Good morning and welcome to the Hilton Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jill Slattery, Senior Vice President, Investor Relations & Corporate Development. You may begin.

Thank you, Chad. Welcome to Hilton’s third quarter 2022 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 the forward-looking statements. And forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to update or revise these statements. 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-K and first quarter 10-Q. 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 on 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, will provide an overview of the current operating environment and the company’s outlook. Kevin Jacobs, our Chief Financial Officer and President, Global Development, will then review our third results and discuss our expectations for the year. Following their remarks, we’ll be happy to take your questions. And with that, I’m pleased to turn the call over to Chris.

Thank you, Jill. Good morning, everyone, and thanks for joining us today. The third quarter marked a very important milestone in our continued recovery. For the first time since the pandemic began, system-wide RevPAR surpassed 2019 levels. Additionally, adjusted EBITDA and adjusted EPS exceeded the high end of our guidance and 2019 levels. We achieved several notable development milestones in the quarter, including reaching 100,000 rooms open across Europe, and announced various strategic partnerships, further enhancing the guest experience and the strength of our global system. The quarter's strong performance, coupled with our capital-light business model, enabled us to continue returning meaningful capital to shareholders. Year-to-date, we've returned more than $1.3 billion. And for the full year, we're on track to return between $1.5 billion and $1.9 billion to shareholders. Turning to the specifics results in the quarter, occupancy reached more than 73%, only four points shy of 2019 levels. As expected, strong travel demand continued through the summer months, primarily driven by robust leisure trends. Post Labor Day, demand remained strong as business transient and group demand improved significantly and leisure demand remained robust. Overall demand for the quarter peaked in September, nearly reaching 2019 levels with business transient demand only two points off 2019 levels. ADR also continued to strengthen and proving quarter-over-quarter and up 11% versus 2019. Rates across all segments surpass 2019 levels, with leisure transient rates up in the high-teens and both business transient and grew up in the mid-single digits. All of this translated into third quarter system-wide RevPAR growth of approximately 30% year-over-year, and 5% compared to 2019 levels, with each month surpassing prior peaks. Leisure transient RevPAR continued to lead the recovery, exceeding 2019 levels by more than 11% for the quarter. Business transient RevPAR reached 2019 levels, with notable acceleration in…

Thanks, Chris, and good morning, everyone. During the quarter, system wide RevPAR grew 29.9% versus the prior year on a comparable and currency neutral basis and increased 5% compared to 2019. Growth was driven by continued strength in leisure demand, as well as steady recovery in business transient and group travel. Adjusted EBITDA was $732 million in the quarter, exceeding the high end of our guidance range and up 41% year-over-year. Our performance was driven by better than expected fee growth, particularly across the Americas and Europe. Results also benefited from further recovery in our European ownership portfolio. Management franchise fees grew 33%, driven by continued RevPAR improvement and strong Honors license fees. Good cost control continued to benefit results. For the quarter, diluted earnings per share adjusted for special items was $1.31, exceeding the high end of our guidance range and increasing 68% year-over-year. Turning to our regional performance. Third quarter comparable US RevPAR grew 22% year-over-year and was up 6% versus 2019. Performance continued to be led by strong leisure demand over the summer travel season, with continued recovery in business transient and group travel further benefiting results. Total US business transient reached 2019 levels for the quarter, with US group RevPAR up 7 percentage points quarter-over-quarter to 95% of 2019 peak levels. In the Americas outside the US, third quarter RevPAR increased 74% year-over-year and was up 17% versus 2019. Performance was driven by continued strength in leisure demand, particularly across resort properties where ADR was up more than 20%. In Europe, RevPAR grew 92% year-over-year and was up 20% versus 2019. Performance benefited from strong leisure demand and international inbound travel throughout the summer. In the Middle East and Africa region, RevPAR increased 45% year-over-year and was up 6% versus 2019. The region continued to benefit…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Joe Greff with JPMorgan. Please go ahead.

Good morning, Chris, Kevin, Jill.

Good morning, Joe.

I wanted to talk about corporate negotiated rates. Can you give us some perspective on how important or what percentage of your room nights, pre-pandemic room nights associated with corporate rate negotiations accounted for as a percentage of the total? And then as you think about those negotiations that are ongoing now for next year, do you get the sense that more companies that were traditionally part of the corporate rate negotiations are opting to go to a more dynamic, less contractual rate type of model?

I'll take it in the order you gave it. Just by way of background, you asked where was it in 2019. It was about 10% of our overall business in 2019. At the moment, it's about 7% of our overall business. And that is largely at this point given the big accounts are coming back by choice because we have chosen to pivot our mix as we've been talking about for the last several quarters a little bit more heavily towards SMB, small and medium-sized enterprises, simply because they are higher rated and more resilient through ups and downs. Having said that, our big corporate customers have been customers of ours a long time, and they're important, but we have weighted that down. I think as they I mentioned that we were most recently only really about 3% off with our top 20, my guess is that 7% will go up a bit, but our objective is to keep it a bit lower than 2019. We're early in that negotiation season, and what I can say at this point in talking to our teams is the vast majority of those accounts are going to dynamic pricing. That's something that we've been doing over a very long period of time, even pre-COVID. We did have the majority of the accounts dynamic, but we had a decent chunk, I want to say, 25% or 30% pre-COVID. And through the last few years, we've moved very aggressively to get more people dynamic. So at this point, the majority of them are dynamic. And I think that all customers understand because of what they're dealing with in every aspect of their life, that is that, at least at the moment, inflation is a real thing and that their expectation is that they're going to have to pay more. And the best – it's early days. The best we think at this point is high single-digit, very low double digit sort of in 9% to 10% range is best we can figure at this moment.

Great. Thanks, Chris.

And the next question is from Shaun Kelley from Bank of America. Please go ahead.

Hi. Good morning, everyone. Chris, historically, the third quarter is kind of when we get a little bit of a taste of kind of a 2023 RevPAR outlook. And I think knowing all of the macro turmoil that's out there, it makes all the sense in the world to not maybe provide something specific. But can you just help us walk us through your thinking here, big picture? You obviously see a lot speak with a lot of people out there. So based on kind of what you know right now, maybe give us a little bit of directional color. And specifically, what can accelerate further from the trend lines that we're seeing in the third and early fourth quarter? And just how do you see it moving through the year in 2023?

Yeah. I think you're right. There's a lot of macro uncertainty. And as a result, it's a little bit early for us to prognosticate on what we think for next year. Not only that, but we're just at the early stages of our budget process, which we'll be going through over the next 60 days or so, to complete by year-end. And so it is premature. Having said that, directionally, I'm happy to comment on, sort of how we and I think about it at the moment on a forward-looking basis. What we're obviously looking at, as I said in my prepared comments, is fundamentals that are currently pretty strong. And while, again, we're not naive to what's going on with the Fed here in central banks in other parts of the world in the sense of trying to tame inflation by slowing economies, we do think we have a reasonably unique setup that is maybe different than some other industries for a period of time that is going to benefit us not just in the fourth quarter, but into next year. What are those things? Not to be too redundant because I covered them briefly, the laws of economics are alive and well, supply and demand. Supply is at historically low-levels, and it's going to stay there for a while, right, just given everything that's going on from COVID and now into the macro concerns. Demand, is picking up. As I covered relative to the third quarter, our expectation is that it's going to continue to pick up into the fourth quarter. Why is it picking up? It's picking up because the segments remain strong. I mean, leisure, I covered it. People still have desire and a lot of disposable income and savings to spend and more flexibility and…

Thank you very much.

Sure.

The next question is from Carlo Santarelli with Deutsche Bank. Please go ahead.

Hi, everybody. Good morning. Chris, obviously, you guys have gotten back to returning capital much in the way you did prior to the pandemic with buybacks. But since kind of coming public again, this is the first time where you've operated in an environment where interest rates were something greater than where they've been. So I'm just wondering, as you think about your capital return strategy, you think about your cost of funding, obviously you're debt, there isn't a ton that's really rate sensitive and you have some time before you have any bonds do. How does the new interest rate environment kind of factor into your capital plans?

Yeah. I mean, obviously, it factors into it. I'd say, first of all, background we're returning more capital than we ever have historically. And that's because we're producing more free cash flow than we ever have historically. And we intend to continue to do that. We have, from a balance sheet point of view, said we want to be at 3 to 3.5 times leverage. We still want to be in that zone. We have said we want to be towards the higher end of that, which would imply incremental borrowing that might increase our buyback. And at some point, there will be a time I suspect that we want to do that. At this moment with where the capital markets are, we probably are not to rush to go out and take on more debt to do that. But at the right time and the right place, there we might be. And there are obviously other ways of our raising capital in the form of shorter – our credit facilities and other facilities that we have. But at the moment, we are still at the mind 3 times to 3.5 times. We're probably, honestly, going to end the year a little bit lower than we might have guessed because of where the capital markets are. But we think those things will stabilize. And again, if there are opportunities that present themselves to do more than we're doing, we'll certainly look to take advantage of those opportunities. From a balance sheet point of view and maturity, we're in fabulous shape. Kevin, you can add on if you want. But we don't really have any meaningful maturities until 2026. We took great advantage both pre-COVID and then during COVID when the Fed leaded so hard to be so helpful to those…

Thanks, Chris.

The next question is from Smedes Rose from Citi. Please go ahead.

I wanted to ask you a little bit more about what you're seeing in China and maybe kind of what the development pipeline looks like there. And with rooms, I guess, opening just into a very depressed demand, would you expect developers to pull back there or kind of how are you thinking that plays out over the next year or so?

Yes, Smedes, what I would say is it's sort of similar to -- it's kind of a microcosm of what Chris was saying on the macro. I mean, you've got some headwinds and you've got some tailwinds, right? I mean, you definitely have macroeconomic disruption there that's been well publicized. It's also -- I think we've talked about this in prior quarters, the actual way development gets done on the ground in China is still very much a face-to-face environment, a face-to-face culture. So that's affecting our level of signings at the moment. Interestingly enough, we've had really strong signings over the last couple of years, and so starts are up in China this year, pretty -- in third quarter pretty materially and will be up for the year. Deliveries will be up for the year. And as you know, we're pivoting to more of a limited service strategy in China that's ultimately going to be less sensitive to the macro environment over time. And so that's all sort of a mixed view and what we would say is developer optimism remains really strong. There's a lot of demand for our brands, particularly Hampton and Home 2 that are just getting started and then we're rolling out Hilton Garden franchising. So that's sort of a long way of saying, we think the trajectory is up over time in a material way, but in the short term, you do have some choppiness.

Thank you.

The next question comes from David Katz from Jefferies. Please go ahead.

Hi, morning everyone. Thanks for taking my question. You've given a ton of fundamental information. I get the puts and takes with all of it. I wonder if you could talk about the non-RevPAR fees to some degree as they become just an important part and how we might expect those to behave in the puts and takes around those, as well as the opportunities to grow them into other areas, et cetera, longer term. Thanks.

Yes, sure. It's a good question. I think we -- you've heard, David, you've heard us say in prior quarters that those fees during COVID, they were less volatile, right? They sort of went down a lot less when the world blew up, and then our expectation was that they'd go up not quite at the pace of other fees, RevPAR-driven fees during recovery. Interestingly enough, in the near term, those fees are actually growing almost at the rate of our overall fee growth, right? So we've had very strong -- I mean, our two primary ways that we generate fees, of course, are credit card fees, which have been bolstered by one change we've made to the program. I think the program is as strong as it's ever been. Obviously, consumer spending has been pretty strong. So that fuels the spend and the issuance of points and fuels remuneration. HGV is doing quite well. Their fee growth has been really strong so far this year. They're public, so you can look at their numbers. I don't have to tell you how they're doing. But you should assume that we grow kind of in lockstep with them as they recover and they grow fees. And so over time, I would say they'll continue to be a more meaningful contributor. It's hard to say, in a more normalized RevPAR environment, they probably do grow at or slightly above the level of RevPAR if trends continue, and then we'll be looking for ways to continue to grow those over time. And So we're not going to get into specifics on things that haven't happened, but you should assume that the co-brand credit card product is one that can be taken outside of the primary countries that we're in now. We're getting good growth with our new products in Japan, and we'll be looking to bring that to other countries. HGV just did an acquisition, right? So they're doing quite well. And then we're always thinking about ways we've talked to you guys in the past about how to commercialize our customer base further and how to drive more revenue. So more to come on that, but that's sort of generally the story.

Understood. And I don't want to break the rules, but there was just one. SG&A came down a little bit, and I hope this is helpful to everyone. I was just curious what the driver of the SG& A guide coming in a little bit was and if it's sustainable in 2023, and then I'll stop. Thank you.

Yes, that's okay. We'll let you break the rules a little bit. Look, it's a fair question. I would say, generally, it's a really good story, right? I mean, we continue to do a good job of containing costs where as you know, we're very disciplined about spending money. There is a little bit of timing stuff in the GAAP numbers, and I know we give you the gap, and we think about it warrant cash, and it's a little bit unfair. There is a little bit of noise in the GAAP numbers, but it's still a really good story. There's still legit savings on the GAAP side. And then we think about it more on the cash side, right? What are we actually spending on overhead? And our cash G&A this year for the full year is going to be sort of down in the low to mid-teens relative to 2019. That's not to say there aren't some headwinds in terms of as the business recovers and people move around a little bit more, cost of labor, inflation is a real thing. But we still think that over time, we'll be able to grow our G& A base sort of around the level of inflation going forward. And so you'll see sort of permanent -- that's part of what's driving the margin improvements that Chris was talking about earlier in the call.

Thanks very much.

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

Great. Circling back to you having more rooms under construction than you did a quarter ago. I know you talked a bit about China and that starts are up there. Can you talk about what's going on with US rooms under construction? And it's just what we hear from others is that it's been so much more challenging to get developers to put shovels in the ground, right, outside of the signings, actually putting a shovel in the ground. And so is what you saw here in Q3 an anomaly in terms of having more refund construction sequentially, or is that something that you think you'll continue to see. Thanks.

Well, we certainly hope we continue to see it. I mean, it is definitely an inflection point in the third quarter, which we think continues into the fourth quarter. While it's certainly relative to normal times, if there is such a thing, it's more difficult in terms of cost to build financing availability. The other thing that's happened is the recovery has been much, much steeper than anybody thought. And obviously, unlike any other recovery period, rate strength has way outperformed what anybody had thought. And when you look at it, you could look at the majority of our system, which we do, the majority of our system, the hotels are generating greater profitability than they ever have, greater than 2019, which was the prior high watermark. So, what is that -- what is happening? That is then fueling optimism. We'll talk about the US because you asked about the US, it's fueling optimism in people wanting to do more deals. This is -- we have a very diversified owner base. It's mostly small and medium businesses. This is what they do. It isn't a part of what they do. It's 100% for the most part of what they do, and they like what they see and they're making gobs of money in most of their hotels, and they want to do more of it, and they want to lock up the best brands to pat us on the back. We have the highest-performing brands in the business, the highest market share across on average and across each of the segments. And so we, I think, are disproportionately benefiting from that. And how it's showing up is, as Kevin, I think, mentioned in his prepared comments, we're going to be over 2019 levels on signings this year in the US.…

Great. Thank you for the color. And just for my follow-up question, if I could ask about group. You mentioned your position for 2023 is 5% ahead of 2019. And I think that's a total revenue position. And just given how much disruption there's been that groups that were not necessarily booking as far out because of the disruption from the pandemic, it seems like, I'm just thinking about the impact on your RevPAR for next year, that the benefit to you is that if they're booking closer in, you're going to be able to get these, sort of, current rates as opposed to like historically group, you're stuck with whatever rates you agreed to two years ago. Can you give us a sense of maybe how much the volume is down? Like thinking about like the incremental price that you may get on. I don't know how significant that volume delta between now and what you have in 2019 one.

Let me sync up on stats because I think maybe I misheard you, or you misstated what I said when I gave group stats. So we're 5% up in the fourth quarter. By the way, if you go back a couple of quarters ago, we were not. We were 5% or 10% down. So again, the business has been picking up at a very rapid pace, but it is relatively short lead. We are 9% or 10% often group position system-wide for 2023, not ahead. But our tentatives and pipeline are literally off the charts. I mean, when we sit here and talk to our sales teams, across the world, the biggest issue is just having enough people to keep up with all the demand. There's a massive amount of demand, and it is short lead demand. So when we look into next year, just given the experience we've been having, it makes us feel very, very good about being able to fill in that group base and ultimately get group back, which was that 93% in the third quarter. We think it will be, from a revenue point of view, roughly at par in the fourth quarter. And we think given this trajectory, it will be above 19 high watermarks next year. Thus, another contributor like leisure, which we think will stay strong, and business transient, which we think is picking up steam and will stay strong, to why we think next year will be a reasonably a very good positive year. In terms of rates -- that is a good thing in the sense that we do, I think, have a reason -- if all these segments stay stable to strong, we have an ability to maintain pricing power that I think is, again, just back to the…

Great. Super helpful. Thank you.

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

Good morning. Thanks for taking my question. Kevin, you mentioned that one of the areas of the Q3 came from the better European ownership segment, which is probably benefiting from a stronger US dollar and just overall recovery. Can you talk about how you're thinking about this segment, the margins around that maybe in the fourth quarter and beyond? I know at the beginning of the year, there was probably a little bit more pessimism. And I'd say in the last two quarters, this has probably come in ahead of expectations and push numbers higher? Just trying to level set on that. Thanks.

Yeah, sure. I think, yeah, that's completely fair. I mean, I think that Europe has continued to despite what -- if you -- the rhetoric over there and what they're bracing for in the winter and things like that, we talked about all the time around here, the operating results have continued to defy gravity, and you heard the results that I've said in my prepared remarks, which are its growth in excess, both obviously on an absolute basis because of how far it fell, but relative to 2019 in excess of the other regions of the world. That clearly has translated through to our real estate portfolio or at least the part of it that is concentrated in that part of the world, the UK and Central Europe. I'd say for the fourth quarter, similar to what we've said about the macro, we don't see any reason to believe that won't continue. And then you probably, in that part of the world, have some headwinds next year. I mean, you think about the inflation that they've got going on, that affects labor, that affects, energy, costs and utilities and things like that, although the fundamental environment holds up, we should do just fine. And then Japan, where we have a couple of large leases, again, they just opened the country up, demand is starting to pour in, and that's a part of the portfolio that could be a headwind. And so I'd say to wrap it all up, on a run rate basis, we're about three quarters of the way back to 2019 levels. So we don't see any reason why that portfolio doesn't continue to recover to where it was, which should continue to enhance our growth rate broadly overall. And I think it's always worth mentioning that that, keep in mind that the rest of the business, the fee business is growing at a nice clip, and that portfolio continues to get smaller over time because of the work we've done there. So we exited seven leases last year. We'll exit another two or three of them this year. I think two or three a year is probably the right way to think about it. And that business will be -- you wake up a few years from now, that will be 5% or less of the overall business.

Great. Thank you very much. Appreciate it.

Sure.

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

Hi. Good morning, everyone.

Morning.

I wonder if we could talk a little bit more about the group pace. If I got my numbers correct, you said next year down roughly 9% to 10%, and then you said for 4Q, up 5%. I wonder since you reported in the end of July, how is the pace been going for those two different periods? It certainly sounds like 4Q was up, but what was the comparable pace for next year when you last reported…?

Best I remember, they both moved about 500 basis points in the quarter. Q – Patrick Scholes: Correct. A – Chris Nassetta: Up. Better. Better. Q – Patrick Scholes: Okay. And then do you have any -- I know it's early, but any indications on sort of the longer -- how are corporations feeling about 2024, 2025 at this point? I guess, it's fair to assume that they are probably a lot more cautious than they would be to book a holiday party at this point? A – Chris Nassetta: Yeah, I mean, that's not -- the business that gets booked that far out is typically the mega size groups. The association groups and other trade groups, and not so much -- I mean, corporations don't -- they don't book their small meetings or their social events. That's a relatively short cycle. But when you look at the big -- I think I mentioned -- I know I mentioned in my prepared comments, what we're seeing in terms of the mix on a forward-looking basis in bookings on the group side is looking a lot like the mix from pre-COVID, which by definition means we're getting a much bigger mix of the very large meetings and events that are getting booked. It's not surprising. It took some time to get there. And to get the revenue consumed, we'll take more time because these are huge multi-thousand person events, many of them citywide. They just take a long time to plan and implement. But that is definitely starting to happen as you talk to convention, visitor, CVBs around the country that is starting to happen. And it makes sense. Notwithstanding the macro concerns out there, a lot of these groups have to meet to survive. I mean, these are events that…

The next question comes from Duane Pfennigwerth from Evercore ISI. Please go ahead. Q – Duane Pfennigwerth: Hey, thanks very much. Maybe switch gears a little bit. I wanted to ask you about revenue management systems. One of the things we've heard from operators recently is a preference for Hilton RM systems and the concept of pricing floors in those systems moving up. Can you speak to the investment you've made around RM? What do you think your special sauce is there and how you might be viewing pricing floors and institutionalizing those pricing floors differently than you have in the past?

I'll let Kevin answer. But competitively, we're probably not going to give you quite a detailed answer that you want.

Yes, I was going to say that. But, yes, we probably won't get into the way the algorithms work or any -- I don't even know, I can't even bring myself to say that out loud. But, look, I'd say, we have a long history of being really good at revenue management. And it is part of our special sauce. We say all the time, you can't really unpack all of the different things that we do commercially and say it's that -- that one thing is x basis points of RevPAR index premium, right? It all goes into the premiums that we drive. But, I would say, we, in our history, we have a vendor that we work with. We co-created the algorithm with them. We work -- they've been an amazing partner. We work really hard with them. And we think we're really good at it. We've created the concept of the consolidated center. We drive more of our owners that sign up to be in these consolidated centers where we help them. We don't set pricing for the vast majority of our system, right, because 75% of it's franchise, and it's ultimately up to the franchisees to set the pricing. But we can advise them on how we do it, and we're really good at it and it's part of our special sauce, and I’d probably just leave it at that. I don't know got anything to add.

And -- no, I would say, that's right. And we don't stop. I mean, it's not a system. In the old days, these systems are like, build a new system and then you let it run for a long time. We’re -- these algorithms are being tweaked constantly to add incremental data fields that used to be in revenue management in our world. It was really just like data related to the hotel. Now, we have data sets, because the world is awash in data that are contributing to the decision-making in these algorithms and just make it smarter. During COVID and the aftermath of COVID, one of the big things has not been less about floors and more about ceilings. And so, I think, we've been very thoughtful about that as well. So, yes, it's part of our -- one of the many things that we think we -- our commercial teams are second to none in the industry, not just in revenue management. But in every other regard, but this is one area that we think we do a really good job.

Appreciate the thoughts.

Yes.

Next question is from Stephen Grambling from Morgan Stanley. Please, go ahead.

Thanks for taking my question. This is a bit of a follow-up on the last topic and on pricing power broadly. Prior to the pandemic, there were regular questions, it seemed on why rate was so hard to push even as occupancies were near peak. Given that there seems to be very little pricing pushback now, how would you frame what has changed cyclically versus structurally? Do you consider the changes in consumer behavior, distribution, yield management as you were describing or other factors? Thanks.

Thanks, Stephen, good to have you on the call. I mean, not to be pedantic about it, but maybe I'll sound that way. It's just the loss of economics. I mean, I don't know how many times I got asked in the lead up to the pandemic. Why can't you get rate pressure? I'm not going to accuse you of it, but probably got asked a thousand times by you and everybody else. And my comment there is just, there was no compression. You were in an environment where, while supply wasn't high, it was over 30-year averages, and more importantly, demand was low, because you were in this very low work growth environment where GDP was vacillating between like 0% and 2%. And you put those -- you were an equilibrium. I mean, supply and demand, or maybe even a little bit at an equilibrium in the wrong way, and that doesn't give you pricing power.

And no inflation.

And no inflation. Now, you have all the things that allow you to have pricing power. You have very limited capacity for what will be an extended period of time, robust demand growth that we're talking about and broader inflationary pressures. And those things are different to the laws of economics. As they say around here, they're alive and well, and that's what's happening. They were driving the results prepandemic and they're driving this result just a different set of conditions.

Makes sense. Thanks for getting me on. I’ll leave it with one.

Sounds good.

The next question is from Brandt Montour from Barclays. Please go ahead.

Hey, good morning, everybody. Thanks for taking my question. Chris or Kevin, I'm curious if you have thoughts about the conversion activity into a potential macro slowdown. And the basis for the question is that, that activity historically has acted sort of countercyclical for obvious reasons, but you guys just had a cycle where conversion activity was really high. So I guess, was there a pull forward of the conversion activity into 2020 and 2021 and 2022, that we would have maybe normally seen in a macro type of slowdown which we could eventually see?

Yes, I don't think -- it's a good question, Brandt. I don't think there's been a pull forward. I mean, we're still going to do roughly 25% of our rooms additions this year as conversions. You're right, that interestingly, it does tend to be countercyclical. And I think this is what you're saying, but I'll just say it anyway, look, sort of rising tide -- conversions actually get tougher in really strong fundamental environments, right? Rising tides lift all boats. And so, if you think of an independent hotel that may be considering needing a brand in a really strong demand environment, they need us a little bit less. And so the pace of convergence goes down. So that's actually a little bit, interestingly, a little bit of a headwind right now. And then the other thing that drives it is a lot of them happen around transactions, right? And at the moment, because of people thinking about macro headwinds going forward, transaction activity has slowed somewhat because bid-ask spreads have widened in those markets. And so there aren't as many assets trading. So that's a little bit of a headwind. And I think actually a downturn can sort of be a strong tailwind on both of those fronts, right? If you get a little bit of a reset in people's outlook, you sort of have a downturn, then the outlook gets better, capital costs sort of adjust, rates come down, spreads widen, you actually then see a pickup in transaction activity, which helps. And then during the downturn, as demand softens, people need us more. So, we think that conversions will continue to be a big part of the story. And interestingly enough, a little bit of a softening in the macro could be a nice tailwind there.

Makes sense. Thanks for all the thoughts.

Sure. End of Q&A:

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.

Thanks, everybody, for the time. As always, we appreciate the great questions and opportunity to give you a little bit of color on everything going on. Obviously, the macro environment is a little bit uncertain. And like you, we're watching it very carefully. But as you heard today, we remain really optimistic, certainly, about the long term of the business given the position that we're in from a brand strength and margin and overall enterprise-wide point of view. But we also remain optimistic in the short to medium term, just given that these tailwinds that we've talked about several times today are pretty strong. And we continue to see very good trends and very good recovery across all the segments. So we'll look forward after the end of the year to giving you a sense of the fourth quarter, and obviously, a little bit more visibility into how we think about 2023. Thanks again. Have a great day.

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