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Joseph L Shaefer
Joseph L Shaefer
Articles (113)  | Author's Website |

Can Hotel Companies Survive Airbnb? This One Will

Airbnb, Expedia, TripAdvisor, Priceline and the rest of the alternative lodging purveyors may pose a threat to some hotels and hotel companies. But not all...

December 28, 2017 | About:

I published an article/novella on GuruFocus as Part I of a series on the lodging industry, Hot Hotel Stocks? Look Before You Leap.

I recommend you read that first article in order to see just how hotels are typically owned, managed and marketed. It isn’t what most people assume. Part I provides the background in which hotels operate -- company-owned, managed and branded; investor-group owned, externally managed and externally branded; franchised, and so forth. In it I also discuss how the industry is rapidly evolving, and provide my investment suggestions for your further due diligence. When you return to this Part II article, begin here.

All hotel stocks have performed well in 2017. That was not just the rising boat phenomenon of a good market; it was outsized performance that beat the market as a result of investor expectation of rising business and leisure travel in 2018. But we cannot assume that all travelers will select traditional hotels. Nor can we any longer assume that the hotel owners and/or managers and/or branders the “flag” companies like Marriott (MAR), Hilton (HLT), and Hyatt (H) will be as profitable given increased competition for the traveler’s dollar.

The first assault has come from the online travel agencies (OTAs) like Hotels.com, Booking.com, Priceline (PCLN), Expedia (EXPE), TripAdvisor (TRIP) and the rest of the aggregators of hotels, motels, B&Bs and other traditional lodging. Hotel owner-managers (if they are independent) or managers (if they represent owners) tend to have a love/hate relationship with such sites.

On the one hand, no owner or manager wants to see a hotel room that has cost money to market, maintain and clean remain vacant. The Pricelines and Expedias of this brave new world help fill those rooms – for a fee that cuts into the hoteliers’ bottom line, of course. On the other hand, better to pay 10% of something than get 100% of nothing.

I use Priceline, TripAdvisor and Expedia as examples because these three now control, via aggressive acquisition, much of the industry. For instance, Expedia owns Expedia.com, Hotels.com, Hotwire.com, trivago, Venere.com, cheaptickets, hotwire, vacationrentals.com, Travelocity, Orbitz, VRBO and HomeAway.

Priceline owns Priceline, Booking.com, Kayak.com and many others that are not hotel-related but which refer from cheapflights.com, rentalcars.com, Open Table, and so forth. to suggest a hotel vacation.

TripAdvisor owns (again, not all hotel-related but all will link to lodging sites) Airfarewatchdog, BookingBuddy, Citymaps, Cruise Critic, Family Vacation Critic, FlipKey, GateGuru, Holiday Lettings, Independent Traveler, Jetsetter, OneTime, SeatGuru, SmarterTravel, Tingo, VacationHomeRentals, Viator, andVirtual Tourist.

These various sites dilute the likelihood that a hotel website will gather 100% of the “eyeballs” when trying to get the attention of the traveling public. Especially if they believe they are in the “hotel business” rather than the more complex “guest hosting business” then they will rapidly fall behind in the basic technological and cost-saving appeal of the OTAs.

It is not that deep-pocketed owners, management firms and “flags” (the big chain names) cannot compete in this crowded field; it is instead a matter of how profitable they can be and how much of their gross revenue can be brought down to the bottom line. But many believe there is a greater threat to the hotel industry than the online travel agencies:

What if people simply stopped staying at hotels? That would be a different matter. And that is the concern engendered by the entry of Airbnb and its newer competitors as well as by the many “vacation rental by owner” companies like Expedia’s VRBO and HomeAway and TripAdvisor’s FlipKey.

Speaking from personal experience, I own a 2500 square foot home in the Florida Keys with a dock and all the amenities that I rent for barely more than a mere hotel room. I’ve also rented as a guest through many of these organizations and found the same to be true. On a recent trip to Venice, my wife and I stayed in a beautiful apartment with a full kitchen not a block from the Piazza San Marco for less than $175. Hotel rooms in the area start at $450 a night.

How do hotels fight back against such incursions? Sometimes they offer more amenities: a pool, room service, excursions, or something else.

The infinity pool atop the Marina Bay Sands Hotel in Singapore, 55 stories high

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Sometimes they are a bit more under-handed and fight back through local regulators. In the case of the Florida Keys they seem to have some county commissioners who are, shall we say, surprisingly like-minded. In the unincorporated parts of the Keys, a homeowner cannot rent their home for less than 30 days without incurring massive fines. This benefits the hotel industry but the same county government can’t figure out why tourism is down!

Absent the heavy hand of local government, is Airbnb and the vacation rental businesses a serious threat to the hotel industry?

In some ways, yes. But in the most important ways I believe there is plenty of room for both approaches. Not everyone is willing to go online, read the reviews on places they have never seen, compare properties and prices, and make their decision. Not when they know what they are going to get when they select a no-surprises Holiday Inn or Hilton Garden Inn or Marriott.

The argument in favor of Airbnb and its copycats is that it is growing by leaps and bounds and is therefore on track to replace hotels. That’s a particularly egregious case of linear thinking. In fact, it is likely there is room for growth for both. Airbnb grew its revenues in 2017 but so did the entire hotel industry. And Airbnb provides a different kind of a stay -- it generally attracts a guest who demands little more than a bed, some privacy and wifi. With some fine Airbnb exceptions, hotels provide a greater level of customer service and reliability of what the traveler expects and receives.

Then there are the travelers who aren’t commuting from one place to another, nor are they seeking to stay in a city singly or as a couple or family to explore its attractions. They are there for conferences, banquets, weddings or other group get-togethers. There are some I suppose who might tell their wedding guests to check out places within x miles on Airbnb but that sort of civility is hopefully far in the future.

The argument has also been made that competition from Airbnb et al is forcing room rates down for the hotel industry. If that is true I sure haven’t seen it. Hotel rates are up, Airbnb rates are up and vacation rental rates are up.

Hotel owners understand that there are ups and downs in room occupancy and tend to have credit lines available and do other strategic planning for the tougher times. They are also willing to lower their rates even below the profitability level to at least defray some of the downside if necessary.

I think the owners listing on Airbnb would be reluctant to offer their homes and apartments for less than they are now getting. They won’t have the flexibility the more experienced hoteliers have over many years of good and bad times. Nor will they be as happy with Airbnb, which will likely be a public company then and under the gun to show increasing earnings even if it means increasing their fees on the owners.

Then, too, many hotels are noting the things that some travelers like about Airbnb and adopting some of its best practices. The big flag chains have the deep pockets to experiment and, if it works for them, create a closer to Airbnb experience – rooms that are more individualized, providing a private entry, adding kitchens or simply buying vacation rental chains or building their own inventory.

Accor (ACCYY), which I am buying as a result of my research for Part I of this series, is leading this charge internationally and has the ability to maintain standards of inspection and maintenance that are likely to exceed those Airbnb can impose upon its independent owners.

There’s another issue with the peer-to-peer economy that Airbnb is a leading part of: security. As the spate of allegations against Uber drivers shows, physical security is an aspect of the sharing economy too often overlooked. If a single traveler books a room in someone’s home they are staying where someone else has a key and that someone else may not live by the same moral code travelers expect. This may be even more the case in international travel to offbeat locations. When a traveler checks in to a respected flag hotel they kow they can expect either on-site security or a staff well-trained to summon local authorities immediately.

Finally there are the hotel loyalty programs. As I just did on a recent road trip, I can stay at the Hampton Inn in Gainesville GA, the Embassy Suites in Concord NC, the Hilton Garden Inn in Woodbridge VA, and the Home2Suites back in Charlotte NC, then use the points I earned to stay for free at the Conrad in Singapore or the Waldorf in New Orleans. I don’t see the loose confederation of owners at Airbnb or even looser confederation at HomeAway submitting to lower rates in order to create a loyalty program for Airbnb or Expedia.

Bottom line – I believe hotels are here to stay. When I say “hotels” I include all three parties that make for most successful hotels today: the hotel owners, the hotel managers, and the big flag chains that provide quality control and consistent levels of desired experience.

I think flag chains may one day replace at least some of the hotel management companies. Marriott, Hilton, IHG, Wyndham, Hyatt, Accor and the others can afford to offer their management at a competitive rate and that gives the actual hotel owners one less outside party to negotiate with. Most flags are selling at a price I am unwilling to pay right now (except for Accor) but I believe every one of them will continue to aggregate brands, innovate with unique hospitality offerings, and survive and thrive.

Even Hyatt, which will be the primary subject of Part III of this series and the flag chain I (until recently) held in greatest regard and to which I gave my greatest loyalty, is likely to survive the current management blunders. I think the brand will survive and the nonpareil training will be restored, but I imagine it will likely be as part of a larger company. Only under a larger umbrella might we see a rebranding of the Hyatt limited-service offerings with a new emphasis on the Hyatt luxury and premium properties. In short, I think Hyatt might be an ideal acquisition target.

But that’s another article. For now, however, let me review a true hotel “owner” that I can strongly recommend, albeit one most people have never heard of.

Park Hotels& Resorts(PK) owns properties – and not just any properties. It was formed just under a year ago, on January 3 rd, 2017, when Hilton (HLT), one of the forward-leaning innovators in the travel and lodging industry, decided to focus on management and branding and leave the ownership of the land and buildings to someone else. Hilton spun off an amazing portfolio of company-owned properties, to newly formed Park Hotels & Resorts, retaining management and branding and gaining substantial investor capital to continue its growth.

I consider the spun-off properties some of the crown jewels of the lodging business. Currently Park owns 67 hotels with over 35,000 rooms, lots of irreplaceable land, and significant conference and meeting space. These properties are premium-branded, accessible to Hilton guests’ loyalty awards program HHonors, and mostly in the USA. More than 50 of the company’s 67 hotel properties are clearly in the “luxury” or “upscale” category, which allows Park to receive significantly higher room, event and conference rates.

The company has at least one hotel in 14 of the top 25 U.S. travel markets, mostly in central business districts, key on-airport hotels or in highly desirable resort locations. The total current value of these properties is somewhere north of $9 billion.

Among its always-popular business, convention and central city tourist destination hotels are:

* The Hilton New York Midtown

* The Hilton Chicago

* The Hilton San Francisco Union Square

* Parc 55 San Francisco

* The Capital Hilton Washington DC

* The Embassy Suites Georgetown (Washington D.C.)

* The Embassy Suites Kansas City

* The Embassy Suites Austin Downtown

* The Embassy Suites Alexandria Old Town

* The Hilton New Orleans Riverside

* The Hilton Orlando (x2)

* The Hilton Salt Lake, and the

* The Hilton San Diego (Bayfront)

Park’s resort properties, from west to east, are familiar names as well:

* Hilton Hawaiian Village Waikiki

* Hilton Waikoloa Village (Big Island)

* Hilton La Jolla / Torrey Pines

* The Fess Parker Hotel Santa Barbara

* Pointe Hilton Squaw Peak (Phoenix)

* The Doubletree Durango

* The Hilton Orlando

* Waldorf Astoria Orlando

* Casa Marina (Waldorf Astoria) Key West, and

* The Reach (Waldorf Astoria) Key West

In addition to all these signature properties, PK also owns 26 premier major airport and attraction-based hotels and 14 international hotels, of which 8 are in the United Kingdom. All in all, an amazing portfolio.

However, a fine portfolio is not reason enough for me to select an investment. I can enjoy their properties without buying their stock. But I like the company’s prospects for increased revenue and earnings, which means I like the stock as well.

Park has no obligation to acquire additional Hilton properties or to keep any particular Hilton property. It is a company that stands on its own, beholden to no particular flag. The company has, I believe wisely, elected to hire Hilton to manage their current properties, assuring them of continued competitiveness in attracting Hilton’s 73 million HHonors loyalty members.

Nevertheless, going forward management has stated quite clearly that they plan to “employ an active capital recycling program -- expanding our presence in target markets with a focus on brand and operator diversification, while reducing exposure to slower growth assets/markets” This is the foundation for their strategic planning. I expect to see them sell some of their less-premium properties and reallocate the funds to higher-end hotels.

Further, Park has inherited the benefit of Hilton’s devotion to maintenance, upgrading and remodeling. $1.5 billion has been spent since 2011 to keep these hotels fresh and attractive. That’s more than $44,000 per room.

Park has done a fine job of showing why it plans to diversify managers and brands and which ones they find most desirable in a single graphic. If all hotel owners (and managers and flags) hewed to these principles I believe they would all do well.

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Full Disclosure: I purchased shares of Park Hotels & Resorts on Friday in the Investors Edge® Growth and Value Portfolio, available to all Investors Edge® subscribers.

About the author:

Joseph L Shaefer
Former special ops/Intel Community. Thirty-six years active and reserve service. Retired Schwab senior exec. Geopolitical analyst, speaker and registered investment adviser.

Visit Joseph L Shaefer's Website


Rating: 4.0/5 (1 vote)

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Comments

Praveen Chawla
Praveen Chawla premium member - 11 months ago

Like it - debt is not too high and cash flow is strong. I can't see business people staying at AirBNB's.

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