Hilton Worldwide Holdings Inc (HLT) — Q3 2022 Earnings Call Transcript

Thank you, Chad. Welcome to Hilton’s third quarter 2022 earnings call. Before we begin, we would like to remind you that our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements. And forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of our most recently filed Form 10-K and first quarter 10-Q. In addition, we will refer to certain non-GAAP financial measures on this call. You can find reconciliations of non-GAAP to GAAP financial measures discussed on today’s call in our earnings press release and on our website at ir.Hilton.com. This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment and the company’s outlook. Kevin Jacobs, our Chief Financial Officer and President, Global Development, will then review our third results and discuss our expectations for the year. Following their remarks, we’ll be happy to take your questions. And with that, I’m pleased to turn the call over to Chris.

Thank you, Jill. Good morning, everyone, and thanks for joining us today. The third quarter marked a very important milestone in our continued recovery. For the first time since the pandemic began, system-wide RevPAR surpassed 2019 levels. Additionally, adjusted EBITDA and adjusted EPS exceeded the high end of our guidance and 2019 levels. We achieved several notable development milestones in the quarter, including reaching 100,000 rooms open across Europe, and announced various strategic partnerships, further enhancing the guest experience and the strength of our global system. The quarter's strong performance, coupled with our capital-light business model, enabled us to continue returning meaningful capital to shareholders. Year-to-date, we've returned more than $1.3 billion. And for the full year, we're on track to return between $1.5 billion and $1.9 billion to shareholders. Turning to the specifics results in the quarter, occupancy reached more than 73%, only four points shy of 2019 levels. As expected, strong travel demand continued through the summer months, primarily driven by robust leisure trends. Post Labor Day, demand remained strong as business transient and group demand improved significantly and leisure demand remained robust. Overall demand for the quarter peaked in September, nearly reaching 2019 levels with business transient demand only two points off 2019 levels. ADR also continued to strengthen and improved quarter-over-quarter and was up 11% versus 2019. Rates across all segments surpassed 2019 levels, with leisure transient rates up in the high teens and both business transient and group up in the mid-single digits. All of this translated into third quarter system-wide RevPAR growth of approximately 30% year-over-year and 5% compared to 2019 levels, with each month surpassing prior peaks. Leisure transient RevPAR continued to lead the recovery, exceeding 2019 levels by more than 11% for the quarter. Business transient RevPAR reached 2019 levels, with notable acceleration in large corporate business. Our top 20 business accounts are now just 3% shy of 2019 levels, with forward bookings trending above 2019. Small and medium-sized businesses remain ahead of 2019 levels. Group RevPAR reached roughly 93% of prior peak levels for the quarter, with company meetings improving significantly as a percentage of mix. We expect trends to remain strong for the balance of the year with system-wide RevPAR once again surpassing 2019 levels in the fourth quarter. Leisure transient RevPAR is expected to remain meaningfully above prior peaks, driven by solid consumer confidence and continued eagerness and ability to travel. We expect business transient RevPAR to continue to see gradual recovery, primarily driven by rising demand as companies encourage their people to get back on the road. System-wide group position for the fourth quarter is approximately 5% above 2019 levels, accelerating over the last several months, largely due to a robust demand pipeline. Additionally, rates on new bookings are up in the mid to high teens versus 2019, with group mix continuing to normalize. Company meetings and convention business make up a larger percentage of forward bookings versus the same period in 2019. As we look ahead, we remain very optimistic about the future of travel. Despite near-term macro headwinds, we're not seeing any signs that fundamentals are weakening. Rising demand, coupled with historically low industry supply growth, should continue to drive strong pricing power. Consumers are shifting back to spending on experiences, international borders are reopening and pent-up demand is being released across all segments. Consumers still have an estimated $2.4 trillion of excess savings accumulated during the pandemic, or approximately 55% more in their checking and savings accounts than they did in 2019. Additionally, according to a recent global Hilton study, 85% of business travelers hope to travel as much or more next year, and group position for 2023 is less than 10% shy of 2019 peak levels, with a tentative pipeline up significantly. While the macro environment is more challenging, we are in the midst of a strong rebound with secular tailwinds that should support continued growth. Turning to development, we opened 80 properties, totaling nearly 13,000 rooms in the quarter and achieved several important milestones, including reaching 100,000 rooms in Europe, 25,000 Curio rooms globally and 600 Hilton Hotels & Resorts. All of our brands continue growing at a healthy pace given their distinct identities and compelling value propositions for both owners and guests. According to STR, our year-to-date net additions remain higher than all major branded competitors, demonstrating the power of our disciplined development strategy and the strength of our industry-leading RevPAR index premiums. During the quarter, we signed approximately 20,000 rooms, bringing our pipeline to a record 416,000 rooms, half of which are under construction. Signings were boosted by strong RevPAR performance in the US, which drove greater owner optimism around the recovery. While macro factors tempered international signings, we were thrilled to announce nine landmark agreements to expand our luxury presence across seven countries in the Asia Pacific region, including the Conrad, Singapore Orchard. We also signed agreements to grow our flagship Hilton brand in Malaysia, Waldorf and Morocco in what will become our first system-wide tempo property in Times Square. Construction starts outperformed expectations in the quarter, largely due to better activity in the US as the cost of materials stabilized and demand for residential construction declined. According to STR, Hilton is the only major hotel company to deliver year-to-date growth in its under construction pipeline. For the full year, we continue to expect net unit growth of approximately 5%, and we expect mid-single-digit growth for the next couple of years before returning to our historical growth rate of 6% to 7%. With even more exciting destinations to enjoy, we continue strengthening our value proposition for Hilton Honors members. In the quarter, Honors membership grew 19% year-over-year to $146 million, and members accounted for more than 61% of occupancy, up 200 basis points year-over-year and roughly in line with 2019. We also continue to invest in new innovations focused on ensuring we deliver reliable, friendly stays that meet guests’ evolving needs. An overwhelming 98% of guests in a recent survey said they are prioritizing wellness activities while on the road. During the quarter, we announced an industry-first partnership with Peloton to add Peloton bikes in every fitness center across all of our 5,400 US properties by year-end. Our extremely talented team works tirelessly to execute on a great strategy, and we continue to be recognized for our award-winning culture. Hilton was recently named the number one Best Workplace for Women in the US and the number two on the World's Best Workplaces by Fortune and Great Place to Work, our seventh consecutive year on the list and the only hospitality company on the list. As we begin a new golden age of travel, I think we're better positioned than ever. Our brands are performing at their highest levels, we're running our highest margins in our company's history and we're on track to generate our highest levels of free cash flow yet. Now, I'll turn the call over to Kevin to give you a bit more details on the quarter and our expectations for the full year.

Thanks, Chris, and good morning, everyone. During the quarter, system-wide RevPAR grew 29.9% versus the prior year on a comparable and currency neutral basis and increased 5% compared to 2019. Growth was driven by continued strength in leisure demand, as well as steady recovery in business transient and group travel. Adjusted EBITDA was $732 million in the quarter, exceeding the high end of our guidance range and up 41% year-over-year. Our performance was driven by better than expected fee growth, particularly across the Americas and Europe. Results also benefited from further recovery in our European ownership portfolio. Management franchise fees grew 33%, driven by continued RevPAR improvement and strong Honors license fees. Good cost control continued to benefit results. For the quarter, diluted earnings per share adjusted for special items was $1.31, exceeding the high end of our guidance range and increasing 68% year-over-year. Turning to our regional performance. Third quarter comparable US RevPAR grew 22% year-over-year and was up 6% versus 2019. Performance continued to be led by strong leisure demand over the summer travel season, with continued recovery in business transient and group travel further benefiting results. Total US business transient reached 2019 levels for the quarter, with US group RevPAR up 7 percentage points quarter-over-quarter to 95% of 2019 peak levels. In the Americas outside the US, third quarter RevPAR increased 74% year-over-year and was up 17% versus 2019. Performance was driven by continued strength in leisure demand, particularly across resort properties where ADR was up more than 20%. In Europe, RevPAR grew 92% year-over-year and was up 20% versus 2019. Performance benefited from strong leisure demand and international inbound travel throughout the summer. In the Middle East and Africa region, RevPAR increased 45% year-over-year and was up 6% versus 2019. The region continued to benefit from strong leisure demand and international inbound travel, particularly from Europe. In the Asia Pacific region, third quarter RevPAR was up 46% year-over-year and down 16% versus 2019. RevPAR in China was down 14% compared to 2019, improving 33 percentage points quarter-over-quarter as leisure demand picked up over the school holidays and COVID lockdowns in Shanghai and Beijing were lifted in July. Travel demand remains volatile in China as a result of strict COVID policies and restrictions to contain new outbreaks. The rest of the Asia Pacific region saw continued improvement with RevPAR, excluding China, up 10 points quarter-over-quarter, with September RevPAR down just 8% to 2019. We remain optimistic about further recovery across the entire Asia Pacific region as travel restrictions continue to ease and borders reopen to international travel. For example, our recent booking pace in Japan has already started to increase following the recent government stimulus announcement and border openings. Turning to development. Our pipeline grew year-over-year and sequentially, totaling nearly 416,000 rooms at the end of the quarter, with nearly 60% of pipeline rooms located outside the US and roughly half under construction. For the full year, we still expect net unit growth of approximately 5% and signings of approximately 100,000 rooms globally with US signings exceeding 2019 levels. Despite the near-term macroeconomic challenges, we remain confident in our ability to deliver net unit growth in the mid-single-digit range for the next couple of years. Moving to guidance. For the fourth quarter, we expect system-wide RevPAR growth to be between 19% and 23% year-over-year or up 2% to 6% compared to fourth quarter 2019. We expect adjusted EBITDA of between $641 million and $671 million and adjusted EPS adjusted for special items to be between $1.15 and $1.23. For the full year 2022, we expect RevPAR growth between 40% and 43%. Relative to 2019, we expect RevPAR to be down 1% to 3%. We forecast adjusted EBITDA of between $2.5 billion and $2.53 billion. Our adjusted EBITDA forecast represents a year-over-year increase of more than 50% at the midpoint and exceeds 2019 adjusted EBITDA by nearly 10%. We forecast diluted EPS adjusted for special items of between $4.46 and $4.54. Please note that our guidance ranges do not incorporate future share repurchases. Moving on to capital return. We paid a cash dividend of $0.15 per share during the third quarter for a total of $41 million year-to-date. Our Board also authorized a quarterly dividend of $0.15 per share in the fourth quarter. Year-to-date, we have returned more than $1.3 billion to shareholders in the form of buybacks and dividends. For the full year, we expect to return between $1.5 billion and $1.9 billion to shareholders in the form of buybacks and dividends. Further details on our third quarter results can be found in the earnings release we issued earlier this morning. This completes our prepared remarks. We would now like to open the line for any questions you may have. We would like to speak with as many of you as possible, so we ask that you limit yourself to one question. Chad, can we have our first question, please?

Good morning, Chris, Kevin, Jill.

Good morning, Joe.

I wanted to talk about corporate negotiated rates. Can you give us some perspective on how important or what percentage of your room nights, pre-pandemic room nights associated with corporate rate negotiations accounted for as a percentage of the total? And then as you think about those negotiations that are ongoing now for next year, do you get the sense that more companies that were traditionally part of the corporate rate negotiations are opting to go to a more dynamic, less contractual rate type of model?

I'll take it in the order you gave it. Just by way of background, you asked where it was in 2019. It was about 10% of our overall business in 2019. At the moment, it's about 7% of our overall business. And that is largely at this point given the big accounts are coming back by choice because we have chosen to pivot our mix as we've been talking about for the last several quarters a little bit more heavily towards SMB, small and medium-sized enterprises, simply because they are higher rated and more resilient through ups and downs. Having said that, our big corporate customers have been customers of ours for a long time, and they're important, but we have weighted that down. I think as they mentioned that we were most recently only really about 3% off with our top 20, my guess is that 7% will go up a bit, but our objective is to keep it a bit lower than 2019. We're early in that negotiation season, and what I can say at this point in talking to our teams is the vast majority of those accounts are going to dynamic pricing. That's something that we've been doing over a very long period of time, even pre-COVID. We did have the majority of the accounts dynamic, but we had a decent chunk, I want to say, 25% or 30% pre-COVID. And through the last few years, we've moved very aggressively to get more people dynamic. So at this point, the majority of them are dynamic. And I think that all customers understand because of what they're dealing with in every aspect of their life, that is that, at least at the moment, inflation is a real thing and that their expectation is that they're going to have to pay more. And the best – it's early days. The best we think at this point is high single-digit, very low double digit sort of in the 9% to 10% range is the best we can figure at this moment.

Great. Thanks, Chris.

Hi. Good morning, everyone. Chris, historically, the third quarter is kind of when we get a little bit of a taste of kind of a 2023 RevPAR outlook. And I think knowing all of the macro turmoil that's out there, it makes all the sense in the world to not maybe provide something specific. But can you just help us walk us through your thinking here, big picture? You obviously see a lot more people out there. So based on kind of what you know right now, maybe give us a little bit of directional color. And specifically, what can accelerate further from the trend lines that we're seeing in the third and early fourth quarter? And just how do you see it moving through the year in 2023?

I agree that there is considerable macroeconomic uncertainty, making it difficult for us to predict what will happen next year. We're still in the early stages of our budgeting process, which will take about 60 days to complete by year-end, so it's too soon to comment definitively. However, I can share that we are currently seeing strong fundamentals. We are aware of the Federal Reserve and other central banks' efforts to control inflation by slowing down the economy, but we believe our situation is somewhat unique compared to other industries, which should benefit us not just in the fourth quarter but into next year as well. The principles of supply and demand are very much in play; supply is at low historical levels and is likely to remain constrained due to factors stemming from COVID and broader economic issues. On the other hand, demand is increasing, as I noted in relation to third quarter performance, and we expect this trend to continue into the fourth quarter. This demand surge is driven by robust segments like leisure travel, where people now have disposable income and the freedom to spend, as well as significant pent-up demand in business travel and events. Additionally, a broader societal shift is occurring where individuals are prioritizing experiences over material goods. While we faced significant challenges during COVID, we are now recovering. We experience both headwinds and tailwinds; the headwinds stem from macroeconomic conditions, while the tailwinds come from increased spending on experiences, pent-up travel demand, and the necessities of business operations and gatherings. Currently, these tailwinds are outweighing the headwinds. In my view, we have enough momentum to continue moving forward, although the pace will depend on the macroeconomic environment. For the next few quarters, I anticipate strong tailwinds will continue. We're actively engaging with customers and monitoring real-time data to gauge the situation. To sum it up, while I'm unsure of exact figures for next year, I am confident that RevPAR will be higher year-over-year and above 2019 levels. As we finalize our budget process and observe the interplay of macro conditions and market dynamics, we'll gain a clearer understanding of how much it will increase. We hinted at a mid-single-digit growth expectation, similar to this year, as we gain more insight into the pipeline, construction, and delivery timelines.

Thank you very much.

Hi, everybody. Good morning. Chris, obviously, you guys have gotten back to returning capital much in the way you did prior to the pandemic with buybacks. But since kind of coming public again, this is the first time where you've operated in an environment where interest rates were something greater than where they've been. So I'm just wondering, as you think about your capital return strategy, you think about your cost of funding, obviously you're debt, there isn't a ton that's really rate sensitive and you have some time before you have any bonds due. How does the new interest rate environment kind of factor into your capital plans?

Certainly. We're returning more capital than ever before because we're generating more free cash flow than we have historically, and we plan to keep doing that. We're aiming for a leverage ratio of 3 to 3.5 times and prefer to be on the higher end, which suggests we may borrow more to support our buyback. Although we're not rushing to increase our debt in the current capital market environment, we’ll consider it when the time is right. There are also alternative ways to raise capital, such as through our credit facilities. Currently, we expect to end the year with leverage slightly lower than anticipated, but we believe the market conditions will stabilize. If opportunities arise to do more than we're currently undertaking, we will certainly explore them. Our balance sheet is in excellent shape, with no significant maturities until 2026. We took full advantage of market conditions before and during COVID to refinance and extend our maturities, giving us a solid maturity profile. Historically, interest rates fluctuate, and while the Fed is acting to control demand, it’s likely we’ll see rates move in the opposite direction in the coming years. The bond market isn’t appealing right now, but we still have access to lower-cost credit through other facilities. In summary, while the interest rate environment does impact us, it doesn't alter our commitment to returning significant capital. This year, we expect to continue generating more free cash flow, and if my predictions about RevPAR are accurate, we'll generate even more cash flow next year, allowing us to maintain our capital returns without needing to borrow in a less favorable market.

Thanks, Chris.

I wanted to ask you a little bit more about what you're seeing in China and maybe kind of what the development pipeline looks like there. And with rooms, I guess, opening just into a very depressed demand, would you expect developers to pull back there or kind of how are you thinking that plays out over the next year or so?

Yes, Smedes, what I would say is it's somewhat reflective of what Chris mentioned regarding the broader situation. There are both challenges and opportunities present. There's definitely macroeconomic disruption that has been widely reported. Additionally, as we have discussed in previous quarters, the way development operates in China still relies heavily on face-to-face interactions, which is influencing our signing levels currently. Interestingly, we have seen strong signings over the past couple of years, so starts in China are significantly up this year, particularly in the third quarter, and we anticipate growth for the year. Deliveries will also increase for the year. As you know, we are shifting towards a more limited service strategy in China, which should be less affected by the macro environment over time. Overall, developer optimism is still quite high. There is a strong demand for our brands, especially Hampton and Home 2, which are just beginning their rollout, along with Hilton Garden franchising. In summary, we expect a positive trend over time in a significant way, but in the short term, there is some volatility.

Thank you.

Hi, morning everyone. Thanks for taking my question. You've given a ton of fundamental information. I get the puts and takes with all of it. I wonder if you could talk about the non-RevPAR fees to some degree as they become just an important part and how we might expect those to behave in the puts and takes around those, as well as the opportunities to grow them into other areas, etc., longer term. Thanks.

Yes, that's a great question. As we've mentioned in previous quarters, during COVID, the non-RevPAR fees were less volatile and saw a smaller decline when the market experienced turmoil. We expected them to increase, but not at the same speed as other fees driven by RevPAR during the recovery. Interestingly, in the short term, these fees are growing nearly at the same rate as our overall fee growth. Our main revenue sources are credit card fees, which have improved due to a change we've made to the program. It's performing exceptionally well, and consumer spending has been robust, driving both spending and point issuance. HGV is also performing strongly, and you can find their financials publicly. We anticipate that our growth will closely align with theirs as they recover and increase their fees. Over time, I expect them to become a more significant contributor. In a more normalized RevPAR environment, we believe they could grow at or slightly above the rate of RevPAR if current trends continue, and we will look for ways to enhance growth in the future. While I can't provide specifics on unannounced plans, you can assume that our co-brand credit card product has the potential to expand beyond our current primary markets. We're experiencing solid growth with our new offerings in Japan, and we plan to introduce them to other countries. HGV has recently made an acquisition, which is a positive development for them. We're continuously exploring options to further leverage our customer base and increase revenue. More details will follow, but that's a general overview.

Understood. And I don't want to break the rules, but there was just one. SG&A came down a little bit, and I hope this is helpful to everyone. I was just curious what the driver of the SG&A guide coming in a little bit was and if it's sustainable in 2023, and then I'll stop. Thank you.

Yes, that's fine. We can allow some flexibility. It's a reasonable question. Generally, we have a strong narrative. We are effectively managing costs and being disciplined with our spending. There are some timing issues in the GAAP numbers, and while we provide the gap, we think about it concerning cash, which can seem a bit misleading. There is some distortion in the GAAP figures, but it still reflects a solid story. There are legitimate savings on the GAAP side, and we focus more on our actual overhead costs. For the full year, our cash G&A will be in the low to mid-teens compared to 2019. Although we face some challenges as the business resumes and labor costs rise due to inflation, we believe we can grow our G&A base at a rate in line with inflation moving forward. This is a key factor driving the margin improvements that Chris mentioned earlier in the call.

Thanks very much.

Great. Circling back to you having more rooms under construction than you did a quarter ago. I know you talked a bit about China and that starts are up there. Can you talk about what's going on with US rooms under construction? And it's just what we hear from others is that it's been so much more challenging to get developers to put shovels in the ground, right, outside of the signings, actually putting a shovel in the ground. And so is what you saw here in Q3 an anomaly in terms of having more construction starts sequentially, or is that something that you think you'll continue to see? Thanks.

We hope to maintain the positive trend we observed. The third quarter marked a significant turning point, which we believe will carry into the fourth quarter. Compared to normal times, it is indeed more challenging regarding cost and financing availability. However, the recovery has been much stronger than anticipated, and the strength in rates has exceeded expectations. Most of our hotels are experiencing higher profitability than they did in 2019, which was previously the peak period. This situation is creating a sense of optimism, particularly in the US, where it encourages more deal-making. Our owner base is diverse, primarily consisting of small and medium businesses that are deeply invested in this industry. They are witnessing substantial profits in their hotels and are eager to pursue additional opportunities, aligning with top brands. We hold some of the highest-performing brands in the market, which contributes to our advantages. As Kevin mentioned in his comments, we are set to surpass 2019 signing levels in the US this year, with many of those signings already converting into construction starts. We saw an increase in starts during the third quarter, and we expect this trend to continue into the fourth quarter. While there are uncertainties ahead, we are observing a turning point and remain hopeful that it will persist for an extended period. Although input costs are rising, there is some stabilization, and a decline in other construction sectors has improved the availability of subcontractors. Despite challenges with larger banks regarding lending, our ownership community is securing financing from local and regional banks, which maintain strong relationships. They are indeed putting up more equity and often facing higher rates, but they believe this situation is temporary. These short-term financings can transition to more favorable long-term solutions once the assets stabilize. While it is undeniably more difficult overall, the behavior of our broader owner community reflects increased deal-making and an inflection point in construction starts, which we find promising. The performance and market share we are witnessing are significant factors in this positive dynamic. We will continue to monitor the macro environment for any shifts in trends, but we are very encouraged by the current momentum.

Great. Thank you for the color. And just for my follow-up question, if I could ask about group. You mentioned your position for 2023 is 5% ahead of 2019. And I think that's a total revenue position. And just given how much disruption there's been that groups that were not necessarily booking as far out because of the disruption from the pandemic, it seems like, I'm just thinking about the impact on your RevPAR for next year, that the benefit to you is that if they're booking closer in, you're going to be able to get these, sort of, current rates as opposed to like historically group, you're stuck with whatever rates you agreed to two years ago. Can you give us a sense of maybe how much the volume is down? Like thinking about like the incremental price that you may get on. I don't know how significant that volume delta between now and what you have in 2019 one.

Let me clarify the statistics because I might have misunderstood your question or you might have misquoted what I said regarding group stats. In the fourth quarter, we're experiencing a 5% increase. If we look back a few quarters, we were actually down by 5% or 10%. The business has been improving rapidly, but the lead time is relatively short. For 2023, we're about 9% to 10% off in group position system-wide, not ahead of expectations. However, our tentative bookings and pipeline are extremely high. When we speak with our sales teams globally, the main challenge is having enough personnel to meet the demand. There is a significant amount of short lead demand. Looking ahead to next year, given our current experiences, we feel optimistic about revitalizing our group base, which was at 93% in the third quarter. We expect revenue will align closely with this in the fourth quarter, and due to this trajectory, we anticipate exceeding the high points of 2019 next year. Leisure is expected to remain strong, and business transient is gaining momentum, contributing to our belief that next year will be positively impactful. Regarding rates, we see a favorable situation where if these segments maintain stability or strength, we can retain our pricing power, which reflects well on our business fundamentals. We are securing new business at significantly higher rates. While existing bookings are at somewhat lower rates, most match or exceed 2019 rates. Currently, I believe about half of our bookings for next year are already secured, and considering the ongoing demand, I anticipate we will enter next year with more bookings than we have now, all at the higher rate structure. This gives us an opportunity to not only return to but surpass the demand levels of 2019 at higher rates, which will contribute significantly to RevPAR growth. Historically, group business comprised around 20% of our overall operations in 2019, but it's currently around 16% to 17%. We expect next year will see normalization to, if not exceed, historical demand levels from a segmentation perspective.

Great. Super helpful. Thank you.

Good morning. Thanks for taking my question. Kevin, you mentioned that one of the areas of the Q3 came from the better European ownership segment, which is probably benefiting from a stronger US dollar and just overall recovery. Can you talk about how you're thinking about this segment, the margins around that maybe in the fourth quarter and beyond? I know at the beginning of the year, there was probably a little bit more pessimism. And I'd say in the last two quarters, this has probably come in ahead of expectations and push numbers higher? Just trying to level set on that. Thanks.

I believe that's a valid point. Despite the ongoing discussions in Europe about winter preparations, the operating results have surprisingly remained strong. We've experienced growth that surpasses both absolute levels and those in 2019, particularly in the UK and Central Europe, which is reflected in our real estate portfolio. As we move into the fourth quarter, we don't foresee any changes to this trend. However, there might be some challenges next year due to inflation impacting labor, energy, and utility costs. Nonetheless, the fundamental environment looks stable, and we expect to do well. In Japan, where we have several significant leases, the recent reopening of the country is driving demand, although this area might also face some challenges. Overall, we are about three-quarters of the way back to 2019 levels in our portfolio and anticipate continued recovery that will contribute to our overall growth rate. It's important to note that our fee business is growing significantly, and we are reducing our other portfolio over time; we exited seven leases last year and plan to exit another two or three this year, which aligns with our strategy. In a few years, this segment will constitute 5% or less of our overall business.

Great. Thank you very much. Appreciate it.

Hi. Good morning, everyone.

Morning.

I wonder if we could talk a little bit more about the group pace. If I got my numbers correct, you said next year down roughly 9% to 10%, and then you said for 4Q, up 5%. I wonder since you reported in the end of July, how is the pace been going for those two different periods? It certainly sounds like 4Q was up, but what was the comparable pace for next year when you last reported.

Best I remember, they both moved about 500 basis points in the quarter. Up. Better. Better.

Correct.

The business that gets booked far in advance usually involves large groups such as associations and trade organizations. Corporations typically don’t plan their smaller meetings or social events that far ahead, as those have a shorter booking cycle. However, looking ahead at our group bookings, the trends mirror what we saw before the pandemic, indicating we are seeing a higher volume of large meetings and events being scheduled. It took some time to reach this point, and generating revenue from these large events will take even longer due to their complexity and scale, particularly those involving thousands of attendees across cities. This trend is beginning to take shape, as convention and visitors' bureaus across the country are reporting an uptick in bookings. Many of these groups must meet to maintain their operations, as these gatherings are crucial for revenue generation. Prior to now, they avoided holding events mainly due to health concerns, but now that the situation has improved, they see it as safe to proceed. They are actively engaged in booking and planning events. During COVID, health concerns were the primary issue; without participants, events could lead to significant financial losses. Now, while I don’t want to prematurely declare the end of COVID, it seems that the public perception has shifted, and people are more confident in attending events again. Observations from airports and large hotels indicate that when events occur, they resemble those from before the pandemic.

Okay. Chris, I appreciate the color. Thank you.

I'll let Kevin answer. But competitively, we're probably not going to give you quite a detailed answer that you want.

Yes, I was going to mention that. However, we likely won't discuss the specifics of how the algorithms function. I won't even attempt to articulate that. What I can say is that we have a long-standing track record of excelling in revenue management, which is a key aspect of our success. It's not possible to isolate the various commercial strategies we employ and attribute a specific revenue premium to any single element. All these strategies contribute to the overall premiums we achieve. Historically, we've collaborated with a vendor to develop our algorithm, and they have been an excellent partner. We put in a lot of effort together and believe we excel in this area. We established the consolidated center concept, which encourages more of our owners to participate in these centers where we assist them. While we do not set prices for the majority of our system—since 75% of it is franchised, and it's ultimately the franchisees who determine pricing—we can offer guidance based on our expertise. This capability is a significant part of our success, and I think I'll leave it at that. I don't have anything more to add.

That's correct, and we don't stop. It's not a system where you just build something and let it run for a long time. These algorithms are constantly being adjusted to incorporate additional data fields that were previously part of revenue management. Initially, the focus was mainly on data related to the hotel, but now we have access to various data sets that enhance the decision-making process within these algorithms, making them smarter. During COVID and its aftermath, our focus shifted from floors to ceilings, and we've been very mindful of that. Our commercial teams excel in the industry, not just in revenue management but across the board, and this is an area where we believe we excel significantly.

Thanks for taking my question. This is a bit of a follow-up on the last topic and on pricing power broadly. Prior to the pandemic, there were regular questions, it seemed on why rate was so hard to push even as occupancies were near peak. Given that there seems to be very little pricing pushback now, how would you frame what has changed cyclically versus structurally? Do you consider the changes in consumer behavior, distribution, yield management as you were describing or other factors? Thanks.

Thanks, Stephen, it's great to have you on the call. I don't mean to be overly technical, but it’s essential to understand the economic principles at play. Prior to the pandemic, I was frequently asked why we couldn't increase rates. I must have been asked that thousands of times by you and others. The reality was there was no compression. Supply was not particularly high, but it was above the 30-year averages. More importantly, demand was low due to a sluggish work growth environment, with GDP fluctuating between 0% and 2%. This created an equilibrium, or perhaps a skewed equilibrium, which ultimately resulted in a lack of pricing power.

And no inflation.

Now, you have all the things that allow you to have pricing power. You have very limited capacity for what will be an extended period of time, robust demand growth that we're talking about and broader inflationary pressures. And those things are different to the laws of economics. As they say around here, they're alive and well, and that's what's happening. They were driving the results prepandemic and they're driving this result just a different set of conditions.

Hey, good morning, everybody. Thanks for taking my question. Chris or Kevin, I'm curious if you have thoughts about the conversion activity into a potential macro slowdown. And the basis for the question is that, that activity historically has acted sort of countercyclical for obvious reasons, but you guys just had a cycle where conversion activity was really high. So I guess, was there a pull forward of the conversion activity into 2020 and 2021 and 2022, that we would have maybe normally seen in a macro type of slowdown which we could eventually see?

Yes, that's a good question, Brandt. I don't believe there's been a pull forward. We're still planning to do roughly 25% of our room additions this year through conversions. Interestingly, this process tends to be countercyclical. When the market is strong, independent hotels that might consider needing a brand feel less urgency, which slows down the pace of conversions. Additionally, many conversions occur during transactions, and currently, transaction activity has slowed due to concerns about macroeconomic headwinds, leading to wider bid-ask spreads. This makes fewer assets available for trading, creating a bit of a headwind. However, a downturn could actually serve as a tailwind in both cases. If there’s a shift in outlook during a downturn, capital costs may adjust, rates could decrease, and spreads might widen, which could lead to an increase in transaction activity. During downturns, as demand weakens, hotels tend to need us more, so we believe conversions will remain a significant part of the narrative. Interestingly, a modest downturn in the macro environment could provide a beneficial tailwind for conversions.

Makes sense. Thanks for all the thoughts.

Thanks, everybody, for the time. As always, we appreciate the great questions and opportunity to give you a little bit of color on everything going on. Obviously, the macro environment is a little bit uncertain. And like you, we're watching it very carefully. But as you heard today, we remain really optimistic, certainly, about the long term of the business given the position that we're in from a brand strength and margin and overall enterprise-wide point of view. But we also remain optimistic in the short to medium term, just given that these tailwinds that we've talked about several times today are pretty strong. And we continue to see very good trends and very good recovery across all the segments. So we'll look forward after the end of the year to giving you a sense of the fourth quarter, and obviously, a little bit more visibility into how we think about 2023. Thanks again. Have a great day.