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Hedge funds have lost more than $6 billion this year betting against cruise lines and hotels, after underestimating the resilience of consumers globally. The sharp rally in cruise lines like Carnival (CCL) and Royal Caribbean (RCL) and other travel-related firms, such as hotels, has left them sitting on $6.4 billion of mark-to-market losses as of the beginning of August, according to data from S3 Partners.
Many of these U.S.-based hedge funds started the year expecting an impending recession that has yet to arrive. This outlook encouraged them to short sectors that would be exposed to a downturn in consumer spending. However, economic growth has remained resilient, despite higher interest rates.
Ongoing Luxury Travel Boom
There looks to be even more pain in store for these short sellers.
InterContinental Hotels Group (IHG), owner of the Holiday Inn and Crowne Plaza chains, has predicted a full recovery for travel worldwide by 2024. This recovery is expected to be led by a strong U.S. economy and the end of Covid-19 restrictions in China.
The rebound in travel is particularly noticeable in the luxury end of the market, as Covid-19 restrictions recede in the rearview mirror. The luxury hotel market has been especially resilient throughout the pandemic, and continues to display greater strength in many key countries throughout the Asia-Pacific region, with ADR (average daily rate) growth/recovery outperforming the overall market.
The luxury market continues to lead from the front as travelers look to spend their savings on destinations and hotel offerings that would normally be out of reach to the average consumer. The strength of the luxury segment has been underlined by the performance of resort destinations, with the Maldives in 2022 registering a luxury ADR almost 1.5 times higher than in 2019.
According to real estate consultant JLL, the Asia-Pacific luxury hotel market size is 560,000 rooms, a number that is expected to increase by 90,000 in 10 years.
And Hilton Worldwide Holdings (HLT) – already with 880,000 rooms in 103 countries – is planning to become a big part of that growth by bringing its top-end Waldorf Astoria brand to Malaysia, Vietnam, India, and other countries for the very first time.
Hilton in Asia
Hilton's luxury hotel brands include Waldorf Astoria, Conrad, and LXR. The company already operates 33 luxury hotels in the Asia-Pacific region, and will open 25 new luxury hotels there over the next few years, aiming for long-term growth. The 25 new properties are either under construction or being renovated.
In 2027, Hilton will open India's first Waldorf Astoria in Jaipur, the capital of the state of Rajasthan. This city is known as the "Pink City" because of the color of the buildings in the old city, a World Heritage Site.
The hotel will feature villas with swimming pools and guest rooms on a roughly 22-acre site. Events will be held in conference and banquet facilities, and outdoors on an extensive lawn, as the property tries to tap into demand for India's famously lavish weddings.
"India holds a strategic significance for Hilton, and we are eager to establish a new standard for luxury in the country," said Alan Watts, president of Hilton's Asia-Pacific operations.
Hilton has also decided to bring its Waldorf Astoria brand to Kuala Lumpur, Malaysia; Hanoi, Vietnam; and Sydney, Australia. In China, the company will add its top-of-the-range hotels in Xi'an and Shanghai. Japan's first Waldorf Astoria will open in Osaka in 2025, followed by Tokyo in 2026.
Hilton's strategy seems sound. According to STR, a subsidiary of leading real estate analysis company CoStar Group, June's hotel revenue per available room (in the local currency) in Indonesia, Thailand, Malaysia and Singapore was 13% to 24% higher than in June 2019, before the pandemic.
Hilton's revenue per available room in the Asia-Pacific region has rebounded strongly. In the January to March period, the figure was 91.2% higher than it was a year earlier. That was followed by a 79% increase in the April to June period.
Hilton's Future in Asia
Beyond the current "revenge travel" trend, Hilton sees a bright future in Asia. One reason for its high expectations is that continuing economic growth will mean more wealthy people.
Another is that millennials, who place greater priority on "experiences," will likely begin spending more on vacations. These customers are increasingly looking for unique travel experiences. So they expect hotel's services and products in the luxury segment to be further upscale and more luxurious to meet their expectations.
That's why Hilton is trying to grab market share in the luxury segment, which is very rewarding for hotels because of the premiums the customers are willing to pay.
Overall, Hilton's revenue should reach $9.9 billion in 2023 and $10.8 billion in 2024, following a 259% increase to $8.8 billion in 2022 due to the rebound from pandemic-related disruptions. I expect a continued growth in revenue per available room (RevPAR) across geographical regions, with Asia-Pacific (+79% in the second quarter) leading the way.
Profitability remains strong, evidenced by second-quarter EBITDA of $811 million, which surpassed Hilton’s guidance for $770 million to $790 million, amounting to 131% of 2019’s level versus 128% last quarter. Management increased its 2023 EBITDA target to $2.975 billion to $3.025 billion from $2.875 billion to $2.95 billion.
Add it all up, and HLT is a buy anywhere below $150 a share.
