We have a love affair with "disruptive" technologies. We have come to recognize these emerging technologies as a part of a broader economic movement towards a "sharing economy." And the financial and mainstream media have attached an aura of "social good" around these technologies. We have seen Uber (UBER) emerge from small startup to become a dominant player in the ride-sharing industry. Anyone who has used Uber can readily recognize that it is simply a superior business model than the old "call a cab" alternative.
Now Airbnb (AIRB), a "home-sharing" service with similar ambitions to Uber, is poised to dominate the hotel business. A $1.5 billion fundraising round just last week valued the company at $25.5 billion, more than the market capitalization of the six largest hotel REITs... combined.
Shares of hotel REITs, which own the underlying property that companies like Marriott ( MAR ) and Hilton ( HLT ) operate, have been tumbling, cutting their market value nearly in half. Despite record low vacancy, limited supply growth, and strong economic tailwinds, these stocks have suffered immensely amid fears that Airbnb is the industry's grim reaper.
As the consensus thesis goes, Airbnb is about to end it all, and make hotels completely obsolete, akin to the taxi medallion in New York City. A flood of available rooms will push down prices in hotels, eating away market share as Airbnb reaches its projected 10% market share from hotels within four years. Like Uber, Airbnb will become the default choice for millennials, and before long, hotels are poised to go the way of the dinosaur.
Or maybe not. Here's the reality: Airbnb is no Uber .
What about Uber makes it a superior choice to the incumbent cab industry? Is it cheaper? Debatable. Sometimes it is, sometimes it isn't. Generally, consumers know it's at least competitive. Cost itself, though, is not the driving force.
The emergence of Uber is a result of three key factors:
- Uber is easier and saves time. There is no time wasted searching through listings of different cab services, or hailing a cab.
- Uber offers a standardized experience. We generally know what to expect when the Uber pulls up to the curb. Yes, the cars are different, but generally they are clean, drivers are friendly and competent, and know they will be held accountable via their rating system.
- Uber embodies how millennials like to interact: through online interfaces, which require slightly less "social effort." It's the same reason that so many millennials now order pizza online rather than calling the store.
Why are these points important to highlight? Because everything that Uber is, Airbnb is not. In fact, these driving forces behind Uber seem to reinforce the reasons that the millennial generation would choose a hotel over an Airbnb experience.
Let's revisit the reasons why we choose Uber and apply them to hotels and Airbnb:
- Booking a hotel is considerably easier and takes less time than searching through dozens of pages of listings on Airbnb and emailing the host to find out how to access the space. From experience, you have to budget at least an hour of time to find the right room and coordinate with the host. Hotel bookings and check-ins typically take less than ten minutes combined.
- The hotel experience is considerably more standardized than the Airbnb experience. In a hotel, we know there will be soap and shampoo, clean sheets, and more pillows than we know what to do with. There's also a high level of certainty for what to expect in terms of booking, amenities, and security.
- Hotels don't require the level of "social effort" that sharing a room within a house of a stranger may entail.
Do many people love the Airbnb experience? Absolutely. Just as people love Craigslist, the unpredictability of it, the desire to find a bargain, to meet new people, to venture outside their comfort zone, there's a segment of people that absolutely crave that experience. They would take a little extra time to read reviews online, assume the risks associated with the lack of standardization (and perhaps no soap or shampoo), and put in the extra level of "social effort" to make friends while sharing a space with someone they recently met.
Yes, research has shown that as many as two-thirds of Airbnb listings are for entire apartments or houses, negating the negative aspects of "sharing" your space with a stranger. And yes, that is a robust market, with Airbnb now in preliminary discussions with several major apartment REITs, including Equity Residential ( EQR ), though the terms of those discussions are not yet known. Airbnb will serve that market extremely well, and all but eliminate Craigslist from that market. Again, though, that is not the hotel market.
Who is in the market for the "whole home" rentals that Craigslist currently serves? It's the group of five friends that want to rent a place for two weeks or a month. It's the business person that is on a month-long assignment in another city and would otherwise need to rent a long-term property. It's students looking for a sublet during the summer months when they study at another university or take a summer job. Airbnb is great for the longer-term traveler - those that need somewhere to stay for longer than a week. This may eat away at longer-stay properties, but those are rarely a part of the generally higher-end hotels in REIT portfolios.
For shorter-term leases, though, it's hard to envision 10% of the hotel market putting in the extra time and effort to find a suitable Airbnb rental. Even as Airbnb fixes some of the quality and standardization issues, hotels aren't standing idle. Many hotels now offer or are testing "no-check-in" service where you simply open the door to your room with your smartphone.
Legal issues aside (many cities have been cracking down on "illegal hotels" that Airbnb facilitates), Airbnb simply isn't as good at serving the shorter-term traveler as traditional hotels. We don't see that trend reversing, unless hotels really fall asleep at the wheel and fail to innovate.
So what's the actionable trade? Hotel REITs have been getting absolutely crushed by Airbnb fears, even amid excellent operational and real estate fundamentals, not to mention falling energy and transportation prices. Across the board, these hotel REITs are trading at sizable discounts to NAV and cash flow that price in an imminent and catastrophic secular decline.
REITs with strong balance sheets such as LaSalle ( LHO ), Host Hotels ( HST ), and Sunstone (SHO) each have double-digit AFFO growth, with PEG (specifically Price/AFFO/'16 Growth) ratios down under 1. Each of these names are trading at 35%+ discounts to NAV, and have the possibility of a private buyer coming in and paying a premium for these companies.
Of these, LaSalle Hotel Properties is our favorite. With a diverse portfolio of high quality assets in high-density urban centers, excellent operating metrics, and a 28% leverage ratio under the industry average of 35%, LaSalle is more than prepared to go to battle with Airbnb. Shares have continued to tumble, now down nearly 45% from the 52-week highs, and the REIT now yields over 7%. And to keep things in perspective, LaSalle has a market capitalization of $3 billion on $1.19 billion in sales, compared to Airbnb's $25.5 billion valuation on $0.9 billion in sales.
(click to enlarge)
Airbnb is like the boogieman in the closet for these REITs, and may continue to put pressure on these stocks. For the time being, calling the bottom in hotel REITs may be like trying to catch a falling knife. Eventually, though, fundamentals win out over hype. Airbnb is a great business, and will be an excellent substitute to Craigslist. But if you're trying to tell me that Airbnb is going to kill the hotel business, I think you're caught up in the hype of this "disruptive" technology. Airbnb is no Uber, nor will it ever be.
See also Chevy Bolt Will Hurt Nissan And BMW, Not Tesla on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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