Gov. Cuomo Attacks Airbnb Hosts…

Louis BaseneseThe hotel industry is trying to regulate Airbnb out of existence.

It’s similar to what happened when Uber suddenly rose to challenge the 110-year-old taxicab industry.

The cabbies lost that particular battle.

But can the home-sharing industry — led by Airbnb — win in the same resounding fashion as Uber did?

Well, perhaps not…

New York Gov. Andrew Cuomo recently signed new regulation that penalizes Airbnb hosts who list properties on Airbnb’s home page.

Analyst Brittany Hunter reports that “Hank Fried and Tatiana Cames were the first to be penalized for breaking the new restrictions and were fined a combined total of $17,000 for continuing to list properties online after the law had gone into effect.”

Ouch!

Cuomo’s new regulation is a serious blow to the evolution of the home-sharing industry.

The resistance against home sharing is being led by Marriott.

Marriott has a long history of supporting free markets, as the hotel industry has exploded.

But now that the hotel industry is under siege, the company suddenly favors heavy regulation.

Such a reversal underscores the dark side of capitalism.

I asked my senior analyst, Martin Hutchinson, to assess the health of the hotel industry.

During his a due diligence, he discovered an opportunity to earn a quick buck.

Hutch’s full analysis is below.

Ahead of the tape,

Louis Basenese
Chief Investment Strategist, True Alpha


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Question: Martin, a little niche thing happened just recently. I want to bring it to your attention and get your comment on it. Marriott’s CEO basically sent a warning to President Trump that his policies could cripple the tourism industry. What gives?

Martin Hutchinson: Marriott is now the largest hotel company in the world, and Arne Sorenson just sounds like other people criticizing Trump. But actually I think he may be preparing the market. He’s giving it a good excuse for bad news to come, because the hotel industry currently has massive head winds on at least three fronts.

First, interest rates are rising. That raises their financing costs, because much of their financing is done either short term or with floating rates.

Second, because interest rates have been low for so long now — eight years — there’s a huge glut of hotel space. Occupancy rates have not recovered since the 2008 downturn, and they’re currently averaging maybe around 65%.

And then thirdly, barriers to travel are increasing. You’ve got more protectionism, which will reduce business travel. You’ve got harsher border controls that Trump is bringing in, but other countries are as well. And then the sheer unpleasantness of the airline industry, as we’ve seen with the United Airlines’ business.

These are only a few of these factors, but there are a lot of reasons why people might decide not to travel internationally and maybe do something closer to home this year. And so I think the hotel industry has got some problems coming.

There are an awful lot of hotels that were built in recent years that are not very full and are zombie assets at this point.

Question: Martin, from my experience, when industries like this are under some pressure, you’ll see some consolidation as a result. Is that happening?

Martin Hutchinson: Yes, that is happening. Marriott just bought Starwood last year for $14.6 billion, and they could very well have been buying at the top. But that’s made them the world’s largest hotel company, and I guess the matchup was too good to miss.

It’s worth looking at Marriott. At today’s price in the low $90s, Marriott is on a historical price/earnings ratio of 35, and it’s trading at 6.6 times book value.

As you know, I like to buy long-dated puts out of the money. So I’d buy January 2019 puts. Perhaps the $75 at around $5.

Then if Marriott falls to $40, which is still three times puts, that’s still a perfectly reasonable price — you’d make $35 for that $5 you put in.

So it’s a pretty good trade percentagewise that bets on the problems that are looming for the hotel industry — and that I think Mr. Sorenson is preparing for.

Question: Great stuff Martin. Thank you for your time today.

Martin Hutchinson: Great pleasure.

Question: This is Wall Street Daily, signing off.

Good Investing,

Martin Hutchinson
Senior Analyst, Wall Street Daily

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Martin Hutchinson