Growth remains a priority for Hilton, with openings, conversions and signings continuing in the second quarter and more expected next year.
MCLEAN, Virginia—The second quarter of 2020 was “not a shining moment in our 100-year history,” said Hilton President and CEO Chris Nassetta.* But despite pandemic-related performance lows, he pointed out several recent wins, including year-over-year positive net unit growth and the June signing of a deal with Country Garden to develop 1,000 Home2Suites hotels in China.
Hilton’s overall hotel performance in the quarter reflected massive hits—systemwide revenue per available room dropped 81% year over year and net loss was $432 million for the quarter. However, the company also notched month-over-month improvements within the quarter that Nassetta called “meaningful.”
“Approximately 20% of properties systemwide had temporarily suspended operations at some point in the first half of the year. Today, nearly 80% of those hotels have reopened, including all of our hotels in China and the majority of our hotels in the United States,” he said. Overall, 99% of the global Hilton portfolio is open now.
The lowest lows of the quarter from a demand perspective were recorded in April, but Nassetta cited more recent bumps—especially over the Fourth of July holiday—that brought the company from a systemwide occupancy low of 14% to approximately 45% now.
Development and conversions
Net unit growth remains a priority for Hilton, and Nassetta said that despite setbacks, the company still opened 6,800 rooms in the quarter, resulting in the addition of 5,500 net rooms, representing 4.8% growth compared to the same quarter last year.
Also on the growth front, the company in late June signed a strategic cooperation agreement with China’s Country Garden to develop 1,000 Home2 Suites by Hilton hotels across China.
Nassetta said recently the company signed the Conrad Costa del Sol in Spain, a Waldorf Astoria hotel in Tokyo and the Oceana in Santa Monica, which will join Hilton’s LXR brand.
Conversion activity in the quarter turned out higher than what the company expected, Nassetta said.
“We saw positive momentum across our Doubletree, Curio and Tapestry brands,” he said. Conversions are up approximately 50% over the comparable period in 2019—some of which will factor in to 2020, but most will happen in 2021, he added.
“The combination of (conversions) with properties in construction that were delayed will mean next year will be a better (net-unit-growth) year,” he said. “It won’t be back to where we were yet, but we’re still signing lots of deals and getting construction deals. Our best guess is that signings may be down 20% and our starts are down about 10%, but … we’re still signing lots of deals that will eventually open.”
Nassetta said he’s been pleasantly surprised at the company’s development activity. He pointed to the Country Garden deal, which was in the works before the pandemic, specifically as “testament to the fact that we’re not crying in our milk.”
Hilton closed the second quarter with systemwide occupancy at 22.3%, down 56.1% year over year. The Asia-Pacific region led the system with 28.8% occupancy, while Hilton’s hotels recorded only 7.1% occupancy in Europe and 24.4% occupancy in the U.S., according to the company’s Q2 earnings release.
Systemwide average daily rate was $97.18 for the quarter, down 33.2% year over year, and RevPAR was $21.67, an 81% drop.
The company’s higher-chain-scale brands were hardest hit by the RevPAR decline, with Waldorf Astoria dropping 93.3% and Conrad dropping 87% compared to the same quarter last year. Home2 Suites and Homewood Suites respectively had 61.5% and 65.1% year-over-year drops in RevPAR.
Nassetta said the difficulty with ADR is “a mix issue.”
The traditional Hilton customer is “higher-rated leisure and higher-rated business,” he said, but to get over the pandemic hump, the company and its owners have gone after any available business, leading to overall rate drops.
“We’ve been going after that lower-rated leisure traveler because it’s the bulk of what’s out there and we need to help our owners,” he said. “But when you get to a new normalized environment with our traditional travelers … this will right itself rapidly” in terms of ADR returns, he said.
Group business visibility remains difficult, he said, but he projects the company will retain about a third of its corporate negotiated business, and the rest will divide into retention and finding other options.
As of right now, bookings indicate group business will pick back up in Q2 2021, he said.
Leisure business is expected to continue past the traditional summer window this year, particularly if schools and offices remain closed, Nassetta said.
“We’ll see a little heavier leisure as we go into the fall, which will be helpful, and you will see some movement up in business transient,” which is “grinding slowly up,” he said.
Management and franchise and licensing fee revenues decreased 77% and 50%, respectively, during the three- and six-month periods ending 30 June 2020.
Nassetta said Hilton executives are spending more time on decisions about long-term changes to the overall hotel operating cost structure “than on any other single thing.”
The goal, he said, is “to dive very deeply into each brand’s CapEx and OpEx standards to see if we can drive far greater efficiency.”
He acknowledged that over time, brand standards increase and that the industry has “been better at adding things than taking them away.”
As a result, he said the company has every option on the table and is “looking at the engineering of every element of every hotel, to the penny on cost per occupied room and the like,” which will lead to a dual outcome—savings for owners and added relevance and value for customers.
A big part of that is working with owners and customers to identify what elements of the hotel and the stay are important and add value, and what might not matter and can be cut.
He cited the company’s current CleanStay initiative, which limits housekeeping among other efforts, as “a live, systemwide test” to generate data on what customers truly want, while still driving margin for owners.
As of press time, Hilton’s stock was trading at $83.16 a share, down 25.4% year to date. The NYSE Composite was down 8.6% for the same period.
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*Editor’s note: Hotel News Now is a division of STR, a CoStar Group company. Chris Nassetta serves on CoStar Group’s Board of Directors.