Hello, and welcome to Hilton's Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Jill Chapman, Senior Vice President, Investor Relations and Corporate Development. You may begin.

Thank you, MJ. Welcome to Hilton's third quarter 2023 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. 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, 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 quarter results and discuss our expectations for the year. Following their remarks, we will be happy to take your questions. With that, I'm pleased to turn the call over to Chris.

Thanks, Jill, and good morning, everyone, and thanks for joining us today. I wanted to start today by saying that our thoughts are with all of those impacted by the tragic events that are unfolding in the Middle East. Our priority remains the safety and security of our team members and guests as well as helping in any way we can to support the relief efforts for the humanitarian crisis in the region through a number of organizations, including the International Committee for the Red Cross. Turning to results. We're pleased to report another strong quarter with system-wide RevPAR, adjusted EBITDA and adjusted EPS all above the high-end of our guidance ranges. The strength of our brands, power of our commercial engines and resilient business model continue to drive strong top and bottom line performance. This supports meaningful free cash flow generation and greater shareholder returns. Year-to-date, we've returned more than $1.9 billion to shareholders, and we remain on track to return $2.4 billion to $2.6 billion for the full year. In the quarter, system-wide RevPAR increased 6.8% year-over-year, boosted by strong international performance and continued recovery in business transient and group. Demand improved across all segments and regions with system-wide occupancy for the quarter reaching our highest level post-pandemic and only two percentage points off prior peak levels with September just one point shy of 2019. Group RevPAR rose 8% year-over-year, outperforming leisure and business transient RevPAR growth of 5% each. Compared to 2019, system-wide RevPAR grew 11.4% in the quarter with all segments accelerating sequentially versus the second quarter. Overall performance was driven by both rate and occupancy. Steady rate growth and rising demand drove leisure RevPAR up 29% versus 2019, improving roughly 300 basis points versus the second quarter. Business transient RevPAR grew 7% with both large and small accounts improving. Adjusting for holiday and calendar shifts, mid-week RevPAR increased nearly 500 basis points versus the second quarter. On the group side, RevPAR exceeded 2019 peak levels for the first full quarter since the pandemic and we continue to see positive group booking trends in the quarter for all future periods. Group position for 2024 is now up 18% year-over-year, and lead demand in the quarter for all future arrivals increased more than 15%. As we look to the fourth quarter, we expect continued strength in international markets, along with continued improvement in business transient and group demand to drive further acceleration in RevPAR compared to 2019. Better-than-expected third quarter performance and increased expectations for the fourth quarter, partially driven by better group bookings. As a result, we now expect full year RevPAR growth of 12% to 12.5%. Turning to development. We saw another quarter of robust signings with a near-record 35,500 rooms signed increasing 80% year-over-year. Our pipeline now stands at the highest in our history, totaling 457,000 rooms, up 4% versus the second quarter and 10% year-over-year. Signings in the quarter spanned our portfolio, demonstrating the benefits of a diversified industry-leading family of brands. Conversions accounted for 35% of signings, increasing sequentially versus the second quarter. Overall, we remain on track to deliver the highest annual signings in our company's history, surpassing 2019 record levels by double-digit percentage points. We also delivered another strong quarter of construction starts with every major region exceeding our expectations, and the US in particular, delivering its strongest quarter of starts since Q1 2020, up 18% year-over-year. Roughly half of our pipeline is currently under construction, and we continue to have more rooms under construction than any other hotel company accounting for more than 20% of industry share. In the quarter, we opened 107 hotels totaling nearly 16,000 rooms, up 22% year-over-year and 12% versus the second quarter. We achieved several milestones in the quarter, including the opening of our 700th hotel in the Asia-Pacific region, and we celebrated our 60th anniversary in Japan. We also opened our 300th lifestyle hotel in our 50,000th lifestyle room, including the global debut of Tempo by Hilton designed with well-being in mind; the brand's first property is now open in the middle of Times Square, New York, as part of the TSX development. Additionally, Canopy launched in the south of France with the opening of the Canopy by Hilton Con, marking Hilton's entry into the city and the latest addition to a growing portfolio of Canopy properties across Europe. Curio celebrated its debut in Savannah, Georgia. Tapestry increased its portfolio with the opening of the Bankers Alley Hotel in Nashville, and Motto expanded its signature flexible design and local vibe with its second hotel in New York City. During the quarter, we also celebrated the debut of our newest cost-effective conversion brand Spark by Hilton; the grand opening of the Spark by Hilton Mystic Groton in Connecticut solidified our foray into the premium economy segment. I just visited the property last week and was blown away. I would encourage any of you that are in the area to go see it. Opening just eight months after launch, Spark is the fastest announcement to market brand in Hilton's history, with more than 400 deals in negotiation; we think this is the start of a journey to reshape the premium economy segment while expanding our customer and owner base. Announced just five months ago, Project H3 also continues to see tremendous demand with 350 deals in negotiation. In fact, later today, we're breaking ground on the first-ever property in Kokomo, Indiana, which we expect to open in late summer 2024. Positive momentum in openings has continued into the fourth quarter with several notable openings in October, including the 540-room Hilton Cancun, Mar Caribe, and all-inclusive resorts. Tomorrow, we'll announce and open a 1,000-room conversion property in the Northeast part of the United States. We forecast conversions will account for approximately 30% of full year openings. For the full year, we continue to expect net unit growth of approximately 5%. We believe we have hit an inflection point and expect a meaningful uptick in openings in the fourth quarter with continued positive momentum into next year. With a forecast for our highest level of signings in the year, the largest pipeline in our history, nearing the largest under-construction pipeline in our history with identified 2024 openings and positive momentum in conversions, we are confident in our ability to accelerate net unit growth to 5.5% to 6% next year and to return to our prior 6% to 7% growth rate. In terms of fee contribution, our algorithm is alive and well, and we expect fee growth above RevPAR plus net unit growth going forward. Our under-construction portfolio mix of roughly 60% focused service hotels and 40% full-service remains in line with our existing supply. This balanced and diversified pipeline, along with rising RevPAR and royalty rates gives us confidence in our ability to continue delivering high-quality growth with increasing fees per room. We also continue to strengthen our value proposition for Hilton Honors members. In the quarter, Honors membership grew 19% year-over-year to more than 173 million members and remains the fastest-growing hotel loyalty program. Members accounted for 64% of occupancy, up more than 200 basis points year-over-year. Demonstrating our commitment to meeting the evolving preferences of our guests, we recently announced several new innovations. As part of our long-term commitment to digitally transform the business travel experience for millions of small and medium-sized enterprises, we will launch Hilton for Business early next year. The multifaceted program will feature a new booking website along with targeted benefits designed especially for SMEs, which account for approximately 85% of our business mix. Additionally, we will expand our events booking capabilities, enabling customers to book meetings and event spaces with or without guestroom blocks directly on our website. For travelers who prioritize sustainability, we recently announced an expanded agreement with Tesla to install up to 20,000 universal wall connectors at 2,000 hotels, making our planned EV charging network the largest in the industry. We also continue to be recognized for our culture. During the quarter, we were named the top hospitality employer in Europe and in Asia by Great Place to Work. And just yesterday, we were named the number one Best Workplace for Women in the United States for the fifth year in a row. The strong results we're reporting today would not be possible without our more than 460,000 team members who spread the light and warmth of hospitality each and every day. Overall, we're very pleased with the performance in the quarter, and we remain very optimistic about the tremendous opportunities that lie ahead with continued strong demand, coupled with our record pipeline and accelerating net unit growth forecast. We're confident in our ability to further differentiate ourselves from the industry in the years ahead. Now I'll turn the call over to Kevin for a few more details on the results for the quarter and our expectations for the full year.

Thanks, Chris, and good morning, everyone. During the quarter, system-wide RevPAR grew 6.8% versus the prior year on a comparable and currency-neutral basis. Growth was driven by strong international performance as well as continued strength in leisure and steady recovery in business transient and group travel. Adjusted EBITDA was $834 million in the third quarter, up 14% year-over-year and exceeding the high end of our guidance range. Outperformance was driven by better-than-expected fee growth largely due to better-than-expected RevPAR performance and license fee growth. Management and franchise fees grew 12% year-over-year. For the quarter, diluted earnings per share adjusted for special items was $1.67, increasing 27% year-over-year and exceeding the high end of our guidance range. Turning to regional performance. Third quarter comparable US RevPAR grew 3% year-over-year with performance led by continued recovery in both business transient and group. Leisure demand in the US remained strong even with tougher year-over-year comps. Relative to 2019 peak levels, US RevPAR increased 10% in the third quarter, improving 200 basis points versus the second quarter. In the Americas outside the US, third quarter RevPAR increased 11% year-over-year. Performance was driven by strong group demand, particularly in urban locations. In Europe, RevPAR grew 11% year-over-year. Performance benefited from continued strength in leisure demand and recovery in business travel. In the Middle East and Africa region, RevPAR increased 19% year-over-year led by both rate growth and strong demand from the summer travel season. In the Asia-Pacific region, third quarter RevPAR was up 39% year-over-year, led by the continued demand recovery in China. RevPAR in China was up 38% year-over-year in the quarter and 12% higher than 2019. The rest of the Asia-Pacific region also saw significant growth with RevPAR, excluding China, up 40% year-over-year. Moving to our guidance. For the fourth quarter, we expect system-wide RevPAR growth to be between 4.5% and 5.5% year-over-year and 12% to 13% versus 2019 with continued sequential improvement versus the third quarter. We expect adjusted EBITDA of between $739 million and $759 million and diluted EPS adjusted for special items to be between $1.51 and $1.56. For the full year 2023, we expect RevPAR growth to be between 12% and 12.5%. We forecast adjusted EBITDA of between $3.025 billion and $3.045 billion. We forecast diluted EPS adjusted for special items of between $6.04 and $6.09. Please note that our guidance ranges do not incorporate future share repurchases. Moving on to capital return, we paid a cash dividend of $0.15 per share during the third quarter for a total of $39 million. Our Board also authorized a quarterly dividend of $0.15 per share in the fourth quarter. Year-to-date, we have returned more than $1.9 billion to shareholders in the form of buybacks and dividends, and we expect to return between $2.4 billion and $2.6 billion for the full year. Further details on our third quarter results can be found in the earnings release we issued earlier 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 as many of you as possible, so we ask that you limit yourself to one question. MJ, can we have our first question, please?

Yes. Of course. Our first question today comes from Shaun Kelley with Bank of America. Please go ahead.

Hi, good morning, everyone. And thanks for taking my question.

Good morning, Shaun.

Good morning, Chris. So Chris, I think the big incremental here is obviously your 2024 improving net unit growth outlook. I think this is meaningfully better than what people were expecting out there. So you gave some color in terms of what you're seeing on obviously, signings, starts, and details. But just help us kind of dig in here a little bit. What would give you the confidence to bump that up from where we were a quarter ago? Is there something in particular you'd like to call out for us? And specifically, just remind us of exactly the activity levels you're seeing here in the US as we know we're fighting that sort of tougher construction and financing environment for owners broadly, it seems like you're obviously able to buck that trend. Thank you.

Yes. Last quarter, we provided a broad range of five to six, which we felt positively about, considering it was the middle of the year with much time left to evaluate signings, starts, and conversion success. As indicated in Kevin's and my comments, we continued our strong performance in the third quarter, which has carried into the fourth. As I mentioned earlier, we expect to achieve a record year with signings up by double-digit percentages. While starts haven’t fully returned to previous levels, they are close. We have also seen an increased conversion rate of 30%, which we anticipate will persist across various brands, including the addition of Spark. Our current confidence stems from a detailed model, which is more robust now than in mid-year when we had less data. A lot of what we plan to achieve next year has already been identified, and though there will be many conversions throughout the year, we have experienced substantial success. Our confidence is built from the ground up, region by region, and hotel by hotel, with reasonable expectations based on our conversion momentum. We believe we will end up in the range of 5.5 to 6. We wouldn't state this if we weren't confident, as it reflects our underlying momentum and production activities. I am aware that questions arise about returning to the six to seven range, and as I mentioned, I am confident we will. It's possible we could reach the lower end of that range next year if circumstances align favorably. However, it's still October 2023, so we will approach things step by step. We are optimistic about the 5.5 to 6 range, and we will continue to refine our outlook. Based on the detailed data, I believe there is more upside potential than downside risk at this point.

And then Shaun, just to circle back to the US, I think the situation is a bit more challenging due to financing costs. However, if you have financing, are entitled, and are ready to build a hotel, it's better to start rather than leaving that asset idle. Additionally, the environment is supportive, as there is optimism about growth and limited capacity additions. We continue to gain market share, so I believe it's a positive narrative for the US as well.

The next question comes from Joe Greff with JPMorgan. Please go ahead.

Good morning, everyone. Thank you for taking my questions. Chris, I’m trying to understand the long-term trends regarding the increasing net rooms growth. On average, how long do typical full-service or limited-service hotels remain in the pipeline? Is that timeline shortening? I recognize that next year's growth in rooms is largely driven by past gross room signings and the recent increase in starts. However, are you noticing any reduction in the time that rooms stay in the pipeline on a like-for-like basis?

Every region has its own unique dynamics. I don't have a precise statistic in mind, but I can offer a general overview. For limited service projects, the timeline in the pipeline is usually a couple of years, while full service projects typically take about three to four years. However, this can differ significantly based on the region. Overall, these timelines seem quite reasonable. The COVID pandemic extended these timelines considerably due to overall project halts and slowdowns, along with persistent supply chain issues even after reopening efforts began. While things have improved and are closer to our pre-pandemic timelines, they remain slightly extended. It's a bit more challenging to get projects completed in many parts of the world, which aligns with what Kevin mentioned. Financing is available, but if developers aim to initiate five projects, they might only secure funding for two or three, leading to longer wait times. The gestation period has lengthened somewhat. Notably, with 30% of our deliveries being conversions, the time from pipeline to net unit growth is relatively short, which is beneficial. On average, considering the increase in conversions compared to the low 20s before the pandemic, the pipeline duration for gestation remains similar. However, purely for new construction, it is taking a bit longer compared to before. We've accounted for these factors, as we have teams globally collaborating with our owners on every construction project. We are optimistic about the timelines for deliveries next year, predominantly concerning conversions. These projects are underway, under construction, and we have realistic expectations for their completion timelines.

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

Thank you for taking my question. Chris, earlier in the call, you mentioned that you expect fee growth to exceed the combined effect of net unit growth and RevPAR. Could you provide some insight into how we should consider the relationship between net unit growth, RevPAR, and the fee component for the operating business?

We frequently receive questions regarding fees per room and their trends, which is why we included this information. We plan to provide more detailed insights on March 19 of next year during a full day presentation. We wanted to clarify our perspective because of the recurring inquiries. In the past, we described a model that incorporates same-store growth, new unit growth, and the leverage from license fee increases, suggesting that this model would lead to same-store fee growth surpassing the sum of those two factors. This condition remains true today. As we analyze our business moving forward, we expect this trend to persist. Our business is experiencing same-store growth, we are expanding our units, and we continue to increase our license fee rates as contracts are renewed. Each year, 5% of our system undergoes mark-to-market adjustments, and we are increasing license fees for several brands. When all of these elements are considered, they contribute to our core RevPAR base. Additionally, our non-RevPAR base fees are performing well. The major contributors to this success are our credit card co-brand business and our HGVC HCV business, both of which we anticipate will grow at a rate higher than the historical algorithm. Taken together, these factors indicate that our fees will increase at a rate greater than that of RevPAR plus net unit growth. This expectation translates, through straightforward math, to a rise in fees per room when factoring in RevPAR growth over time. We believe the calculations support this view, which is why we included this information. We aim to provide further clarity during our Analyst Day, where we will offer enhanced transparency regarding our business model and the associated arithmetic.

The next question comes from Stephen Grambling with Morgan Stanley. Please go ahead.

Hey, thank you. I was going to touch on key money a little bit, which went up a bit guidance for the fourth quarter, even as conversions are also going up. Can you just remind us of your general approach to key money and how the industry dynamics around key money have been evolving as we think about, not only in 4Q, but beyond?

Yes. Stephen, our approach to key money has remained consistent throughout our time here. Currently, less than 10% of our deals involve key money. It's important to note that as the competitiveness for conversions increases, we see a corresponding rise in both competition and costs. This year, we have raised our overall CapEx guidance, which does not specifically pertain to key money. We've been fortunate to secure a number of larger deals in the more competitive segments of the market during the fourth quarter. One significant deal was carried over from last year and did not close until this year, which resulted in a lighter capital expenditure last year and a heavier one this year. Looking at a three-year average, our total CapEx has been below $250 million, which is how we guide it. We believe this is the best perspective moving forward. We expect next year to normalize and return to the low to mid-2s range in terms of total CapEx.

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

Hi. Good morning, everyone. Thanks for taking my question.

Good morning, David.

You covered a lot of details and in particular, the net unit growth acceleration into next year. If you could help us unpack a little bit. Is there some expectation for improvement in the landscape? And I know Kevin mentioned taking share of the opportunities that are out there. How? Is that a function of key money? I'd love to just get a sense for how you're pitching it and why you win?

I would describe our analysis for next year as very detailed, focusing on production and conversion. The overall environment is challenging yet manageable, and financing is still occurring. In this tough climate, as Kevin mentioned, we are gaining market share; we are capturing more than our fair share of development opportunities. I believe this is largely due to the superior performance of our brands. Our market share is the highest in the industry, and when owners are selective with their deals, they tend to choose brands that offer the best returns. Although financing remains difficult, it is open, albeit slowly. We have not made significant assumptions for our projected net unit growth numbers for next year, believing that the situation will gradually improve, especially if interest rates decrease at some point next year. We've built our projections on the current production levels. We expect to continue taking share, including about 30 conversions this year and the same next year, which gives me confidence in our forecasts. If things align in our favor, we might even exceed expectations; we have reached a pivotal moment. If you think back to the second half of last year, we saw a shift in momentum, with signings and starts beginning to recover. While there have been concerns, we have observed positive changes since last year, and we anticipate a strong delivery quarter coming up. Based on what we have in production, I believe we are on an upward trajectory, although we don't foresee a significant improvement in the broader development and financing landscape from where we currently stand.

The next question comes from Smedes Rose with Citi. Please go ahead.

Hi. Thank you. I just wanted to go back to your comments around group business, which looks like it's pacing very well up for next year. You mentioned as you have before, that 85% is coming from smaller business enterprises. I was just wondering if you could talk a little bit about the remaining 15%, which I guess is comprised of larger businesses? And maybe just what you're hearing in terms of their sort of appetite to book into next year at this point?

Thank you for the question, Smedes. It seems you might be mixing up a couple of points. Our group business is up by 18% for next year. The 85% I mentioned refers to small and medium enterprises, which is purely coincidental. The remaining 15% consists of larger groups, those with over 300 rooms. Moving forward, I expect that group business will continue to be largely influenced by small and medium groups. However, we are beginning to see the return of larger groups starting in the latter half of this year. Planning for such events takes time, and many organizations were hesitant to commit last year due to uncertainty. They have significant financial investments in these events and can't easily back out due to penalties. As a result, there has been a delay. Securing space for big groups and city-wide events has become increasingly competitive, and this is a time-consuming process. I anticipate that next year there will be a shift towards larger groups, led by pent-up demand. While the shift won't be drastic, there is likely to be a noticeable increase in larger groups, which will alter our metrics. Traditionally, the ratio tends to be around 80-20 for group business. Next year, I predict an increase in larger groups, which should help normalize our statistics. In terms of demand across different sizes of groups, our sales team reports strong interest across the board. The group segment is robust, with high levels of demand and longer lead times, largely due to a shortage of group hotels that have been built in the last two decades. As a result, venues are filling up quickly, and groups must plan further ahead. Despite uncertainty in the economy, we have not observed any negative impact on group demand. Our teams are actively trying to keep up with this demand.

The next question comes from Brandt Montour with Barclays. Please go ahead.

Hey, good morning, everybody. Thanks for taking my question. Maybe for Kevin, the fourth quarter RevPAR guidance looks strong, not out of the realm of your third quarter RevPAR growth. And you don't see that sort of translate into EBITDA year-over-year growth in the fourth quarter versus sort of the third quarter. Just wondering if there's timing you want to highlight between the two quarters or anything else and why that would be a little bit diverging?

Yes, sure, happy to, Brandt. I think, yes, obviously, we raised our guidance about the amount of the third quarter. We did increase the top line for the fourth quarter a little bit, not huge, and it is flowing through, say, for there's a little bit of timing in corporate expense, a little bit of FX and then a small amount for Israel. That's really it.

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

Great, thanks. I wanted to return to the topic of unit growth. You mentioned a conversion percentage of around 30% for next year and in 2024. Can you provide some insight into how many of those conversions are typically recorded in October of the previous year versus how many are expected to occur in the upcoming year? I’m trying to grasp the visibility on this. Thanks.

It's a great question, and I wish I had a definitive answer. Each year can be quite different. I would estimate that less than half of the conversions are booked already; while it's not nothing, a significant portion of the work happens during the year. If I had to make a guess, I would say around 40% to 50% would be in some form of negotiation, though it might not all be in the pipeline.

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

Hi, good morning, everyone. The question about how you're thinking about upcoming corporate rate negotiations for 2024? Thank you.

Yes, we feel optimistic about our progress. We're just starting to delve deeper into it. There's still a lot of work to be done, and it's currently a small segment of our overall business, accounting for about 6% since we've focused heavily on the SME sector, which represents 85% of our business. When you break it down, it comes to roughly 6%. At this moment, considering both fixed and dynamic pricing, a majority of our pricing is dynamic, likely falling within the upper single digits.

The next question comes from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Hey, thanks. Good morning. Chris, I'll ask you to pull out your crystal ball for a second. Could you share some high-level thoughts on, which regions have the most RevPAR growth potential into 2024? Are you thinking maybe next year is more of a domestic growth-driven year or more of the same with international leading? Does the regional leadership change into 2024?

I believe the RevPAR growth will be fairly balanced between the US and the Rest of World, potentially slightly lower in the US compared to the Rest of World, but not significantly different based on current observations. For the Rest of World, we anticipate positive growth across all regions; there is no area where we expect to see a decline. As we are in the midst of budget planning, it is a bit early to make a precise assessment, but if I had to estimate, I would suggest we are looking at low to mid-single-digit global RevPAR growth. We will provide a more refined outlook during the next call once we complete the budget process. I believe the Rest of World will perform slightly better than the US, and again, Asia-Pacific will likely lead the growth, especially due to factors related to China. After China reopened and has shown strong performance, particularly after a lackluster start to the year, we expect significant growth in the travel and tourism sector there. This momentum should continue into early next year, aided by favorable comparisons. Therefore, in terms of year-over-year RevPAR growth, I predict China and, subsequently, the Asia-Pacific region will take the lead. As the world moves past the complexities introduced by COVID-related comparisons, we are approaching a more normalized state where most regions were operational, except for the initial part of the year in China, which will create some comparative issues for early 2024.

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

Good morning. Thanks for taking my question. Just in terms of occupancy versus rate discussion, I guess, more focused on occupancy. Chris, can you talk about how we should think about occupancy exiting 2023 as a percentage or decline versus 2019? And then more importantly, is there still a day of the week that just hasn't come back? Should occupancy permanently be a couple of hundred basis points off? Just trying to think about this in the medium term? Thanks.

In the third quarter, we were just 200 basis points off, and in September, we narrowed that to 100. I anticipate we will finish the year approaching previous occupancy levels for the industry, especially for Hilton. Looking ahead to next year, I'm optimistic about rebuilding our group base. We are witnessing a return of midweek business, and leisure travel remains strong, particularly on weekends. However, major US cities are still lacking the group base necessary to support other segments of the business. We expect a robust year for group bookings, which is essential for reaching occupancy levels similar to 2019. As we progress through next year and regain that group base, I feel confident the other segments will perform well. There are concerns about business travel, but in reality, travel demand is high. Small and medium-sized enterprises are traveling more, and even the corporations that remain are increasing their travel. I believe we will return to previous occupancy levels next year. We're getting closer, though not quite there yet. When considering occupancy and rate, it's still early, but I believe the two will be fairly balanced next year.

The next question comes from Michael Bellisario with Baird. Please go ahead.

Thanks. Good morning, everyone. Just wanted to ask on luxury. Maybe just remind us where is the white space today as you see it? And then maybe more importantly, what are your customers still asking for as you think about investing key money dollars at the higher end price point?

I believe that our growth opportunity lies in the luxury lifestyle sector. We've discussed this topic extensively and are currently undertaking significant initiatives in this area. I anticipate that we will launch a product next year. Over the years, we've made substantial progress, but we intensified our efforts after launching Spark in the third quarter. Our customers appreciate what we offer, as demonstrated by the strong loyalty we have, with some of the highest engagement levels in the industry. The ecosystem we've developed, which encompasses loyalty programs and product offerings, resonates well with our customers. From recent focus group discussions, there doesn't seem to be any overwhelming demands from them. We have a lot of valuable insights, but no urgent requests for changes. What we do recognize is that expanding our luxury offerings will enhance our appeal. We are already well-established in the luxury and resort markets, and we believe this is attractive to our Honors members. However, there's potential for even more growth in this segment, which is why we are pursuing the luxury lifestyle initiative. Moreover, we have development opportunities that we are currently missing out on. Many of our loyal owners are interested in building luxury lifestyle hotels, but we do not yet have the right products to meet this demand, which is frustrating. This gap has the potential to drive our growth. Unlike our more mainstream brands, luxury lifestyle is more niche and bespoke; it won’t result in thousands of new properties, but having even a few high-quality locations will help strengthen our network effect. We are in a strong position with a projected 200 million Honors members by the start of next year who are very loyal and appreciate the network we’ve built. Therefore, pursuing luxury lifestyle initiatives and further luxury deals with brands like Waldorf, Conrad, and LXR will contribute to our growth. The success of our Honors program compared to competitors is a clear indicator of the effectiveness of our ecosystem. While we strive to continuously improve and expand our product offerings to drive growth, we are confident that investing in luxury lifestyle will yield positive results.

The next question comes from Bill Crow with Raymond James. Please go ahead.

I'm sorry, Chris. Good morning.

Good morning.

Chris, Kevin, and Jill, a quick two-parter on maybe the last question for today.

A lot in that question.

First of all, the headlines surrounding Country Garden in China are getting any better. I'm just wondering as it regards the pipeline as opposed to the already constructed and opening units, what do you think the risk is to that pipeline as you stand today? The second part of the question is more specific on the key money, and we understand the hotel you're going to announce the conversion on tomorrow is in Boston; the reports are circulating that's a $40 million key money payment. I'm just trying to figure out the economic state out of payment like that.

Let me address both questions. Regarding Country Garden, it is not a significant part of our overall pipeline in China at this point. I don't see any risk there. The guidance we have provided on net unit growth is based on a conservative outlook for that market. Country Garden has its challenges, but this venture is entirely separate from their residential operations. They are very committed to it and have strict milestones to maintain their exclusivity with Home2. If they fail to meet those requirements, we have various options to proceed independently. Home2 is well received by both Chinese customers and the owner community, acknowledging that Country Garden is not involved in building these properties. This is a management agreement where we collaborate with franchisees who are investing their own money, making it a non-drain on Country Garden's capital. They find it profitable, and I believe they will continue with it. If they don't meet the milestones, we have mechanisms in place and will not need to wait long. They have assured us of their commitment. The key element is that Home2 is highly popular and profitable in the regions we've opened, similar to its success in the US, which means we can expect more Home2 locations to be established. Ideally, this will be in partnership with them, but if needed, we will pursue it ourselves. Regarding the deal mentioned, we will not disclose specifics about it. Generally, in major urban centers, full-service or luxury properties are the types that involve most of our key money expenditure. As Kevin mentioned, less than 10% of our pipeline requires any balance sheet support, primarily because such deals are competitive and strategically essential, especially in areas with lower distribution density. In every instance, we are generating profit. We never offer key money without ensuring we are creating greater value than the amount contributed. As a for-profit business, we do not approach deals in any other way.

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

Thanks, everybody, for the time today. Obviously, very pleased with Q3, but more importantly, pleased with the momentum we have going into the fourth quarter. I feel pretty good about next year. We'll get back to you on exactly what we think as we get through our budget process. But given the macro view of what next year is going to be like and the pent-up demand, particularly in group, but also in business travel, we feel very good about it. We talked a lot about net unit growth today. We tried to give you a much more granular view of that. We feel good that we've hit a point of inflection and we're on the road to getting back to our 6% to 7% growth rate. So we got a busy end of the year to make all that happen and get set up for next year. We'll get back to it, and we'll look forward to getting back with you after the year is over.

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.