JUST A DAY after rolling out a new urban brand, Motto, Hilton Worldwide Holdings President and CEO Chris Nassetta said the U.S. market’s supply growth is slowing due to a variety of factors. However, he also said the company’s global foothold positioned it to weather that slowdown, and said it will continue to see more net unit growth into next year.
During Hilton’s third quarter earnings call last week, Nassetta covered a range of topics after discussing the company’s performance, including his ongoing inclination away from mergers and acquisition, the possible acceleration of conversions and his expectations for Motto. The report itself was mostly positive.
Hilton’s diluted earnings per share rose 10 percent from the same time last year to $0.54. Net income for the quarter was $164 million, and system-wide RevPAR rose 2 percent. It approved29,200 new rooms for development and opened 16,100 rooms, making a net unit growth of 14,800 rooms, a 24 percent increase from the same period in 2017.
“Calendar shifts and weather impacts tempered reported RevPAR growth, but fundamentals remain strong,” Nassetta said. “We continue to feel optimistic about overall demand trends for the balance of the year and into 2019.”
However, he said that he expects the companies signings to go down some in the U.S. because “it’s getting harder to get deals done.”
“Since the last quarter I don’t think it’s dramatically or materially different, but it’s definitely harder,” he said. “Why? Inflation is picking up, cost of labor is going up, cost to build projects is going up. We think by the end of the year, it’ll be sort of a 10 percent increase in the cost to build.”
Nassetta also said interest rates are “are moving a little bit in the wrong direction,” muffling supply growth. “And I think you’ll keep seeing supply go down because it takes a long time for that cycle to reverse,” he said.
Responding to questions, Nassetta said he does not see an immediate interest in mergers and acquisition.
“For the 11 years I’ve been here, the filters have literally remained the same. Does something really work well strategically in terms of brands and our brand portfolio versus what we can do on our own and does it – can we do it in a way that’s really accretive to value?” he said. “Everything to-date that we have filtered through that, those lenses, really has not made sense versus what we’re doing like launching Motto by Hilton just yesterday, where we think we can do it better than anything out there and we can do it exactly the way the customer wants it and create more organic growth without having to buy growth.”
Still, Nassetta said, that doesn’t eliminate the possibility that a deal will pass through his filters. Meanwhile, conversions are seeing a slight uptick and he expects them to make up 20 percent of Hilton’s nut unit growth.
“When things gets tough, conversion activity picks up,” he said. “We’ve seen a little bit of an uptick this year. We’re not expecting, given our outlook for next year, to see a whole heck of a lot of uptick because we think next year is going to be another pretty good year.”
Hilton has increased its “weapons in the arsenal” by adding conversion brands like Tapestry and Curio, and a soft luxury brand should be launched soon. Nassetta went on to talk about Hilton’s expectations for Motto, which the company is promoting among existing Hilton owners first.
“We’re always talking to customers and doing focus groups as we design these brands and figure out how to make them tick the right way, so that they’ll appeal to customers,” he said. “But we are also working very closely with owners to make sure that we’re engineering the cost to build and the cost to operate in a way that they’ll deliver returns that work for owners. Otherwise, we’ll have a great thing for a customer, but we will have no hotels for the customer to stay in.”
Hilton already has six firm deals for the new brand with about 20 more “sort of cooking.” Still, Tru will probably remain the company’s largest brand due to its price.
“Motto will be very big, but as I said in my prepared remarks, it’s hundreds of hotels. Tru will be thousands,” he said. “Again, these are more complicated urban deals that take longer to sort of pull together. But I think you’ll see that we’ll very quickly get the pipeline into the dozens of hotels and I think we’ll start bringing it to life and reality. Hopefully, next year you will be able to take on a tour of the first Motto.”