Shaun Kelley: Chris or Kevin, just maybe we could talk about the development side. I mean, obviously, the kind of shifts from China side, the overall outlook on the construction starts remains robust, and we just continue to get a lot of investor concern about the ability of developers to finance new projects. How has that changed with the interest rate environment or the economy? So, how did your conversations go kind of throughout the quarter? And then, if you could talk, maybe dig — as my follow-up, dig a little bit deeper into Spark. There’s been a bit of concern or question in the past about kind of going further down in the chain scales and just hoping you could unpack that a little bit for us. Why is right now the opportunity set right for moving into the premium economy space?
Kevin Jacobs: Yes. Sure, Shaun. Thanks. I’ll start with sort of maybe the construction trends more broadly and then maybe hand it off to Chris to cover Spark a little bit. I think what you’ve seen — look, there’s a lot of puts and takes, right? So, you’re talking about the interest rate environment and availability of capital. And obviously, rates are a lot higher than they had been. And availability of capital is a little bit more constrained, but there’s still plenty of money available for the right projects in the world. If you think about what’s going on at the local and regional bank level is different than what’s going on at the money center banks in terms of capital constraints and things like that. You have some headwinds as we would say in terms of construction costs coming down.
They’re still higher than they were in 2019 by about 20% to 30%, but that’s off of peaks and moving in the right direction. And then, as we’ve been talking about the fundamental environment gives people more confidence that when the hotel — when they develop the hotel and it opens, it will perform at a higher level than maybe it otherwise would have. So, their pro forma goes up. So, you sort of put all that into gonculator, and that’s why starts started to build in the U.S. and ended up higher in the U.S. last year than they were the year before. It depends on where you are in the world. Obviously, it was really difficult — not only was it difficult to get hotels open/impossible in China at the end of the year because, literally, the offices that gave you your certificate of occupancy were closed.
And so, that’s why you saw a little bit of softness in our NUG. That same environment is going on in starts. So, if you’re in China, starts have been behind. But we think starts are going to continue to build from here. The fundamental setup does give developers optimism. And the way they’re thinking about it, they can absorb, not in all cases but in a lot of cases, they can absorb a higher cost of their construction loan and thinking that the world will be in a better place when they open the hotel, it will perform better and that when they roll their construction loan into a permanent loan, then hopefully, the rate environment will be a little bit more normalized. So, those are sort of some of the puts and takes of what’s going on in the world.
Chris Nassetta: Yes, supporting that, and I’ll talk about Spark. When we talk to our owners, I would say at this point, the majority of our system are making more money. Each individual hotels are making more money than they were at the peak of 2019. So, that’s driving optimism. And the reason they’re making money is more efficiencies, higher margins, obviously, rate integrity and pricing power has helped that. But they’ve got — the bulk of the portfolio is producing more free cash flow than it ever has, and this is the business they’re in. And many of them are quite good at finding the money in a local and regional context as they have decades-long relationships. And as Kevin said, that’s why you saw in the second half of the year, we saw an inflection point where starts started to go up here in the U.S. and generally around the world.
And we think that trend — we don’t see anything that suggests that trend is reversing itself. On Spark, listen, we spent a lot of time. We — the truth is we have been thinking about something in this space for a long, long time, almost the entire time I’ve been at the Company. We had a lot — obviously, we’ve doubled the size of our brand portfolio. So it’s not like we’ve been sitting around doing nothing. We had not entered that zone. But three years ago or so, we started to look at it and say, like, because it’s a very big customer base, it’s a huge opportunity to better serve our existing customers, but also an important opportunity to acquire new customers, if you look at that customer base, at least half, probably, I think, arguably more than half of that customer base or customers that are early in their travel lives that are going to grow up and do other things.
And the sooner you get them into the system and building loyalty with them, the better off you are. So, as always, when we look at brands, it starts with a sort of a customer acquisition and a network — continuing to build the network effect for our existing customer base. So, we were confident when we started looking at it three years ago that there was a lot of reasons to be serious about it. Then comes the hard part of trying to figure out how do we engineer something at this price point that really works, that it works for customers, meaning that the experience they have with us is going to be great, friendly, reliable, consistent and that we can apply the same magic, if you will, from a commercial point of view to our ownership community that we have in our other brands so that we drive superior performance to our competition.
And so, there’s a reason we spent three years on it because it’s not easy, but we think we figured it out. I would say, and time will tell, this will be the most disruptive thing we’ve done in terms of brand space because it is very ripe for disruption. If you go look at hotels at this price point in this segment, you will find a very high beta situation in terms of the physical attributes. And it’s very hard to fix when you have a big system that’s already out there. So, you’d say, well, this is all conversion. It is all conversion. But what we did over the last few years is figure out with our supply management team, with our design teams, with our brand teams and everybody else in this company, how can we engineer a product where every single hotel, 100% of the time when it comes in the system has been refreshed, everything that is customer-facing.
We built it, we built the rooms, we put it in real hotels, we built the lobbies. And we brought customers in to say, is this what you want? Is it different? And so, what will be different about this in this space and why I am not worried about it and why, frankly, I’m — I mean it’s not sexy, okay? It’s not as sexy as lifestyle luxury. But in terms of an opportunity to be a value contributor in the billions of dollars for this company and its shareholders, I’m as excited about this as anything else we’ve done because from a customer point of view, we are going to give them a high-quality, consistent experience at this price point that does not exist in the market because of the way we’ve engineered the retrofit of these properties. And this will ultimately take some time, but it can happen quickly.
It will be thousands — it’s the biggest segment in the U.S. It’s the biggest segment in Europe. I mean, it will be thousands — it should be, over time, the biggest brand we have in terms of number of units. And as I said, most importantly, it always starts with what is best for better serving our existing customers and acquiring new customers. And how do we do it in a way that owners will get a superior return. We think we have cracked the code. We will have to prove it. It will come to life quite quickly. As Kevin said, we will have Sparks open this year, won’t have a too terribly big impact on this year’s numbers. But as we get into next year and beyond, we think it will have a meaningful impact. And as I said, ultimately, I look at these as opportunities as a consumer branded company to think about a new product at our scale, being able to be deployed at scale, deployed globally and have the opportunity to be worth billions of dollars to our shareholders.
And I think this is — checks all of those boxes. So, we’re super excited. We’re not nervous. We’ve done all the work. I hope we’ve proven at this point, given this is the tenth or 11th brand that we’ve created out of the ashes or out of the dust that we’re pretty good at this at this point.
Operator: The next question is from Smedes Rose from Citi. Please go ahead.
