If you're willing to bet against the herd, there's a big opportunity brewing in the hotel industry. The rise of Airbnb, from a little-known website that allows people to list and rent their homes into a global brand with a current value of $25 billion, has been a major catalyst in spooking investors away from some intriguing companies.
In fact, real estate investment trusts, or REITs, that own luxury hotels in major cities across he U.S. have seen their stock prices slashed by at least 30% since last January. The list of victims includes LaSalle Hotel Properties (NYSE:LHO), Pebblebrook Hotel Trust (NYSE:PEB), and Sunstone Hotel Investors (NYSE:SHO).
The concern is that it's darn expensive to run a traditional hotel. You have a large staff, management fees, food expenses, and hotel and property taxes to pay. For instance, the three companies mentioned above have some of the strongest margins among their peers, but they are still paying 80% of their revenue toward operating expenses. On the other hand, Airbnb "hosts" do not have the same costs to consider and this allows them to underprice hotels -- in some cases, by hundreds of dollars a night.
The price difference between what Airbnb and luxury hotels charge their guests creates a significant hurdle for our hotel REITs to overcome. However, I think the difference in price is smaller than it appears and I'm going to dig into three reasons why.
1. Prime location
The first thing everyone wants in a hotel is a great location. All three of the hotel REITs I mentioned meet this qualification by focusing on prime locations in major cities -- New York, Boston, San Francisco, and the like.
This point is something Airbnb hosts also seem to understand. I mentioned that Airbnb could easily save travelers hundreds per night, but the difference between what Airbnb and luxury hotels charge a night shrinks considerably in prime locations.
Airbnb still tends to be the cheaper option. But in financial districts and top tourist destinations you can easily find four- or five-star hotels -- the kind that our hotel REITs own -- within $50 or less of the average Airbnb price for the area. I think this situation works in the favor of the hotels. As long as the price is within shooting range, then hotels can hold onto their share of the customers by offering an experience worthy of a premium.
2. A predictable experience
I should mention that LaSalle Hotel, Pebblebrook Hotel, and Sunstone Hotel don't operate their hotels. Rather, they pay an operating fee to high-end hotel brands such as Hyatt, Starwood, and a number of others to run the day-to-day business. Most important, these types of brand-name hotels come with a strong reputation and an expectation of cleanliness, privacy, hot water, working toilets, reliable Internet, and staff you can call if there's a problem.This level of predictability can be a key advantage.
You're likely to get most of those things with Airbnb, too. Similar to hotels, Airbnb uses a rating system to weed out poor hosts and promote the best. However, the Airbnb model still lends itself to less predictability. For instance, if you're sharing a space with your host, then privacy could be an issue. In the opposite case, if your host isn't there, you might have trouble fixing a problem.
This may not be a huge concern for the average traveler, but the threat of having to deal with unexpected problems could be a deal breaker for businesses travelers. According to the Global Business Travel Association (GBTA), business travel is a $300 billion market, and represents a demographic that hotels can't afford to lose. This is why hotels not only focus on eliminating surprises, but have loyalty programs that help to hammer down the price for business traveler even further. Additionally, many business travelers are limited to specific hotel chains, which effectively ensures hotels a captive market that Airbnb cannot encroach upon.
3. A bigger experience
Finally, luxury hotels can create an experience and provide amenities that Airbnb simply can't. The difference can range from higher-quality beds and fitness centers to offering lavish perks such as five-star restaurants, pools, spas, and golf courses. Also, the majority of these companies' hotels have over-the-top ballrooms for hosting weddings and corporate events, which turns the hotels into destinations and give them clear advantages over Airbnb.
LaSalle Hotel Properties' Lansdowne Resort in Virginia is a great example. The resort has two 18-hole golf courses, which are available only to private members and hotel guests. There's also The Benjamin in New York, which Pebblebrook Hotel owns -- it leases space to one of Iron Chief Geoffery Zakarian's restaurants.
Hotels have also been adding unique perks to serve business travelers. The amenities vary by hotel, but many offer personal concierge service, a credit for the mini bar, free coffee, laundry service, private cars, and some are becoming more pet friendly to make the hotel feel more like home. Ultimately, these features help to create an experience worthy of a premium price.
There's still value in luxury hotels
In terms of real dollars, luxury hotels can't beat Airbnb. But luxury hotels have never catered to bargain hunters, and I don't expect that to change.
In fact, the current situation may serve as a wake-up call that these companies need to focus on what they do best, which is to provide a perfect location and an exceptional experience. When you factor for location and experience, and combine it with hotel loyalty and rewards programs, I think luxury hotels provide a better value proposition than Airbnb. And it's for that reason I believe investors should be taking a closer look at the beaten-down stocks of hotel REITs such as LaSalle Hotel, Pebblebrook Hotel, and Sunstone Hotel.