It'll be interesting to see what works better for relatively smaller hotel companies like Loews, Red Lion, and even Hyatt with each of their respectively divergent business strategies: traditional asset ownership; totally asset-light; and asset recycling.
In an increasingly competitive hotel landscape marked by consolidation, Loews Hotels is hoping to stand out from the rest by doing things differently from its peers.
The New York-based hotel company, part of the larger Loews Corporation, isn’t following in the footsteps of larger competitors when it comes to pursuing an asset-light strategy, something companies like Marriott, Hilton, Red Lion Hotels Corporation, and Wyndham have made the cornerstone of their business strategies.
While the company has only sold two hotels since 2015 and opened a total of seven, its next three hotel projects all involve development and ownership on Loews Hotels’ part.
“Why have we focused more on building versus buying? It’s simple,” said Loews Corporation CEO James Tisch during the company’s third quarter earnings call on Monday. “First, when you build something, you get exactly what you want. Second, we think the returns are great.”
Tisch added that because “Loews Hotels is both an owner and an operator, a business model that is increasingly rare for hotel companies,” it makes the company “an attractive partner for developers, immersive destination owners, and municipalities alike. We think like owners because we are owners, which creates mutually beneficial partnership dynamics for all constituents, something Loews Hotels has prided itself on for almost 60 years that we’ve been in the business.”
Why So Many Hotel Companies Choose to Go Asset-Light
The asset-light hotel real estate strategy isn’t a new one to the hospitality industry, but it has increasingly become the business model of choice for brands across the spectrum.
Red Lion Hotels Corporation Chief Financial Officer Doug Ludwig told Skift that “the secret of why the industry is going toward this asset-light model” is this: “You don’t need a lot of capital to add franchise agreements and they are immediately profitable; there are no startup losses. You’re not exposed to capital requirements of real estate assets themselves. It’s a low-capital, stable, high-margin business — the investment community is willing to pay a higher valuation or higher multiple because of those characteristics.”
In other words, it makes money and it helps companies grow and scale much more dramatically.
“The shift to an asset-light strategy continues to accelerate across the industry, especially as shares of Marriott and Hilton now trade at premium valuation multiples,” Michael Bellisario, senior research analyst for Baird Equity Research, wrote in an note to investors.
And even those hotel companies known for not having an asset-light approach seem to be shifting their strategies today as well, Bellisario noted: “Hyatt is one of the remaining global brands with an owned real estate strategy; however, even Hyatt’s tone appeared to subtly shift recently with management noting that the company’s future growth was expected to be driven primarily by its management and franchise business.”
Hyatt is strategic about property sales but doesn’t fully embrace an asset-light strategy. If it does sell properties, it invests that money into hotels in markets where the real estate is not as overvalued.
Why Loews Hotels Won’t Go Asset-Light
Loews Hotels, however, believes it can stand out by owning real estate and being a developer, in addition to being a hotel management company, primarily because of what Loews Corp. CEO Tisch called an “increasingly challenging environment.”
“For almost a decade, the hotel industry has seen consistent top line growth, but in many markets supply is now outpacing demand and RevPAR [revenue per available room] growth has decelerated,” Tisch said. “Social media, instant availability of information, distribution intermediaries, mobile devices, and the sharing economy all exert pressure on a hospitality industry. Simultaneously, hotel companies have consolidated into industry behemoths with economies of scale pressuring smaller operators.”
To face those challenges, he said, the company will focus on “highly profitable, distinguished hotels in the upper upscale market” that “cater to group business and are therefore better able to withstand disruptors such as the sharing economy and technological disintermediation.” These are hotels such as the Loews Chicago Hotel, Loews Vanderbilt Hotel in Nashville, and the Loews Miami Beach Hotel, all three of which also have robust meetings group business.
Working With Partners, Attracting Group Business
The second way Loews Hotels will continue to grow is by working with partners that possess “built-in demand generators” and building convention center-adjacent hotels.
Tisch pointed to the company’s partnership with Universal Orlando Resort as a prime example of the company’s success in working with partners.
“Our partnership with Universal began almost 20 years ago with a joint venture in the first three hotels on the theme park campus,” he said. “Today, Loews Hotels in partnership with Universal has five hotels and 5,600 rooms in Orlando, and we’ll open our sixth property in the summer of 2018, the 600-room Aventura Hotel, and there’s more to come. In the next several weeks, the partnership plans to announce a project that will be our largest investment so far in Orlando in terms of both rooms and dollars. So, stay tuned.”
Attracting groups is also a foundational objective for Loews Hotels. It plans to open an 800-room convention center-connected hotel in Kansas City in 2020.
And working with The Cordish Companies, Loews is launching a new partnership called Live! by Loews, which combine Loews hotel projects with major sports arenas to form entertainment districts. Loews’ first two Live! by Loews locations include hotels in Arlington, Texas and St. Louis, Missouri.
“In St. Louis, we’ll partner with the St. Louis Cardinals; and in Arlington, we’ll join forces with the Texas Rangers,” Tisch said. “Both teams have a deep-rooted fan base and we look forward to welcoming them to our new best-in-class assets, but have no fear these hotels will do plenty of business on non-game nights too. The stadiums and the Cordish entertainment districts will host many concerts and events throughout the year, and our hotels will include significant meeting space, making these ideal destinations for groups and transient customers looking for a unique immersive experience.”
Tisch is right in capitalizing on a growing trend among meeting and event planners: using sports venues for non-sporting events. Loews Hotels also isn’t alone in its idea of debuting hotels in partnership with sports teams and venues: Omni Hotels is doing something similar in Dallas and Atlanta.
Whether Loews Hotels’ overall asset-heavy, partnership- and meetings-driven strategy will prove to be successful, or deliver the kinds of returns that asset-light hotel companies produce, remains to be seen.
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Photo Credit: A rendering of the upcoming Live! By Loews hotel in Arlington, Texas. The hotel is an example of future sports-related partnerships that the company is pursuing. Loews Hotels