Christopher Nassetta : Correct. Yes. I mean, the way to think about those is those are normalizing in growth rates, above algorithm growth, above typical growth you would assume sort of on a same-store basis. But we’re still particularly because of Omicron, on the fee side, we have a supercharged fee growth rate in the first quarter. But I think the way to think about, over the intermediate, even longer term, is we think all of those ancillary license fees and otherwise, they’re going to grow better than our typical algorithm growth. You’re just — yes, you have some year-over-year normalization going on in Omicron impact.
Kevin Jacobs : And 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.
Operator: And the next question is from Joe Greff from JPMorgan.
Joseph Greff : Chris, I’d love to hear your views on and your understanding of what developers are feeling right now, just given changes in the credit markets and the banking environment, particularly with maybe limited service developers that are more reliant on regional bank for financing. Are they requesting more capital help 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 what your expectation is for maybe pipeline growth for the balance of the year? And then I have a follow-up.
Christopher Nassetta : Yes. I mean, it’s early. So we’ve obviously been talking to a lot of our ownership community as the banking issues have sort of taken hold. And I would say there’s a broad range that anecdotally go from, we haven’t seen much impact. We’re still getting finance. As you can see in our numbers in starts in the U.S. being so far up. Now part of that was before the banking, the regional local banking set of issues, but part of it was after. They’re still getting the best owners with the best relationships are getting their deals done, and our market share in a tougher environment goes up. So proportionately relative to others in the industry, we typically do even better. But we also have folks that are saying very hard to find 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. Let me see how this all plays out.” And so I think it’s early to know. I think being objective about it, which I always am trying to be, I think the Fed seems to be managing through this reasonably well. There’s some ongoing things today 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 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’ll 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 times get tougher for financing, et cetera.
But it’s hard to believe that in the 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 seen it yet, but I think in terms of pipeline, people, I think our expectation at this point for the year is the pipeline is going to keep growing. The bigger question is going to be the conversion under construction. In the first quarter, it was very, very good, as you heard, in the data. I think that will get more challenging. I think it just stands to reason that will get more challenging. And so listen, the good news for us is we tend to get — our share goes up. It’s a big world. While China has been a little bit slower to sort of pick up steam on the development side, it is picking up steam, I think, particularly as we think about next year, I think it’s going to be a big net contributor.
And conversions are — have been and continue to be a big focus of ours. We think we’ll do 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 100% conversion, very low cost of entry in a relative very, very lightly, 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, create a bigger and better network effect, but just in time management, the timing of it actually is quite good. As we said, it’s not going to do a lot for this year, but I think over — starting next year and beyond, it will add significantly. But the net of all that, Joe, is, again, answering — I’m trying to give a little bit of color across the board.
We do expect that what’s going on in the banking system, particularly for limited service, which is disproportionately financed by the regional and local banks, that they’re going to pull in their horns. They’re going to survive. Most of them are going to get through this, but there’s going to be less credit available, and that’s going to slow things down a bit.
Joseph Greff : Great. Thank you for that, Chris. And just my follow-up question is this, the system-wide RevPAR is flat, which is sort of what’s baked into the second half guidance. But if we just think about it for the intermediate term, not that you’re guiding to anything beyond the second half, do you think fee growth can be in excess of RevPAR growth, just given the rooms growth in the last few years?
Christopher Nassetta : Should be, yes. It should be mathematically, yes. The algorithm is, as you know, so the same-store plus unit growth. And we’ve been delivering on average even through COVID, 5-ish, maybe a tick over, even in an environment that is being impacted by some of the things I just described. We believe we’ll continue to do that as we manage our way over the next couple of years back up to the 6% to 7%. 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, but even in that environment, fees would continue to grow with unit growth.
Operator: And the next question is from Shaun Kelley from Bank of America.
Shaun Kelley : 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 a little bit of your experience of how this played out during the global financial crisis a little bit. Just help us think about, if we think about some of the — there’s kind of three drivers, I think, about domestic unit growth, obviously, decently reliant on the financial system; the conversion activity, where you’ve got a pretty interesting pipeline of brands that might even be stronger than back then; and then the international side. Can you help us think about sort of buckets 2 and 3? And as we get on to ’24 and ’25, 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?
Christopher Nassetta : Yes. I mean, that’s the right question to ask. And that’s why I said, yes, 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 you described. We’ve been around 5 through the toughest down cycle in recorded history. Through COVID, we’ve stayed sort of 5-ish or a tick above. And we think over the next period of time, as these things sort of work their way through the system, that we’ll be able to say there. How are we going to do it? Well, one, we’re going to gain share because our products perform better, and we have the highest market share brands in the business. We’re going to keep pushing market share higher. And so while there’s going to be potentially less new build activity domestically, we will plan to work hard to get an even larger share of that.
Conversions, we do believe 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 we’ll have ever done 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 depends very little on financing. Most of the other conversions still depend on financing. A lot of conversions, not all, but a lot of conversions do happen around asset transactions where people say I’m a buyer and a seller and I’m going to change brands and upgrade properties. We’ll still convert a bunch of other types of properties that — where they’re not changing ownership, but no change — lower change of ownership puts a little pressure on that.
But Spark is I guess that we’ll keep giving in the sense of unit growth because, again, you’re talking about 20,000 rooms. You’re talking about a $2 million sort of bogey for somebody to convert and get into our system versus even at the lowest price point, newbuilds that require financing and/or writing checks of $10 million, $15 million or, in most cases, much higher than that. So conversions will play a big part in it. And as I already said, it’s a big world. So what’s going on here in the U.S. is with the banking system is unlike The Great Recession where the whole financial system around the world was sort of imperiled in free fall, this really at the moment is more of a U.S. thing, obviously touched Europe a little bit and Switzerland, but it has largely been sort of continued 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 China is probably taking a quarter or two more. So I think China won’t contribute what I would have hoped it would this year, but I think it will be made up for next in ’24 and ’25 because the engines are really cranking up. It’s just a process. So it will be conversions, international growth and increased market share of what does get done in the U.S. The other thing that is going on is we launched Spark. We’re getting ready, and I’ll maybe tickle the ivories a little bit. We’re getting ready to launch another brand sort of at the — in the extended-stay space at the lower end, mid-scale, very low end of mid-scale, below home to that we have — we’ve been working with our ownership community and customers on that while 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 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 going the fastest. And so again, 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 want it, owners want to build it. But again, it won’t have any effect this year but starting probably the latter part of ’24, more likely ’25 as people look at a brand that can deliver just astronomical margins on a very efficient per unit build cost, we think it will build a lot of excitement.
Home2 has been off the hooks in demand throughout all of COVID and otherwise because people make — 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, 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 ’25, ’26, even in an environment that’s been more challenging — is more challenging from a financing point of view, as the financing markets come back and they always do, it’s those products that really get done fastest. And so we feel good about being around 5 and headed back to 6 to 7 over the next couple of years, and it will be a combo platter of all of those things that you said and that I just spoke to.
Operator: And the next question is from Smedes Rose from Citi.
