Short-Term Thinking | Issue 001

Happy belated Thanksgiving! Hopefully you had a wonderful holiday and got to spend some quality time with friends and family this past week. Thanksgiving can be a surprisingly stressful week for STR hosts, so hopefully everything went smoothly for those of you who are hosts yourselves. As for me, I just had to buy an extra plunger to satisfy one of the weirder guest requests I’ve ever received:

I also got a chuckle out of this exchange with the same guest - here’s hoping you have a better relationship with your mother-in-law!

Now on to the reason you’re here - we are through Q3 earnings season for all the major public companies in the hospitality industry. I went through thirteen earnings releases, shareholder letters and analyst call transcripts and have distilled them down to “One Key Takeaway” from each earnings report. I also did more detailed Twitter threads on a handful of the companies below which I will link where applicable.

Airbnb (ABNB)

Sponsored Listings

First off, I don’t think that sponsored listings are imminent - I would be hugely surprised if we saw them in 2024. However, it will only be a matter of time until the pull of that sweet, sweet revenue with 90+% incremental margins finally becomes too alluring. My guess is that they keep it in their back pocket to introduce when they start to see growth slow, or cracks in the thesis start to emerge.

Airbnb isn’t dumb - there is a strategic rationale for waiting as long as possible before rolling this program out. Airbnb’s main point of differentiation (both against VRBO and against hotels more broadly) is the unique supply you can find only on Airbnb - there are properties on Airbnb you literally can’t book anywhere else. Right now, Airbnb’s business is humming so why would they risk alienating hosts with such an aggressive move?

But just how much profit is Airbnb leaving on the table by not having advertising on the marketplace? For comparison, Expedia generated $400m in advertising revenue and Uber’s advertising program is on a $650m run-rate. We can also use Amazon and Instacart as proxies - for the first nine months of 2023 advertising was 10% of Amazon’s (non-AWS) revenue, and 28% of Instacart’s total revenue. If we assume Airbnb can get to 15%, then they are foregoing $1.35b in annual revenue and likely $1b+ in annual profit by not having sponsored listings.

(A couple additional estimates: Skift has surmised that the program could be $1.2b within 24 months of launch and BTIG research estimated that it could reach up to $1.1b by year five)

It’s a question of when, not if, we see sponsored listings - eventually that number will be too big for them to resist.

Expedia (EXPE)

Loyalty & Leisure Travel

Expedia finally rolled out its new, unified loyalty program “One Key” in early Q3, which is important to us in STR-land because now guests can earn and use points for stays on VRBO. I think many analysts are too bullish on the potential for this program to increase VRBO’s penetration, and I think many industry participants/observers are too bullish on the impact of loyalty programs more broadly (every couple months we get a new “Why doesn’t Airbnb/Sonder/Wander/Vacasa have a loyalty program?” discussion). Here’s why loyalty and leisure travel doesn’t mix:

• Not Habitual (Too Infrequent): The best loyalty programs build habits - they lead to an incremental transaction. Think Starbucks (I’ll go to Starbucks every day instead of mixing Dunkin in every once in awhile because I want the points), or Marriott (traveling sales rep who is on the road every other week and just chooses Marriott, even if a Hyatt might be a little closer). The vast majority of STR stays are for leisure travel. Most people only travel for pleasure a couple times a year. Even if they wanted to earn more points and travel (add an incremental transaction), often they are unable to due to life circumstances (kids in school, limited PTO, etc).

• Earn & Burn: One of the reasons loyalty is so important to Marriott and Hilton is the earn/burn dynamic - you earn points on business travel (on the company card) and burn them for personal travel. When your employer is paying, price often isn’t the primary consideration, and these stays can be more profitable for the hotels than they otherwise would be if the traveler was spending their own money. Given how heavily skewed STRs are to leisure travel, this same dynamic does not exist.

• Loyalty is an Expense: Loyalty programs aren’t free - you have to give away something of value to your members. It is likely that you are giving away your margin to guests who would have traveled and stayed with you anyway, impacting profitability while not increasing incrementality.

• Leisure Travel is Expensive: Lodging is just a small piece of the expense of traveling. Even if Airbnb/VRBO gave me a free stay somewhere, I’d still need to book flights, get a rental car, find a dogsitter/babysitter, book meals at our destination, etc. Whatever points I earn/use are not going to move the needle in determining whether we should make an extra trip because lodging is just a fraction of the overall cost.

Side note: when you listen to the earnings calls for Airbnb and VRBO back-to-back, this dynamic really, REALLY stands out:

Booking.com (BKNG)

The Sleeping Giant

If you ask industry participants which OTA will be a much larger player in the short-term rental space a decade from now, I think most people would say Google. I think the answer is Booking.

Booking has already grown a sizable STR business, and that is with negligible host support and the world’s worst onboarding process (those that have spent time on the Booking Extranet know just how bad it is). If Booking can improve the UI/UX for non-professional hosts I think the amount of supply on their platform would explode. But they haven’t done it yet, so will they actually devote the necessary resources? Who knows…

Sonder (SOND)

Brand is Meaningless

Until proven otherwise, I will continue to believe that brand-building in the STR space is completely irrelevant and a waste of time. If you are an operator with 10, 50, 200 units it does not make sense to spend money and effort “brand building”. The fact of the matter is that Sonder now has almost 12,000 units under management and is a public company, and STILL nobody gives a crap about them or really knows who they are.

Case in point, this is what Google auto-populates when I search for “Sonder brand”:

The extent of the branding you should do: pick a company name and property names that are unique enough that when a guest sees you on Airbnb and searches for you off-platform, your link pops up first with no SEO work. Unless social media/SEO/email marketing is your area of expertise, there is very little benefit to doing any more work beyond that.

(One additional caveat after a back and forth with my friend Conrad O’Connell: I think it can be worthwhile for a regional property manager to spend time on brand because it serves a dual purpose - it can attract both new guests AND new owners, instead of just targeting guests)

Additional Details: Sonder Earnings Twitter Thread

Vacasa (VCSA)

“You Only Find Out Who is Swimming Naked When The Tide Goes Out”

Vacasa is struggling - after two years of being supported by the post-Covid tailwinds benefiting all STRs, Vacasa’s poor performance is now being exposed. Management admitted that churn (the number of owners who are taking their properties off of Vacasa) is rising and they expect it to continue in coming quarters.

Our friend Rohin Dhar has been reminding us for years how terrible Vacasa’s operations and revenue management are, and even though Vacasa management claims their property operations are improving (despite them cutting local staff earlier this year…) the fact of the matter remains that on an absolute basis they are still terrible.

Marriott (MAR)

More Extended Stay Competition

Marriott launched new midscale extended-stay brands in the US and worldwide (the US branding is StudioRes).

If I was Sonder (or any Host that has an undifferentiated 1-bedroom apartment/condo/ADU in an urban/suburban area) this would have me extremely worried. For a long time, STRs could be successful just by being a hotel room with a kitchen - those days are coming to an end, and quickly.

Hyatt (H)

New “Homes & Hideaways” Platform

On September 28, Hyatt launched “Homes & Hideaways by World of Hyatt”, their “Homes and Villas by Marriott Bonvoy” competitor (editor’s note: JFC these names are terrible). It appears that they partnered with only one or two property managers for the launch so the initial selection is pretty bleak, but it’s worth monitoring as I know Homes & Villas is a meaningful platform for many hosts.

Hilton (HLT)

“Group” Strength - A Point of Differentiation For Hotels

It’s worth reading Hilton’s CEO’s entire answer above, if only to see a CEO say something is “off the hook” on an earnings call for the first time in recorded history. “Group” travel (think conventions, conferences, retreats, etc.) has been extremely strong recently and there is a long runway for it to continue to grow - almost every hotel-related call this quarter talked about how positive the outlook for Group travel is.

We talk a lot about how STRs need to differentiate themselves to succeed today - both against hotels and against their competitors. Group travel is one place where hotels can differentiate themselves against STRs - an STR is never going to be a great alternative for groups of people who don’t know each other to gather for business, meetings, etc.

This feels like an area of hospitality that could see a lot of innovation in the coming years, and there is probably a real opportunity for an entrepreneur to create a space that brings the best of both STRs and the “Group” hotel. It feels like the common wisdom for remote work is the need to gather people together in person on a semi-regular basis - who is creating great spaces for this use case?

Apple Hospitality (APLE)

Recent Hotel Acquisitions

Apple has been one of the most active acquirers of individual hotel assets recently - in October alone they purchased 3 hotels worth a combined $130m. (They are particularly bullish on Salt Lake City - 2 of those three purchases were in downtown SLC and they have another under contract just outside the city)

Additional color on their recent purchases - they have been buying 8-caps and the 14 properties they have purchased since the pandemic have settled at a ~9% unlevered yield:

Why follow APLE: Apple owns over 200 midscale hotels (think, Hilton Garden Inn, Hampton Inn, Embassy Suites, etc.) in cities all over the US - you’ll get the best pulse on the health of the middle class traveler from their reports. They have also been highly acquisitive and give pretty good financial disclosures about the acquisitions.

Park Hotels & Resorts (PK)

Japan & Hawaii

I didn’t realize quite how depressed Hawaii visitation from Japan still is - incredibly, the number of Japanese travelers staying at Park’s Hawaii resorts in the first 6 months of 2023 was 8%(!) of 2019’s totals. That number increased considerably in Q3 to 24% - but still, a tiny fraction.

Japanese tourists were 20% of total visitation in 2019 - if those trends normalize further in 2024 we could see tourism revenue in Hawaii explode. Might want to book that trip sooner rather than later…

Why follow PK: 30% of their revenue comes from two enormous resorts in Hawaii, so you generally get great color on trends for the island. The ongoing drama with their San Francisco properties that they walked away from has also been entertaining.

Ryman Hospitality Properties (RHP)

Group Strength (cont.)

As mentioned above when discussing Hilton, “Group” travel is one area that should be extremely defensible for hotels that are properly amenitized for this use (as a reminder, Group is convention, conference, meetings/offsites, etc).

Group is really starting to accelerate out of it’s post-Covid doldrums, and given the long lead-times in planning/booking these gatherings there is clear visibility into a couple years of really strong growth. You’ll also notice the Ryman subtly mentions the fact that they likely underpriced some of their past bookings and are being much more aggressive on price now.

Why follow RHP: Ryman’s hospitality division focuses solely on convention center properties (primarily under the Gaylord brand) so you’ll get the best gauge on business/convention/group travel from their releases. And if you care about country music they also own a bunch of country music venues/assets (including the Grand Ole Opry).

Host Hotels & Resorts (HST)

Leisure Demand Reverting to Normal

For awhile I’ve been banging on about leisure demand being impacted this summer as international travel patterns revert to normal. Host provided some great additional insight here - inbound international travel is still significantly lagging outbound international travel:

Why follow HST: Host is the largest hospitality REIT and gives the best overview on the state of the industry broadly. They also release incredibly detailed quarterly data supplements which have tremendous data on how individual metro areas are performing.

Sunstone Hotel Investors (SHO)

Leisure Demand Reverting to Normal (cont.)

Sunstone mentioned this same impact, specifically mentioning their Florida coast and California wine country properties:

Why follow SHO: Sunstone owns only 14 hotels but they are located in popular leisure destinations (Florida, Napa Valley, Hawaii, New Orleans) and gateway cities (Boston, DC, SF). If any of those metros interest you then this is the company to follow (and they are more candid than most on their calls).

Thanks for reading - if you made it through all of that, you have my admiration. See you in a couple weeks!

-YoC