The following segment was excerpted from this fund letter.
In the first half of 2024, Hilton (NYSE:HLT) generated strong revenue growth as the lodging industry experienced solid global demand against a favorable supply backdrop.
Near-term industry trends remain positive, with continued strong international growth, improving business transient demand and extremely robust group demand, which is poised to sequentially accelerate in the third quarter. Leisure travel continued to moderate from the high levels of recent years following the COVID-19 reopening.
In the second quarter, HLT’s revenue per room (“RevPAR”), the industry metric for same-store sales, increased 3.5% as compared to 2023. Combined with strong 6% net unit growth, aggregate fee revenues grew 10%. Earnings per share grew 17% year-over-year, benefiting from Hilton’s excellent cost control and continued best-in-class capital return.
Reflecting an incrementally challenging macroeconomic picture, principally in China, the company slightly reduced the upper end of their prior RevPAR guidance, now estimated by management to be +2% to +3%, while modestly increasing full year’s earnings guidance. Net unit growth continues to accelerate towards Hilton’s 6% to 7% long-term growth target supported by new brand concepts including Spark and LivSmart Studios by Hilton.
Over the coming quarters net unit growth will be further boosted by Hilton’s acquisition of Graduate Hotels and the on-boarding of properties from Hilton’s partnership with Small Luxury Hotels of the World (“SLH”), which is seeing better-than-expected owner uptake with 400 hotels poised to join the Hilton system. The SLH partnership expands Hilton’s network into a new category of hotel, while providing incremental sources of value for Hilton Honors members and travelers. While Hilton only earns fee revenue on the proportion of sales that comes through Hilton’s channels, the comparatively higher average nightly rate of SLH hotels relative to Hilton’s systemwide average means that even modest penetration levels could become a meaningful incremental fee stream to Hilton.
Over the medium-term, strong net unit growth combined with continued RevPAR growth (which has compounded at a 3% rate over the last 15 years) and a double-digit rate of growth from Hilton’s non-RevPAR fee revenue, which comprises about 20% of revenues, all combine to generate strong high-single-digit revenue growth. Coupled with excellent cost control, high incremental margins, and a substantial capital return program Hilton should continue to realize robust mid-to-high-teens compounded earnings growth for the foreseeable future.
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