Hospitality Stockwatch — July 2023

Authors
Arun Upneja, Ph.D. MBA, Dean, Boston University – School of Hospitality Administration
Steve Kent, Ph.D., CFA, Assistant Professor, Molloy University-School of Business

Summer travel has begun! Stock prices are experiencing a bit of turbulence in the form of a mixed outlook. In this edition, we hone in on the short-term rentals (STR) segment which is increasingly top of mind for both travel industry participants and investors. The growth of STR inventory and Airbnb’s dominance as an online marketplace impacts nearly all 18 sectors in our Stockwatch.

Year-to-date stock performance, the biggest hospitality sectors still lag the S&P 500, illustrating investors’ hesitation to make a bullish call on much of travel. Both supply and demand have been impacted over the past three years by multiple exogenous factors such as Covid-19, revenge travel, longer bleisure stays (blending of business and leisure), reduced Asian and cross-border travel, the experiential consumer, and economic conditions. Another issue that investors are pondering is if STR is inducing more people to travel, or if the extra supply reduces pricing power for hotels, casinos, and cruises.

Digging deeper into STR, the demand driver is business and leisure travelers’ desire to rent apartments/houses with more space/amenities as opposed to traditional hotel rooms. The supply side of the equation is driven by the arbitrage opportunity of entering into a long-term lease for an apartment at $2,000/month or buying a vacation home with a $3,000 mortgage and then charging $200-300 a night for short-term guests.

The business case for STR seems viable. However, the STR stocks have shown poor performance (down over 45% YTD). One complication, specific to STR shares, is that many of the major public market players such as Sonder, Selina, and Vacasa went public as SPACs (Special Purpose Acquisition Companies) and have broadly underperformed. Underlying it all is the fundamental question of whether there truly is a need for stand-alone branded multi-unit short-term rental companies. 

The viability was raised at Skift’s Short-Term Rental Summit in New York with questions about the progress and cash burn. Top-line growth has been impressive, but the expense of building out the brand, creating proprietary technology, and significant overhead means the companies are running a deficit. The need for upfront capital for furnishings and other significant investments reduces some of the return measures. Public and private STR companies have retrenched on the expense front but the model may need to evolve.

Rafat Ali, Skift founder, questioned whether STR operators may need to move more toward an “opco/propco” model (one entity manages the property and the other owns it) (Wade, 2023). Similar to an unbranded hotel management company, hotel management companies’ revenues are usually derived from base fees (% of revenue) and incentives (% of profit) while the property owner benefits from cash flow and asset appreciation. STRs could follow the same model to reduce the need to spend on capital investments and marketing buildout. With this scenario, STRs would rely more heavily on Airbnb marketing, existing revenue management, and operating technology. The focus would be on the nuts and bolts of check-in/check-out, cleaning, and maintenance. The best management companies would spread the operating expenses over more units and possibly grow by “rolling up” other small STR management companies.

STR is a fundamentally good business. The risk to investors is that some of the  companies may need to change their “flight plan,” by streamlining operations and lowering expenses before they really can take off.

Winners and Losers: June 2023 Performance Review

Cruise and airline stocks showed some of the biggest gains this past month. Carnival gained over 60% partly due to a solid Q2, a favorable outlook, and an analyst day. Delta Airlines management raised their 2023 guidance on a positive outlook for travel as well as lower fuel costs. Gaming and lodging (operators and REITs) treaded water reflecting investor sentiment that RevPAR trends will start to moderate. One other issue that could weigh on these stocks, along with the broader market, is that interest rates stay higher for longer. The Federal Reserve has made it clear that there is still work to do to pull down inflation. Higher interest rates make building new properties more difficult as well as weighing down the consumer.

If you would like to receive the Boston University Hospitality Stockwatch data weekly, please email us at skent@molloy.edu.  We are one of the few publications offering earnings, valuation, and performance data on virtually every US public company in the world of Hospitality.   

Click here to download Hospitality Stockwatch – current as of Sunday July 2, 2023 

View last month’s Hospitality Stockwatch – June 2023