Vacasa: Changing The Sector's Paradigm Requires Patience

seekingalpha03-19

Vacasa is shifting its strategy towards a more conservative approach, prioritizing high-value properties over mass acquisitions in the short-term rental sector.The company aims to improve operations, ...

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(NASDAQ:VCSA) stock is based on my outlook for the short-term rental industry due to a shift in the paradigm from growth to a focus on operating profitability. My conclusion was based both on the analysis of Vacasa's forecasts for the years 2024 and 2025 and on the sectoral projection observed at the 2023 Short-Term Rental Summit. In this way, the sector will prioritize the acquisition of properties with high added value, acquired through individual negotiations, and will avoid mass purchases from a specific client portfolio, through the acquisition of local property management companies. This acquisition model proved to be inadequate, as there was a stampede of platform owners in 2023. Qualitative analysis Vacasa is one of the largest property management companies focused on vacation rentals in the United States. The company also has properties in Mexico, Canada, Costa Rica and Belize in its portfolio. The company proposes to act as an intermediary between the landlord and the tenant through a technological and integrated application system, while offering a series of services related to property management, such as cleaning services, property brokerage services (since 2018 with Vacasa Real Estate), interior design services, among others.   Some interesting facts about Vacasa (Author) What differentiates Vacasa from other companies in the sector is mainly its business model aimed beyond intermediation between property owners and renters, but rather the management of the property itself. At this point, Vacasa stands out as a giant among local real estate agencies and independent property managers that operate locally, in addition to some small/medium-sized companies that Vacasa has been acquiring. Since merging with TPG Pace Solutions and going public, the company has acquired Beach Pros Realty, Sandbridge Realty and TurnKey VR. But the company has been using this strategy for a long time by acquiring local property management companies, such as Pointe West Properties (2014), Discover Sunriver (2016), Beach Walker (2018) and Oasis Collections (2018). Vacasa's challenge in the property management segment lies in creating value for the owner, who can choose to manage their property independently or use a local property management company. These companies generally maintain decentralized operations and offer personalized services due to their local operations and specific resources, such as local staff and market knowledge. Therefore, Vacasa, in an attempt to precisely achieve this creation of value that we are talking about, has been investing in the creation of an application that facilitates the entire process involving property management, from cleaning to interior decoration services. The choice, as always, will fall to the customer, who will have to choose between a personalized and decentralized service from a local administrator or an integrated network of applications and services offered by Vacasa. And this is precisely why the acquisition of small local property management companies is extremely important for Vacasa. Once the acquisition is completed and the business model is maintained, Vacasa is able to bring together all the advantages of the local model, personal and lean, with centralized and technology-based management. Domestically, Evolve poses a significant challenge, while internationally, companies like Awaze and Interhome present formidable threats in the medium/long term (I will specify when talking about these two companies). It is important to highlight that Evolve operates in property management offering marketing, listing, insurance and support services. However, the company does not directly offer all the services that Vacasa offers in its value proposition, such as cleaning, refueling and maintenance services, in addition to additional services such as interior decoration, linen program, 3D virtual visit, among others. As I said previously, internationally there are two strong competitors that could threaten Vacasa in the long term: Awaze and Interhome. But why do I say in the long term? As said at the 2023 Short-Term Rental Summit, the CEO of Awaze highlighted his preference to focus on the European market (which in Kjellberg's opinion is a much more mature market) instead of expanding geographically. And, if we look at the numbers, this reservation regarding the expansion of Awaze's operations in the short-term rental market in the United States is justified.   Comparison between Vacasa and the largest European short-term rental companies (Author) Today there are about 2.5 million vacation properties that are rented every year in the United States, and about the three biggest players own less than a hundred thousand of these homes individually. This indicates that even though Vacasa has around 44,000 properties under its management, and Evolve a little over 30,000, Sonder with just over 5,000, the market is still very decentralized, and there is still a huge percentage of market- share that is with the local administrators. Therefore, the European giants prefer to keep their distance from a complex market, which would require a large injection of capital and administrative efforts. This allocation of resources in the American short-term rental market would harm Awaze's competitiveness in Europe. Therefore, in my opinion, European companies are closely monitoring the United States' internal competition, to eventually participate in the American market through a strategic acquisition. Meanwhile, American companies develop through an integrated system of applications, mergers and acquisitions with local companies, and brand development. I don't think this movement of mergers or acquisitions should occur yet. With the apparent end of the era of very low interest rates, leverage and growth also become more punitive when not based on praxeological signs, this indicates slower growth (both in expansion of activities inside and outside the United States) but sustained through more tangible results. And therefore, when we see a movement towards accommodation in future interest rates and potential stability in the economy, we want Vacasa's expansion with its mergers and acquisitions to translate into positive returns for shareholders. And that's not what we're seeing today. In my opinion, with the economic perspectives that prevail today and future expectations of accommodative conditions, the biggest challenge for Vacasa will be to translate the dominance that it appears to have in the domestic market into positive returns for shareholders, and not into trying to capture a larger share of the market. There is still a lot to improve in its margins and, consequently, in its operability. What's new at Vacasa? It is interesting to note that Vacasa, as well as the short-term rental market as a whole, is currently aligned in terms of a paradigm shift. In recent years we have seen this expansionist momentum, both from Vacasa, and the accelerated growth of Evolve. In the case of Vacasa, this becomes evident when this revenue growth, observed after the acquisition of TurnKey VR, did not translate into increased profits for shareholders, on the contrary, the result, which was already bad in 2021, worsened in 2022-2023. The clarity stems from my observations at the 2023 Short-Term Rental Summit, and Vacasa's 2023 summary that for now, the portfolio acquisition strategy will be replaced by a leaner, customer-focused model, targeting sales individuals and in the acquisition of high-value properties. This paradigm appears to be being applied in both the European and American markets. It appears to me that the short-term rental market should temper its expansionist momentum and instead focus inward on its operations, placing greater emphasis on economics and returns rather than market dominance. To achieve these goals, Vacasa defined some objectives to be pursued in 2024, which are:  Improve and align Vacasa's products and technology capabilities to benefit owners, guests and support teams; Enhance service offerings to meet the needs of homeowners and guests to add desirable homes to the platform and increase homeowner retention; Implement a one-to-one sales approach to drive growth by leveraging relationships built by employees with owners; Prioritize profitability in the face of a dynamic industrial environment, seeking ways to allocate resources to drive long-term growth; Continue to improve operational effectiveness and efficiency across the organization.  The 5% drop in the total number of homes registered on the platform also raises concern. Vacasa attributes this resistance from some owners to the transition of management of properties previously managed by regional and local companies acquired by Vacasa. That's why the company is focused on retaining these owners by improving the owner experience on its platform. Aiming at the profitability of the operation and the change in the operational direction that the company was heading towards by 2022, Vacasa recently announced that it will lay off 320 employees. According to some estimates, these layoffs will cost Vacasa around $5 million, which must be paid in the first half of 2024. This seems to me to be the company's first step in the search for a leaner operation, aimed at generating shareholder returns. Furthermore, in my opinion largely due to the change in direction of mergers and acquisitions and the call for improved operationality, the company announced that director of operations John Banczak is leaving the company. Fundamental Analysis I will begin the fundamental analysis with an in-depth analysis of Vacasa, Inc. capital structure. This way I will be able to equate the participation of each source of capital in Vacasa’s organizational structure, find out if it has its own working capital (part of the equity that is not immobilized), net working capital (long-term resources that are not immobilized) and what is the cost of the capital sources when put in perspective with the profitability that Vacasa is generating at from each source of capital.   Participation of third-party capital in perspective with other companies (Author) The indicator of third-party capital participation can also be interpreted as a risk prospect or dependence on third parties by the company. Since leverage, according to the orthodoxy of corporate finance, as seen in the DuPont model of profitability analysis, can enhance shareholder returns, the company must constantly balance the costs of capital sources and reconcile returns and costs to formulate a WACC that optimizes the acquisition of different sources at the lowest cost, whether debt or equity. The trade-off that the company needs to make between allocative freedom, especially for new projects, and leverage itself, will need to be deliberated by the board. For Vacasa, Inc. we were able to observe that the company usually uses a higher percentage of third-party capital in its operations, since due to recurring negative results, equity gradually decreases while equity absorbs losses incurred in recent years. In the table below I will highlight the costs that Vacasa incurs to obtain capital from each of its sources and the return on this capital when allocated and used in the company's operations.   Costs and returns of each Vacasa capital source (Author) Having completed my analysis of the participation of equity and third parties, in addition to the return incurred on each source of capital, I will now analyze the composition of Vacasa's debt (debt profile).   Short-term obligations in perspective with others (Author) Vacasa maintains an average of 84.44% of short-term obligations in relation to total debts. The company's debt profile is less favorable than the industry average.   Vacasa debt profile (Author) Vacasa's debt profile has shown signs of deterioration since 2020, particularly impacting liquidity ratios, as we'll explore in the upcoming section of this analysis.   How much of the equity Vacasa has immobilized in perspective with other companies (Author) The equity immobilization indicators show that Vacasa, Inc. invested in fixed assets an amount equivalent to 107.85% of equity in 2019; in the most recent period, in 2023, this percentage was 191.57%. From this indicator comes the understanding of the element called Own Current Capital, which is nothing more than the portion of equity invested in current assets, and, consequently, not fixed. As Vacasa, Inc. has equity immobilization above 100%, this indicates that its fixed assets are financed from all of its equity and another part using third-party capital, which is the other source of capital for a company. This indicates that Vacasa does not have its own working capital, as it has immobilized all of its equity and still depends on external financing to cover the rest of its fixed assets.   Amount of own working capital that Vacasa has each year (Author) The negative amount of own working capital highlighted in the table above is related to the amount of debt capital that Vacasa needed to finance its permanent assets each year. Since the company has immobilized a greater amount of equity capital than it has, the remaining permanent assets had to be obtained through loans. We will now see the immobilization of Vacasa non-current resources, which will give rise to the concept of net working capital, another very important concept when we analyze the capital structure of a company.   Immobilization of non-current resources (equity and long-term debts) (Author) The immobilization of Vacasa, Inc.'s non-current resources increased from 99.63% in 2019 to 165.22% in 2023. This means that Vacasa began to immobilize all of its long-term resources over the years, using short-term obligations to immobilize and manage its daily operations.   How much net working capital does Vacasa maintain each year (Author) Having a negative net working capital means that the company will depend on short-term resources both to finance its current assets and a part of its fixed assets that was not covered by long-term resources. To exemplify this relationship between own working capital, long-term liabilities, and net working capital, I've presented it in the table below.   Formation of net working capital and its components (Author) Now that we've discussed Vacasa’s capital structure, let's examine its liquidity and solvency indicators. I will concatenate the solvency indicators through the Kanitz thermometer analysis, since we can get straight to the point and analyze the probability of Vacasa's bankruptcy.   Vacasa's bankruptcy risk from the perspective of the Kanitz thermometer (Author) Despite a deterioration in liquidity, a fact that we can observe through the endogenous indices of the Kanitz thermometer and the dilapidation of free cash flow (this will be presented at the end of the fundamental analysis), Vacasa is still solvent and does not present any immediate danger of bankruptcy. I will now analyze the various indicators that measure the profitability and operational efficiency of Vacasa, Inc.   Vacasa's asset turnover in perspective with other companies (Author) Vacasa, Inc.'s asset turnover surged due to a slight revenue increase and asset reduction, coinciding with a decline in goodwill and intangible assets. In any case, what Vacasa manages to generate in revenue from its investments is certainly something positive.   Vacasa's gross margin in perspective with other companies (Author) Vacasa, Inc.'s gross margin remained above its peers only in 2019, the rest of the years the company maintained it slightly below the industry average. However, Vacasa's gross margin remains at comfortable levels throughout all periods given its core activity.   Percentage of gross margin spent on SG&A in each company analyzed (Author) Failure to maintain stability in SG&A and gross profit relationship may suggest inefficiency in operational cost management and a vulnerability in adapting to market changes. Such long-term fragility can lead to a waste of gross profit during unfavorable economic conditions. As shown in the graph above, Vacasa, Inc. consistently maintains a significant proportion of its gross profit consumed by SG&A expenses, although there has been a slight improvement trend over the last three years. Despite this marginal improvement, I find these levels to be unhealthy and alarming.   Vacasa's net margin in perspective with other companies (Author) To finalize our analysis of Vacasa's profitability, I will apply the DuPont method of profitability analysis and then compare shareholder returns with other similar companies and market indices.   Analysis of profitability using the DuPont method (Author) Realize that the deterioration of margins and the increase in turnover contribute to greater losses and negative returns for shareholders. Improving margins should be Vacasa's most pressing concern before 2022. The decrease in equity participation from 2022 to 2023 also contributed to the poor reported profitability. If the company had maintained this proportion the same as seen in 2022, for example, shareholder returns would be approximately -81%.   Vacasa's ROE in perspective with other companies (Author) It's evident that Vacasa's shareholder return is consistently lower compared to both the industry average and the broader market. To conclude the fundamental analysis, below I will correlate some key events for Vacasa and how this reflects on its free cash flow:   Vacasa's unleveraged free cash flow combined with some important events (Author) Risks The risks to my thesis are primarily based on Vacasa's inability to generate positive returns for shareholders in the coming years. I believe that this risk is resolved once I find that the company is solvent and is not at risk of going bankrupt for now. Now, when we put market factors such as consumer demand for short-term rentals into perspective, we can see a sharp decrease of occupancy ratio from 2018-2019 levels. Meanwhile, demand for cruises and ocean travel has increased as American consumers' time preferences appear to have shifted toward international travel. This fact is corroborated when we take into account that demand from foreigners for short-term rentals increased by 17%, while demand for domestic travel only increased by 4.5%.   Short-term rental industry data (AirDNA) When we consider that 2023 was challenging compared to 2022 for the short-term rental sector, it is still up in the air whether 2024 will follow the same path. This risk is mitigated when we verify that wage inflation is higher than inflation, this allows for the accumulation of extra income, allowing travel expenses to increase, which is positive for the sector. According to AirDNA, properties located in small cities, mountains and coasts will benefit in this 2024 season. As I have already demonstrated in the qualitative analysis, in the last decade Vacasa has many acquisitions in its portfolio that would benefit if this increase in demand was actually observed, as they are located in coastal areas. Valuation As I showed in the fundamental analysis, Vacasa maintains a negative unleveraged free cash flow, and it is up to the analyst to determine some assumptions regarding future free cash flow Given the commitment expressed in the last letter to Vacasa shareholders to increase profitability and free cash flow, I will use as a reference for the year 2024 the amount of free cash flow at the same levels as in 2020. Now, for the growth rate, I will consider a slow but steady growth of 2.5%, in line with the perpetual growth rate. For WACC, as already expressed in the fundamental analysis, I will use the rate of 9.8%. Vacasa's discounted cash flow using the assumptions previously established (Author) Given the conditions for the materialization of the expected scenarios for both the sector and Vacasa, in line with the paradigm shift already observed, I consider that there is a potential for the share value to recover. Conclusion As already discussed in the analysis, I believe that Vacasa's paradigm shift and the search for profitability in exchange for a greater market share is beneficial for healthy growth. The search for a healthy relationship between owners and the platform becomes a pressing need for companies operating in this sector, being much more important than the simple accumulation of customer portfolios of local administrators that decrease while owners migrate to another administration or manage the property themselves. It all comes down to the perception of added value that Vacasa brings to its services, all of this offset by more expensive fees than other companies like Evolve. Therefore, I believe that the new strategic acquisitions plan will be less expensive and more profitable for Vacasa in a scenario of sustainable growth.  I will be closely monitoring the market and company reactions to this new paradigm. The next quarters will be fundamental to understanding how this dynamic will play out in practice.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2420243461"}