Update: Nassetta reports no signs of weakness

McCLEAN, VIRGINIA – The positive impact of improving global travel and a record 36,000 rooms signed highlight Hilton’s 2Q23 earnings report, which beat estimates across the board.

Second quarter highlights: RevPAR growth was 12.1%; adjusted EPS of $1.63; adjusted EBITDA hit a record $811 million; total fees of $773 million all beat Street estimates. Occupancy to 77% in June, highest post-pandemic.

Owned and leased profits of $44 million was ahead of consensus and incentive management fees of $69 million were some $15 million to $17 million ahead of estimates, likely driven by international demand rebound. For example, 2Q23 RevPAR in Asia Pacific was up 79% year over year.

“Everybody wants to will the business backwards, but we don’t really see it,” said Hilton CEO Chris Nassetta during the earnings call. “I gave you some sense of where we have really good forward-looking information, which is on the group segment remaining really, really strong. I mean, obviously, leisure is growing at a somewhat slower pace because of the comps, but it’s still way over the prior high-water mark. Business transient keeps grinding up and getting better – and the same with group. So, as I’m sitting here today, honestly, while we will take a macro view of later in the year because we’re not economists, we’re not seeing any signs of weaknesses.”

Digging deeper into 2Q23 results, Nassetta said strong demand drove continued pricing power across all segments. Systemwide occupancy improved more than four points during the quarter to reach 77% in June, Hilton’s highest level post pandemic. Business transient RevPAR remained strong growing 11% year over year as trends continued to normalize. Leisure RevPAR increased 7% versus last year, driven by solid rate growth and despite more difficult year over year comps. Nassetta added that group recovery remained robust in the quarter with RevPAR growing 19% year over year. Compared to 2019, systemwide RevPAR grew more than 9% in the quarter with all segments performing well versus prior peaks and accelerating sequentially versus the first quarter. Stable demand and rising rates drove leisure RevPAR growth by 26% versus 2019, while business transient grew 6%. Group RevPAR was roughly flat versus prior peak levels and improved versus the first quarter.

Our [group] bookings in the quarter for 2024 arrivals grew 30% with group position now up 13% driven by the corporate segment. Our sales team saw the largest revenue bookings in our history for all future arrival periods.

Chris Nassetta

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As Hilton looks at the back half of this year, Nassetta said they expect continued strength driven by recovery in international markets, business transient and group demand. On the group side, he said Hilton continues to see very positive trends. “Our bookings in the quarter for 2024 arrivals grew 30% with group position now up 13% driven by the corporate segment. Our sales team saw the largest revenue bookings in our history for all future arrival periods.”

Full year 2023 system-wide RevPAR is expected to increase between 10% and 12% on a comparable and currency neutral basis compared to 2022; full year net income is projected to be between $1,387 million and $1,422 million; full year adjusted EBITDA is projected to be between $2,975 million and $3,025 million. Capital return for the full year is projected to be between $2.4 billion and $2.6 billion.

“We have a positive view of Hilton's 2Q23 beat-and-raise print,” wrote R.W. Baird analyst Michael Bellisario. “The global travel recovery continues to unfold, particularly internationally, and Hilton's conservative 2H23 macroeconomic assumptions that were previously embedded in guidance appear less likely to materialize, which we believe is leading to the upward revision to implied 2H23 expectations.”

Revised unit growth to the lower end of guidance at 5% could reflect challenges with construction delays. Hilton approved 36,000 new rooms for development during the second quarter (more than 60,000 for the year), bringing its development pipeline to 440,900 rooms (roughly 3,000 hotels) as of June 30, 2023, representing growth of 7% year over year. Hilton added 14,000 rooms to its system in the second quarter, resulting in 11,200 net additional rooms, and roughly half of Hilton’s pipeline is under construction, said Nassetta, who also alluded to ongoing development of a lifestyle brand that is perhaps a year away from launching.

Conversions accounted for nearly one-third of 2Q signings in the U.S., while signings in international markets doubled versus last year, driven by strong momentum across Europe and Asia Pacific and accounting for roughly half of systemwide signings in the quarter.

In China, Hilton Garden Inn continued to show strong growth since Hilton launched a new franchise business model. in the quarter, Hilton signed approximately 3,700 HGI rooms in China – more than three times last year and accounting for more than one-third of the company’s signings in China.

Signings in the Americas were up 25% year over year with strong interest in the U.S. despite tighter credit conditions. Hilton has signed more than 50 Tru by Hilton hotels year to date, representing the strongest pace since 2017.

Results were further assisted by the Spark by Hilton brand which signed about 60 hotels with another 400 in negotiation just six months since its launch. Nearly all deals are conversions from third-party brands and half represent new owners to Hilton, according to Nassetta. The first Spark by Hilton is scheduled to open in September and roughly 20 by year end after an initial projection of 50 openings this year.

The newly launched apartment-style extended-stay brand still operating under the Project H3 moniker has received strong interest from owners and developers (300 deals in negotiations), especially institutional investors who want to develop multiple units, according to Nassetta.

“With forecasts for our highest level of signings, the largest pipeline in our history and approaching the largest under construction pipeline in our history, we expect net unit growth to accelerate to five to 6% next year, and to return to 6% to 7% over the next couple of years,” Nassetta added.