The asset-light model is all about the give and get. Major hotel brands give owner-investors the power to fly their flag, while collecting a fee. These owner-investors, in turn, give their time, energy and money to support the asset’s day-to-day operations, while getting access to the brand’s loyalty programs and customer base, in addition to the potential for strong returns.
Naturally, each party wants to walk away happy, which can be easier said than done when the two have separate duties and expectations. Still, the model has proven to be a rather successful strategy for the world’s biggest hotel chains since it was first executed by Marriott in 1993…and it doesn’t show any signs of slowing down.
The question then becomes whether this model is advantageous for the owner-investor.
Going Lean
For Jim Butler, Chairman of the Global Hospitality Group and founding partner of Jeffer Mangels Butler & Mitchell (JMBM) in Los Angeles, the brand benefits of the asset-light model are obvious.
“It solves the capital restraint on hotel company expansions,” he explains. “The market gives higher valuation to companies that are less capital dependent for growth.”
This market reality makes it possible for branded hotel companies to sell more stock, finance operations, use capital for short periods of time, reduce volatility and expand to thousands of hotels.
“In adopting this approach, the branded hotel companies sold many hundreds of billions of hotel assets – and overwhelmingly did so without continuing debt or equity investments,” Butler continues. “They get almost the same control and net revenues without the hassles or risk of big investment…this helped a few companies to become international giants without all the capital restraints.”
Hyatt would be one of those companies.
“Our business model is more than 80 percent asset light, and we have realized more than $5.6 billion in total asset disposition proceeds,” says Adam Rohman, the company’s senior vice president of investor relations and financial planning and analysis. “We have more brands in more destinations for every purpose of visit for our members and guests to choose from.”
Hyatt made the decision to go mostly asset light in 2017. Since then, it executed a targeted asset disposition program and invested the proceeds to grow its management and franchise business, including the acquisitions of asset-light platforms, such as Two Roads Hospitality, Apple Leisure Group, Dream Hotels and Standard International.
These efforts have allowed Hyatt to double its amount of luxury rooms, triple the number of resort rooms and quintuple the number of lifestyle rooms across its global portfolio. It’s also tripled its World of Hyatt loyalty membership, which now sits at 51 million members.
“This is important because our loyalty members stay with us more often than non-members,” Rohman adds.
It’s also important because that loyalty base can be coveted among owner-investors.
Zach Demuth, global head of hotel research for JLL, adds that the asset-light model gives owner-investors the opportunity to not only profit off the brand’s flag, but the land it’s planted on.
“The pro to owning the real estate is that you get the return from the real estate,” he says. “And hotel real estate has appreciated over the years. Broadly speaking, hotel real estate has appreciated about 20 percent to 25 percent over the last five or six years, but it is a semi-long-term strategy.”
Naturally, location will play a large role in the real estate’s viability. Hotels situated in high-demand urban markets, mixed-use developments or secondary cities with strong growth potential typically top the list in terms of desirable locales.
Treading Lightly
One of the reasons Demuth believes the asset-light model works so well for so many is its divide-and-conquer approach.
“You have to think of it from a risk profile perspective,” he says.
Demuth notes there’s a “fair amount” of risk that comes with owning a hotel and dealing with the ebbs and flow of the real estate market. The same can be said for operating a hotel and handling the consumer-facing side of the business.
“So, it’s basically a risk mitigation strategy,” he explains. “Do you want to have to deal with all levels of risk surrounding owning, operating and managing everything? Or do you only want to deal with one side of that? I think the reality is that most firms are good at one or the other – very few are good at both, particularly if you're a public company.”
In exchange for offloading some (or all) of these responsibilities, the owner-investor working with a brand reaps the profits while the brand collects management or franchise fees, which are normally based off the hotel’s gross revenue. The hotel’s profit, on the other hand, is not necessarily their focus, Butler says.
“The hotel companies are no longer primarily concerned with the profit from individual hotel operations or the amount of capital they must spend for maintenance and improvement,” he notes. “They are not affected directly by the profit and loss, or economic performance metrics of the hotel.”
Butler further notes these considerations are still relevant to the brand’s reputation and its marketability to owners and lenders, however. Still, competing goals exist if, say, a hotel brand is focused on shareholder returns and expansion while the owner-investor’s priority is running a cash flow-positive asset.
Keeping one’s head above water is easier in some parts of the cyclical hotel market than others. Factors like economic downturns, labor shortages, epidemics, travel bans, or additional operating costs from inflation or government regulations can stack the deck against owner-investors in certain instances.
That’s why Hyatt intentionally works with its owners under the theory that a rising tide lifts all boats. The company has a dedicated Franchise and Owner Relations Group that supports its franchise owners and operators with their performance and financial results. The brand also provides commercial services support to the more than 1,350 properties in its global portfolio, with the goal being to drive topline revenue and owner profitability.
“This includes everything from property marketing and promotions, a world-class sales organization driving group business, the award-winning World of Hyatt program, revenue management services and much more,” Rohman adds. “Our owner’s success is our success.”
As with any hotel investment, potential owner-investors are encouraged to do their due diligence. Butler notes that hotel management (HMA) and operating (HOA) agreements can extend for 20 to 80 years, while franchise or license agreements are usually up to 20 or 30 years. JMBM’s HMA and Franchise Agreement Handbook states some of the most important provisions in these agreements include reimbursement obligations, termination rights, performance standards, indemnification obligations, ramping up management fees, owner approval rights over operating and CapEx budgets, preferred returns for owners and subordinated incentive fees for operators.
Outlining the expectations, obligations and essentially who controls what and for how long can help mitigate some speedbumps. Demuth notes, however, that this can be difficult when there are multiple parties involved in one hotel.
“The average hotel in the U.S. has three, sometimes four different constituents,” he says. “You have the real estate owner. You have the operator. You have the brand, which is basically just a flag, and then you might even have an asset manager and they're all different companies or different individuals.”
Demuth adds that it’s also difficult for owner-investors to participate in many of the ultra-luxury brands, such as the Ritz Carlton, JW Marriott or St. Regis. That’s because some of the big players like to keep these premier properties close to the vest.
“They want to maintain more control of their luxury brands because there's so much tied into that from the consumer expectation perspective and, ultimately, the possibility of diluting the overall brand if there's a misstep,” he explains. “But we’re starting to see this change.”
As many of the world’s largest hotel chains dive deeper into this model, so, too, may some investors. Many are driven by the fact that these agreements are becoming more flexible, some brands like Hyatt have adopted a supportive role and the ultra-luxury brands are opening up to the asset-light model.
Then there’s the industry data. STR notes hotel RevPAR increased 8.1 percent while ADR rose 13.6 percent in 2022 when compared to 2019 (pre-pandemic). The relatively narrow spread between cap rates and borrowing costs also suggests that hotel investments remain appealing, especially when compared to other real estate asset classes. Hotel cap rates averaged 8 percent in third-quarter 2023, according to CBRE, and the average hotel CMBS loan carried an 8.4 percent interest rate.
Each investor will have to decide for themselves whether participating in the asset-light model and its corresponding agreements (and obligations) is right for them. If it isn’t, perhaps another strategy may offer a way in: become a shareholder in one of the major public hotel chains.
“If you can’t beat’em, join’em.” It’s one of the oldest plays in the book.