As we head into the end of 2020, investors continue to look for lucrative opportunities to end the year on a strong note. One event that investors are closely watching is this week’s Airbnb IPO.
Morningstar senior equity analyst Dan Wasiolek sees some key takeaways from Airbnb’s initial public offering filing: it has a network advantage, which means the company benefits the more people use it. It has seen a stronger recovery in travel demand versus the industry, aided by domestic road trips during the pandemic as people stay local rather than fly. Three, Airbnb’s liquidity profile appears to be strong, but it is generating losses as it builds out its network to compete with peers such as Booking.com and Expedia.
While Airbnb offers particular strengths and opportunities, investors still continue to demand that environmental, social and governance (ESG) factors be considered in their investments. Morningstar’s behavioural research shows that interest in ESG continues, according to researcher Samantha Lamas. “Even during a pandemic and extreme market volatility, investors continue to be interested and swayed by ESG information. In other words, interest in ESG investing is not going anywhere, and investment professionals would be well-served by incorporating it into their practices.”
What are the ESG considerations for potential IPO investors? We could not find any significant environmental risks, but found some concerns on both societal and governance factors.
Proposed Governance Structure a Concern
As ESG ratings agency Sustainalytics recently noted, the company is going to list with three share classes. There are shares set aside for hosts and these will have no votes. The ones that will start trading this week are Class A. The shareholders of Class A shares will have one vote per share. Class B shares are held by founders, key employees, directors and large shareholders. A single Class B share will have 20 votes. The three founders will control around 44% of pre-IPO voting power. Wasiolek notes that 5% plus shareholders will have have 58.8% voting control.
Sustainalytics also calls out other provisions that insulate the board of directors, currently comprising nine members, and make a takeover attempt unlikely. Recruitment to the board will be staggered, with one third of directors being elected each year. The board will also have exclusive rights to amend its size, while two thirds of voting power will be required to change the company’s bylaws and the articles of incorporation. Furthermore, shareholders will not be entitled to call special meetings.
A representative from campaign group Fairbnb, JJ Feuser, says this means that independent shareholders will have no ability no ability to influence important matters like director appointments, exec compensations, M&A or shareholder proposals.
Poor governance raises ESG risks. Recent research by Morningstar director of sustainability research Jackie Cook suggests that share structures that skew away from the one-share-one-vote principle were overrepresented amongst companies targeted with shareholder resolutions that addressed diversity and social justice in the 2020 proxy voting season. Cook notes that where affiliated shareholders - like founders, founding families and controlling parent companies – hold sway over an outsized proportion of the vote, the power of shareholders to raise ESG concerns via the proxy process will be weaker.
Community Pushback
Dan Wasiolek says that the market that Airbnb operates in has faced opposition over the impact of property disruptors on society. There are concerns over residents' quality of life in areas where Airbnb operates, as well as tenant safety. But the biggest community push-back has been because Airbnb and others drive up the price of accomodation in areas with a shortage of housing stock by allocating supply to tourists at the expense of residents. He adds that most of Airbnb's biggest cities by revenue have been hit with tighter regulation, and that will act a drag on future growth.
"These cities and others can face further regulation in the future. Regulation could entail guests and hosts sharing information with cities, having hosts register for a license to list on alternative accommodation platforms, limiting the amount of days a unit can be rented, and requiring units to meet safety standards," he says.
Leilani Farha, global director of affordable housing initiative The SHIFT talks of the "financialisation of housing" where housing is treated like a commodity, or as a place to park and hide capital. “This is a relatively new phenomenon ... This is about a new set of actors who have unprecedented amounts of capital, using this to leverage housing to make more capital. Airbnb and other short-term rental platforms fall into this very well,” she says.
As the coronavirus pandemic continues, experts argue that short-term rental companies like Airbnb negatively impact already struggling housing markets.
Does Airbnb Push Up Rental Costs?
Farha points to the depletion of affordable housing stock because of Airbnb: “2.7% of the UK’s 1.5 million landlord population have switched from long to short term rentals. In the US more than 600,000 of 1 million hosts operate 2 or more units, leading to the eating up of long-term housing stock.
"Meanwhile Airbnb also has an impact on rent levels. In Barcelona, Airbnb increased rents by 50% in some areas. Add to this, we are also seeing investor driven development, where rather than having developments for people who need it, developers build for investors who buy not to live in the units, but for investment sake through short term rentals,” she says.
Dale Carlson, who works for tenants' union ShareBetter San Fransisco, has written to US regulator the SEC, asking that Airbnb disclose how much revenue comes from commercial operators as opposed to home sharers. “The SEC filings do not answer this, and Airbnb continues to promote home sharing as foundation of their business model while in fact most of the revenue and profitability depends on people with hundreds of units that have illegally been converted from residences to full time tourist accommodations. That is deeply troubling,” he said.
Fairbnb's Fueser thinks the IPO comes at a strange time for a hospitality company: “It is either a couple of years late, or a little too early. As an investor, you want to be starting at the beginning of the recovery and ride the wave to the peak. It is unclear if the worst is over. Q3 is often the company’s only profitable quarter, in 2020 this profitability was achieved through cost cutting by getting rid of consultants, cutting budgets and laying off 25% of staff. In a competitive market, is that sustainable?”
