Q1 2023 Hilton Worldwide Holdings Inc Earnings Call

Good morning, and welcome to the Hilton first quarter 2023 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero. After today's prepared remarks, there will be a question and answer session to ask a question.

May Press Star then one on your Touchtone phone.

To withdraw your question. Please press Star then two.

Please note this event is being recorded.

I would now like to turn the conference over to Brian Qusai Senior director of Investor Relations you may begin.

Thank you Chad.

Welcome to Hilton's first quarter 2023 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.

In addition, we refer to certain non-GAAP financial measures on this call.

You can find reconciliations of non-GAAP to GAAP financial measures discussed in today's call in our earnings press release and on our website at IR adopt Hilton Dot com.

This morning Christmas setup, 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 first quarter results and discuss our expectations for the year.

Following their remarks, we'll be happy to take your questions.

With that I'm pleased to turn the call over to Chris. Thanks, Brian Good morning, everyone and thanks for joining US today, we're pleased to report that demand for travel remains strong maintaining the trend that we saw in the back half of last year, which led to both our top and bottom line results, finishing the quarter above the high end of our <unk>.

Guidance as we move forward fundamentals remains strong and we're and we expect secular tailwind to continue to support growth.

Spied continued macroeconomic uncertainty we are optimistic that the power of our network effect, our industry, leading revpar premiums and our fee based capital light business model will continue to drive strong operating performance of unit growth and meaningful cash flow, enabling enabling us to return an increasing amount of cash.

Capital to shareholders.

In the first quarter system wide Revpar grew 30% year over year, and 8% compared to 2019 rate continued to drive growth up 11% compared to 2019 and system wide occupancy reached 68% up from the prior quarter and just to point shy of peak levels.

Globally, all segments outperformed expectations in the lifting of Covid restrictions in China drove significant recovery in demand across Asia Pacific throughout the quarter.

As a result revpar in the month of March exceeded 2019 levels across all regions and segments for the first time since the pandemic began.

Given our strong results and positive momentum, we're raising both top and bottom line guidance for the full year, which Kevin will cover in more detail in just a few minutes.

Turning to the segment details leisure trends remained strong throughout the quarter with Revpar, surpassing 2019 by approximately 15% ahead of prior quarter performance strong leisure transient demand continue to drive rates up in the mid teens above 2019 and occupancy.

Fully recovered back to 2019 levels driven by the surge in travel in Asia Pacific business transient also continued to improve with Revpar up 4% from 2019, reflecting the resiliency of business travel, particularly for small and medium sized businesses, which remained roughly.

85% of our segment mix recovery in group remains robust with Revpar, finishing roughly in line with 2019 with steady improvement each month in the quarter and March exceeding 2019 by 5%.

Demand for future bookings also remains strong with full year group position up 28% year over year and 3% versus 2019. Additionally, new group leads ended in the quarter, 13% higher than 2019, an increase of six points compared to prior quarter.

<unk>.

Looking at the full year based on the better than expected Q1 results the accelerated accelerated demand across Asia and continued positive momentum in group. We now expect full year system wide topline growth between eight and 11% versus 2022 assuming some slow down.

In the back half of the year due to macro economic uncertainty, particularly in the U S.

Turning to development in the first quarter, we opened 64 properties totaling over 9000 room celebrating several milestones, including the opening of our 500th hotel in China, Our 100th edition to the tapestry collection and the opening of the canopy Toronto Yorkville the lifestyle brands debut in Canada.

We also opened two new embassy suite resort properties in Virginia Beach, and Aruba with the Aruba addition, marking the brand's 10th international property.

And after recently being ranked the number one hotel franchise in entrepreneur magazine's franchise 504, a record breaking 14th year in a row Hampton by Hilton expanded its global presence to 37 countries with the brand's first property in Ecuador.

While we expect to see some impact from the current financing environment. We're encouraged by the progress on the signings and starts front, we signed approximately 25000 rooms during the quarter.

Growing our pipeline to a record 428000 rooms more than half of which are currently under constructions signings in the quarter outpaced prior year across all regions and conversion signings in the quarter were 24% higher than prior year benefiting in part from the role.

Out of our newly launched brand sparked by Hilton. The initial interest in spark has been tremendous we currently have more than 300 deals in various stages of negotiation and our teams are working hard to deliver this exciting new premium economy conversion brand with hotels opening later this year Hilton Garden.

Then also continues to be an engine of global growth with 14, new signings across six countries in the quarter and over 60 working deals in 22 countries. Additionally in April we announced the signing of the Waldorf Astoria Jai poor, marking the debut of the brand in India and further demonstrating.

Our commitment to expanding our world class luxury brands across the globe.

Construction starts for the quarter totaled over 19000 rooms up nearly 20% from prior year and starts in the U S were up more than 50% year over year, our global under construction pipeline is up 8% compared to March 2022 mm per STR, we continued to lead the industry.

In total rooms under construction.

Taking all this into account, we still expect to deliver net unit growth within our guidance range. This year and remain confident in our ability to return to six 7% net unit growth over the next couple of years on the loyalty front Hilton honors grew to more than 158 million members, a 19% increase year over.

A year and remains the fastest growing hotel loyalty program in the quarter Hilton honors members accounted for 62% of occupancy and increase of 200 basis points year over year. Additionally, in an effort to further provide our loyal guests with an elevated wellness experience in April we announced the.

Expansion of our partnership with peloton, bringing peloton bikes to properties across the U K, Germany, Canada, and Puerto Rico building on our existing partnership to make peloton bikes available in all U S hotels.

As one of the world's largest hospitality companies, we recognize Hilton has a responsibility to protect the planet and to support the communities. We serve to ensure our hotel destinations remain vibrant and resilient for generations of travelers to come in early April we published our 2020 to travel with purpose report.

Outlining our latest progress towards our 23rd 30, environmental social and governance goals, including our efforts to reduce our environmental impact, while creating engines of opportunity within our communities and preserving the beautiful destinations, where we live work and travel we remained.

<unk> to driving responsible travel and tourism globally, while furthering positive environmental and social impact and sound governance across our operations and our communities all of our success would not be possible without the dedicated efforts of our talented team.

We continued to be recognized for our remote remarkable workplace culture recently, great place to work in Fortune ranked children. The number two workplace in the U S. Our eighth consecutive year on the list and once again, the top ranked hospitality company and accomplishment I'm truly proud of overall.

Despite macroeconomic uncertainty, we believe that our world class brands dedicated team members and resilient business model have us incredibly well positioned for the future now I'll turn the call over to Kevin for a few 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 30% versus the prior year on a comparable and currency neutral basis and increased 8% compared to 2019.

Growth was driven by strong demand in APAC as well as continued strength in leisure and steady recovery in business transient and group travel.

Adjusted EBITDA was $641 million in the first quarter up 43% year over year and exceeding the high end of our guidance range.

Outperformance was driven by better than expected fee growth across all regions as well as strong performance in Europe , and Japan benefiting our ownership portfolio.

Management and franchise fees grew 30% year over year, driven by continued Revpar improvement continued good cost discipline further benefited results.

For the quarter diluted earnings per share adjusted for special items was $1.24, increasing 75% year over year and exceeding the high end of our guidance range.

Turning to our regional performance first quarter comparable U S. Revpar grew 21% year over year with performance continuing to be led by strong leisure demand both business transient and group Revpar finished above 2019 peak levels for the second consecutive quarter driven by strong rate growth.

In the Americas outside the U S first quarter, Revpar increased 56% year over year, and 35% versus 2019 performance was driven by strong leisure demand and resort properties, where revpar was up over 60% compared to peak levels.

In Europe , Revpar grew 68% year over year and was 13% higher than 2019 performance benefited from continued strength in leisure demand and recovery in international inbound travel, particularly from the U S.

In the Middle East and Africa region, Revpar increased 32% year over year, and 42% versus 2019 led by strong rate growth in group demand.

In the Asia Pacific Region first quarter, Revpar was up 91% year over year and down only 4% versus 2019 Revpar in China was down 5% compared to 2000 1932 points better than prior quarter as demand recovery accelerated due to the lifting of COVID-19 restrictions.

The rest of the Asia Pacific Region also saw significant improvement with Revpar, excluding China up 19% versus 2019, representing an 11 point improvement versus prior quarter.

Turning to development, our pipeline grew year over year and sequentially and now totals 428000 rooms with nearly 60% located outside the U S and over half under construction.

Looking at the full year, despite the near term macroeconomic uncertainty, we still expect net unit growth between 5% and five 5%.

Moving to guidance for the second quarter, we expect system wide revpar growth to be between 10% and 12% year over year, we expect adjusted EBITDA of between $770 million and $790 million and diluted EPS adjusted for special items to be between $1 54 and $1.59.

For full year 2023, we expect revpar growth of between 8% and 11% we forecast adjusted EBITDA of between 2.875 billion and $2 $95 billion, we forecast diluted EPS adjusted for special items of between $5.68 and $5 88.

Please note that our guidance ranges do not incorporate future share repurchases.

Moving on to capital return, we paid a cash dividend of 15% 15 cents per share during the first quarter for a total of $41 million. Our board also authorized a quarterly dividend of <unk> 15 per share in the second quarter year to date, we have returned more than $600 million to shareholders in the form of buybacks and dividends and we expect to return between $1 8 billion.

And $2 $2 billion for the full year.

Further details on our first 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. Please Chad can we have our first question. Thank you. We will now begin the question.

And answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

And the first question is from Carlo Santarelli from Deutsche Bank. Please go ahead.

Good morning, Chris Good morning, Kevin Good morning, Chris.

Chris just in terms of the way you guys are thinking about the year your guidance, obviously from a revpar perspective up about 350 basis points at the midpoint first quarter, obviously contributes some of that that lift you guys spoke to a tougher macroeconomic situation in the second half of the year.

<unk> on your fourth quarter call.

How much has your outlook on the second half changed as obviously you get some contribution from the first quarter you have a lot of visibility in the second quarter, just trying to understand within the context of that guidance.

If you had any kind of change or pushing out or when do you guys believe or when you're interpreting the macro economic conditions will topic.

Yeah really good question, obviously, you know I think I used the macroeconomic uncertainty two or three times for a reason because there is a there is an uncertainty environment I mean, what we're seeing today is as you you heard in you know what you saw in our numbers and in the prepared comments.

There's very good strength across all our segments leisure continues to be Super strong business transient in the quarter, both demand and pricing.

<unk> has returned to prior peak levels in group is motoring on its way. It's just you know longer in gestation to get there, but you know based on the trends is going to get there you know in the second half of the year I think but with you know with a great deal of certainty. So you know we are not you didn't really ask it this way, but I think part of it is we're not see.

Seeing any cracks in terms of demand patterns. There is a lot of momentum I sit at this very table every Monday morning, with my entire Executive Committee, representing every region of the World and the first question I ask are you seeing any cracks any any issues with demand broadly any issues regionally.

He issues set from a segment point of view and the truth is we're just not seeing it having said that.

We know here in the U S and in many other places around the world. There's an inflation issue now. It's you know it's being you know it is it is it is being managed its becoming you know it is in the process of normalizing, particularly here in the U S. But it's not there and the fed you know as has said it's going to.

Deal with it I believe that I take them at their word and.

And I think ultimately that means you're going to continue to have a slowing of the broader economic environment that at some point has to have some impact on us.

It hasn't yet for a bunch of reasons I I suggested one I still think we have a lot of pent up demand.

Two we are still benefiting from a secular shift in spending patterns broadly so while people may have a little less disband their spending more of it on on experiences and a lot less of it out on things you see that throughout the economy.

And international travel is you know finally with China opening up well, it's not you know back anywhere near where where it has been international travel is really on a steep up slope and all of those things. You know are you know are keeping you know the momentum and demand in the business recognizing also.

By the way that capacity additions are at historical lows and are probably going to stay there for a while so when I said you know very quickly in my comments fundamentals remains strong I mean fundamentals of supply and demand demand is good for the reasons I suggested supply in the industry is anemic thankfully, we get a lot more than our fair share of the supply so it.

That's good for us, but the basic fundamentals in the business are good.

<unk> said all of that.

We do expect things will slow down you asked the question, which I'm actually gonna answer, which is do I feel any differently than I did sitting here a quarter ago, and I would say, yes, I would say.

Number one the economy appears to be to be more resilient inflation is being tamed I have a higher degree of confidence at this point I'm not the right person to ask but I'll tell you what I think I have a higher degree of confidence that the fed will land the plane reasonably well and that we're not gonna have a deep dark kind of recession.

We're gonna have a slowdown maybe a recession it feels a lot more like it will be reasonably modest at this point, so I feel better about that and I definitely feel like things have been pushed out a little bit one time has gone by and we have now a quarter under our belt. We're deep you know were deepened understanding half of the year I mean, we're not done theirs.

And there's you know a bunch of the second quarter left but we have pretty good sightlines at this point into Q2.

And that feels it feels like the momentum is continuing so you get a half a year sort of under your belt. It gives you more confidence and so yes, I feel better about thus why we you know we increased our guidance on the topline and Bottomline because I feel like there's enough momentum in our business. The economy broadly is pretty risky.

There's more confidence in the fed being able to sort of do this without reaching too much habig. So I'd say net net yeah, I feel I feel a bit better.

Having said that we did and I said it intentionally in the prepared comments, we do assume because we are sentient and you know we know what's going on that at some point you will see some slowing I think realistically it's more.

Late third quarter and into the fourth quarter I honestly think there's a chance it kicks it kicks into next year, given the broader momentum and the strength of the consumer broadly, but I don't know and so what we've tried to do in our guidance is built in an expectation that this these efforts of the.

Here and in other parts of the World will will eventually.

Work and that we're going to we're going to see some at least modest slowdown and so that's sort of what we feel we feel better than we did we still think there's a lot of uncertainty.

And we've tried to factor for that and and our guidance in the second half of the year.

Great. Thank you, Chris and then if I if I could just one quick follow up in the period, obviously I think managed franchise Revpar was 29% unit growth on the franchise side was four four.

The fees franchise fees grew about 23% I'm, assuming that that's a comp issue with some and salary ancillary non revpar fees in the <unk>. Okay. I mean, the way to think about those as those are normalizing and growth rate above algorithm growth above you know typical growth.

You would assume sort of on a same store basis, but but you know, we're still particularly because of OMA kron on the fee side, we have a supercharged.

The growth rate in the first quarter, but I think the way to think about you know over the intermediate even longer term as we think all of those ancillary license fees and otherwise they're gonna grow are going to grow better than our typical algorithm growth. You. Just yeah, you have some year over year normalization going on in home a crime impact that's correct.

Got it a little bit of mix as well. So the franchise business is a little more concentrated in the U S where revpar growth has not been as robust as outside the U S. Yeah makes sense. Thank you both.

And the next question is from Joe Greff from J P. Morgan. Please go ahead.

Hey, good morning, guys.

So of course, I'd love to hear your views on and your understanding of what developers are feeling right now just getting.

Changes in the credit markets and the banking environment.

Particularly with maybe limited service developers that are more reliant on regional bank for financing.

Or are they requesting more capital help from from you guys.

Do you think maybe they're pulling forward some deals maybe in an effort to circumvent future tightening can you talk about you know what your expectation is for maybe pipeline growth for the for the balance of the year.

And then I have a follow up thank you.

Yeah, I mean, it's early so we've obviously been talking to a lot of our ownership community is the banking issues have sort of taken hold.

And I would say, there's a broad range that you know anecdotally go from we haven't seen much impact we're still getting financed as you can see in our numbers and starts in the U S being so far up now part of that was before you know the banking you know the regional local banking set of issues, but part of it was after.

You know, they're still they're still getting the best owners with the best relationships or are getting their deals done and you know our market share in a tougher environment goes up so you know proportionately relative to others in the industry. We typically do we do even better but we also have folks that are saying very hard.

Define the money and some in the middle that are saying like they're talking to their banks and their banks are saying, hey, we're going to be there for you just give me like 90 days. So let me see let me see how this all plays out and so I think it's early to know I think you know being you know being objective about it which I always.

I'm trying to be you know I think you know the fed.

<unk> seems to be managing through this reasonably well you know there is some ongoing things today, you know or this week going on but I think the fed I think is pretty committed to making sure there isn't sort of a run on you know on regional banks broadly. So I think we're in reasonably good shape that way, but I think that.

The net result is for a period of time there'll be less credit available. Okay. I still think we will get more than our fair share of it because our brands are better performing and we'll see our share go up as we historically do when when times get tougher for financing et cetera, but it's hard to believe that in.

Short to intermediate term, there's not going to be some impact it hasn't shown up it didn't show up in the first quarter.

We haven't we haven't seen it yet, but I think in terms of pipeline people you know I think our expectation at this point for the year as the pipeline is going to keep growing you know the bigger questions is going to be you know the conversion to under construction in the first quarter. It was very very good as you heard in the data I think that'll get more challenging I think.

I think it just stands to reason that will get more challenging and so listen the good news for US is you know we tend to get our share goes up it's a big world, while China has been a little bit slower to to sort of pick up steam on the development side. It is picking up steam I think you know us.

Do we think about next year I think it's gonna be a big net contributor and conversions are have been and continue to be a big focus.

<unk> of ours.

We think we'll do a meaningfully more as a percentage of overall delivery. This year as conversion somewhat aided by this year, a little bit, but a lot I think next year by spark, which is a 100% conversion very low cost of entry in a relative sense very very lightly if and if.

Dependent at all on the banking community so.

That's not why we did spark we did spark for all the right reasons to better serve you know create a bigger and better network effect, but just in time management. The timing of it actually is a is quite good as I said, it's not going to do a lot for this year, but I think over the starting next year and beyond it will it will add significantly but the net of.

All of that Joe is again answering you know I tried to give a little bit of color across the board. You know, we do expect that what's going on in the banking system, particularly for limited service, which as you know.

Disproportionately financed by the by the regional and local banks that they're gonna pulling their horns theyre going to survive. It's you know most of them are going to get through this but theres going to be less credit available and that's going to that's going to slow slow things down a bit.

Great. Thank you for that Chris and Mike.

And my follow up question is this it system wide Revpar, it's flat which is.

Sort of what's baked into the second half guidance, but if we just think about it for the intermediate term.

I think you're guiding to anything beyond the second half do you think fee growth can be in excess of breath par growth just given the rooms growth in the last few years.

Should be yes should be mathematically yes.

I'm glad that you know what the algorithm is yes as you do that you know sort of same store plus unit growth and we've been delivering on average even through Covid. You know five ish, maybe a tick over you know even in an environment that you know is being impacted by some of the things I just.

Described we we believe we will continue to do that.

We manage our way over the next couple of years back up to the six to seven and so even in a no growth same store environment, which is not certainly what we're experiencing now for the record as you can see them, but even in that environment fees fees would continue to grow with unit growth.

Thank you.

And the next question is from Shaun Kelley from Bank of America. Please go ahead.

Hi, good morning, everyone and thanks for taking my question.

Chris I kind of wanted to stick with the development activity, but maybe let's just go out a little bit longer term and if you could help us pull from you know a little bit of your experience. How this played out during the global financial crisis, a little bit just just help us think about when you think about some of the there's kind of three drivers as I think about domestic unit growth, obviously decently rely.

On the financial system conversion activity, where you've got a pretty interesting pipeline of brands that might even be stronger than back then and then and then the international side can you help us think about sort of buckets, two and three and as we get out into 'twenty four and 'twenty five.

How much could those help carry the weight and how protected do you think let's call. It a broad mid single digit net unit growth target should be in a variety of different scenarios. As people are just trying to think about broader fallout here from financing and again, a more difficult macro broadly yeah, but I mean that's.

The right question to ask Guy.

And that's why I said, yeah, we do expect to see some impact, but I also said.

Maybe I backed into it but I'll say it more directly we feel good about being in that range that you described you know we'd been around five through the toughest down cycle. You know in recorded history through Covid, we've stayed sort of five ish or a tick above and we think you know over the next period of time as these things sort of work their way through this.

Something that we'll be able to stay there how are we going to do it well one we're going to gain share.

Because our products perform better and we're you know we have the highest market share brands in the business, we're going to keep pushing market share higher and so while theres going to be potentially less newbuild activity domestically. We we will plan to work hard to get an even larger share of that conversions. You know we you know we do bill.

Leave that we're uniquely suited certainly relative to the great recession by having not only more shots on goal in terms of brands, but spark again, there's long term, we think spark is probably the most.

Disruptive thing that will have ever done, but you know in terms of giving customers at that price point, a really good product, but it's also the timing of it is convenient and helpful. Because it's it depends very little on financing you know most of the other conversions still depend on financing a lot of conversions not all but a lot of conversion.

Do happen around asset transactions when people salmon is a buyer and a seller and I met a change brands an upgrade properties.

Still convert a bunch of other types of properties that where they're not changing ownership, but you know that no change to a lower change of ownership puts a little pressure on that but spark.

Is a gift that will keep giving and the sense of unit growth because again, you're talking about 20000 room, you're talking about a 2 million dollar sort of bogey, you know for somebody to convert and get into our system.

Versus even at the lowest price point, you know new builds that require financing and or writing checks of you know $10 million to $15 million or or most cases much higher than that so you know.

Conversions will play a big part of it and as I already said, it's a big World. So you know what's going on here in the U S. As you know with the banking system is unlike the great you know.

The great recession, where the whole financial system around the World you know it was sort of an Harold.

In free fall this really at the moment is more of a U S thing, obviously touched you know Europe a little bit.

You know in Switzerland, but it has largely been sort of contained to be a U S thing and so you have the opportunities around the whole rest of the world, notably as I said, China in the sense that you know China is probably taking.

A quarter or two more so I think China won't contribute what I would've hoped it would this year, but I think it'll be made up for next in 'twenty four 'twenty five because the engines are really cranking up. It's just you know it's just a process. So there will be you know it will be it will be conversions international grow.

Both and increase market share of of what does get done in the U S. The other thing that that is going on is you know, we we launched spark and we're getting ready and I'll, maybe typically I read a little bit we're getting ready to launch another brand sort of at the in the <unk>.

Tended stay space at the lower end of mid scale very low end of mid scale below home too that we have incurred that we've been working with our ownership community and customers on the well it will be a newbuild product it will be a very efficient build cost so again the things.

My history of this living through the great recession, all of that is your lower cost to build products that have that are very high margin because people make the most money doing it and they're the lowest risk and they're the easiest financed.

Those are the ones that get done when the fastest and so again, we didn't we didn't develop this brand that we're getting ready to launch hopefully in the next 30 or 60 days because of this we launched because customers wanted owners want to build it but it again and again it won't have any effect this year, but starting probably the latter part of 'twenty for more more likely 'twenty five.

As people look at a brand that can deliver just astronomical margins on a very efficient.

Per per unit build cost we think it will it will build a lot of excitement at home too has been off the hooks in demand you know throughout you know all the COVID-19 in an otherwise because people make so it's such customers love. It. It's very high margin, we think customers are going to love. This.

It's something different it's at a lower price point, but the margins are much even higher than that and so again you know it will take time to gestate that but we think that is a mega brand opportunity for us that as we think about more likely 'twenty five 'twenty six.

Even in an environment that's been more challenging it is more challenging from a financing point of view as the financing markets come back and they always do is those products that really.

Get the fastest and so we feel good about you know being you know around five in and headed back to six to seven over the next couple of years and it'll be you know a combo platter of all all of those things that you said and that I just spoke to.

Thank you very much.

And the next question is from Smedes Rose from Citi. Please go ahead.

Hi, Thanks.

I just wanted to ask you quickly on that extended stay mm launch we've seen a lot of product from different brands being launched into the extended stay segment.

I was just curious what do you think is driving so much interest from customers and I've been abandoned in another segment.

Mid scale.

Yeah, we don't get data or at least in our case, we don't get extended stay data specifically, we could see the chain scale data.

I'm wondering what sort of shifts you're seeing within that that.

It is for.

So many people people are tomorrow sector, we were already seeing it pre COVID-19, where there was just you know is the band for workforce housing and people, but you know more mobility in their lives and they you know they wanted to be places in work from different places and you know they they you know they didn't know they were gonna be there long enough to commit.

To like get an apartment and pay a pay you know.

One year's deposit and all that fun stuff and so we are already seeing demand that was there was outstripping supply and then COVID-19 hit and while a lot of things have normalized.

And I've said I've talked about this on prior calls a bunch of times. The one thing that happened is it accelerated the idea of mobility you know well you know the office environment is normalizing a lot of people coming back its not exactly what it was more you know more people are going to be remote as a percentage of the workforce permanently more are going to have flexibility.

And sort of you know different times of year times of the week, you know Mondays and Fridays and all of that is is continuing to just as those patterns shift.

Building more and more demand against a limited amount of supply and so the fundamentals. We think are just great. The way I think about the product that we're developing and I'm getting ahead of myself, but it's coming really soon I mean I doubt we haven't we've built that we've done we've done you know 99% of the work it's almost.

Our hybrid it's like an apartment efficiency meets hotel and I'd say it.

It's almost like 60 40, it's more apartment efficiency. There's so many workforce housing needs that are just unmet with this kind of product for somebody who needs to be somewhere at 30, 60, 90 120 days so.

You're talking about average length of stay of probably 20 to 30 days on average versus most of the core extended stay brands are like five to 10, maybe you know somewhere in that in that range. If you look at the industry. So it's a different it's a different demand base different types of locations, which is why we love.

It because we're not serving it meaning it's not competitive with what we're doing with them too and certainly not competitive with homewood.

Because it's serving a totally different need mostly in totally different markets.

And as I said, we you know okay.

Didn't intend to go this far sorry, but you know this is hundreds and hundreds and hundreds of hotels over time. This is not like we're gonna do 50 or 100 of these I mean, you'll wake up over time in 10 years, and we'll it'll be like come to will have you know 456, we'll have a lot of it because we think the need is there now and growing and we.

Well a lot of people are doing things in this arena.

We I think we've proven by launching brands that we do uniquely I've done it pretty well to launch brands and get to scale and build network effect not just broadly for the company, but within within brands.

And we've done that I think as well or better than anybody and I. You know I think you know I think we have an opportunity.

To do it here in our system you know delivers the system delivers the highest market share in the business. So as you know if you're an owner or thinking about I'm going to build a similar product somewhere else I mean, youre going to youre going to look at the system strength and ultimately I think you know.

Historically people vote with their feet with you know a product that they think will work better from a customer point of view ultimately higher higher margins and.

And drive higher share and so we gotta do it again, but we've got a pretty good track record of doing this stuff. We've spent a lot of time on this.

And hopefully by the next time, we talk it'll be out out of the shoot will be talking about how many deals we got lined up.

Thank you and two quick other question here the difference between the gross room additions in the first quarter in that room.

Wider than what we've seen is that was that.

Sort of a seasonal thing or was there something in particular on the completion side that you can call out or.

You're talking about the difference between Q, if you do Q1 and the guidance Smedes.

Well, just the first quarter gross room additions.

Additions.

No Theres no then removals is right in line with normal we'll end up about 1%, 1% and change for the year at just the gross rooms from a timing perspective, I mean, I think I don't want to repeat what Chris said earlier on the call, but I think from a timing perspective for the full year gross room additions were lower in the first quarter.

<unk> and deletions were about the same so that's the difference.

Alright, thank you.

Thank you and the next question is from Stephen Grambling from Morgan Stanley . Please go ahead.

Hey, Thanks, maybe following up on some of your comments about the new brand launches spark and then it sounds like another one in the extended stay when you think about growing into some of these lower end chain scales. I think many of the peers, often see higher attrition rates or deletion rate. What can you do to ensure that the attrition rates from your brands are more resilient.

Long term and have you seen any evidence of that from your current lower chain scale brands that is true.

No you mean attrition, meaning losing losing hotels out of the system no I mean, here's the listen I'm not to be too too simplistic about it but you know what we do is really made much easier by delivering commercial performance, so having great brands that resonate with customers.

<unk> loyalty that connects the dots that that the customers are engaged with them.

Product and service in those particular brands, you know that really resonates with customers and ultimately our commercial engines and commercial strategies that deliver the highest level of market share and so if you look at our frankly, if you look at like you know are true or Hampton, almost I would say.

Almost 100% I don't know, 90% to 100% of the deals that exit the system within those brands I don't think any truth have exited the system that I'm aware of it's a relatively new brand I'd, probably insignificant it probably none but hampton is by our choice meaning that.

That their time is up there in a location or there you know in a physical state that you know that we just don't think you know.

Works anymore, and so you know that that's buy out by our choice, we have very little attrition and back to where I started the reason we have very little attrition is our Burger category brands are category killers, They drive incredibly high share. So as we think about spark as we think about you know our new extended stay.

<unk> brand, we have to get it right, which we will we have to drive really high share, which we will the product is to really work for customers, which is what drives that and people don't want to leap right. So our history is super Super good in the Mega categories. If you just go through the whole list of all our extent you know home too.

Wood Hampton true you know the attrition there is almost all the vast vast majority of it is by our choice.

That's helpful context. So that's my one question. Thanks, so much.

You bet.

The next question is from David Katz from Jefferies. Please go ahead.

Good morning, everybody. Thanks for taking my questions.

I wanted to just go back to spark is obviously a lot of enthusiasm and success since unlike things that you've done before if we look at the makeup of the deals that you've put together I'd love some color on what's in there are those independents that are.

Looking for our brand are those.

Switching from other brands for one reason or another or are any of the hotels switching within your system into that may have otherwise departed for one reason or another.

Yeah of the 300 I'll get destruction of the 300 being around it I would say almost all it's very little of US. So you know there there are a few hamptons and of the 300, so a teeny teeny number of Hamptons that we would probably otherwise.

They will exit the system that we think for spark will work, even though they wouldn't work for Hampton, That's a teeny tiny amount the rest of it is almost there theres a little bit of independent of that data point man, but it's almost all coming from other brands in that in the economy space and spread around what you would guess but.

You know and I have some of that data, but I'm not sharing it.

Fair enough and understood My follow up is when we look at the revenue intensity of adding in this.

<unk>, how does that measure up with your other brands obviously, the upper upscale a unit is generating more right, but how does the fee structure on the revenue intensity of this.

Measure up and add to your system.

Yeah. The fee structure is quite similar to the other fee structures. They you know.

They are smaller than it is at a lower rate. We think you know the rate here is probably 80 to $90. You know versus you know the net true which is you know 120 in the hundred Twenty's with.

With Hampton being at like 140, so it's there theres there are similar size. So a lot of the trees in the hamptons, they're at a lower ADR by by design and so yeah, you know per pound fees will be a.

A little bit less and certainly versus upper upscale, but the thing you have to remember in our world as you know we're trying to create a network effect.

This is a massive customer acquisition tool for us, there's 70 or 80 million people in the traveling in this segment half of whom are younger people that travel and this is all they can afford and while we serve some of them were not serving many of them. So the opportunity is for us to get a get them hooked on our system early buy gifts.

The best product that they can find in the economy space. Because every single hotel every customer facing element of the hotel has to be done or it doesn't get our name and we regulate the gate nobody comes in nobody passes through the gate.

Until that is done and so the other thing to remember is.

It's an infinite yield so we built we bring in you know tens of millions of new customers that are going to trade up theyre going to grow up and they're going to use our other products, they're going to trade in and around our products and you know we built this brand you know with a lot of a lot of hard work and.

Elbow grease.

From the standpoint of you know the deals that we're getting while they may be per per pound a little lighter we're not paying for them. I mean, you know thus the infinite yield there's no investment we continue to build you know these incremental fee streams.

And when you add up what the potential I mean, I suspect you know 30 years ago somebody said that about Hampton well I mean, you know Hampton at that time was a 50 dollar rate and it's 100 and 120 room hotel how many how much money you can that make you will Hampton is a.

Well into the billions of dollars because it turns out when you do a few thousand of them. It adds up in the ultimate the ultimate potential of spark is bigger than Hampton, because it's a bigger bigger.

Bigger slice of the pie so.

We're we're very excited about it we think it is it is going to add not just new unit growth, but it's going to add significantly.

Two to earnings as it ramps up and ultimately to the.

Overall value of the company.

Sounds like no meaningful key money there either.

Nope.

I think they appreciate it as always.

Just to add just a little bit and you know Chris Chris covered it yeah, I mean, the capital intensity of our in our business is much higher at the upper end right. So the higher you go on the chain scale. The more the deals are competitive and you're contributing capital and the other thing I'd say is where I think sort of working with you for a while I think where your where you were headed with that I think you know from a revenue intense.

City perspective, Chris described it as you layer in these lower fee per room hotels mathematically of course your fee per room does go down, but when we model it out over a long period of time you'd be surprised the fees per room do not going off they keep going up over time and we continue to grow at what you know what we often talk about is algorithm. So if you take.

Same store sales plus nug, the fees per room and the fee growth continues at that pace and part of that is because of the non revpar driven fees that Chris mentioned earlier on the call, which we think will continue to grow at a higher rate than algorithms. So you put that all in your model and you know it's.

It's relative it's surprisingly steady slash continues there is no year, where fees per room or going down because the arithmetic and you know we continue to have revpar growth on the existing pool of assets. You know that continues to go up in fees per room as we model. It 510 years out just keep.

Going up.

Okay. Appreciate it thank you.

The next question is from Robin Farley from UBS. Please go ahead.

Great. Thanks, Mike I wanted to ask a little bit about the.

This is transient performance in the quarter.

I know you talked about Revpar being ahead of 2019 levels, but I wonder if you could give us a sense of where either occupancy or number of business transient nights in the quarter compared to Q1 of 19, it seemed like from kind of broader industry trends that Q4 didn't show.

That much sequential improvement from Q3 in terms of that change versus 2019, and maybe you'll say you know of course it may not matter at all when you have revpar performance as strong as what you have.

Not on that thing its not a strong quarter, but I'm kind of curious what's going on with that business transient rate piece of that.

On a on a global basis business transient actually fourth quarter to first quarter ticked up. So you know it was about in the fourth quarter about 103, and it went to 104.

But importantly on a on an aggregate occupancy basis in the first quarter for the first time.

It actually got back or are slightly above where it was at the prior peaks now that's not a U S. That's a that's a global number so why is that happening in the face of everything you are reading and it's really simple, which is why I said it in the comments. It's SME, it's like what what we're all filtering through as you know a big core.

But America the corporate America.

As worried about the world you know all the uncertainty.

And maybe curbing some of their appetite for travel having said that I've met with we had a big customer event and I didn't get that impression even at a big Corporate America, I think incrementally year over year, they're all traveling more but maybe not as much as they would have thought but the Smes continue which are 85% of our business continue to perform.

Really well and the big corporates Werent really back in <unk> in any event and so since they had not come back to prior levels, while they may recover more slowly they're not my impression from talking to a bunch of them and they're not really cutting because they already had cut so much and they hadn't built back there just maybe maybe it's.

It's flattening.

For them, but said it many times.

Over the last few years, we have by choice, we were always quite dependent.

80% of our business was Smbs, it's 85% now by choice meeting, we have shifted our mix because it's higher rated business it's more resilient.

In the sense that it's more fragmented, but by the very nature of what it is so.

You know the business transient is.

Well and I'd say you know in the first quarter you know both the price was above and volume was.

After a slight slightly above and that trend continues into Q2, although we're early in Q2.

Okay, great very helpful. Thanks.

And then just a question kind of a small one is.

Our distribution.

Keith I have to imagine that.

Does this strengthen this coming back.

Distributions moving down compared to last year, just given that leisure Tonight.

Normalizing its slightly elevated relative to pre COVID-19, but not much and has come come down a bunch and we expect probably by the end of the year certainly an indexed it'll be normalized with where it was which is where we want it to be.

Okay, great. Thank you.

The next question is from Brent Moen Tour from Barclays. Please go ahead.

Hey, good morning, everybody. Thanks for taking my question.

I was wondering if you could just dig in a little bit to the drivers of the conversion activity, taking spark out of it Chris you mentioned potentially lower hotel transaction activity from from financing headwinds, putting pressure as well as financing being a headwind and that itself for.

Doing non spark higher end convergence I guess could you stack that up against some of the maybe positive tailwind.

Perhaps enforcement of brand standards across the industry, forcing more trade down or even more independents getting more nervous looking for branch how do you look at all of those factors.

Net basis later into the year.

Yeah I'll take this one Brian I think out outside of spark because we've covered that I think you've got a couple of factors. One is yeah in in sort of an environment, where people are expecting demand to soften they tend to seek out brands more often and obviously they tend to seek out the stronger brands. So it's being driven by somewhat of demand for independent hotels.

Converting to brands and then I think the other factor is in an environment where credit is tighter.

Our cash flowing hotel Reits, so acquiring a hotel on the and that's already cash flowing it's easier to finance than than a than new construction. So I think those are the two primary drivers and then you think about you know.

Some of the things that are going on around the world, but they're generally driven by transactions.

And you you're generally in a softening demand environment easier to finance and more demand for for the for the branded systems.

Great. Thanks, so much sure.

The next question is from Bill Crow from Raymond James. Please go ahead.

Hey, good morning, Chris and Kevin.

As we think about the change to your guidance for 2023, how much of that is driven by.

Areas outside the U S hasn't really been any change positive change to U S expectations.

Yeah, I think bill what you're seeing is it's kind of a it's across the board. It's it's positive change to all regions largely I think Chris covered this earlier in the call largely concentrated with the demand strength continuing into the second quarter in us taking the second quarter up a little bit a little bit in the third quarter and then you know and then the and if you think about pushing out the Ana.

Dissipated slowdown in the back half of the year, but there is there is improvement in the outlook in all regions, including the U S.

A follow up I'm going to actually switch my follow up.

One of them.

I'll actually address something you just said, Chris which is that large corporate seem to be flattening and their demand and I'm. Just curious whether this early in the recovery and I know their issues going on in Tech and financial services in particular, but.

This is.

Give credence to that argument that business travel never fully recovers.

I don't I mean, I don't think so because number one.

<unk> fascia evidence it has so I mean, if you know bill, but I just finished on a couple of questions ago.

And the data in the first quarter of business travel has already recovered I I think I think what it means for US as you know in the intermediate term as you get more certainty in the environment. There is upside in business travel, meaning we've done a good job of shifting to Smes with that shift we're sort of on.

Volume.

Basis back to where we were right basis hire them the big corporates still have to travel by the way. The big Corporates are also not one size fits all it's really where you see the impact is technology banking consulting if you look at a lot of the other big corporate sectors, they're still growing but those sectors weighed it down.

As those sectors stabilize.

And start to think about the future and being competitive and getting their sales forces back out and get out of cost cutting mode, which they will they always do.

Look it is upside so I think when you wake up you know in a year or two and we're in a little you know whenever we get to a more certain environment hopefully it's sooner than later I think the opportunity will be the business business travel both volume and price will be higher than the prior peak I think the same thing.

<unk> four.

For the group business I think this is done what's happened in the last three years has done nothing but reinforce I mean, we're definitely benefiting from a lot of pent up demand, but it's done nothing but reinforce as I talked to all of our group customers and and the like that the need for people to be congregating to do the things that they do in culture and collaboration.

And innovation and all of those fun things so.

Now I kind of famously said when we get through this in like April May of 2020, I think it'll look a lot more like it did then it does and I think that's I still think that and I think the data largely supports that if you look at the business mix like this quarter versus pre COVID-19.

Bid and you know the big segments of business transient leisure transient and group were within a point I mean right now the only difference is leisure as a point higher in groups of point lower otherwise, it's about where it was right and that's because you know group takes time to sort of you know to come.

Back and in the meantime, leisure has been strong, but ultimately as we get strong high rated groups back we will continue to mix more of that and so.

I do not personally believe there is credence to that argument I think the data supports that argument at this moment.

Thanks, Chris look forward to see the early next month, Yeah Sami.

Ladies and gentlemen, this concludes our question and answer session I would like to turn the call back to Christmas setup for any additional or closing remarks. Thank you Chad. Thanks, everybody for the time today interesting times with all of you know the word of the day as uncertainty, but you know as you can see we feel very good about what we deliver.

In the first quarter, we feel great about second quarter, frankly, we feel pretty good about the full year, we're making sure that we're keeping our eyes wide open about whats going going on in the world but.

You know, we you know, we continue to do well and deliver and and most.

Most importantly return more and more capital, which will continue to do so thank you for the for the time and we'll look forward to catching up with you after the quarter.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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