Sometimes, it’s the most obvious thing that is overlooked. For all the talk in the hotel industry around asset-light this and asset-light that, there is the other side: somebody has to hold the asset to make it all work. And it took an asset-light company chief to bring it to the fore. At ALIS, one of the largest hotel investment conferences of the year, during a panel session, IHG Hotels & Resorts CEO Elie Maalouf said the quiet thing aloud: ”If somebody isn’t willing to be asset heavy, then the asset-light game stops.” It prompted a bit of a stir in the crowd and rightfully so: companies like IHG and its peers succeed off the backs of hotel owners, such as real estate investment trusts, who own the hard assets that allow lodging companies—and their breadth of brands—to remain not weighed down. It sounds like something that a country crooner could croon about.
Hotel owners have been battered by escalating expenses that have driven down profitability and a high-interest-rate environment that has kept cap rates elevated and property values reduced. The challenges have led to a large delta when it comes to stock valuations. Hotel REITs over the past five years have had a –9.5% return versus the overall S&P, which is up 74% over the same period. Meanwhile, lodging companies, from Marriott to Hilton, have shined: up more than 110% in that time span, superior to the overall S&P return. The irony is this: share prices of the large publicly traded companies are up dramatically while the value of the hotels they brand has, for the most part, declined.
Perhaps it’s an embarrassment of riches that led Maalouf to state the obvious. Then again, some in the industry voice concern that his admission is just lip service. One former management company CEO told me that it is mostly just talk from the brands that are focused on net unit growth and not the overall health of their ownership base. Owners, he said, are getting pummeled. Ouch!
Another hotel executive told me that the expense side of the ledger has to fundamentally change—and he is a brand exec! At its core are the fees and line-item expenses that owners contend with—and that comes before debt-service coverage and other below the-line costs. ”Expense items continue to grow ahead of the historical base and it has put extraordinary stress on the return proposition of an investment,” said Tony Capuano, president & CEO of Marriott International. Brand companies have aimed to ease the cost burden by examining some of the fees they charge franchisees and leveraging scale to save on procurement. ”There is urgency around making these investments as compelling to our partners as they once were, because that’s not where they are,” Capuano said.
Which came first: the hotel or the brand? Unlike fowl, we know this: the brand cannot stand without the hotel.
