Investing in Timeshare or Short-term Rental: The conundrum that investors face as global economies recover
June 23, 2021 (Investorideas.com Newswire) Of the many travel and leisure domain investment opportunities available, two aspects include companies operating in the short-term rental and The Timesharing business. The former represents owners who make their properties available to vacationers and renters on a short-term basis - typically under a month; while the latter involves joint ownership of a shared property, by vacationers, that's managed by a Timeshare operator.
Both models offer investors an opportunity to add various dimensions to their portfolios, including real estate, hospitality, travel and vacationing and the service industry. However, when making the investment decision though, one factor to carefully consider is: How well did businesses serving each domain perform over the past year.
Making Sense of the Numbers
The American Resort Development Association (ARDA) is an umbrella organization that advocates for the Timeshare industry. A look at the numbers provided by the association paints a picture of a growing, flourishing industry.
Based on these numbers, the Timeshare industry isn't just thriving, but has also morphed into a significant engine for employment and economic growth. However, to truly get an insight of how Timeshare is faring, world-wide, we need to take a closer look under the hoods of the financial statements of some of the heavy-hitters in that segment.
THE WALT DISNEY COMPANY (DIS)
Entertainment giant Walt Disney represents Timesharing through its Disney Parks, Experiences and Products (DPEP) segment. A significant part of that unit's revenue comes from vacation rentals (Timeshare) and membership through the Disney Vacation Club (DVC) operations.
According to one report, between April and June 2020, the ongoing global crisis hit the Timesharing giant hard, and "…resulted in more cancellations and lower attendance than the company was expecting, with the park operating at lower capacity". Those cancellations and closures cost the entertainment goliath nearly $5 billion in revenue. That negative momentum continues. In Q2-2021, on a quarter-over-quarter, and six-monthly comps basis, DPEP's revenues have suffered 44% and 49% decline respectively contributing to nearly a 34% decline for the tourism sector. It's clear that, for one of the industry's leading players, Timesharing has suffered a significant hit.
MARRIOTT VACATIONS WORLDWIDE CORPORATION (VAC)
VAC is yet another heavy-hitter in the global Timesharing arena that, unlike Disney, earns its revenue primarily through Timesharing and vacation property rentals. For the full year 2020, the company clocked a massive 57% decline in consolidated vacation ownership (Timesharing revenues), resulting in a diluted loss of $0.45 cents.
For Q1-2021, the company managed to clock a slight (26%) increase in revenue compared to the comparable quarter last year. However, the diluted loss of $0.49 cents is higher than the full-year numbers reported for 2020. The company's cash reserves also declined in the latest quarter, underscoring tough slogging.
WYNDHAM HOTELS & RESORTS, INC. (WH)
(Name changed to Travel + Leisure Co. on February 17th, 2021 - Trades under ticker symbol "TNL")
Wyndham was yet another Timeshare company that was plagued by cancellations and declining demand. In Q4-2020, the company saw revenue declining by a staggering 36% compared to the same quarter of 2019. On a full-year basis, the numbers were even more sobering. Revenue declined year-over-year by 48%.
The company's margin erosion was profound. 2019 margin was 24%, but that fizzled out to 7% in 2020. Although the company's Volume Per Guest (VPG) metric increased by 24%, lower margins also mean the "quality" of the VPG isn't as robust as it might have been - the company is spending more (eroding margins) to gain that volume.
Lack of demand for timeshares, and consumers looking to get out of Wyndham timeshare contract due to challenges with air, sea and land travel account for steep decline in the profitability of these heavy-hitters in the industry. As an investor, it's hard to justify, therefore, putting money in these names if your primary aim is to add communal real-estate rental and Time-sharing exposure to a portfolio. So, what might be an alternative to Timesharing companies that offer such exposure?
The Timesharing Alternate
Clearly, the vacation rental and timesharing business has come under heavy pressure due to COVID-related cancellations, travel restrictions and grounded airlines. But another competitor - short-term rentals - may also be eating into the time-sharers cake.
Many vacationers, who were able to travel to destinations away from where they had their timeshares booked (i.e.: perhaps because those alternate destinations had less stringent lockdowns), would have found it compelling to cancel their bookings and book elsewhere. And businesses, like Airbnb, Inc., were prime beneficiaries. Their numbers bear that out.
AIRBNB., INC (ABNB)
Unlike its peers in the Timeshare arena, who saw revenue declines due to cancellations and postponements, Airbnb's Q1 2021 revenues rose by 5%. Analysts were expecting the company to deliver $714.4 million in earnings, but the company brought-in $886.9 million, beating analysts' expectations. Moreover, as many renters choose to stay in independent homes, as opposed to communally-owned and shared properties, the short-term rental giant saw gross booking value increase by over 52%.
Despite the ongoing COVID crisis, which also hit Timesharing, Airbnb saw strength in its North America operations, and was even able to charge higher Average Daily Rates ("ADR") during the quarter. Airbnb reported a surprising 64.4 million nights of bookings, which was up by nearly 40% from the previous quarter (Q4-2020). This too was a beat on Analyst's call, who predicted no more than 62.5 million nights.
The company clocked an EBITDA of $(59) million. While this was still a loss, it was significantly lower (by more than 82%) than the $(334) reported in the same quarter last year. Clearly, things are turning around much better (and faster) for short-term rentals than Timeshares.
One reason that Timesharing saw so many cancellations might relate to the fact that these properties are typically located closer to densely populated areas. Most Timesharing companies count this as a positive; but given the extenuating circumstances of the past year or so, vacationers went to great lengths to avoid heavily-populated regions of the world.
Airbnb, on the other hand, was able to pivot and offer a variety of packages to its clients, including nearby-stays, domestic travel, longer-term (28-days-plus) rentals, and rentals in less densely-populated areas.
The Investment Thesis
The case for investing in Airbnb doesn't just rely on the fact that economies around the world are opening-up. It also takes into account the fact that Q1-2021 proved that customers are willing to spend up to $160-a-night - up by 25% from Q4 2020. That, and the fact that more renters are booking for longer-duration stays of over 28-days (24% in Q1 versus 14% pre-pandemic in 2019) makes it a compelling name to add to any portfolio. Given market volatility, investors should look for short-term investing strategies that provide leverage on market swings.
And, given the company's network of 4-million hosts spread across 100,000 cities is now ready and eager to receive guests once more, the resumption of cross-border travel and urban tourism is sure to supercharge any portfolio holding Airbnb.
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