Are There Buying Opportunities in the Industrial REIT Space?

In this podcast, Motley Fool senior analyst Maria Gallagher discusses:

• Mixed second-quarter results from Booking Holdings (BKNG -0.72%).
• Why CEO Glenn Fogel's declaration about upcoming record revenue may be grounded in reality.
• Crocs (CROX -3.08%) struggling with gross margin pressure and inventory management.
• Whether buying the HeyDude line of footwear was a good use of capital.

Amazon's decision to sub-lease warehouse space caused some industrial REITs to fall. Motley Fool senior analysts Deidre Woollard and Matt Argersinger discuss the potential for buying opportunities in this group.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on August 4, 2022.

Chris Hill: We've gotten global travel comfortable footwear and industrial REITs on the menu, so pull up a chair. Motley Fool Money starts now. I'm Chris Hill joining me today from New York City. Motley Fool senior analysts Maria Gallagher, thanks for being here.

Maria Gallagher: Thanks for having me.

Chris Hill: Let's start with travel. Shall we? Booking Holdings is the parent company of Priceline and Booking.com. A mixed second quarter I think that's fair to say. Revenue was a bit light, adjusted profits were a higher-than-expected. We can get into the CEO's comments in a minute. But in terms of the results for booking, what stood out to you?

Maria Gallagher: I think it shows a pretty good picture for travel recovery in general in the US. Their gross travel bookings were up 57 percent. The room nights booked were up 56 percent, which are both the highest quarterly amounts ever for those metrics. The room nights for the quarter surpassed their 2019 levels for the first time, their customers booked about 246 million room nights, which is up 16 percent from 2019. We are seeing this travel recovery, which I think is obviously important for booking, but it's also just a more interesting macroeconomic way to look at. Something else that I think that I'm paying attention to that they're working on is enhancing the benefit of their loyalty program.

They're trying to build out this idea of a connected trip vision. They're trying to increase engagement with customers from downloading their app and utilizing their app to book flights as well as hotels, as well as that broad experience. I think that that's an important and interesting thing for them to focus on. It seems like they're executing that pretty well. Again, I just think that almost 75 percent of Americans plan to travel domestically for their summer vacations so I do think that's also something to pay attention to is both the macro travel habits of the consumers and where they're going. I do think Booking is still a predominant place people go, so I would say I thought it was a pretty good quarter overall.

Chris Hill: The experiences that you mentioned, we see that with Airbnb as well. In that sense, both these companies are looking to provide more than just be a place to transact and we'll keep watching both of them in terms of how much they're able to build that up. Because it seems like that can be particularly in case of Booking Holdings that can be a powerful lever for them in building out that loyalty program. I'll just speak for myself. I have almost no loyalty when it comes to booking travel. It's easy to click around at different sites. But I think the business that can provide that value proposition so that they become the default place and people like me get rewarded for using the platform then that's going to work in their favor.

Maria Gallagher: Yeah. I think that's an important thing and that's what we saw a lot for hotels for such a long time as those loyalty rewards members, especially if you're doing business travel. It's getting those customers to say there's a benefit for me just utilizing this one platform. I do think it's interesting. I don't know why no one's tried to acquire Groupon recently. I feel like it's an experience platform that people know, it has a good brand name. I think both Airbnb and Bookings would benefit from having that broader experience based on their platform. I think Booking is a bit better at it than Airbnb is as of now because they have so many other options whereas Airbnb has ideas for you, but not necessarily. The length of saying here's where you can book a boat for your next trip or whatever that might look like. I do think that Booking Holdings is a little more sophisticated with their holistic travel booking than Airbnb is. But I do think it makes sense that both of them are striving for that right now.

Chris Hill: I agree with everything you just said, except for the part about Groupon having a good brand. I think that if either of these companies or if anyone was to acquire Groupon, then you're ditching that name and then it becomes like Booking experiences. It becomes a separate division, that sort of thing.

Maria Gallagher: I love Groupon. Do you think it has a bad brand name? I love a deal.

Chris Hill: I don't think it has a bad name. I don't think there is wrapped up in that business. I don't think the brand name itself is just a name. I don't think it is so great and so positive that an acquiring company would not get rid of it. I don't think it is some sacred cow in that business. If it weren't, the stock price would probably be higher.

Maria Gallagher: That's fair. I just personally love Groupon.

Chris Hill: Glenn Fogel, the CEO of Booking Holdings, give him credit for not holding back. He said in an interview this morning. We expect record revenue next quarter. I got to say in this environment, Maria, I'm a little surprised that he would say something like that out loud.

Maria Gallagher: Quarter 3 is usually their best quarter anyway, with seasonal trends as well as you can see a lot of the trends. A lot of people book travel in advance. I feel like it's more of a calculated thing that he's able to say it because he's seeing these trends from advanced bookings. I think it's coming with a little more information than just somebody saying. It's probably going to be great. I think he's coming with, he already knows because they already have a lot of interest or they've already seen the rates of people getting or booking vacations for the summer way higher than in recent years. I do think it's bold and I hope that it is a record quarter. Because if it's not, I think the stock will really get hit quite quickly if that ends up not being true. But I think he's coming from a place of a lot of knowledge for he said something like that.

Chris Hill: Let's go from global travel to comfortable footwear. Here's the good news for Crocs. Second-quarter revenue was up 51 percent. Record revenue for the second quarter profits were higher than expected. Here's the bad news for Crocs, almost everything else. Their gross margins are getting hit. They cut their full-year guidance by mid-single digits and the stock is down more than 10 percent today.

Maria Gallagher: I think what's interesting with Crocs right now is their acquisition of, Hey Dude, for over $2 billion, we're seeing that impacted that acquisition this quarter. As you said, revenue was up 51 percent-ish which is inflated because of that recent acquisition. But their Crocs brand quarterly revenue was about 14 percent. Their digital sales were up 16 percent. Their gross margin was hit a bit because of their freight headwinds as well with that acquisition increased inventories. I think that that's what's really interesting with Crocs right now is that the Hey Dude brand, their revenues exceeded 232 million, which is up 96 percent and they are exceeding expectations with that new brand.

They are expecting their revenue to be about a billion dollars for the year. They're also working on expanding more in Asia, which they're hoping to be about 25 percent of revenues long term. But I do think that their financial picture just isn't the same as it was a year ago with that acquisition of Hey dude they have $2 billion more in debt, they have $400 million of new inventories. I think in this current economic environment, that's not something that a lot of people are excited about as they would have been a couple of years ago. If they had made that big of acquisition and taken on so much debt, say two years ago. I don't know personally know the brand Hey Dude, I don't know how well it's going to fit into the overall kind of ethos of Crocs. I think it's going to be interesting to see that and how that plays out in the next couple of years.

Chris Hill: One other thing for Crocs that's going against them. Their inventories were up pretty significantly in this last quarter and broadening beyond Crocs, I feel like this is one of the most important questions right now for retailers and apparel makers. How is the inventory management going? Later this month when Walmart and Target report their earnings after we get the top and bottom-line numbers, as far as I'm concerned, that is the key question. Talk to me about your inventory management because it seems like that is making all the difference in the world right now for some businesses.

Maria Gallagher: Yeah. I agree, and I do think something that's on Crocs side within inventory management as well as one that the price point for Crocs aren't too high and to that, the look is pretty similar throughout time. Crocs have a pretty distinct look. They've looked the same way for a long time as opposed to UC fats and trends where then you have all this leftover inventory of something nobody wants. I do think that plays within Crocs' favour. They quoted in their earnings that they were featured in a Vogue article that was titled, "These ugly chic sandals have gotten me the most compliments this summer." I think Crocs is really self-aware. They know who they are. They know that they're here for comfort, not necessarily for fashion. I do think that is a bit in Crocs' favor, but I do think it's definitely one of the most important things to look at is the inventory management for sure.

Chris Hill: You're absolutely right. That's a great point and it ties back to what you were saying earlier about the Hey Dude brand of shoes. Because you're right, that goes in the plus column for Crocs. They know who they are, they're not trying to be anything else and that's what makes the Hey Dude acquisition both an opportunity and a challenge at the same time.

Maria Gallagher: Yeah. I was looking at the Hey Dude Website. I don't know. They look similar to a lot of other things. I think Crocs is pretty distinctive and they know what they do and they do it well. I think it was. I don't know. I don't understand necessarily why they paid so much for it. I don't think it's that well-known. I've never heard of it, so maybe that's just me using my own personal worldview and conflating it. But I've never really heard of Hey Dude. I don't know anyone who knows it. I think it's going to be interesting to see how well that acquisition does over the next couple of years.

Chris Hill: Maria Gallagher, great talking to you. Thanks for being here.

Maria Gallagher: Thanks so much for having me.

Chris Hill: Amazon said it was going to sublease warehouse space, and that announcement caused some industrial rates to drop. Did this create a buying opportunity? Deidre Woollard and Matt Argasinger have more.

Deidre Woollard: I'm Deidre Woollard. I'm here with Matt Argasinger who is the senior Analyst at Motley Fool lead investor on our Mogul and Real Estate Winners services. How are you doing today, Matt?

Matt Argersinger: I'm great Deidre, glad to be with you.

Deidre Woollard: You and I have been talking a lot this week which I love, and we've been talking about earnings. I heard one of Motley Fool analysts say something about earnings season that I really loved and that this is the triumph of the boring companies this quarter. Real estate gets lumped in being boring, not true for either of us I know, and among real estate, boring sectors may be the most boring of them all is industrial real estate until the pandemic and then it became the hottest sector rents going up, prices going up, inventory going down. Now we're getting back to normal. Is it going to be the way it was before?

Matt Argersinger: Well, that is a good question, but I'll start by saying real estate is definitely not boring. You heard Deidre and I talked before on the show, we don't certainly think it is. Industrial real estate, what we think of these days as properties like warehouses, distribution hubs, cold storage facilities has definitely not been boring since the pandemic, especially. We know we had this incredible surge in e-commerce activity. Many Americans who had previously not shopped online very extensively were essentially forced to, and a lot of cases after the beginning of the pandemic. Many were buying groceries online, ordering takeout to agree that they hadn't before. We are seeing these activities level out and you are seeing some consumers return to traditional brick-and-mortar shopping.

However, I do think there has been at least a partial sea change. It's not just about the consumer Deidre, you know as we've witnessed, the pandemic expose a lot of vulnerabilities with supply chains, semiconductor manufacturing, drug, and medical device manufacturing, so there's a lot of talk about the need to move a lot of them in manufacturing back to the US. You've got buzzwords like on-shoring or near-shoring and many industries would prefer to move to a place of just-in-case manufacturing versus the just-in-time paradigm that was dominant for decades and I think the recent passage of the chips to act could also be a long-term catalyst. I think some of those e-commerce froth is going to come off, but the need and demand for more industrial space, especially that warehouse distribution space that we talked about. I think in most markets across the country, it's going to remain quite strong for a long time.

Deidre Woollard: Yeah. We've been pretty excited about industrial in the recent few months. But then we got a little bearish for a second because Amazon CEO Andy Jassy, a few months ago, he started talking about scaling back warehouses and logistics and the whole market freaked out on industrial a little bit. But then I saw report, I think it was last week that Amazon is moving forward to like monster-sized warehouses, a 4.1 million square foot facility in outside of Los Angeles, another 3.9 million square foot facility in Loveland, Colorado. What's going on with this?

Matt Argersinger: Well, I think, yeah. Amazon definitely sent a chill to the market. A lot of industry rates fell sharply after those comments by Jassy, as much as 30 percent from the highs in a few weeks, which is really unusual for REITS. Which generally don't have that volatility. But the key thing to know, I think is that while Amazon, by far the biggest e-commerce player, it still only makes up a fraction of a typical industrial reads rent roll. For example, if I love talking about stag Industrial, as you know, it's a mid-sized industrial read. I follow it pretty closely. It's an Amazon landlord. But Amazon only makes up about three percent of stags base rents on an annual basis and you just mentioned two examples of where Amazon is still moving ahead with massive facilities. If I had to guess, despite those comments and maybe despite some short-term noise, I'd say Amazon's overall industrial footprint is still going to climb for many years to come. But you have to think about all the other companies involved in this space. FedEx, UPS, Target, Walmart, or Costco. I'm thinking of all these big Lowe's, Home Depot, that kind of big-box retailers that are really expanding their e-commerce footprint as well. They need more distribution and fulfillment space as well. It's far from just an Amazon story, which is why I think this whole Industrial reach trend that we've seen, it has a lot of legs to it.

Deidre Woollard: Yeah. Totally agree. You mentioned one of your favorite industrial we'd so that's, would be up perfectly to mention one of my favorites, the begin this basis, which is Prologis. We've seen a bunch of read earnings come in and once that I really liked from Prologis is that they said that 71 percent of the leases expiring in the next 12 months are either already pre-leased or in negotiations. This compares to their pre-pandemic average of 56 percent. That made me feel pretty optimistic. What kind of stats are you loving from this earnings season about industrial real estate?

Matt Argersinger: Yeah. That's really strong and of course, Prologis is the giant into space. I think for me it was just seeing the rents on new leases. For example, I review the results from EastGroup properties, which is a much smaller than Prologis, but they reported a 37 percent increase in rents on new or renewal leases in the second quarter. If you were to industrial tenant that was looking to lease space at an EastGroup property, your rent climbed 37 percent compared to whoever was previously leasing that space. That is incredible growth and I think Prologis put up a similar number and we're also seeing occupancy for most of these industrial REITS in the 97 to 98 percent range and that is any rate that's really high. But even for industrial REITS especially so they've never really been more utilized or generating more revenue than they are today. It's pretty incredible.

Deidre Woollard: Yeah. Absolutely. All right, let's switch into an area that probably everybody finds [laughs] more exciting, which is hospitality. We've talked before, we're in the midst of this everyone on vacation thing. It's August of course, but it's also just that revenge spending thing happening, [laughs] but I'm wondering about the impact of inflation long-term. What are you thinking about hospitality right now?

Matt Argersinger: I think this year like you said, it's the revenge spending. It's so much pent-up demand. I love hospitality. I think it's one of the more compelling parts of the real estate sector if you're an investor because most Americans spent the better part of the last two years not traveling, not go into events or conferences, not having weddings or family reunions. So there was this huge pent-up demand that's just being released this year and then when the vaccines became widely distributed, people felt safer travelling, especially this year, the demand for hotels and resorts went through the roof. Pun, definitely intended there. But, yeah, you mentioned inflation. I think that might be a later story, but I think right now, most consumers, most travelers, are willing to put up with those high rates, and big spending with you because they just haven't done the last few years. They've saved for these things. They might be getting sticker shock and other parts of the economy like at the grocery store, gas station, or if they're trying to buy a used car, but I think when it comes to travel, booking flights are booking hotels, they're willing to spend the money right now.

Deidre Woollard: Yeah, I think you're right, and the data bears that out. I was looking at the recent data from STR. They published news on hotel occupancy, and they had occupancy at 72.8 percent highest number since August 2019. What's even more interesting is prices average daily rate up almost 159 dollars revenue per available room, 115 dollars, really strong compared to where we've been and the most interesting thing I saw was that hotel gross operating profit per available room at its highest level since October 2019, so all great news for hotels. Are we going to see more hotels is they're going to be hotel development happening?

Matt Argersinger: Well, yeah. The industry has really bounced back. The few hotel rates I follow, are all you mentioned average daily rates. They're actually reporting daily rates that are above 2019. Actually higher than pre-pandemic levels, so occupancy is still below 2019 generally, but coming on strong, so I even see in some reports suggesting that business travel is coming back. Would you believe that Deidre, sometimes a lot of people, including myself, I didn't use well, we were really worried about that. That would actually never fully recover from the pandemic. But I don't know about the development side. I don't expect we'll see a big resurgence there, building costs are so much more expensive. We have, we have supply chain issues. Replacement costs have gone way up. I think you'll see what you'll see is a pickup in transactions. You already seeing that I think private equity is getting more involved, are seeing the value is in this space. We've seen some mergers and consolidations and so we'll see that we'll also see, I think the increase in valuations which have been really beaten down.

Deidre Woollard: Yeah, well, one company that can scale without developing is Airbnb. They had their recent earnings. They reported the most bookings and a single-quarter most profitable Q2 ever. They announced a massive 2 billion dollar share repurchase program. How should investors be thinking about all of this information?

Matt Argersinger: It was good news all around for Airbnb. I'm still skeptical in the long run of how much a disruptor of the company can really be. I mean, it's added a ton of uniqueness to the guest experience. I love what they're doing in various markets with going there and the experiences that they're offering. But I think that uniqueness also has made for a lot of inconsistency. We are seeing at least anecdotally is a travelers are being really frustrated by sudden cancellations, experiences, and amenities not living up to what the listing at promised. You're seeing increased regulations. I know this is an Airbnb host. You're seeing increased regulations, and taxes on hosted many markets, which makes it costlier to really do, to do business. I think for people who are getting back to traveling in Airbnb, I don't know how you feel about this teacher, but they sometimes value the consistency that you get with a hotel and resort and the embedded customer service that hotels have there, where you, here's some nightmare stories about people dealing with Airbnb is customer service when they have a bad experience. The stock is at a pretty severe haircut to its stock price. I get it, and the results were fine, but I think you still have a stock that trades for about 50 times forward earnings. That's expensive even for a company, I think growing like Airbnb is.

Deidre Woollard: If not Airbnb is there any hotel or hospitality company that you have your eye on?

Matt Argersinger: Yeah. Two hotel rates that I've I've talked about in the past, Ryman Hospitality Trust ticker, RHP, and Pebblebrook Hotel Trust ticker, PEB. These companies own really large-scale resorts or really unique boutique hotels in cities and I think that's where you're seeing the pricing power, that's where you're seeing a lot of the demand resurgence. I just love how these companies are managed. They cut their dividend big time after the pandemic. I see those dividends coming way back probably as early as this year, but certainly next year, so I think those are two I look to probably before looking at Airbnb.

Deidre Woollard: In a sense, can't argue with Ryman. I get a great view of it from my balcony every day. All right, well, thank you so much. It was great to chat, Matt.

Matt Argersinger: Thanks.

Chris Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against them, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.