Motley Fool Hidden Gems Investing - A One-Night Tenant

Episode Date: March 9, 2024

Deidre Woollard and Matt Argersinger check in on the world of hospitality real estate including Airbnb as well as two real estate investment trusts with big hotels and even bigger ambitions.They discuss: If Airbnb can take a greater share of the hospitality market. Why sports and the Sphere are a winning combination for Las Vegas. How large-group travel provides a safety net for Ryman Hospitality. Companies discussed: VICI, RHP, ABNBHost: Deidre Woollard Guest: Matt Argersinger Producer: Dylan Lewis Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

I do think it is becoming a bigger hassle for a lot of hosts. For a long time, in a lot of markets, the delta between doing a long-term rental versus a short-term rental, the short-term rental was so much more profitable. You could charge daily rates that were much higher than you were going to get over the course of a month from a long-term tenant. And so it made a lot of sense. You're making a lot of revenue, but you kind of start factoring the costs and the time to be a host, and it can really start to shrink that margin quickly.

I'm Deidre Willard, and that's Matt Argersinger, a real estate investor and analyst here at The Motley Fool. As we complete travel week, we're turning our attention to where you might lay your head when you're far from home and which of those companies might also earn a place in your portfolio. you. The days are getting lighter and our minds are going towards summer vacations. I'm here with Matt Argersinger to take a look at travel and hotels from a real estate perspective, specifically checking in on some of the hospitality and REIT companies we follow. Welcome, Matt. How are you? Hey, Deidre. Great to be with you. Yeah, I'm excited to talk because I'm feeling a little bit more nervous about travel than maybe I did a year ago. I mean, last year you and I talked about this and it was like, everyone was, everyone was going international. We know cruises experienced record

bookings, hotels boomed, but anytime there's a big cycle up, I always start to be like, okay, where's the down? Do you think that there's a possibility of that given that there is a little consumer weakness starting to show up? I think there might be. I mean, we, so yeah, as you said, We're sort of past the pent-up demand from the pandemic. I think everyone got out, you know, their delayed travel. They got it all out of their system kind of in 2022, 2023. And here we are, 2024. And we are, you know, we are seeing some consumer weakness, not necessarily in travel.

But, you know, if you look at results that we've gotten from, say, Target, the Home Depot, Nordstrom came out with results recently that were not great. They are telling us a story about consumer weakness. And of course, there are other, you know, related data points out there looking at consumer credit, how that's at record highs. And we've seen credit card delinquencies tick up a little bit. You know, mortgage rates are still high. I mean, the cost of capital in the economy is just higher. So you've got to believe that consumers, you know, although the job market is still strong and wages have been rising, consumers are probably feeling a little bit of a strain at this point. But, you know, where you haven't really seen it yet, and I'm glad we're talking about it, is you haven't really seen it yet in sort of hospitality yet or, you know, or entertainment or experiences. I mean, people are still going out and spending. And just look at a few examples of companies we follow. Ryman Hospitality Properties, which we're going to talk about, a big resort owner. They're experiencing record bookings.

They're seeing, you know, all-time high average daily rates. another company i follow pebble brook hotel trust a kind of a more boutique uh hotel and resort owner they've seen solid growth as well solid growth in revenue per available room and then vichy properties which is the big las vegas reet they also own other properties of course outside las vegas but they're seeing solid growth they gave decent guidance for the year and so put it all together and i feel like the hotel hospitality hospitality spending side of the economy uh is doing just fine. And where you'll see a downturn, the fascinating thing about hotels, which is why I like to follow them, is that a hotel guest, which is essentially the hotel's tenant, they're

essentially on one-day leases. So if there's a downturn in the economy, hotels are usually the first commercial real estate category that you're going to see a slowdown because occupancy is going to drop right away. We saw this right after the pandemic hit in early 2020. Occupancy fell down through the floor, average daily rates plunged, hotels were losing money. And so if there's a downturn, I expect it's really going to hit the, especially the small to medium sized hotel companies, especially hard. Some of the bigger resort companies might be a little more resilient. And I think we'll get into that. They have strong balance sheets. You know, they have the ability to kind of take advantage of downturns, but you'll definitely see it in sort of the lower end or

middle market hotels first. Yeah, I think that's a good point. It sort of mirrors a little bit of what we saw in in office where the top tier properties uh still did well but the middle ones didn't do quite as well so i think i think that's an interesting phenomenon that that happens in a bunch of places yes it's a totally apt comparison because same thing if you're looking at hotels the big resorts the destination resorts the people that you know the places i mean just think of las vegas is one but miami uh you know certain places in California where people just want to travel because they'll, they'll spare the expense to travel Disney world, you know, those kinds of places. And so those will probably hold up pretty

well. But again, it's, you're right. Just like office, it's that middle tier, you know, hotels that depend on, for example, regular work travel that those will be hit first. Yeah, absolutely. I want to talk a little bit about Airbnb before we get deeper into, into the, some of those hotel properties. You know, last summer was the first time I started to hear this phrase, Airbnb bust. Now, this sort of refers to the idea that maybe people weren't getting as much out of their investments in Airbnb properties as they were. You wouldn't know it from looking at the stock performance. I mean, stock performance has been great. The metrics on nights booked keep going up for the full year. Nights and experiences were up about 14%. But some of those hosts,

those individual investors, they've either pivoted to long-term rentals. Some of them have sold some of those super hot markets. One of them that I used to follow, Joshua Tree, California. Some of them, it's shifted now a little bit. And is that something we need to watch with Airbnb as an investment? I don't know how big of a problem that's going to be. And I will just share this anecdote. My wife and I used to have several Airbnbs that we are running in the Washington DC area. And we pivoted to long-term rentals a few years ago, and we haven't gone back to Airbnb. And it's not necessarily because we didn't like Airbnb. For us, it was more of a lifestyle change. We had a child and our time got a little pinched.

I do think it is becoming a bigger hassle for a lot of hosts. For a long time in a lot of markets, the delta between doing a long-term rental versus a short-term rental, the short-term rental was so much more profitable. You could charge daily rates that were much higher than you were going to get over the course of a month from a long-term tenant. And so it made a lot of sense. You're making a lot of revenue, but you kind of start factoring the costs and the time to be a host. And it can really start to shrink that margin quickly, especially like places like Joshua Tree, you mentioned. I'm even thinking of a place like Washington, DC, where we had our first Airbnb. I remember when we first started our Airbnb, this was 2009, Deidre. And we had an Airbnb in Capitol

Hill, which is a nice neighborhood of DC. And we're one of the three other Airbnb hosts at the time. Today, if you go to Airbnb and you look at Airbnbs in Capitol Hill, DC, you're going to find like 300 listings. I mean, so the competition has also become a pretty big factor. But I would say, you know, in the long run, I'm not too worried about that. I think the network effect that Airbnb is so powerful. I mean, 5 million hosts, 7.7 million active listings. Their active listings were up 18% year over year in the fourth quarter. I think they had almost 100 million nights or experiences booked in the fourth quarter. That's incredible, the sheer scale. And then the balance sheet is just in terrific shape. It's almost $8 billion in net cash. To me,

and we've talked about this as well, the biggest threat to Airbnb is just the continued regulatory issues, the complexity of regulations from jurisdiction to jurisdiction. We've talked in the past about some of the restrictions that New York City has put on hosts. And here's another anecdote. I live in a small town about an hour west of DC. It's a little bit of a tourist magnet. There's a lot of wineries and breweries out here. You're also near the Blue Ridge Mountains. So during the warmer months, a lot of people flock to this area. And for a lot of years, a lot of the people who owned houses in the town tried to see if they could do airbnbs but the town had a pretty strict code against uh short-term rentals but there's

also a resort in town and this resort recently built a lot of uh is building actually a lot of single-family homes as part of the resort and the resort is petitioning the town to see if they can turn those into short-term rentals and i just can't wait to see what the reaction is going to be from you know other people in town who have tried and been rejected in the past and whether the resort might win out or get a special zoning permit to do it. But that just shows you this is one small town in Virginia, right? Now just imagine around the world, all the different types of regulations and complexities that hosts have to deal with, that Airbnb has to deal with to try to make it legal for their hosts to do short-term rentals. And I think it's going to

come with tremendous legal costs over time, lobbying costs, and the competitive pressures are not abating either. So it's just, those are some of the bigger challenges I see with Airbnb. Yeah, absolutely. I know they had they they put together a housing council last year that has like former mayors and things like that. I mean, they're taking it they're taking it on, but it certainly is an issue. But at the same time, you know, you mentioned that the competition in your old neighborhood of Capitol Hill, you know, it's interesting because Airbnb, even though they have that many and people are complaining about the competition, they also still don't really have enough supply, which is which is kind of nuts. I mean, that's part of the problem is that they're taking that greater share of the vacation or spend, but they haven't fully disrupted hotels partly because of that. And, you know, they've done this push lately for single rooms. They said, like, we're going back to our roots. We're going to do single rooms. And yet at the same time, they're running these ads about, you know, they've got that cute little French ad where they're like, oh, you don't have to have the same bedtime as your kids if you get an Airbnb.

would be so i mean it kind of sounds like they're talking out of both sides of their mouths on this one they are yeah i think they are trying to satisfy a lot of different guests you know guest needs or demands i you know the the point though with air bb is that i think they can't because their network is so diversified you know across such a diverse range of rental options you know whether it's single rooms single beds or uh you know or full you know full units full apartments full houses or even, you know, ranches. I mean, it's, they, it runs the full gamut. And I think that's a little bit of the power of the model is unlike a hotel, right? It's, it's not a standardized experience. They can have really, you can almost create any unique experience, uh, or stay that

you want. And it's, it's, again, it's part of what makes their network, uh, so powerful. Um, I would say we've talked about this as well, though, you know, there is, there is sometimes when you're traveling a desire. I know I have this desire to stay in a hotel because it's a comforting kind of standardized experience. You know, you're going to have support at the hotel. You're going to have service that you can get at the hotel without having to call, maybe call Airbnb or try to reach your host if there's a problem. It's all right there for you, room service, all that stuff. And so hotels absolutely still have a big, will still maintain a huge market share. We know that. And in some ways they also have competitive advantages that Airbnb doesn't

have when it comes to service and reliability. Yeah, yeah, absolutely. For me, sometimes as a woman traveling alone, there's safety concerns there that also make me opt for a hotel. Yeah, great point there. So thinking about that, so we know with Airbnb, they build supply by getting more hosts. If you're a hotel, the only way you build more supply is by building more supply or by acquisition. I started being curious about this. And I saw this data that I shared with you from Lodging Econometrics. You know, we didn't see hotels being built during the pandemic or at least not that much. And post-pandemic, it's been slow. It looks like it's heating up. You know, and I'm looking at this at the same time that

interest rates are maybe stabilizing. Perhaps that makes a better environment for development overall. If you were looking at hotel operators, do you want to see them building right now? Or do you still feel like this market is is a little bit uh you know a little a little bit unsure i i i really like the data that you shared because it was i was surprised to see how strong it is i mean if you looked at look at it so according to uh lodging econometrics you know there are i couldn't believe this there are 5700 hotel projects in the pipeline either you know actively being constructed or planned to be constructed. And it spans almost 673,000 rooms.

Now, it might take several years. It's going to take several years to build that out. And obviously, some projects may never break ground. But it does suggest a roughly 10% increase in the number of hotels in the U.S. and a 12% increase in rooms. If you had told me that without seeing the data, I would have said, wow, that's so surprising given the uh like you said the the way the state of the interest rates market you know the pandemic we just went through and you know one thing we've talked about is just the elevated construction

labor costs these days i mean it's hard and expensive to build a uh you know a ground of development in any market really because you've had the lead times are huge permitting issues construction costs are high inputs are high late i mean thank goodness timber expense you know lumber expenses have come costs have come down because those were at record highs about two years ago, if you recall. And then just getting labor has been really difficult. So it's an impressive number. It'll be even more impressive to see if that fully gets built out. It does suggest to me, though, that developers see opportunity in markets. And there are some tailwinds to this hospitality sector that maybe we're not appreciating. And I don't doubt the

numbers. I mean, yeah, interest rates are where they are. Maybe they're stabilizing. Maybe they come down even. But clearly, they see the demand. They see the long-term demand for hospitality. And I think, you know, I think there's a case to be made. Yeah, I think it's interesting. You know, earlier we talked about office. I'm comparing this a little bit to multifamily development in that I think that it's mostly going to be at the top end of the market where we're seeing this development. It's like you mentioned earlier, you know, those smaller hotels, we're going to see less

of the like generic hotels being built, I think, and more money going toward those larger resorts. I think that's right. I think that's it. Yeah, I think that's exactly where it's going. Well, you know, we can't talk about travel without talking about Las Vegas. We don't have the February numbers yet, the Super Bowl numbers. But in January, one thing I found interesting from the Las Vegas Tourism Authority was that convention traffic was up nearly 9%.

You know, conventions are back, finally. Maybe not fully, but pretty close. And you've got the Sphere. So, you know, that big venue that YouTube had their residency in, that's been driving traffic up. people just go there to gawk at it. Speaking about hotel development, all of a sudden, there's been a lot in Vegas in the last couple of years. And finally, they completed the Fontaine Bleu Hotel, which was years and multiple people involved in that one. Is there a concern in Vegas that there's going to be too much supply? I don't think so. And I'm not, of course,

an expert in Las Vegas's economy. But just from the vantage point of some of the companies we follow and some of the reports we read i vegas is as strong as it's ever been and i know there are real worries about that uh you know during the pandemic and even coming out of it but you know just just obviously they just had the super bowl there uh like you mentioned conventions are back and it's always just going to be a great you know a premier travel and entertainment destination not just you know not for just for u.s travelers but obviously travelers from around the world and i love your point i mean the convention i'd say a convention slash large event industry is going gangbusters. And I think there's reason for that, right? If we're stepping

away from the whole idea of office, where employees were getting together daily, we're getting away from that. And we're getting away from also just the travel to speak with customers or meet customers or do sales meetings. I mean, if those are gradually, if not totally going away, You know, conventions slash big sort of meetup events are great for companies to bring employees together from various parts of the country or to have big sales meetings with multiple customers. These large scale gatherings, you know, I think are going to be a big trend. And so and Vegas is perfect for that. I mean, every virtually every hotel or on the strip, you know, is able to host large events with, you know, hundreds of rooms. And so I just think Vegas is such a, and it's also one, and of course, it's also a very cheap

destination to get to. There's so many flights from every major city going every day to Vegas. And so it just, I feel like it's going to remain such a magnet for travel tourism, but now kind of as well, just a corporate retreat and large gathering type of market as well. And it's now a sports town and that's having an impact. I mean, you have your Stanley Cup winners there you've got you know you've got you've got football you're going to get baseball there's there's a lot happening in vegas that way right and of course it's always been a gambling mecca but the rise of sports gambling you know a lot of it is done online but but vegas is all you know as sports leagues have fully embraced it for the most part and that's that's also going to be

driving a lot of business vegas this way as well yeah i think we're almost in the age of i mean it's not really like revenge convention attending, but I mean, I went to conventions for many, many years in, in real estate. I, I found out I've now, I now miss it. I now I'm ready to go back to conventions. And I think a lot of people, you know, they, they miss that circuit. And so we'll, we'll, we'll see what happens there. Well, I want to talk a little bit about, uh, the sphere and, and that leads us to talk about Vichy properties, which owns the land beneath the venue and really most of a lot of the Las Vegas strip, including some undeveloped land, I think they're going to start putting to use. I love this, this company. I've interviewed their

CEO, Ed Petoniak, a couple of times. One of the things I like about him is he's always asking himself what's next. And so we think of them as owning, you know, owning all of these properties, like the Venetian, all these Vegas strip properties and owning gambling properties in, in other States, but he's also gone in all of these experiential directions lately. So they've got Bolero, they've got partnership with Canyon ranch. They've got, uh, partnerships with great Wolf water parks. As this company expands, what are, what are some of the things you're asking yourself? Cause it feels to me like it's still, it's still a, a gambling read, but it's also so much more now. It is. It's definitely diversifying. And I'm a, I'm also a big fan of Vici properties

and what they're doing. I think the big concern slash question for me is as it starts expanding and working with smaller tenants, it's one thing to have very long-term triple net leases with companies like MGM and Caesars Entertainment, right? Blue chip casino operators, very long-term leases. You never have to worry about whether the rent's going to get paid, obviously. But if you start working with a lot of smaller operators, the question becomes, well, What risks am I taking? What are the credit ratings of these smaller tenants? Am I going to run into more trouble? That's the biggest question to me. What I do like, though, is the approach they're taking. In a lot of places, they're not necessarily becoming the full owner. They're using their balance sheet. They're lending capital, doing joint ventures. and should these projects work out great but if they don't then vici also has the opportunity to use this balance sheet to acquire the uh the property so it's in a way they're using their

balance sheet and they're lending and it's kind of a lower risk way of building an acquisition pipeline so i like that a lot and so that's a way of maybe mitigating the risk a little bit as they expand beyond their core gaming their core vegas market yeah i really like the partnership angle because it feels to me like they're learning these new businesses as they grow. And in some cases, they're taking a small stake and then they take a little bit more. One of the things I like about Ed Petoniak is he always knows what he doesn't know. He called 2024 skiing in a milk bottle. He said this several times in the earnings call. And that seems to me to say that they don't know what's coming next, but with their balance sheet, they feel like they can be prepared to take

some swings and then go bigger if the opportunity is there. Right. It's a great position to be in, for sure. You know, Vici isn't the only hospitality REIT that's kind of going in different directions and going more experiential. Ryman Hospitality Properties, I know it's one you've followed for a while. You know, they've always had the grand old Opry, but now they've got this brand with Blake Shelton, Old Red. They've got another partnership they're doing, and they keep expanding their venue footprint. They just, uh, they, they now have a big space on, on the Vegas strip, although not a hotel there yet. I'm thinking about Ryman a little

bit differently with this entertainment aspect. I mean, they've always had it and it's still not a big part of the business, but it seems like it's a little bit more of the business than it used to be. Yeah, it's becoming that. And I, I just think it goes, it perfectly, it goes hand in hand with their resort business. You know, they've always had, you know, obviously a focus on very large live entertainment venues. And I think now they're marrying that more closely with other entertainment venues. And I just think it, you know, kind of extends and diversifies the business in a very positive way. And I'll just say how impressed I am with Ryman. I mean, if you remember this teacher, I mean, the aftermath of the pandemic, this is a company like all hotels

and resorts just faced really severe challenges. Occupancy fell to near zero. They suspended the dividend early 2020, which is always as a REIT and dividend investor, it just kills you. But here we are, less than four years on, they're seeing record bookings. They've opened several new venues. They're doing these new partnerships, as you mentioned. They reinstated the dividend in the fall of 2022, and they've already raised it four times. And the quarterly dividend today is 22% higher than it was before the pandemic. And it's just, you know, we have this real estate winter service

here at The Motley Fool. It's been one of our best performers and I can see why. They just, they really got through the pandemic. You know, they shielded the balance sheet. And as soon as the market opened up in 2022, they were able to take advantage. And boy, have they taken advantage.

And I just, with record bookings, you just don't see anything close to a slowdown in the demand for, for their, uh, resorts right now. One of the things I found interesting in their, uh, investor presentation was talking about why they prefer large customer groups. And it makes a lot of sense because they're booked, you know, at least a year out. So you've got that stability, you know, what's coming. And if things, if they do have to cancel, you get some pretty hefty cancellation fees there. So you are a little bit protected. So, you know, they're not having to get, uh, what you called earlier, you know, the,

the tenant for one day they're able to to have a little more stability than maybe some other brands do yeah that's something i remember when matt frankel was was recommending it the first time he really focused on that and it was the right thing to focus on which read exactly what you said it can seem like that segment of the market would be more cyclical right but you know think about not just large corporate groups or event groups but just large wedding groups right i mean i don't care what happens the economy no one's really if someone's booked a large wedding at a Ryman property, they're not canceling it. It gives their sales and earnings a lot more visibility than what we talked about earlier, which is the small middle market hotels, which

again, like you said, one day tenants, that's all they have. Yeah. Well, we did have canceled weddings during the pandemic. We're three years out from it now. The hotel business mostly normalized, although as you and I talked about, business travel, not quite there yet. Convention travel, yes. Business, day-to-day travel, not quite as much. What do you think about the possibilities for something else happening? Have we learned lessons? What do you think? Is there any reason to be concerned at all about hospitality? I think you mentioned it, which is the one area that hasn't bounced back and may never bounce back is the traditional business travel. And not talking about the conference or large events that we were talking about. I think those could

be stronger, but simply of the idea of just, you know, small sales or customer teams going out to meet a client, close a deal, meet with a investor, meet with a partner, those kinds of small gatherings, I think are, might be, might be gone forever. Not totally gone, but most of them are gone forever. I mean, if you think about Zoom, DocuSign, all the technologies that we have at our fingertips today, the ability to get business done virtually at very low cost. I mean, I think those are now fully ingrained into workflows and processes. I know they are with our company here at The Motley Fool. And I think they're just becoming widely adopted by the day. So it's an easy area for corporations to cut costs and keep costs down. But on the flip side, as we've talked

about, I just think the larger hotels or resorts that can host large gatherings, those are prime time right now, because I think a company that wants to meet, wants to have its employees collaborate at least a few times a year can take advantage of that. So instead of that daily office culture that we had, we have a hybrid culture, or we have a culture that is trying to get together for three or four large CL events at a time during the year. And who benefits from that are these large hotels or resorts where they have big event spaces. So those will be stronger than ever. And that's why I think I love the two companies we mentioned in the show, which is properties in Ryman because they're just primed for that. Absolutely. And so, yeah, we probably

lost work travel to a certain extent. The pandemic might have changed that forever, but it also has created some positive aspects elsewhere. So are you traveling this summer? And if so, hotel or Airbnb? I am traveling. I'm actually, I'm going to Scotland in June for about 10 days to do a hike with a friend. And yes, well, I should say during the hike itself, we are staying at some local places, some local inns. There are some B&Bs. They weren't booked through Airbnb. They were booked through a travel company. But we are flying into Edinburgh and staying at a hotel there. So I definitely went to the hotel room for that trip.

Nice mix. Thanks for chatting with me today, Matt. Okay. Thanks, Deidre. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Willard. Thanks for listening. We'll see you tomorrow.