Share Price: $150 Target Price: $170 (increased from $160)
Position Size: 2.1% 1 Yr. Return: +32%
Key takeaways:
- Very positive quarter and strong progress on recovery – RevPAR continues improve vs. 2019 baseline, w/ RevPAR for the quarter down -13% vs 2019…US leisure travel continues to be a key demand driver and is expected to stay strong. Recovery of group, business transient and Chinese and European markets will all be added tailwinds going forward.
- Saw some weakness w/ omicron but outlook is very positive – Seasonally softer leisure demand coupled with incremental COVID impacts due to the Omicron variant tempered recent trends (January system-wide RevPAR was ~75% of 2019 levels). Despite near-term choppiness, they remain very optimistic about accelerated recovery across all segments throughout 2022.
- Solid unit growth, ahead of guidance (+5.6% YoY) – they expect 5% this year, accelerating to 6-7% longer term. This provides key support to LT growth story, as industry leading RevPAR premiums continue to drive a high quality pipeline.
- China is not a problem – China is an important part of their pipeline and growth there is intact. Commentary around China was very optimistic.
- Expect to reinstate buybacks and quarterly dividend in Q2
Highlights:
- Q4 RevPAR was roughly 87% of 2019 levels with ADR nearly back to prior peaks. More moderate than Marriott’s 81% due to Marriott’s higher mix of luxury/urban/corporate.
- By geography…RevPAR in EMEA (+7% vs 2019) and US (-11% vs 2019) were strongest while China (-24% vs 2019%) and Europe (-25% vs 2019) were weakest given lingering Covid restrictions.
- By demand segment…
- Leisure is leading the recovery w/ record performance which continues to exceed 2019 levels. Their strong leisure demand over the holiday season drove U.S. RevPAR to more than 98% of 2019 levels for December. They anticipate strong leisure trends to continue again this year driven by pent-up demand and nearly $2.5 trillion of excess consumer savings.
- Business transient room nights were approximately 80% of 2019 levels, but management’s outlook is very positive. They expect growth in GDP and non-residential fixed investment coupled with more flexible travel policies across large corporate customers to drive an improvement in business transient trends. About 80% of their corporate demand is from SMBs – they’re getting close to 2019 levels while large corporates are down >30% from 2019. As a positive indication of business transient recovery…at the beginning of January midweek U.S. transient bookings for all future periods were down 13% from 2019 levels and improved to just down 4% by the end of the month.
- Group – December room nights were just 12% off of 2019 levels. Performance was largely driven by strong social business, while recovery in company meetings and larger groups continued to lag. Group demand takes longer to recover given planning lead times for large social events and business conferences. Future group booking are occurring at higher rates than 2019. They are seeing huge amounts of pent-up demand and think 2022 will be a “barn burner” year for their group business. “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.”
- Margins going up…
- 2021 margins were +500 basis points above 2019 peak levels reaching ~66% for the full year despite full year RevPAR and adj. EBITDA being 30% below 2019 peak levels.
- Inflation is also a tailwind. They have pricing power, re-price their product daily and have a significant portion of their revenues that are royalties tied to top line. Franchising is almost 2/3 of EBITDA and tied to top line, managing is another 25% of EBITDA where the fee stream is a mix of base management fees (% of room revenue) and incentive management fees (% of hotel profitability). So, in an inflationary environment, pricing power = margin expansion.
- They expect permanent margin improvement versus prior peak levels in the range of 400 to 600 basis points over the next few years aided by cost efficiencies gained through Covid, including lowering labor intensity.
- Inflation and pricing power…
- “It has been hard to hire labor, we do need to bring some of those service standards back, obviously everybody knows what’s going on with inflation and wage inflation. But of course the flip side of that on inflation is that helps on the revenue line, right? We reprice the rooms every night. If inflation is a headwind on the cost side, it’s going to be a tailwind on the revenue side and the revenue base is obviously bigger than the expense base. And so, that ought to lead to higher margins coming out the other side. So, when you put that all together, we think we can do a better job for customers, give them what they want, take away what they don’t want, and what they won’t pay for, and use driving revenue through an inflationary environment to get our owners to be higher margin businesses coming out the other side.”
- “we’re going to have more inflationary environment broadly. Thank you, Federal Reserve and the US Congress for fiscal and monetary stimulus, …we could debate transitory or otherwise. But those things are translating into broadly, a more highly inflationary environment and that applies to us too, and that obviously is helping from a pricing power point of view.”
- Pipeline – Stable unit growth underpins the story
- Development activity continues to gain momentum across the globe as the recovery progresses.
- China development activity is particularly strong – “most of the development trends have been following the trend of the virus. So meaning, as the world has been opening up in those regions you see a pretty direct correlation to signing activity and approval activity in those regions… China has been kind of the exception to that rule, meaning even with lockdowns and people not moving around and you would think not being able to travel across the country would slow the pace of activity, but that just hasn’t been the case.” Mgmt. says the addressable market there is enormous (easily 20K hotels or more). This will be a LT source of growth for them.
- Unit growth in Q4 was 5.6% YoY and the pipeline increased to >400K rooms. That represents ~38% room growth from their current installed base of >1 million rooms and more than half are under construction (helps underpin several yrs. of predictable growth).
- 62% of their pipeline is located outside the US (franchise and mid-tier focus, tied to growing global middle class)
- Continued strength in their market leading RevPAR index. RevPAR index is their RevPAR premium/discount relative to peers adjusted for chain scale. I.e. Hampton Inn (35 year old brand) has a RevPAR index of 120. 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. The thought is that they would likely take more pipeline share if lending standards tighten and that’s exactly what we’ve seen during Covid. The other countercyclical aspect of their pipeline growth is conversions (an existing hotel changes their banner to Hilton). They continue to see strong conversions which were 20% of openings in the quarter.
- ESG – named the number three World’s Best Workplace by Fortune
- Capital returns resuming –In 2019 they returned more than 8% of their market cap to shareholders in the form of buybacks and dividends. They intend to return to their historical capital return model.
$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