Sonder Holdings Inc. is a leading global brand of premium, design-forward apartment-style accommodations serving the modern traveler. Since its inception in 2014, the company has rapidly expanded its footprint, offering inspiring and thoughtfully designed properties in prime locations across 46 cities in 10 countries. Sonder’s unique blend of technology-enabled service and design-led experiences has positioned it as a disruptive force in the hospitality industry.
Business Overview and History Sonder was founded in 2014 by Francis Davidson, Sanjay Banker, and Lucas Pellan, with the vision of providing a seamless and elevated travel experience for guests through a combination of modern technology and curated design. The company’s business model involves leasing properties, furnishing and decorating them to meet its standards, and then making them available for guests to book directly through the Sonder app, website, or sales personnel, as well as indirectly through online travel agencies (OTAs).
In the early years, Sonder focused on rapid expansion, signing leases for properties in key markets across North America and Europe. The company leveraged its technological capabilities to streamline operations and provide a consistent, high-quality experience for guests. This strategy enabled Sonder to scale quickly, with the number of Live Units (units available for guests to book) growing from just a few hundred in 2016 to over 10,300 as of June 30, 2024, spread across 46 cities in 10 countries.
Sonder’s growth was fueled by significant private equity funding prior to its public listing. In January 2022, the company went public through a business combination with Gores Metropoulos II, Inc., a special purpose acquisition company, and began trading on the Nasdaq stock exchange. This move provided Sonder with additional capital to support its expansion plans and operational improvements.
The company has faced several challenges throughout its history. In February 2020, Sonder encountered a Legionella bacteria contamination issue at one of its properties in New York City, leading to a dispute with the property’s landlord. This resulted in Sonder withholding rent payments and the landlord subsequently suing the company, a legal battle that remains ongoing with a trial pending to determine damages.
The COVID-19 pandemic in 2020 and 2021 had a significant impact on Sonder’s business, as travel demand plummeted. In response, the company had to make difficult decisions, including restructuring its workforce and renegotiating lease terms with landlords. These actions, along with the general market turmoil, contributed to Sonder’s net losses during this period.
Despite these setbacks, Sonder has continued to invest in its technology platform to enhance the guest experience and operational efficiency. The company has also expanded its corporate sales business to serve a broader range of travelers, diversifying its revenue streams and customer base.
Financial Performance and Liquidity Sonder’s financial performance has been marked by significant growth in revenue, which increased from $234.15 million in 2021 to $602.07 million in 2023. However, the company has also incurred substantial losses, with net losses of $293.95 million in 2021 and $295.66 million in 2023. This has led to a deterioration of the company’s financial position, with a stockholders’ deficit of $376.70 million as of December 31, 2023.
In the most recent quarter (Q2 2024), Sonder reported revenue of $164.60 million, representing a 4.6% increase from the prior year period. This growth was driven by a 1.5% increase in Occupied Nights and a 3% increase in Average Daily Rate (ADR). The company also reported a net income of $32.75 million for the quarter, a significant improvement primarily due to a $71.12 million net lease adjustment gain, partially offset by increased interest expense and professional fees related to the Marriott agreement.
Sonder’s occupancy rate for Q2 2024 was 79.3%, down from 82.4% in the prior year period. Revenue per Available Room (RevPAR) was $163, slightly down from $164 in the same period last year. The company reported Adjusted EBITDA of $16.7 million for Q2 2024, down from $24.5 million in the prior year period.
In terms of cash flow, Sonder reported negative operating cash flow (OCF) of $32.78 million and negative free cash flow (FCF) of $34.27 million for Q2 2024. For the full year 2023, OCF was -$110.90 million and FCF was -$123.27 million.
To address its liquidity challenges, Sonder has undertaken a series of strategic initiatives in 2024. In August 2024, the company secured $43.3 million in new financing through the issuance of Series A Convertible Preferred Stock. Additionally, Sonder entered into a long-term licensing agreement with Marriott International, which is expected to provide $15 million in key money and the opportunity to integrate Sonder’s properties into Marriott’s distribution channels and branding.
As of June 30, 2024, Sonder’s liquidity position included: – Cash: $17.54 million – Debt/Equity ratio: -0.93 – Current Ratio: 0.29 – Quick Ratio: 0.29 – Available Credit Line: A $60 million revolving credit facility, of which $48.6 million was outstanding in the form of letters of credit
Sonder has also implemented a portfolio optimization program, which involves renegotiating lease terms or exiting certain underperforming properties. As of June 30, 2024, the company had signed agreements to exit or reduce rent for approximately 105 buildings, or 4,300 units, with the goal of improving its profitability and cash flow.
Despite these efforts, Sonder’s management has concluded that there is substantial doubt about the company’s ability to continue as a going concern for at least one year from the date of issuance of the Q2 2024 financial statements. The company’s ability to achieve sustainable positive free cash flow, a key priority, is subject to various risks and uncertainties, including potential changes in travel demand, inflation, and the successful execution of its portfolio optimization and cost reduction initiatives.
Operational and Strategic Developments In August 2024, Sonder announced a strategic licensing agreement with Marriott International. Under the terms of the agreement, Sonder’s portfolio of properties is expected to join the Marriott system under a newly-created collection called “Sonder by Marriott Bonvoy.” This partnership provides Sonder with access to Marriott’s global sales and marketing capabilities, as well as its distribution platform, which could help drive increased occupancy and revenue for Sonder’s properties.
Sonder has also been focused on improving its technology and operational capabilities. The company has invested in its proprietary technology platform, which powers the guest experience from booking to check-out, as well as its back-end systems for managing operations, pricing, and revenue optimization. These investments are aimed at reducing operating costs and enhancing the overall guest experience.
As part of its cost-cutting initiatives, Sonder recently implemented a reduction in force affecting 17% of its corporate workforce, which is expected to result in $11 million in annualized cost savings.
Business Segments and Market Presence Sonder’s core business is providing short and long-term accommodations to travelers in various cities across North America, Europe, and the Middle East. As of June 30, 2024, the company had approximately 10,300 “Live Units” across over 200 properties in 46 cities in 10 countries. Additionally, Sonder had 1,800 “Contracted Units” – units for which it has signed real estate contracts but that are not yet available for guests to book.
Sonder’s accommodations come in a variety of sizes and styles, from multiple-bedroom apartments with full kitchens to hotel rooms and suites, catering to leisure travelers, families, digital nomads, and business travelers. The company also operates boutique hotels designated as “Powered by Sonder” properties, each with unique design elements.
While Sonder does not disclose financial performance by geographic market, it primarily operates in the United States and a limited number of international markets.
Industry Trends The short-term rental industry has experienced significant growth in recent years, with a compound annual growth rate (CAGR) of around 15-20% prior to the COVID-19 pandemic. However, the industry faced substantial challenges during the pandemic and is still in the process of recovery. Sonder’s performance and strategic initiatives should be viewed in the context of these broader industry trends.
Risks and Challenges Sonder faces several key risks and challenges that could impact its future performance. These include:
Execution of Turnaround Initiatives: The success of Sonder’s portfolio optimization program, cost reduction efforts, and integration with Marriott’s platform is critical to the company’s ability to achieve sustainable profitability and positive free cash flow.
Macroeconomic Risks: Changes in travel demand, inflation, and other macroeconomic factors could adversely affect Sonder’s occupancy rates, average daily rates, and overall financial performance.
Competition and Industry Dynamics: Sonder operates in a highly competitive hospitality industry, facing competition from traditional hotel chains, vacation rental platforms, and other apartment-style accommodation providers.
Regulatory and Legal Risks: As a multinational company, Sonder is subject to a wide range of regulations and legal requirements, which could result in fines, lawsuits, or other liabilities if not properly addressed.
Outlook and Conclusion Sonder’s future remains uncertain as the company navigates its liquidity challenges and works to execute its turnaround initiatives. The strategic partnership with Marriott International provides a potential path to stabilize the business and drive future growth, but the successful integration and realization of anticipated benefits are not guaranteed.
Investors should closely monitor Sonder’s progress in achieving sustainable positive free cash flow, as well as the company’s ability to secure additional financing and continue operations without disruption. The risks and uncertainties surrounding Sonder’s financial position and operational execution will be key factors in determining the long-term viability of the business.
Overall, Sonder’s journey as a disruptive force in the hospitality industry has been marked by rapid expansion, significant losses, and now a critical juncture where the company must prove its ability to overcome its liquidity constraints and deliver on its transformation objectives. The success of its portfolio optimization program, cost reduction efforts, and the Marriott partnership will be crucial in determining whether Sonder can achieve profitability and establish itself as a sustainable player in the competitive hospitality market.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.