Asset-light strategy and real estate risk of lodging C−corps and REITs

• Published in: International journal of hospitality management 2019-04, Vol.78, p.214-222
• Main Authors: Kim, Sang Hyuck, Noh, Suhyang, Lee, Seul Ki
• Format: Article
• Language: English
• Subjects: C-corporations; Censored regression; Lodging industry; Multifactor model; Real estate investment trusts (REITs); Real estate risk
• ISSN: 0278-4319; 1873-4693
• DOI: 10.1016/j.ijhm.2018.09.004

•The asset-light strategy has been gaining prominence in the lodging industry practice.•Meanwhile, the greatest advantage of the strategy, real estate exposure mitigation, needs to be validated in terms of its effectiveness.•By comparing hotel C-Corps and REITs, the current study examines real estate risk-mitigating effect of the asset-light strategy.•Results suggest that asset-light strategy significantly reduces the lodging firms’ risk exposure, while the REITs show some unique characteristics. The asset-light strategy has been gaining popularity among practitioners for its virtues in lowering capital investment burden and allowing efficient expansion. Meanwhile, arguably the greatest advantage of the strategy—a mitigating effect on the real estate risk exposure—has yet to be validated. To empirically test this effect, this study adopts a comparative approach, utilizing data on both lodging C-corporations and real estate investment trusts (REITs). Yearly firm-level real estate betas are estimated through an augmented Fama-French asset-pricing model for all lodging firms and REITs between the years 2002–2016, and further used for a second-stage analysis on their relationship with real estate ownership and liquidity. Findings reveal that 1) lodging firms are significantly less exposed to real estate risk than REITs, 2) lodging firms may still be conditionally exposed to real estate risk under liquidity constraints, and 3) certain unique characteristics of REITs render differences in the effects of liquidity.