Hilton (“HLT”) (HLT, Financial)
While the hotel industry was extremely negatively impacted by the COVID-19 pandemic, Hilton has done a superb job navigating industry volatility, a testament to both the company’s high-quality business model and excellent management team. At the onset of the pandemic, Hilton’s management team took decisive defensive actions which mitigated profit compression from industry declines in revenue. These actions have now positioned the company to generate improved margins, stronger cash flows, and higher investment returns as the business rapidly recovers to pre-COVID-19 demand levels.
Notwithstanding the arrival of the COVID-19 Delta and Omicron variants, industry RevPAR (the industry metric for same-store sales at a given hotel) has shown continued sequential improvement as travel and mobility have recovered along with COVID-19 vaccine rollouts and the evolution of COVID-19 towards a societally endemic virus. Recent trending has affirmed that a robust recovery scenario is underway, led by domestic leisure travel occasions which saw RevPAR eclipse 2019 levels during the 2021 holiday season, the first time since the onset of the pandemic.
Although there will be volatility in the pace of the recovery, we believe demand is likely to sustainably normalize at or above 2019 levels at some point later this year. In part, this recovery is being driven by an unprecedented snapback in average daily rate “ADR.” Historically a laggard during prior recessions, ADR has been buoyed by a strong consumer appetite to travel, broad and accelerating inflationary pressures (hotels can change room rates in real time), and a positive mix-shift from large corporations to small and medium-sized businesses which are leading the business transient recovery.
Throughout the pandemic, Hilton took actions to reduce corporate expenses by about 20% compared to 2019 levels. Simultaneously, the company provided resources and support to the Hilton owner community which further solidified Hilton as the preferred franchise partner thereby expanding Hilton’s pipeline of units around the world. Hilton has affirmed its near-to-medium term outlook of mid-single-digit net unit growth and the resumption of its historical 6% to 7% net unit growth beginning in 2023-2024, a higher growth rate than competitors, and further evidence of Hilton’s differentiated business model. We believe that Hilton will continue to grow its market share at an attractive rate over time given independent hotels’ increased interest in seeking an affiliation with global brands, particularly in the wake of the pandemic.
While the recovery may continue to be uneven, Hilton has made tremendous progress which will help it become an even more profitable and stronger business going forward. We believe Hilton’s experience with COVID-19 – the proverbial 1,000-year flood – has affirmed the company’s unique high-quality, asset light, high-margin business model, and reinforces our belief that Hilton deserves a premium valuation.
From Bill Ackman (Trades, Portfolio)'s Pershing Square 2021 annual letter.
