Share Price: $141 Target Price: $160 (increased from $150)
Position Size: 2% 1 Yr. Return: +64%
Key takeaways:
- Very positive quarter and strong progress on recovery as RevPAR continues to recover faster than expected leading to better than expected Q3 results. Q2 system-wide RevPAR continued to improve vs. 2019 baseline, w/ RevPAR for the quarter down -19% vs 2019.
- Seeing very robust demand trends – trends continued to improve into the current quarter, leisure demand is exceptionally strong and business travel is recovering.
- Solid unit growth, ahead of guidance (+6.6% YoY) – 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.
Highlights:
- Demand is recovering…despite (now easing) headwinds from international travel restrictions
- Leisure is leading the recovery w/ record performance; leisure rates are already exceeding 2019 levels
- Bookings for all future periods are just 8% below 2019
- Roughly 40% of system-wide hotels have exceeded 2019 RevPAR levels in October month-to-date.
- Business transient is improving, Group will be last to recover.
- Business transient room nights were roughly 75% of prior peak levels and group RevPAR was approximately 60% of 2019 levels, both improving meaningfully from 2Q.
- Outlook for business travel is very strong. Currently business is being heavily driven by SMB demand, which is more rate sensitive. About 80% of their corporate demand is from SMBs – they’re getting close to 2019 levels while large corporates are down 40% from 2019.
- 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…in an inflationary environment, they have pricing power and a significant portion of their revenues 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. This margin tailwind is in addition to cost efficiencies gained through Covid, including lowering labor intensity.
- Inflation and pricing power…
- “the laws of economics are alive and well. Why is leisure so strong in rate? why are we able to price above historically high levels? because they’re crazy amounts of demand. Like our weekend demand is off the charts, we’re running 85% to 90% system-wide in the US on the weekends. And we’re pricing over ’19 levels, obviously because we have a lot of demand.”
- “typically it’s a grind to build back occupancy and rate lags significantly, ….rate is leading the charge.”
- “we’re in an inflationary environment and guess what? We can re-price our product every second of every day we’re a very good hedge in that way to inflation and we’re being very thoughtful about how we’re pricing our product.”
- “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 – China net unit growth rising due to new franchising initiatives and rapidly growing demand for mid-scale hotels in China. The say the addressable market there is enormous (easily 20K hotels or more). This will be a LT source of growth for them.
- Unit growth in Q3 was 6.6% YoY and the pipeline increased to >400K rooms. That represents 40% room growth from their current installed base of rooms and more than half are under construction (helps underpin several yrs. of predictable growth).
- 62% of their pipeline is located outside the US (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 a record number of conversion signings which were 1/3 of total signings in the quarter.
- ESG – named the number three World’s Best Workplace by Fortune
- 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. They intend to return to their historical capital return model.
New hotel to keep in mind if you’re headed to Japan….. Roku Kyoto…https://lxrhotels3.hilton.com/lxr/roku-kyoto/
$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