth in Q2 was 7% YoY and the pipeline increased to a total of approximately >400K rooms. That represents 40% room growth from their current installed base of rooms.
62% 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).
Had a record number of conversion signings in the quarter, representing 30% of total signings

“The system is performing at the highest levels from a market share point of view that it’s ever performed in our history. And I think that’s a great leading indicator for opportunities to convince folks who are independents to come into the fold. As well as folks that have weaker brands that are looking for a better performance to come into the fold, both of which are happening, a little bit better than our expectations.”

China development activity is particularly strong – increased regulatory activity in property sector could add a headwind to development activity.

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.

Shareholder returns should improve w/ recovery – likely will resume 1H22. In 2019 they returned more than 8% of their market cap to shareholders in the form of buybacks and dividends.

$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