Skift Take

Private Equity restructuring for some short-term rental companies may be welcome — even as it means change of management, possible furloughs and cutting parts of the business. Analysts warn against spelling doom against the entire industry, however, demand still remains strong.

Australian short-term rental operator Alloggio will be taken private by private equity firm Next Capital. If approved by a shareholder vote in July, the deal will be worth around $40 million (AU $60 million). 

The New South Wales-based company went public in 2021 and raised AU$16.5 million ($11 million) with a market cap of $33.1 million — this was significantly below initial banker expectations of a $20 million raise and a market cap of $45 million. Alloggio went public to both expand its property management and mid-market hotel divisions and acquire property management rights across Australia.

To insiders, it’s another-one-bites-the-dust scenario where private equity saves the day by swooping up capital-starved companies to keep them afloat and put them back on the path of profitability. 

We saw it happen to Travelport in 2018, Awaze in 2019 and Expedia in 2020. Travelport went private in 2019, Wyndham Destination Network sold Awaze to Platinum Equity in 2019 and private equity investors provided financing to Expedia in 2020 to ensure it had enough capital to get through the pandemic.

Private equity firms’ interest in travel has been well-documented — everything from airlines to casinos, vacation rentals to travel upgrade companies has a large private backer injecting capital and change.

“There is a large appetite in private equity to buy companies,” said Annie Holcombe, co-host Alex and Annie-The Real Women of Vacation Rentals podcast. “Given the economic factors, private equity is waiting to see what they can buy.”

Holcombe also noted that being managed by private equity might make firms agile and run the business better. Holcombe serves as the director of business development U.S. and Canada at Homes and Villas by Marriott.

Sure, private equity can inject much-needed capital to some firms, but it comes with restructuring — furloughs, change of management, shedding parts of the business and more.

Alloggio might be a smaller player, but what does this say about the state of short-term rentals at large?

Prematurely Public?

To be clear, data does point to sustained growth for the sector — there was an “unprecedented explosion” of demand in 2021, large increases in 2022, and pre-pandemic (read as high enough) levels in 2023, according to AirDNA.

But some do wonder if some of these companies went public too soon. 

“Sonder and Vacasa have not been successful as public companies,” said Simon Lehmann, co-founder and CEO of AJL Atelier, a consulting firm specializing in the private accommodation and vacation rental industry. “Both used a special purpose acquisition company route to go public. If not for that, there would have been more due diligence. Both have lost over 90 percent in value.”

Lehmann’s firm recently announced a partnership with travel investment bank Cambon Partners to consult companies looking to buy, sell or fundraise.

Lehmann noted that both Vacasa and Sonder were sold on a promise that scale and the gross margins will outperform operational costs. “But scaling is hard, and capital intensive,” he said.

In a fragmented industry such as short-term and vacation rentals, a lot rides on the last-mile — guest service, cleaning, earning  and keeping the trust of homeowners. A growth-at-all-costs strategy works for companies, but in short-term rentals, only to a certain extent.

Travis Wilburn, who co-founded The 100 Collection, a vacation rental company in Charlottesville, Virginia agrees with this. He refers to it as the ‘old-farm’ theory where if one has to live and thrive in a community, one needs to be a part of it. And that part, according to Wilburn, some of the bigger players don’t do well.

“Homeowners are part of a larger system, and owners don’t like being taken advantage of,” Wilburn said. “They often don’t know whom to call (in the company), the guests don’t have customer service. Vacasa homeowners are going to local brands.”

In its last earnings call, Vacasa  said it saw an increase of homeowner “churn,” in the fourth quarter and into 2023, and forecast that its average gross booking value per home would dip this year.

But that’s now — when these companies went public in the post-pandemic heyday of hospitality — they were banking on a bright forecast.

“Travel companies which went public through a SPAC in 2020 and 2021 were certainly capitalising on a strong bull market, huge pent-up consumer demand for travel – particularly for short term rentals – as well as ample amounts of interest from private equity companies which were sitting on a lot of dry powder for opportunistic investments,” said Pranavi Agarwal, senior research analyst at Skift Research. “However, with 2022 and 2023 seeing record high inflation, rising interest rates and a looming recession, many of the travel SPACs have struggled to prop up their stock price and we have seen several companies such as Vacasa, Sonder and Inspirato dial back their profitability guidance and slash their workforce in attempts to save costs and prevent plummeting profits,” she said.

A handful of public companies do not an industry make; and some analysts say it’s premature to worry. 

“When you go pre-pandemic, it was growth at all cost mode,” said Nicholas Jones, managing director of internet equity research at JMP Securities. “Companies were expected to grow at the cost of balance sheet risk, and a lot of these things cannot happen in a quarter or two, it takes a year,” he said.

Oh Captain, My Capital

It is key to note the growth of short-term rentals – In the U.S. alone short-term rental owners, investors and hosts generated over $62 billion in revenue in 2022.

Investors aren’t blind to this — private equity and institutional investors have reached deep into single-family rentals via everything that touches it from proptech to short-term rental operators, and even the data firms associated with them. Private equity firm Alpine’s acquisition of short-term rental data firm AirDNA was a small but relevant sign of that trend.

And we watch some companies straggling on the stock market, Holcombe might be right about private equity helping a business run better. 

But what triggers the takeover is often capital, or rather the lack of it. 

“Alloggio perhaps found it hard to access capital and private equity offered to take it private at an agreeable price,” said Lehmann.

“We have talked about consolidation for years, and even the biggest ones cannot get bigger,” Lehmann said, as a comment on the state of publicly traded short-term rental companies. 

Vacasa, Sonder and Inspirato — three prominent companies in the industry — are all trading below a dollar. It’s possible these stocks were mispriced by their bankers 

As Alan Woinski of Daily Lodging Report said, we could expect anything from reverse splits to acquisitions even bankruptcies, after eventually get notified that their stock prices are not high enough to maintain listing standards for the “sad sack of lodging SPACS struggling as public companies,” as he called them. 

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Tags: alloggio, awaze, expedia, future of lodging, private equity, sonder, travelport, vacasa, vacation rentals

Photo credit: A Vacasa-managed property in Colorado. Source: Vacasa Vacasa

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