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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 four key takeaways from Airbnb’s initial public offering filing. One, Airbnb has a network advantage. Two, Airbnb has seen a stronger recovery in travel demand versus the industry, aided by domestic road trips, as has been our expectation since the early days of the pandemic. Three, Airbnb’s liquidity profile appears to be strong enough that solvency is a very low risk. Four, Airbnb is generating losses, as it wisely builds out its network to compete with narrow-moat peers Booking Holdings 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, especially after the pandemic. Morningstar’s behavioural research shows that interest in ESG continues, according to researcher Samantha Lamas, “Our research suggests that 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.”
Keeping both these aspects in mind – excitement around the Airbnb IPO, and sustained interest in ESG investing – 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 Sustainalytics recently noted, the company is going to list with three share classes. There are shares set aside for hosts, that share class 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 added that 5% plus shareholders will have have 58.8% voting control.
This is a similar situation to the one we covered at Google, which we believe raised governance red flags.
Sustainalytics also calls out other provisions that insulate the board of directors, currently comprising nine members, and make a takeover attempt unlikely. 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 for the amendment of the company’s bylaws and certain of the articles of incorporation. Furthermore, shareholders will not be entitled to call special meetings.
“Independent shareholders will have no ability to influence important matters like director appointments, exec compensations, M&A or shareholder proposals,” pointed out JJ Fueser of Fairbnb Canada at a SHARE Webinar on the Airbnb IPO.
Poor governance raises ESG risks. A recent Morningstar Manager Research whitepaper authored 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 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 further attenuated under the SEC’s new shareholder resolution filing thresholds.
Don’t Forget the Social Aspects
"During the last few years, the alternative accommodations market has faced ongoing headwinds from opposition concerned with the industry's impact on society (resident quality of life), safety (adhering to codes), and economics (cost of living). But probably the biggest push-back on room-sharing is the negative cost of living impact it can have on inhabitants by allocating supply to tourists at the expense of residents. As of October 2019, 70% of Airbnb’s top 200 cities by revenue before adjustments for incentives and refunds have had some form of regulation, and no city represents more than 1.5% of total listings on the firm’s platform. But 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. While it is tough to quantify, we believe city regulation of alternative accommodations has been a driver of Airbnb’s decelerating booking growth (along with the law of large numbers) during the last few years," Wasiolek said.
Leilani Farha of The SHIFT talks of a ‘Financialization of housing’ where housing is treated like a commodity, or as a place to park, grow, leverage and hide capital. “This is a relatively new phenomenon, and I am not talking about mortgage-based housing systems. This is about a new set of actors who have uber, 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.
Farha points to the depletion of affordable housing stock because of Airbnb. “2.7% of the UK’s 1.5 million landlord population switched from long to short term rentals. In the U.S. 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 said.
Dale Carlson of ShareBetter San Fransisco said on the SHARE webinar that he wrote a letter to 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.
The situation is similar in Canada. Recent research from McGill University found that almost half of all Airbnb revenue in Canada last year was generated by commercial operators who manage multiple listings.
“If you consider Airbnb a hospitality company, the IPO is coming at a strange time. 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?” Fueser asks.
