Hotel brand executives were pleased with their levels of net unit growth during the third quarter and some are expecting Q4 to fare the same despite construction delays, rising costs and uncertainties overseas.
REPORT FROM THE U.S.—Although the industry is facing a low-growth environment in terms of revenue per available room, hotel brand companies aren’t necessarily seeing that same trend with unit growth.
Officials with publicly traded hotel brand companies detailed their unit growth for the third quarter and outlook ahead on calls with analysts this earnings season, any many were pleased to report growing pipelines.
Geoff Ballotti, president and CEO, Wyndham Hotels & Resorts
“We ended the third quarter with 822,000 rooms in our system, a 3% increase since last September, including a positive 1% year-over-year growth here in the United States. In the U.S. we opened 5,400 rooms in the third quarter, an increase of 6% versus last year's third quarter. Internationally we opened over 9,000 rooms, 20% more than we did last year and we grew our international system size by nearly 19,000 rooms. …
“We are not seeing any slowness or softening in our pipeline, and we’re absolutely thrilled with what happened in the third quarter. We saw a pickup domestically where our pipeline increased and internationally where it increased double digits. …
“I think developers are looking to this select-service market in our brands. We’ve seen great interest domestically in our new construction prototype brands, but we are also increasingly seeing interest in some of our more traditional brands. Our Days Inn pipeline is improving; our Super 8 pipeline is improving.
“A lot of what we do is conversions and that’s a really exciting thing to see. We’re not seeing any slowdown domestically, and we’re certainly not seeing it internationally. … We were again thrilled with what happened in China in the third quarter. … We saw a strong unit growth from both our masters and our franchise, our direct business, but we also saw our pipeline pickup in China and continue to see that. …
“As we look going forward, I would say that at this point we probably expect that Q4 will look a fair amount like Q3. The pressures in energy-related markets are going to be there on a year-over-year basis, and from our perspective we see opportunities both on the development side and on the sales-and-marketing side. …
“In a little bit of a tougher environment that we’re seeing in the economy, midscale space, we are going to look for additional conversion opportunities, primarily from independents, where we can bring additional value to the table, and we’re having those discussions on a regular basis with independent hotel owners. Ideally over the next few quarters we’ll see benefits from the increased ability to convert properties. …
“Our pipeline right now is at a record of 190,000 rooms. It’s never been stronger and what excites us most about the pipeline is … it’s growing fastest in our new-construction segment, and that’s both domestically and internationally. We are seeing really strong growth, a 10% growth in our new-construction pipeline domestically. Again we think it’s largely because of the success of our new prototypes which in the economy and midscale space developers are looking to build, and it’s grown 13% internationally on the new-construction front. …
“During slower economies, we have seen consistent 3% net unit growth. We saw that in ’07, ’08 and ’09. Our conversion activity during that period picked up, our brands becoming way more attractive during slowdowns, and we’re seeing great interest … in our conversion brands right now.”
Arne Sorenson, president and CEO, Marriott International
“In the third quarter, we opened nearly 18,000 rooms more than any competitor worldwide. Our development pipeline increased to a record 495,000 rooms, 5% higher than the year-ago quarter, including 214,000 rooms under construction. Nearly 40% of the rooms in our pipeline are high-value upper upscale and luxury rooms in high-RevPAR markets.”
(On construction delays) “Obviously we're disappointed by this, too, and a quarter ago and probably two quarters ago, too. We were asked about net unit growth in 2020 or in the years ahead compared to 2019. And based on the multiyear planning that we've done, much of which we've shared with you when we do analyst meetings and also just based on the obvious which is that the pipeline in aggregate size is very big and we've been signing high-quality deals every year.
“And while every year is not a record, we have been in many respects surprised to the upside about how the new projects are coming into the pipeline. And that continues well into 2019 even with the sort of apprehension in the market. So all of those things caused us to be not just hopeful, but to have some factual underpinning thinking that we were going to see unit growth step up in 2020 and years beyond from the levels we're at today.
“And obviously, we've given you our first look at 2020 this morning or in our release last night. And I have said we now expect it to be roughly comparable negative growth rates next year as this year, which I know is disappointing to folks. We're still early in the process so we should mention that. We don't—we've not finalized our budget plan.
“I think that as we've said in the past and every quarter we go through the entire portfolio pipeline. And we add new units based on signings that have been done we subtract units when they open and we subtract a few that are killed every quarter. The number that we've canceled in this last category is really not moving. So we're not seeing the worst news driving this, which is that deals are being abandoned.
“Instead, what we're seeing is sort of all of the above for delays. And by that I mean, you've got a piece of it which is about the greater upper-upscale and luxury mix that is in our pipeline; greater urban mix which is in our pipeline where permitting and construction often takes longer. You've got continued high construction costs in many markets around the world, which our owners are trying to make sure that they manage well, offset a little bit by continued high availability of debt financing at pretty attractive terms.”
Chris Nassetta, president and CEO, Hilton
“We expect to continue to deliver net unit growth in the 6% to 7% range, which should continue to support solid bottom-line performance next year.
“Our robust development story remains a key driver of our continued success in delivering value beyond the broader fundamentals. Year-to-date, we've opened nearly 330 hotels totaling roughly 47,000 rooms and remain on track to deliver approximately 6.5% net unit growth for the full year. This will mark our fifth consecutive year of net unit growth above 6%.
“At the end of the third quarter, our pipeline totaled nearly 379,000 rooms with continued growth across both U.S. and international regions. Developer appetite for our brands remain strong and we expect to deliver another year of record signings of over 115,000 rooms and record construction starts of more than 87,000 rooms, which supports our net unit growth outlook for the next several years.”
*Disclaimer: Hotel News Now is a division of STR, a CoStar Group company. Chris Nassetta serves on CoStar Group’s board of directors.
Joan Bottarini, CFO, Hyatt Hotels Corporation
“Our net rooms growth, we expect to continue to drive high levels of growth which will drive solid fee growth going forward. We expect to deliver net rooms growth in 2020 within the 6.5% to 7.5% range of our growth model. I would comment that while we see great momentum on new deals and the growth of our pipeline, we are seeing construction delays and cost increases that will have an impact on the timing of openings.”
Dominic Dragisich, CFO, Choice Hotels International
“Comfort and Cambria are leading the way in our high-quality system expansion. We're pleased with the quality of our overall unit growth and the impact the composition of our pipeline can have on future revenue. As such, we're maintaining our net domestic unit growth guidance of approximately 2% for full-year 2019. Our third lever, the price of our franchise agreements, continues to be a significant driver of our revenue growth. In fact, our royalty rate grew by 12 basis points in the quarter and has increased 11 basis points year-to-date. Our ability to increase the effective royalty rate, while simultaneously increasing demand to enter the Choice system, is proof of our focus on maximizing franchisee profitability.
“We remain confident in our value proposition and believe that we can simultaneously continue to increase both the size of our franchise system and pricing of our franchise agreements for the foreseeable future.”
Jonathan Halkyard, president and CEO, Extended Stay America
“Our franchising efforts continue to move forward. During the third quarter, we grew our franchise pipeline by 12% to approximately 7,100 rooms. Combined with the ESA-owned pipeline, our total pipeline is approximately 14% of our existing base. Roughly 75% of our pipeline comes from more than 15 current and future franchisees. Our total pipeline has grown 35% so far this year.
“Our company-owned pipeline has remained steady as we believe we have enough land and construction to account for our target growth for 2019 and '20. We expect to open our first purpose-built ESA hotel this quarter. Importantly, our construction cost for these first few projects are coming in line or below our expectations of $75,000 per key. This is critical for both our own development as well as franchisee development as we continue to prove out the economics to a wider audience. We have assured our shareholders that we would be opportunistic and only opportunistic with acquisitions and conversions.”