Hilton Worldwide Q4 2021 Earnings Call Transcript

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Provided by Quartr
February 16, 2022

Key Takeaways

  • Strong 2021 recovery: Full-year RevPAR rose 60% and adjusted EBITDA jumped 93% versus 2020, while margins expanded roughly 500 basis points above 2019 peak levels.
  • Q4 momentum: RevPAR climbed 104% year-over-year and reached about 87% of 2019 levels, with U.S. RevPAR hitting nearly 98% of 2019 in December as leisure travel surged.
  • Optimistic outlook: Hilton expects permanent margin improvements of 400–600 basis points over prior peaks, plans to reinstate its quarterly dividend and resume share buybacks in Q2, and targets mid-single-digit net unit growth in 2022.
  • Record development: Hilton opened 414 hotels (67,000 rooms) in 2021, grew net units 5.6%, and ended the year with a 408,000-room pipeline (38% of existing supply), supporting future growth.
  • Enhanced guest experience: Launched Digital Key Share and automated complimentary room upgrades, driving a 13% increase in Hilton Honors membership to 128 million and 61% Honors-based occupancy.
AI Generated. May Contain Errors.
Earnings Conference Call
Hilton Worldwide Q4 2021
00:00 / 00:00

There are 14 speakers on the call.

Operator

Good morning, and welcome to the Hilton 4th Quarter 2021 Earnings Conference Call. All participants will be in a listen only mode. After today's prepared remarks, there will be a question and answer session. Please note, this event is being recorded. I would now like to turn the conference over to Jill Slattery, Senior Vice President, Investor Relations and Corporate Development.

Operator

You may begin.

Speaker 1

Thank you, Chad. Welcome to Hilton's 4th quarter and full year 2021 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 Forward looking statements made today speak only to expectations as of today. We undertake no obligation to update or revise these statements.

Speaker 1

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 ks. In addition, we will 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.hilton.com. This morning, Chris Nassetta, our President and Chief Executive Officer, We'll provide an overview of the current operating environment. Kevin Jacobs, our Chief Financial Officer and President, Global Development, We'll then review our Q4 and full year results.

Speaker 1

Following their remarks, we will be happy to take your questions. With that, I'm pleased to turn the call over to Chris.

Speaker 2

Thank you, Jill. Good morning, everyone, and thanks for joining us today. As our results show, we made significant progress in our recovery throughout 20 21. We saw a meaningful increase in demand for travel and tourism and our team members around the world were there to welcome guests With our signature hospitality as they look to reconnect and create new memories, we continue to demonstrate our resiliency By remaining laser focused on providing reliable and friendly service to our guests and by launching several new industry leading offerings to provide them even more choice and control. We also continue to expand our global footprint, adding even more Exciting destinations to our portfolio and achieving a record year of room openings.

Speaker 2

All of this together with our resilient business model translated The solid results. For the full year, we grew RevPAR 60% and adjusted EBITDA 93%. Both RevPAR and adjusted EBITDA were approximately 30% below 2019 peak levels. More Importantly, our margins were 500 basis points above 2019 peak levels, reaching roughly 66 Given our asset light business model and the actions we took during the pandemic to further streamline our operations, We expect permanent margin improvement versus prior peak levels in the range of 400 basis points to 600 basis points over the next few years. Turning to results for the quarter.

Speaker 2

RevPAR increased 104% year over year and adjusted EBITDA was up 100 and 51% RevPAR was roughly 87% of 2019 levels with ADR nearly back to prior peaks. Compared to 2019, occupancy improved versus the Q3 with higher demand across all segments. Strong leisure over the holiday season drove U. S. RevPAR to more than 98% 2019 levels for December.

Speaker 2

Business travel also improved sequentially versus the 3rd quarter with solid demand in October November before the Omicron variant weighed on recovery in December. For the quarter, Business transient room nights were approximately 80% of 2019 levels. Group Rev par improved 11 percentage points over the 3rd quarter to roughly 70% of 2019 levels. Performance was Largely driven by strong social business, while recovery in company meetings and larger groups continued to lag. As we kicked off the New Year, seasonally softer leisure demand coupled with incremental COVID impacts due to The Omicron variant tempered the positive momentum we saw through much of the 4th quarter.

Speaker 2

For January, system wide RevPAR was Approximately 75 percent of 2019 levels. Despite some near term choppiness, we remain about accelerated recovery across all segments throughout 2022. We anticipate strong leisure trends to continue again this year, driven by pent up demand and nearly $2,500,000,000,000 of excess consumer savings. Our revenue position For Presidents' weekend, it's 7 percentage points ahead of 2019 levels and our position for weekends generally is up significantly for the year, Both indicating continued strength in leisure travel. Similarly, we expect growth in GDP and nonresidential fixed Investment coupled with more flexible travel policies across large corporate customers to fuel increasing business transient trends.

Speaker 2

As a positive indication of business transient recovery, at the beginning of January, mid week U. S. Transient bookings for all future Periods were down 13% from 2019 levels and improved to just down 4% by the end of the month. Additionally, STR projects U. S.

Speaker 2

Business transient demand will return to 92% of pre pandemic levels in 2022. On the group Our position for the year has remained steady as omicron related disruption was largely contained to the Q1 of 2022 With most events rescheduled for later in the year, we continue to expect meaningful acceleration in group business In the back half of the year as underlying group demand remains strong. Compared to 2019, our tentative booking revenue was up more than 25%. Additionally, meeting planners are increasingly more optimistic with forward bookings trending up week over week since early January. Overall, we remain very confident in the broader recovery and our ability to keep driving value on top of that.

Speaker 2

This should allow us to generate strong free cash flow growth and our expectation is to reinstate our quarterly dividend and begin buying back stock in the Q2. Turning to development, we opened more than a hotel a day in 2021, Totaling 414 properties and a record 67,000 rooms, conversions represented roughly 20% of openings. We achieved net unit growth of 5.6 percent for the year, above the high end of our guidance and added approximately 55,000 net rooms globally, exceeding all major branded competitors. Our outperformance reflects the power of our commercial engines, the strength of our brands and our disciplined and diversified growth strategy. 4th quarter openings totaled more than 15,000 rooms driven largely by the Americas and Asia Pacific regions.

Speaker 2

In the quarter, We celebrated the opening of our 4 hundredth hotel in China and our first Home2 Suites in the country. This Positive momentum continued into the New Year with the highly anticipated opening of the Conrad Shanghai just last month, marking the brand's debut in one of the world's busiest and most exciting markets. During the quarter, we also continued the With more than 400 luxury and resort hotels around the world and 100 more in the pipeline, We remain focused on growing in these very important categories. We were also thrilled to welcome guests to the Motto New York Chelsea, a major milestone for this quickly growing brand and a perfect addition to Hilton's expanding lifestyle category. This hotel exemplifies what it means to be a lifestyle property.

Speaker 2

It incorporates unique and modern design elements and provides guests with authentic and locally minded experiences. We also celebrated the 1st lifestyle property in Chicago With the opening of the Canopy Chicago Central Loop and debut the brand in the UK with the opening of the Canopy London City. These spectacular properties joined recently opened Canopy Hotels in Paris, Madrid and Sao Paulo. In 2021, we grew our Canopy portfolio by more than a third year over year, opening hotels across all major regions. We ended the year with 408,000 rooms in our development pipeline, up 3% year over year, even after a record year of openings.

Speaker 2

Our pipeline represents It's an industry leading 38% of our existing supply, giving us confidence in our ability to deliver mid single digit net unit growth for the next couple of years and eventually return to our prior 6% to 7% growth range. For this year, We expect net Munich growth to be approximately 5%. As our guests travel needs continue to evolve, we again introduced Innovative ways to enhance the guest experience. In the quarter, we announced the launch of Digital Key Share, which allows more than one guest To further reward our most loyal Hilton Honors members, we introduced automated complimentary room upgrades notifying eligible members of upgrades 72 hours Prior to arrival, with our guests at the heart of everything we do, we've been thrilled to hear that the early feedback For both industry leading features has been overwhelmingly positive. In the quarter, Hilton Honors membership grew 13% year over year to more than 128,000,000 members.

Speaker 2

Honors members accounted for 61% of occupancy in the Quarter just a few points below 2019 levels and engagement continued to increase across members of all tiers. We work hard to ensure that our hospitality continues to have a positive impact on the communities we serve. For that reason, we're incredibly proud to be Thank you, everyone. Thank you, everyone. Thank you, everyone.

Speaker 2

Thank you, everyone. Thank you, everyone. Sustainability Indices, the most prestigious ranking for corporate sustainability performance. Overall, I'm extremely As we enter a new era of travel. With that, I'll turn the call over to Kevin to give you more details on the quarter.

Speaker 3

Thanks, Chris, and good morning, everyone. During the quarter, system wide RevPAR grew 104.2% versus the prior year on a comparable and currency neutral basis. System wide RevPAR was down 13.5% compared to 2019 as the recovery continued to accelerate across all segments and regions, driven by border reopenings and strong holiday travel demand. Performance was driven by both occupancy and rate growth. Adjusted EBITDA was $512,000,000 in the 4th quarter, up 150 1 percent year over year.

Speaker 3

Results reflect The continued recovery in travel demand. Management and franchise fees grew 91%, driven by strong RevPAR improvement and license fees. Additionally, results were helped by continued cost control at both the corporate and property levels. Our ownership portfolio loss for the quarter due to the challenging operating environment and fixed rent payments at some of our leased properties. Continued cost discipline mitigated segment losses.

Speaker 3

For the quarter, diluted earnings per share adjusted for special items was $0.72 Turning to our regional performance, 4th quarter Comparable U. S. RevPAR grew 110% year over year and was down 11% versus 2019. The U. S.

Speaker 3

Benefited from strong leisure demand over the holidays with transient RevPAR 1% above 20 levels and transient rate nearly 5% higher than 2019 for the quarter. Group business also continued to strengthen throughout the quarter with December room nights just 12% off of 2019 levels. In the Americas outside of the U. S, 4th quarter RevPAR increased 100 and Canada continued to see steady improvement as borders remained open to vaccinated international travelers. In Europe, RevPAR grew 3 0 6 percent year over year and was down 25% versus 2019.

Speaker 3

Travel demand recovered steadily through November, but stalled in December as a rise in COVID cases led to reimposed restrictions across the region. In Performance benefited from strong domestic leisure demand and the continued recovery of international inbound travel as restrictions eased. In Asia Pacific region, 4th quarter RevPAR fell 1% year over year and was down 34% versus 2019. RevPAR in China was down 24% as compared to 2019 as travel restrictions and lockdowns remained in place. However, occupancy in the country held steady versus the Q3 as summer leisure travel was replaced with local corporate and meetings business.

Speaker 3

The rest of the Asia Pacific region benefited from relaxed COVID restrictions and the introduction of vaccinated travel lanes in several key markets. Turning to development, as Chris mentioned, for the full year, we grew net units 5.6%. Our pipeline grew sequentially and year over year totaling 408,000 rooms at the end of the quarter with 61% of pipeline rooms located outside the U. S. And roughly half under construction.

Speaker 3

Demand for Hilton branded properties remains robust and along with our high quality pipeline, We are positioned to emerge from the pandemic stronger than ever. Turning to the balance sheet, we ended the year with $8,900,000,000 of long term debt and 1 point Found in the earnings release we issued 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 all of you this morning, so we ask that you limit yourself to one question.

Speaker 3

Chad, can we have our first question, please?

Operator

Thank you. The first question will be from Shaun Kelley with Bank of America. Please go ahead.

Speaker 4

Hi, good morning, everyone. Good morning, Sean. Good morning, Chris. I wanted to dig in a little bit. I thought the margin commentary you gave What's interesting, Chris, I mean, in general, we don't think of I think we think of hotels being more about recovery beneficiaries than we do as thinking Through the pandemic and some of the opportunities you may have presented on the cost side.

Speaker 4

So could you just give us a little bit more color on what some of the key buckets are that have changed in your overall operating model that are driving that improvement. And then secondarily, just help us think through how that might trend over The next couple of years as you kind of ramp up towards that 500 basis point margin target that you mentioned?

Speaker 2

Yes, I am happy to do it. We put it in the comments because the truth is it's, I would argue, very important. I don't think it's had a lot of focus And it has an intense amount of focus inside this company, amongst the management team and for that matter with our Board of Directors, because the idea was As you would want to do in any crisis is take advantage of opportunity. And as we went into the crisis, We saw things that we thought we've not only needed to do to address the crisis, but we could do to make the business stronger. And so We didn't obviously have a lot to worry about liquidity.

Speaker 2

We had a lot to worry about, but our balance sheet was great. We didn't have a lot of liquidity issues. So we very quickly, Not to pat us on the back, but it's true. Like in March, April of 2020, we were focused on recovery, how do we To the other side, what are the things that we can do to make this business faster, growing, better, stronger and higher margin and we've been at it ever since and we'll never stop Because we think there are opportunities. I think if you did the math, it sort of comes in 3 categories that get you there.

Speaker 2

Number 1, we are bigger. So you have units that have been added at 5 plus percent a year through COVID that Haven't been during COVID that productive that are over the next few years going to become productive contributors to earnings. We've had great success in our sort of license arrangements And sort of our non RevPAR related fee segment of the business, so think our HTV business, think Our AmEx, but co brand business generally where we it's a very, very high margin business and It has performed very well. If you look at the numbers carefully, 2021, we were already over peak levels for those Fees peak 2019 levels and we think there is still meaningful growth to come from That and then last but not least and importantly cost structure. We like everybody, Every business that was dramatically impacted by COVID had to think about cutting costs in hotels and in corporate and we did that.

Speaker 2

But again, not patting us on the back, but reality, we said like we don't want to just take cost out. We want to sort of reengineer the way we run the business To be able to where we think there might be longer term efficiencies, realize those and during COVID sort of get build it in To the DNA of the company. And so we were able to take out a bunch of costs that helped during COVID, but that we think We will be able to keep out. When you put all that together, as we said, we think it's 400 to 600 basis points of So at a real run rate margin improvement, we delivered pretty well against I thought last year when we had RevPAR and EBITDA that was 30% off Peak levels and delivering 500 basis point margin levels was pretty compelling as a down payment on what we're saying. Now it won't be a Perfectly straight road, meaning there are last year, we probably underspent in some areas because it's been hard to hire and all that corporately.

Speaker 2

This We will catch up a little bit with that. So it won't be a completely straight line. But as you look out to like 23 and 24, I think we are in those target ranges, hopefully at the midpoint Or beyond those at least as we model it. And as I said, it's not by happenstance, it's not by luck, it's Then a huge focus and I think shareholders should feel comfortable that it will remain an intense Focus of the enterprise, because we know we can and if we can, we should, because ultimately and I won't finish this because I'm sure others have questions We want to have answer. Ultimately, obviously, we are a free cash when we in a normal time, we are a free cash flow machine.

Speaker 2

The higher the margins, The higher the free cash flow and having 500 basis point higher margins allows us to drive a lot more free cash flow that allows us to return a lot more capital Over time and as I said in my prepared comments, we intend to start returning capital in the Q2. That is the Q2 of this year. That is 6 weeks from now.

Speaker 4

Thank you very much.

Operator

Thank you. And the next question will come from Joe Greff with JPMorgan, please go ahead.

Speaker 4

Good morning, everybody.

Speaker 2

Good morning, Joe.

Speaker 4

I have a 2 part question on development. One, it's hard not to notice that the managed footprint has Caught up at least relative to the growth rate into 2019. How do you see the footprint growth between managed and franchise growing in 2020? I know you talked about 5% this year, longer term 6% to 7%. And then can you also just talk about what's going on development wise in China currently?

Speaker 4

Thank you.

Speaker 3

Yes, sure. Joe, I'll take this one. I think it's interesting, I'm not exactly sure what numbers you're looking at. I think our split between managed and franchised As the pipeline plays out, it has been pretty consistent, right? Our existing supply is 75% franchised, Led by the U.

Speaker 3

S. And the Americas, of course, but more and more, our pipeline today is 40% franchised outside in sorry, 40% franchised in EMEA and nearly Half franchised in APAC as our franchise business grows in those regions. And so over time, what had been happening is Growing outside the U. S, more of those deals had been managed and that was sort of skewing us back towards managed. And now I'd say we're on a trajectory overall.

Speaker 3

We'll still add a bunch of managed rooms as we grow outside the U. S, but more and more we're doing franchising outside of the U. S. And so Maybe I'm missing something in your question and I'm happy to do a follow-up, but I think that's been pretty consistent, not really moving around that much. And then interestingly, and so feel free to follow-up, but to get to China, it's interesting most of the development trends and I think we've said this on prior calls, have been following the trend of the virus.

Speaker 3

So meaning as the world's been opening up in those regions, you see a pretty direct correlation into signing activity and approval activity in those regions. So led by the U. S, Europe had sort of a slow start This year, but then really came on towards the end of the year as things started to open up. China has been kind of the exception to that rule, meaning even with lockdowns And people not moving around and you would think not being able to travel across the country would slow the pace of activity, but that just hasn't been the case. So for us, our approvals for 2021 were up 45% For the year and our openings were up 30% over the year and we think our openings will be up something similar to that over the course of 2022.

Speaker 3

So China It's really been strong, led by our Platano Hampton JV. We've now launched Home 2 With Country Garden, we've now launched on our own an individual franchising program for Hilton Garden Inn With still a bunch of Chris mentioned a little bit in our prepared remarks, still a bunch of really great full service and luxury signings along the way. So China has been A little bit of the exception to the rule with COVID where even in the face of lockdowns, we've had a lot of activity.

Speaker 5

Great. You answered it. Thanks, Kevin.

Operator

And the next question will come from Thomas Allen with Morgan Stanley. Please go ahead.

Speaker 5

Thank you. Just a follow-up to Sean's A clarification. As I look at 2024 consensus for you, The Street is looking for $3,100,000,000 of EBITDA and 70% margin. Your comments earlier, Chris, was we're going to Gained 400 to 600 basis points of margin versus 2019, which has you in that 65%, 66% range. What do you think The Street's modeling missed modeling?

Speaker 5

Thank you.

Speaker 2

I have no earthly idea. As you know, We haven't been giving guidance for any period of time, let alone for 2024. So, Thomas, I think the best thing to do Let my comments stay in as they were. We're confident that on a run rate basis, it will sort of be in that range. We're very proud of that being able to accomplish that.

Speaker 2

Obviously, we're always looking to under promise and over deliver, so that will never change, but Not much to add at this point.

Speaker 6

All right. Chris, just I mean,

Speaker 5

I guess that's another way. 2 things I was thinking of when you said One, there's obviously going to be a mix shift of the lower margin owned business coming back. And then secondly, when we look at your margins historically, they increased every single year. So I guess the point I'm making is, I think your commentary around margins is more your confidence around resetting margins higher versus Your commentary that your expense base will grow significantly and you're kind of you're stuck at a margin level. Is that the right way to think about it?

Speaker 2

I'm not sure I understand, but I think so. Yes, I mean we have confidence. Said another way, just to be clear, we have confidence that The structural changes we have made to the company on a like for like basis are going to drive higher margins. So if you think that margins that we're going to continue to grow organically under the prior setup, then we agree with that and we think that there's an incremental Piece to it that is a result of structural changes that we

Speaker 5

have made that we will maintain.

Speaker 3

Yes. Tom, I'd probably just add to that quickly on the real estate is like you are making a Comment about the mix of business, but you should remember that the real estate has been shrinking over time. And even though you've had you've got different rates of recovery in COVID and different mix over time that is going to continue to be a smaller part of the business as we continue to grow the Franchise business and continue to work our way out of the real estate.

Speaker 2

Yes. And not to beat a dead horse, but to just throw something slightly more on top of the real estate. Real estate, you're right, is a lower margin business by definition. We have baked that into what we what our my guidance what my The summary was of what our expectation is over the next few years, so that was taken into account. It also From an EBITDA growth point of view, will be tremendously helpful because it was so beat up given the structure of how Much of it is held that from an EBITDA growth rate point of view over the next few years, real estate is going to be very helpful, Very high growth.

Speaker 5

Thanks for the clarification.

Operator

And the next question will come from Smedes Rose with Citigroup. Please go ahead.

Speaker 7

Hi, thanks. I wanted to ask a little bit more about your thoughts On China and maybe you could just give us a reminder of what the kind of contribution China made to fees in 2019 and maybe kind of how far that fell off in 2021 just because it seems like there is an Maybe for some significant rebounding, maybe it sounds like it's running behind kind of the rest of the world. And if you have any kind of thoughts on maybe how China addresses its policy around COVID going forward Or if they keep the kind of 0 tolerance in place indefinitely.

Speaker 2

Yes. I think China I'm doing this from memory. I think China 2019 was like 5 points of EBITDA overall, and I would guess at this point, it is less than half of that. So So I am looking at Jill, it's probably 2% or something like that. So I think you are right.

Speaker 2

There is a significant I mean by the way that's True for the entire international estate when you think about it. Our Asia Pacific business, our Europe business, they've all Ben, been slower to return and so our EBITDA, if you looked at 2020 2021 was crazy Disproportionately U. S.-based and those numbers aren't fully back to where they were. I mean, we were like 73% U. S.

Speaker 2

I think in 2020, we were like 94, 95 and last year we were like 83 or something. It's coming back and will ultimately return to a more normalized kind of environment, Which means not just China, but the whole world. Whole world outside of the U. S. Has some significant growth Potential as we get to a more normalized environment.

Speaker 2

In terms of the reasons generally and I will depend on China And maybe use this as an opportunity to just talk about sort of the rhythms of what's going on, most of which I think is pretty well known because you guys have a lot of data. But If you look at what's going on in the world, the Middle East, which is not a huge part of our business, is sort of leading the world. I mean, you saw our numbers for the Q4. Middle East is already meaningfully above 2019 levels. So they are sort of ahead in recovery.

Speaker 2

We think that will continue. The U. S, I would say, is sort of next and we can maybe I'll leave it to another question. Our belief is you will see in the second A quarter of transition and then very rapid recovery, all our earlier prepared comments in the second half of the year. I think Europe will be quick to follow in the sense that it's more complicated because you have more countries, the Restrictions aren't just one set of restrictions, but you can start to see it sort of sweeping through Europe, opening sweeping Through Europe now, Asia Pacific, I think will lag in large part because of Dyna and the policies they have had, my own view and that's all it is, it's not because of insider knowledge is that as the rest of the world opens And as you get, which I think we are rapidly approaching to an endemic stage of COVID, I think there will be a lot of pressure Economically, culturally and otherwise for China to open up much like the rest of the world.

Speaker 2

So I think it will be It will lag, but I think it will be a I think Europe and then Asia will be a fast follow. And as I think we as we my own view as we get to the second half of the year, I think you are in an Half of the year, I think you're in an entirely different environment across the globe. And in the first half of the year, you're going to see Things evolving at slightly different pace, but I think when you get to the second half of the year, every the whole world broadly It's going to be a lot more open than anything we've seen in 2 years.

Speaker 7

Great. Thank you.

Operator

The next question is from Stephen Grambling with Goldman Sachs. Please go ahead.

Speaker 8

Hi, thanks. I'd like to Come at margins from maybe the perspective of your owners, which is always key to driving that overall flywheel. How are you thinking owner margins will progress And could you tie in how you envision the hotel experience will structurally change, whether it's longer stays, Charging or opt in for cleaning or reducing non consumer facing labor. And where do you see the greatest opportunity for investing back And do your honors to improve the experience in some of these shifting preferences? Thanks.

Speaker 3

Yes. Good question, Stephen. A little bit to unpack there, but I'll sort of Try to go in order. I think if you take a step back to the beginning of the pandemic, I think we've done a really good job leading the we did a really good job in the pandemic leading the way with Starting out early on advocating for our owners whether that was for government assistance or otherwise being really flexible with standards As the business sort of fell apart a little bit and through recovery sort of similar to what Chris has been talking about Of really taking the opportunity of COVID to drive improvement through our enterprise, we've been doing the same thing at the property level, right. So it's Certain big things you mentioned by being innovative with reengineering our food and beverage and particularly breakfast offerings, Looking at housekeeping, an opt in there and then a bunch of little things across line item by line items are literally grinding Through the P and Ls and standards with our owners to help them help the properties be more profitable through COVID and using that opportunity to make sure that that But of course, the flip side of that on inflation is that helps on the revenue line, right?

Speaker 3

We reprice the rooms every night. If inflation is a headwind On the cost side, it's going to be a tailwind on the revenue side and the revenue base is obviously bigger than the expense base and so that ought to lead to higher margins coming out the other side. So When you put that all together, we think we can do a better job for customers, give them what they want, take away what they don't want and what they won't pay for And use driving revenue through an inflationary environment to get our owners to be higher margin business

Operator

The next question is from Patrick Scholes with Truist Securities. Please go ahead.

Speaker 9

Hi, good morning, everyone.

Speaker 7

Good morning.

Speaker 9

When I try to think about some things that have perhaps permanently changed or at least changed from 2019, I'm wondering what your thoughts are on the degree of key money that you're giving today For new hotels under your brand, number 1. And how have the franchise contracts Yes, change are they more flexible today versus pre COVID, less flexible? Just like to hear your thoughts on those. Thank you.

Speaker 3

Yes. I think I'll start with the second part. I mean, really, there's nothing different about our franchise agreements now versus pre COVID. It's a very well it's a business that's been around for a long time. The protocols are established, the franchise documents, you can read them, they're public.

Speaker 3

They haven't really changed over time. I think when it comes to key money, I mean you could see in our numbers this year that it's It's been sort of higher than it had been in the past. I think that's a function of a little bit of I don't think it's COVID versus Pre COVID, it's a competitive environment out there. So there's definitely competition. We're leading the way in growth and our competitors are trying to catch up to us.

Speaker 3

So that makes for competition. But the reality is, is our number of deals that have key money associated with them is about 10%. That's what it was pre COVID. That's what it is today. That's been pretty consistent.

Speaker 3

And we've just been fortunate over the last particularly year or so, we've signed some really high profile Deals, I think about the Waldorf Astoria Monarch Beach in California, I think about Resorts World in Las Vegas, The deal we did in Cancun and Tulum, those have been deals that we've been working on for a really long time. They're very strategic. They happen to be a little bit higher key money associated with them than we're used to and so we've been a little bit higher. And that trend maybe continues We have some strategic things in the hopper at the moment that I think might keep that number a little bit elevated over the course of 2022 and maybe even for a little while beyond that. But what I'd say sort of in closing and hopefully that sort of covers it and Chris may want to add to that a little to this a little bit is, Relative to our peers, I think we stack up really favorably in terms of what we have been deploying for capital to get to our level of growth, I think it's been exemplary.

Operator

Thank you. And the next question will come from Rich Hightower with Evercore. Please go ahead.

Speaker 2

Hi. Good morning, everybody. Good morning.

Speaker 10

So I want to go back To a portion of the prepared comments, and Chris, I think you mentioned it was STR's forecast. I know this is not a Hilton forecast, but for Business transient demand, I think, to get to the low 90s as a percentage of pre COVID levels this year. So again, not your forecast, but I am wondering if you could take me through the building blocks in your mind as to Perhaps how we might get to that level by the end of this year, especially in the context of hybrid workforces, work from home and so forth.

Speaker 2

Yes. It is in our forecast, but I do buy into it and I think actually It might be even better than that personally, my own opinion. I think there is a really good chance on a run rate basis That we will end up back at or above where we were in 2019 before the year is out. So why do I think There's a lot of pent up demand that obviously helps and Omicron created more pent up demand because a lot of people didn't do trips. But I can't speak for the industry.

Speaker 2

I can speak for us. We are out talking to customers all the time, sort of large, medium, small. And what you find is like heretofore during the crisis, the largest corporate customers have been Way off on travel. So they've been like 80%, well, I'd say through the 3rd Q4, they were 70% or 80% off still. But what happened is that SMEs, small, medium enterprises were out traveling like crazy.

Speaker 2

I've given these stats before on call. Pre COVID, 80% of our business transient was SMEs, 20% of it or 10% of the overall business With large corporate, so it's not that we don't love them and we don't want them, but we were never ultimately that dependent on that. So What happened in COVID for us is, again, I am back to what I said in my earlier comments, we were in March or April of 2020 All right, what do we do? What do we pivot? How do we retool our sales force for getting whatever business is out there?

Speaker 2

And what we found, not Surprisingly, the large corporates disappeared, but the SMEs were still out there, maybe not like they are now, but they were out there More than others. Why? Because they are small and medium, they had to. They die if their business requires it, And so they have to be out there. And so we pivoted a whole bunch of our infrastructure and sort of like retooled our entire sales force to make Sure that we didn't abandon the large corporates and those relationships.

Speaker 2

We kept our entire sales team on payroll During the whole crisis, which is unlike I think a bunch of our competitors, but we did say we need to like reorient how we are focusing our time. And we've done with all, again, I feel like I'm patting us on the back. We've done a really good job. And so we have replaced, we think, Probably already half of what that corporate business was that went away and I think the corporate business is going to come back. You don't have to believe All going to come back, but the idea is 1 plus 1, I think, can equal 3, right?

Speaker 2

Meaning pivoting Even harder to have a larger demand base to put in the top of the funnel of SMEs along with corporates coming back Gradually, it's just going to give us an opportunity to price demand in a way that I think will be superior to what we could price it before. Last comment I'd make is that people think about SMEs versus the big corporates and no offense to all the big corporates that are on this call, but the reality is you guys pay less. So the SMEs, I mean, if you look at the rate structure of SMEs, it's like 15% plus on average higher Because the big corporates beat us up more, they beat everybody up and we discount more. So the reality is not only is there more of it that's been out there and we've retooled We will have to go after more of it, but the reality is, it's at a higher price too. And so that's why I believe And what STR is saying or better is because I do think throughout this year as you release pent up demand, given our access SMEs that have been very robust and we have more of them.

Speaker 2

Corporates are definitely starting to come back, talk to every travel manager in the And they're coming back. When you put all those pieces together, I think it's pretty easy to believe. As you get to the

Operator

The next question is from Richard Clarke with Bernstein. Please go ahead.

Speaker 11

Thanks very much for taking my questions. Just

Speaker 5

want to ask

Speaker 11

you a question about the Construction environment, I noticed your percentage of pipeline that's under construction has dropped below 50% for the first time in quite a while. Is that Just phasing and is that feed into this year's guide on unit growth? Or does that mean we maybe can't expect a recovery in 2023 to return to the normal 6 to 7 takes a little bit longer.

Speaker 3

Yes. Richard, I think, look, that's a slight decrease, almost a rounding error in terms Our amount under construction really sort of rounded to half before it rounds to half now. If you look at the industry data per STR, it's It's down actually a lot more than that. And so we're doing a really good job of both getting and keeping things under construction. And I'd say, the way to think about the trajectory is we actually think we'll start more rooms this year than we started last Now in the U.

Speaker 3

S, which is our largest market, we think we have one more year where it's going to decline slightly and 2022 is probably the bottom. And That does play into our forward looking forecast. And of course, that's just a function of largely input costs, right? If construction costs overall Or sort of up year over year at the moment in the mid teens, raw materials costs and labor cost inflation is not something that should surprise anybody on this call. That's Sort of a thing going on globally, especially in the U.

Speaker 3

S. And so that does all play into our outlook. And so we've actually never said publicly when we think we'll get back to our prior 6 7% level, but given what's going on now, it probably takes 2 or 3 years to get back to that level. We think again, this year will be 2021 was the bottom globally for starts. This year, 2022 in the U.

Speaker 3

S, we think we'll recover from there. You got to start them to deliver them, right. So We have to have starts recover to be able to get back to that prior level of net unit growth. And so you are seeing that sort of affect our outlook And then I guess the last thing I'd say on that is even with everything that's been going on in the world for now a 2 year pandemic with the world blowing sky high, We're still delivering 5 plus percent net unit growth. We still think we'll deliver at that rate through this development lag that's going to come from the pandemic We think that's actually pretty good evidence of the resiliency of the business and the resiliency of our ability to grow.

Speaker 11

Very helpful. Thanks so much.

Speaker 3

Sure.

Operator

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

Speaker 6

Morning, everyone. Thanks for taking my question. I appreciate all of the detail so far. I wanted to ask about the aspect of the The fees which is non RevPAR driven, which are royalties and credit card fees, etcetera. Is there any sort of insights or help that you can For us, as we think about modeling out the next year or 2 as to what those might grow and any puts and takes?

Speaker 6

Thank you.

Speaker 3

Yes, David, I think we've talked about this in the past. We get that it's a little bit hard to model sort of specifically what's going on. Our non RevPAR driven fees cover a bunch of Thanks, obviously, our Cro Brand credit card and our license fees from HGV being the largest part of that, but we have other things in there like residential Development fees and the like. And we've said this before, that's been less volatile, right? So it declined less than RevPAR declined during COVID.

Speaker 3

And now at this point, it's growing less than RevPAR. I think for 2021, it grew about 2 thirds of the rate of RevPAR and that's probably way to think about it going forward. It's hard to say, right? It depends on how those things perform and what goes on. But I think it's going to continue to be a decent growth rate and Additive to our fees, for 2021, it was actually higher, our non RevPAR fees, I think Chris, you might have said this earlier, Sorry if I'm repeating it, but our non RevPAR fees were higher than they were in 2019.

Speaker 3

And our credit card program It is performing quite nicely. I think just a few stats to give you some color. Our account acquisitions were up 45% last Our spend was up about a 3rd year over year and so really strong performance, but again at a lower rate than overall RevPAR because Rev Bar is growing at a really high rate in recovery.

Speaker 6

So hopefully not. So growth, but at a lesser rate?

Speaker 3

At the moment.

Speaker 5

Perfect. Thank you.

Operator

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

Speaker 12

Great. Thank you. Originally, my question was going to be to clarify the comments, the opening remarks about transient midweek Knights for all future periods down only 4%, because that seemed like that number was sort of Too strong a recovery, but I guess really based on you really already commented already on the growth in the small and medium. So I don't know if you have anything else Add on that, only being down 4%, I would think just even the booking window being shorter would make that hard To be at that good of a number, so I can

Speaker 2

give you No, I don't. Robin, I don't have anything to add other than, yes, it's short. The very nature of advanced bookings in Transient only gives you a window so far out in time. It's a relatively short window, but those are the stats. And again, I gave them to you because I think it is Indicative not only of the strength that's building in that environment, but the change from literally the beginning of the year when Omicron was A very big thing to a world where Omicron is becoming a lot less of a thing and we're getting to more endemic stages of

Speaker 12

COVID-nineteen. And then just for a follow-up, if you could put a little more color around, you mentioned reinstating the dividend in Q2 and returning to share repurchase in Q2. Can you talk about where you sort of start at a dividend payout or dividend level, probably lower than pre pandemic initially or just sort of Give us some thoughts around how you're thinking about that balance as you restart that return to shareholders.

Speaker 2

Yes. As I've said a couple of times, we're intending to do it in Q2. We have not Formally declared a dividend, so we haven't made a final decision. But I think the way to think about it and our intention at this point Is to reinstate the dividend at the exact same level we had it before, same $0.15 a share, which is where we were 4 to go back to where we were and then use the bulk of our free cash flow and otherwise to reimplement our share repurchase program. I know there are different views in the world about this.

Speaker 2

Our view, my view has always been that having some modest Dividend is helpful. It does open the universe of investors up a bit to us and we proved that pre COVID and we've talked to lots of shareholders and I think Still have that view, but that the way to drive the best long term returns for all of us that are shareholders is to have the bulk of our program be in the form And so that's what we thought pre COVID. We did a whole bunch of work to see is there anything going on. Jill is nodding her head because she did a lot of it. Is there anything that's changed in the world or with our shareholder base currently that would lead us to a different conclusion And we have not we do not believe there is.

Speaker 2

So, that's what we'll do. We'll get started. I think the way to think, we're obviously haven't given guidance generally, but I think the way to think about it is we'll start out at least thinking about it at a minimum being the free cash flow that we're going to Produced this year and the way to think about that I think directionally is back to my margin point, while we're not back fully recovered By a pretty decent margin yet to 2019 certainly as you look at the full year 2022 because we have with the businesses is Performing better. We have done these structural things that I described to drive higher margins. Our free cash flow is actually pretty much back this year, we think, to 2019 level.

Speaker 2

So we will start at a minimum with that and go from there.

Speaker 12

Okay. Great. Thanks very much.

Operator

The next question is from Chad Beynon with Macquarie. Please go ahead.

Speaker 13

Hi, good morning. Thanks for taking my question. I believe your conversion nug component of total growth has been in the 20% range. Can you help update us On this in terms of where it was for 2021? And then for 2022 against your NUG guide, how should we think about converts and what that Will be as a percentage being slightly offset by higher, I guess, ground up growth?

Speaker 13

Thanks.

Speaker 3

Yes. Thanks, Chad, look, I think it will be I mean the short answer, the crisp answer is, I think it will be consistent, right. It's been about 20%. We are actually doing more Conversions, we've given you some of the stats, but our approvals, our openings for the full year were up 10% year over year are actually our approvals for full year last year were up 42% in conversion. So we're having nice growth in conversion And we are doing more, but we are also doing more ground up development, right.

Speaker 3

And so the denominator in that equation is growing as well. And so will it be Slightly higher going for the next couple of years. It could be, depends a little bit on how a couple of big deals break that Move that percentage a little bit here or there. But I would think about it sort of as being pretty consistent around 20% or the low 20s Of deliveries and I think it's actually a good news story across the board. I mean we in the Americas for 2021, we signed almost half of the conversion deals that were done In the Americas, and so we're doing a lot of conversions, but the reason it's not sort of spiking from 20% to 30% is we're delivering a lot of new development as well.

Speaker 13

Thank you very much.

Speaker 7

Sure.

Operator

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back to Chris Nassetta for any additional or closing remarks.

Speaker 2

Thanks very much everybody for joining today. Obviously, Continuing on with recovery, I think we are, as I have said a couple of times, hopefully getting through the Omicron variant and very rapidly To an endemic stage of this, we are obviously optimistic as we look to the Q2 and the second half of the year and overall Beyond that, and so thanks for the time. We will look forward to updating you on trends that I

Operator

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

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