No M&A announcement for Hilton, but …

MCLEAN, Virginia — When asked to address Hilton’s rumored acquisition of AJ Capital’s Graduate Hotels during Wednesday’s fourth-quarter earnings call, Hilton CEO Chris Nassetta was quick to say he couldn’t comment.

“Our attitude on M&A is the same as it’s always been,” he said. “If nothing, we’ve been consistent. I’ve been consistent.”

Hilton CEO Chris Nassetta

Consistency, in this case, means that Hilton hasn’t done any M&A in the recent past and none since Nassetta became CEO in 2006. He cited a “filtration system” that kept the company from pulling the trigger on deals.

But Nassetta also said he’s been consistent on a “never say never” attitude for M&A and that the company is open to the concept, especially with current economic conditions.

“The environment we’re in is a little bit different,” he said. “For a lot of reasons — interest rates, and otherwise more stress in the system than normal.”

It was at this point that Nassetta sounded more optimistic about a potential acquisition for Hilton for something like Graduate Hotels.

“[The current environment] probably presents more opportunity to do things like this,” he said. “But things that are quite modest in my view, and that are what I view as sort of tuck-in acquisitions.”

Nassetta said the “filtration system” at a high level has two barriers or questions: “Is something additive from the standpoint of the portfolio of brands?” And “can it be done in a way that’s accretive to the value of the company?”

And so far, nothing has passed through.

“We continue to look at everything,” he said. “But the stress in the environment maybe provides a little bit more opportunities than we’ve seen in quite a long time.”

Nassetta added that one way or another, Hilton will enter the luxury lifestyle space at some point this year and that the group is "hard at work."

More details on SLH partnership

Nassetta said Hilton was “excited” about its newly announced partnership with Small Luxury Hotels of the World (SLH) to expand its presence in the luxury space. The deal will allow Hilton customers to book, earn and redeem loyalty points for stays at participating properties in the SLH community of 560 luxury boutique hotels spanning 90 countries.

He said Hilton and SLH have been working on the partnership for some time, including doing focus groups and customer research over the past year.

“We feel like this offering, from the standpoint of our customers, particularly our higher-end customers, is going to be well received in terms of their ability to book it through our channels, and earn and burn their points and go on vacations in these places.”

Nassetta said Hilton has 100 existing hotels in its luxury segment, with another 60 to 70 in the pipeline. Most SLH’s hotels are smaller properties and are heavy in resorts. Sixty percent of the portfolio is in Europe, 20% in the U.S., and 20% in APAC. They are also in niche markets that are hard to get into.

When you look at the overlap, there’s really none because this is a really unique collection of hotels.

Chris Nassetta

“When you look at the overlap, there’s really none because this is a really unique collection of hotels,” he said.

Hilton will get paid for the business it generates, which Nassetta thinks will be significant. He also said he thinks this partnership will help SLH grow.

SLH hotel owners need to opt in to the partnership, and Nassetta said he expects it will take time to ramp up.

“The owners that have that we’ve discussed it with think it’s a compelling value proposition for them to be opting in, which is why we have confidence that the majority of the system ultimately will come in,” he said. “The question is going to be with all the technology… all of which is being worked on because we signed recently, but we’ve been working with them for quite some time.”

Nassetta said the SLH portfolio includes a heavy mix of urban locations and “some really interesting urban environments that we don’t have the luxury exposure to” and will help grow Hilton’s leisure and business transient numbers.

Commenting on the SLH partnership, R.W. Baird analyst Michael Bellisario wrote, “We view this strategic partnership as a big win for Hilton (and a loss for Hyatt, which had the exclusive loyalty alliance for the last ~five years).” Hilton said more details about the program will be forthcoming.

Q4 earnings

Hilton delivered strong 4Q23 performance with 5.7% RevPAR growth due to increases in both occupancy and ADR; management and franchise fee revenues increased 12.2% compared to the same period in 2022; adjusted EPS of $1.68; and adjusted EBITDA of $803 million – all beating Street expectations.

For comparison to pre-pandemic results, systemwide comparable RevPAR for the three months ended December 31, 2023, increased 13.5% compared to the same period in 2019, and management and franchise fee revenues increased 38.5% from the same period in 2019.

Nassetta said Hilton delivered more openings in the fourth quarter than any other quarter in the company’s history (24,000 rooms resulting in 62,900 room openings for the full year, a 4.9% increase versus 2022) and achieved record signings for the year, meaningfully ahead of pre-pandemic levels. “We expect this momentum to continue into 2024 and net unit growth to accelerate to the high end of our guidance range of 5.5% to 6%.” He noted that depending on how fast the hotels that opt-in to the SLH partnership become part of the Hilton system, there could be further growth of 25 to 50 basis points.

Hilton added 33,800 rooms to the development pipeline during the fourth quarter, contributing to 130,200 rooms added for the full year, approximately a 45% increase from the prior year. As of December 31, 2023, Hilton’s development pipeline totaled approximately 3,270 hotels, representing 462,400 rooms throughout 118 countries and territories, including 30 countries and territories where Hilton had no existing hotels. The pipeline total represents an 11% year-over-year increase.

Additionally, of the rooms in the development pipeline, 216,600 were under construction and 259,800 were located outside of the U.S.

For the full year 2024, Hilton projects systemwide RevPAR to increase between 2% and 4% on a comparable and currency-neutral basis compared to 2023; full-year net income is projected to be between $1,694 million and $1,729 million; full-year adjusted EBITDA is projected to be between $3,330 million and $3,380 million. The full-year 2024 capital return is projected to be approximately $3 billion.

Bellisario commented that 2024 RevPAR growth came in as expected, and adjusted EBITDA shows an upside from the higher 2023 earnings base.

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