Asset-light shifts to asset-right

(Asset-light shifts to asset-right)

U.S. hotel companies look to increase ownership stakes through targeted deals


National Report—For years hotel brands embraced an asset-light ownership model to shore up balance sheets during an uncertain economy. Lately major franchise companies have made key asset purchases—triggered in part by Hyatt Hotels Corp.’s 2011 investments to reinforce its select-service portfolio.

Is the time now for brands to switch from asset-light to asset-right, as new opportunities emerge in a strengthening economy?

“Many [hotel companies] are starting to look at targeted acquisitions, whereas everyone was focused on an asset-light model [before],” said Michael Glennie, president and COO of Fairmont Raffles Hotels International. Fairmont recently acquired the Fairmont Sonoma Mission Inn & Spa, an almost contradictory move from a company that rarely owns its managed properties. Fairmont has managed the property since 2002 and held a 20-percent ownership stake. The property entered foreclosure last year.

“It may make sense for [hotel companies] to own more real estate, whether it’s a strategic asset in a strategic city or an asset for which the only way to control it is through an acquisition as a 100-percent owner or as a joint-venture partner with significant equity,” Glennie said.

Looking at the industry at large, tight lending will be less of an issue for hotels in gateway markets. “It’s going to be opportunistic, with people weighing the value of an asset case-by-case,” said Mark Fraioli, SVP at Jones Lang LaSalle Hotels. “It will [come down to] three or four brands competing for the same assets.”

Fraioli said franchise companies have different strategies when it comes to increasing acquisitions.

He cited Marriott International’s $165-million acquisition of the iconic Manhattan Clock Tower building and said the hotel in the works “will have a significant benefit to their brand image.”

He said Hyatt’s approach is more of a power move into the select-service segment. “They’re using a balance sheet to further enhance their select-service presence; they spent about $200 million to get into the Hyatt Place brand through the acquisition of AmeriSuites,” he said. “Those acquisitions are defiant, strong moves for the company.”

Even brand companies that have been historically hands-off when it comes to ownership are dipping their toes in the water. 
Wyndham Hotel Group opened the Wyndham Grand Orlando Resort Bonnet Creek last year, its first owned property.

In this case, Wyndham Hotel Group President and CEO Eric Danziger said ownership is not a new trend for Wyndham, but more of an opportunity. “We were happy to complete the deal [for Bonnet Creek] but I don’t know how long we’ll own it because someone will want to buy it,” he said. “Then we can use that capital. It’s not a strategic shift to be in the ownership business.”

Glennie said Fairmont’s goal with the Sonoma purchase is part of the company’s larger acquisition strategy in the U.S., which focuses on increasing a property’s profitability and selling the hotel off with a long-term management agreement tacked on.

“We’re already in conversations with other potential buyers,” he said.

No matter how many or few assets brand companies seek to acquire, equity requirements remain high for transactions, meaning that brands and buyers with strong balance sheets will seek to enter new markets and drive up prices in the process.

“The difference is that historically you make acquisitions with a small sliver equity piece, and that’s becoming increasingly difficult for assets where everybody’s competing,” Glennie said.