Hilton Worldwide: RevPAR Growth Encouraging; Still Watching Price And Long-Term Debt (HLT)

Investment Thesis: Hilton Worldwide Holdings has the potential for further long-term upside based on resiliency in RevPAR growth.

In a previous article back in February, I made the argument that Hilton Worldwide Holdings (NYSE:HLT) might see some short-term consolidation over potentially slower RevPAR growth this year. However, I maintained that the stock has the potential for long-term revenue growth given continued expansion across strategically important brands.

Since then, the stock is up by just over 7% to $204.51 at the time of writing – notwithstanding a significant short-term decline in the stock since the beginning of April:

The purpose of this article is to assess whether the stock has the capacity to continue seeing upside from here, and also whether my prior assertion that RevPAR growth could be slower this year is likely to be the case taking recent results into consideration.

Performance

Let us compare brand performance for Q1 2024 as compared to the prior year quarter. The below illustrates a plot of ADR (average daily rate) vs. occupancy (%) by brand, with bubble size representing the number of rooms by brand. When looking at the below graphs, it is apparent that as compared to the previous year – five of Hilton’s brands now have an occupancy rate of over 70%, namely the Motto by Hilton, Homewood Suites by Hilton, Home2 Suites by Hilton, Embassy Suites by Hilton, and Conrad Hotels & Resorts.

An interactive web-based version of the below graphs is available here.

Q1 2023

Q1 2024

Additionally, RevPAR (or revenue per available room) for the Conrad Hotels and Resorts saw the biggest increase of 14.6% as compared to the prior year quarter, with ADR for this brand being on the higher end at $286.62 and occupancy for the brand above 70%. Waldorf Astoria and LXR Hotels & Resorts (the two highest brands by ADR) saw growth of 3% and 8.8% in RevPAR respectively as compared to the prior year quarter.

It is also notable that when comparing to Q1 2019 (using a five-year timeline for comparison purposes) – both the Hilton Hotels & Resorts and Hampton by Hilton brands (both the largest brands by number of rooms) had accounted for 49% of overall revenue, but this has dropped slightly to 45% with higher ADR brands such as Conrad Hotels and LXR Hotels & Resorts now accounting for a slightly higher portion of overall revenue.

Q1 2019

Q1 2024

In this regard, the fact that we have been seeing double-digit RevPAR growth for Conrad Hotels and Resorts is quite encouraging given a low season quarter and demonstrates that growth has remained resilient and customers continue to be attracted by luxury brands in spite of continued price growth.

My Perspective and Looking Forward

In my view, RevPAR growth for the first quarter of the year has been encouraging overall and this has been reflected by the upside that we have been seeing in the stock this year.

From a balance sheet standpoint, the company’s net debt to adjusted EBITDA ratio has remained at 2.8x, which is the same level as that seen in the prior year quarter. However, it is also notable that the company’s long-term debt to net income ratio is up to 8.4x from that of 7.0x in the prior year quarter.

From a valuation standpoint, we can see that Hilton’s price to RevPAR ratio has continued to climb in the previous quarter – up to 1.96x at the time of writing.

We see that this is on the higher-end of the trajectory, with the average ratio since Q1 2019 to the present standing at 1.46x.

In this regard, while we have seen encouraging RevPAR growth over the past quarter, a comparatively high price to RevPAR ratio as well as growth in long-term debt relative to net income may give some investors pause – and there is a possibility that the stock might continue to consolidate until such time that we see RevPAR growth start to outpace that of price as well as a reduction in long-term debt relative to net income.

I had previously maintained that a price of $192 represents fair value for Hilton at this time. Given that we have been seeing price growth outpace that of RevPAR, I take the view that this is still the case and we may see the stock consolidate back to around this level in the short to medium-term.

From a longer-term standpoint, the fact that Hilton is seeing strong RevPAR growth across higher-priced brands such as the Conrad is welcoming, and an acceleration of this trend as we head towards the summer months has the capacity to spur further RevPAR growth overall. With Hilton significantly expanding its global portfolio in 2024, the expansion of high ADR brands such as the Waldorf Astoria to locations such as Seychelles and Costa Rica provides further opportunity for Hilton to significantly bolster revenue across its higher-priced brands, as well as through expansion of more mainstream brands such as the Hampton by Hilton.

Risks

In my view, the main risks for Hilton at this time is that price continues to outpace that of RevPAR growth, and that long-term debt to net income also continues to climb. While it is encouraging that Hilton is significantly expanding its portfolio – investors will want to see evidence that the company can continue to bolster RevPAR across its brands. While long-term debt is expected to increase in order to do so, investor enthusiasm may be dampened if we see long-term debt significantly outpace that of net income growth.

Conclusion

In conclusion, I continue to maintain that Hilton Worldwide Holdings has the capacity for further long-term growth given both RevPAR growth across major brands as well as a continued expansion of its portfolio.

With that being said, there may be a possibility that we see some consolidation in the stock over the next quarter, as investors wait to assess whether RevPAR growth can ultimately outpace that of price and we eventually see a reduction in long-term debt relative to net income.