Skift Take

While other hotel groups shed assets, Loews keeps buying more. While others shy from convention businesses, Loews bets on big groups. When everyone is going one way, it opens up an opportunity for others to exploit contrarian paths.

If you listen to the half-dozen largest, publicly held hotel groups based in the U.S. and Europe, you would think owning the hotels you run is a terrible strategy and that providing large hotels for conventions and group bookings is a bad idea. Yet Loews, a publicly held holding company, is happily pursuing both strategies in its hotel business.

Loews Hotels confirmed its contrarian approach when the parent company reported second-quarter earnings on Monday and said its hotel division more than doubled its net income to $74 million.

The publicly held holding company said owning the hotels it operates can make it more profitable in certain circumstances — and can also hedge against competition from short-term rentals.

A Bet on Asset-Heavy

Loews’ bigger rivals — the largest hotel groups — avoid owning or long-term leasing hotel real estate. Marriott was first to shift in the mid-1990s, but its rivals have mostly shed assets, too.

Under the asset-light model, big brands mostly run hotels through management or franchise contracts. They can avoid the need for holding lots of capital to own buildings and land.

Loews prefers to be an owner and an operator.

Over five years, Loews has made gross investments of $316 million in Loews Hotels. The brand’s room count rose by 30% to more than 16,000 rooms. In 2022, Loews Hotels generated an adjusted EBITDA of $345 million — a company record that well surpassed its pre-pandemic results.

Theme Parks as Hotel Bet

Direct ownership was a key to Loews winning a deal to put properties at Universal Studios theme parks, the hotelier said. When you don’t own the asset, you can’t make 100% sure a property is well run. That’s why certain types of developers, such as the owners of theme parks, sports stadiums and other immersive destinations, prefer hoteliers with an owner-operator mindset.

A case in point: Universal Studios agreed 26 years ago to a joint venture with Loews to develop and co-own three hotels at the theme park with 2,600 rooms total.

“It was a very big risk when Universal wrote a very big check 26 years ago,” Jonathan Tisch, executive chairman, Loews Hotels & Company said in a recent video.

After a few more hotels open by 2025, Loews will have 11 hotels with 11,000 rooms at Universal Orlando in a co-ownership deal — a large expansion of the portfolio.

“It’s worked out incredibly well,” Tisch said.

Loews said in another investor letter that its hotels in Orlando have often outperformed their competitive set in average daily rate, occupancy rate, and revenue per available room in the past decade or so.

Groups as a Hedge Against Airbnb

A surprise side effect of most major hotel groups getting out of hotel ownership is that fewer players in the market are able or willing to put up the capital to build large hotels that can cater to group businesses and conventions. Most of the large companies have been avoiding projects that involve building 1,000-room properties.

That has left a gap in the market for Loews.

“We have found that these properties play to Loews Hotels’ strengths in the group meetings market while also being less vulnerable to disruptors such as the sharing economy,” the company said in a letter to shareholders earlier this year.

In other words, hotels that focus on serving transient leisure guests are under pressure of competition from short-term rentals and vacation rentals. But in the dense urban areas around convention centers, group hotels are relatively insulated from the rise of Airbnb and its peers.

Loews said it considers courting group bookings at giant properties — like the Loews Chicago Hotel and the Loews Miami Beach Hotel — one of its “top strategic objectives.” Loews believes it can become a favorite among meeting and event planners for group bookings.

Places That Market Themselves

Loews likes that Universal Studios acts as a kind of “built-in demand generator” for the hotels, reducing the marketing costs to fill the properties at the resort.

Executives have been trying to replicate the “one-of-a-kind-destinations” model in partnerships with sports teams.

Exhibit A is its “Live! by Loews” hotel in Arlington, Texas, which it has developed in partnership with The Cordish Companies and the Texas Rangers.

The nearly 900-room resort property is slated to open in February 2024 with 250,000 square feet of meeting-and-event space at the base of Globe Life Park and next to AT&T Stadium.

“There are already close to 150,000 group room nights booked for future dates,” Loews said.

The Trouble With Being Asset-Heavy?

Loews, the parent conglomerate, is the only company in the S&P 500 index not covered by a major bank or research firm.

“We believe investment banks are reluctant to cover Loews because its multi-industry holding company structure does not fit within the banks’ sector-specific coverage models,” said Loews president and CEO James Tisch on Monday in earnings commentary. “We believe Loews trades at a substantial discount to our view of its intrinsic value. This discount may be due in part to the lack of research coverage of Loews.”

Some context: Investors tend to award asset-light companies with higher valuations because their models for profitability are more predictable. It’s one reason why Marriott’s stock price recently hit an all-time high, and why Marriott’s similar asset-light rivals, such as IHG, Hilton, and Wyndham, also have performed relatively well after disposing many assets.

It’s possible that Loews’ asset-heavy model has been a headwind on the valuation of its parent company. Yet, analysts’ dislike of conglomerates appears to be a bigger factor.

Loews has responded to what it believes is a sagging share price by buying back its stock. In 2007, it had 530 million shares outstanding. As of June 30, it had 226.1 million shares outstanding. In July, it bought another 600,000 for $37 million. The purchases help keep the holding company’s market capitalization at a size to merit inclusion in the S&P 500 index, which attracts many individual investors.

Stock price aside, Loews can point to some traction with its contrarian policy. Its apparent early success seems plausible, given that it’s unlikely that a single model of divestment would be best for all the companies controlling, say, two-thirds of U.S. hotels, given the diverse markets in a country as large as the U.S. (Other asset-heavy companies include Omni Hotels and CitizenM.)

One study by Inès Blal, currently the executive dean and managing director of top-ranked hospitality business school EHL, and Giuliano Bianchi, couldn’t find significant gains from asset-light on two common measures of performance EBITDA and return-on-equity (essentially net income divided by shareholder equity) across a 16-year span ending before the pandemic.

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Tags: asset-light, earnings, future of lodging, hotel development, hotel earnings, hotel investments, loews, loews hotels, meetings and events, universal orlando

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