Update: Hilton's Nassetta foresees 6-7% growth rate

Note: This report was updated to include earnings call comments from Hilton President and CEO Chris Nassetta

Boosted by strong international performance and continued recovery in business transient and group, Hilton reported a 3Q23 earnings beat on Wednesday, stating it exceeded expectations for systemwide RevPAR growth. President and CEO Christopher Nassetta added that the company believes it has hit an inflection point and expects meaningful uptick in openings in the fourth quarter of this year. “With a record number of approvals year-to-date driving the largest pipeline in our history, we are confident in our ability to accelerate net unit growth to 5.5% to 6% next year,” he said.

Hilton reported a systemwide comparable RevPAR increase of 6.8% (versus guidance 4%-6%), on a currency neutral basis, for the third quarter compared to the same period in 2022. Comparable RevPAR increased 11.4%, on a currency neutral basis, for the third quarter compared to the same period in 2019. Asia Pacific RevPAR growth was +39.3% YOY versus the U.S. at +3% YOY.

Full year 2023 systemwide RevPAR is expected to increase between 12% and 12.5% on a comparable and currency neutral basis compared to 2022; full year net income is projected to be between $1.375 billion and $1.389 billion; full year Adjusted EBITDA is projected to be between $3.025 billion and $3.045 billion.

“Demand improved across all segments and regions with systemwide occupancy for the quarter reaching our highest level post-pandemic and only two percentage points off prior peak levels,” Nassetta said. “September was just one point shy of 2019.”

Driven by both rate and occupancy, group RevPAR rose 8% year over year, outperforming leisure and business transient RevPAR growth of 5% each. Compared to 2019, systemwide RevPAR grew 11.4% in the quarter with all segments accelerating sequentially versus the second quarter. Steady rate growth and rising demand drove leisure RevPAR up 29% versus 2019, improving roughly 300 basis points versus the second quarter. Business transient RevPAR grew 7% with both large and small accounts improving.

On the group side, RevPAR exceeded 2019 peak levels for the first full quarter since the pandemic. “We continue to see positive group booking trends in the quarter for all future periods,” Nassetta added. “Group bookings for 2024 is now up 18% year over year, and lead demand in the quarter for all future arrivals increased more than 15%.”

Looking to 4Q24, Hilton expects continued strength in international markets along with continued improvement in business transient and group demand to drive further acceleration in RevPAR compared to 2019. Nassetta cited better than expected third quarter performance and increased expectations for the fourth quarter partially driven by better group bookings. As a result, Hilton now expects full year RevPAR growth of 12% to 12.5%.

“The near-term outlook appears solid, the favorable growth algorithm remains intact and attractive, and EPS should continue to compound at a double-digit growth rate over the next few years (assuming the macro continues to hold),” wrote R.W. Baird analyst Michael Bellisario. “The under-levered balance sheet (just 2.6x net leverage) allows management to be more aggressive with key money dollars when competing for conversion deals (e.g., pending 1,060-room Boston conversion).”

Pipeline update

Hilton approved 35,500 new rooms for development during the third quarter, increasing 80% year over year and bringing its development pipeline to a record 457,300 rooms as of September 30, 2023, representing growth of 4% from June 30, 2023, and 10% from September 30, 2022. Nassetta added that conversions accounted for 35% of the signings sequentially versus the second quarter.

Hilton added 15,700 rooms to its system in the third quarter, resulting in 14,300 net additional rooms for the period.

“Overall, we remain on track to deliver the highest annual signings in our company’s history, surpassing 2019 record levels by double digit percentage points,” Nassetta added. “We also delivered another strong quarter of construction starts in every major region, exceeding our expectations. The U.S., in particular, delivered its strongest quarter of starts since Q1 2020, and up 18% year over year. Roughly half of our pipeline is currently under construction, and we continue to have more rooms under construction than any other hotel company accounting for more than 20% of industry share.”

Nassetta highlighted the opening of the first Spark by Hilton just eight months after the launch of the brand – the fastest announcement to market in Hilton history.

He also said Project H3 has 350 deals in negotiations and is breaking ground this week on the first property in Kokomo, Indiana, which is expected to open in late summer 2024.

Hilton is also about to announce and open a 1,000-room conversion property in the U.S. Northeast, highlighting forecast conversions that will account for approximately 30% of full-year openings.

“We are confident in our ability to accelerate net unit growth to 5.5% to 6% next year and return to our prior 6% to 7% growth rate,” said Nassetta, who added that under construction portfolio mix is 60% focused-service and 40% full-service.

By the numbers

Diluted EPS was $1.44 for the third quarter, and diluted EPS, adjusted for special items, was $1.67 (versus $1.66 expectation from the Street). Net income was $379 million for the third quarter and Adjusted EBITDA was $834 million (versus $808 million expectation from the Street).

Hilton repurchased 4.5 million shares of common stock during the third quarter, bringing total capital return, including dividends, to $723 million for the quarter and $1.938 billion year to date through October. Full year 2023 capital return is projected to be between $2.4 billion and $2.6 billion.

For 4Q23, Hilton guidance included RevPAR growth of 4.5%-5.5%; Adjusted EPS of $1.51-$1.56; and Adjusted EBITDA of $739-$759 million.