In this podcast, Motley Fool host Dylan Lewis and analysts Jason Moser and Matt Argersinger discuss:
- Cava's valuation at fresh all-time highs post-earnings, why Salesforce might be a buy on the dip, and Chewy's strength as a focused company on full display.
- Banner quarters from Dick's Sporting Goods and Abercrombie & Fitch proving the mall isn't dying anytime soon.
- Two stocks worth watching: PayPal and Simon Property Group.
To help us wade through the great tightening in commercial real estate, why many sellers aren't quite ready to deal, and what the rate picture looks like, Motley Fool contributor Matt Frankel talks with Willy Walker, CEO of Walker and Dunlop.
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 May 31, 2024.
Dylan Lewis: Mall names are riding all-time highs. Should investors be buying? This week's Motley Fool Money Radio show starts now. Everybody needs money. That's why they call it money.
It's the Motley Fool Money Radio Show. I'm Dylan Lewis. Joining me over the Airwaves, Motley Fool Senior Analyst, Matt Argersinger, and Jason Moser. Fools, Great to have you both here. We've got the Skinny on real estate from a fool favorite CEO, the surprising strength in Mall retail names, and of course, stocks on our radar. It may be a little bit late in the earning season, but we've got plenty of big moves this week. We're going to be running through them. Kicking off the rundown of Earnings movers and shakers, CAVA. Jason, an extra scoop of Bras Lamb, and results from CAVA this week, the Mediterranean fast casual concept beat on expectations bringing the company to new all time highs.
Jason Moser: Yeah, just wait to until they introduce the steak to the menu. They seem to be very excited about that new option for customers here coming up. So that should be soon. This is a nice start to life as a public trading company for CAVA. It's a story that definitely rhymes with Chipotle. But it remains to be seen whether it can actually bring that same type of scale and growth. Remember, in CAVAs case, they believe there's the potential to have more than 1,000 CAVA restaurants in the US by 2032. So that's still significantly smaller than Chipotle. But hey, you got to start somewhere. When you look at the results, they tell a good story. Revenue growth of 30.3%, same restaurant sales growth of 2.3% and and ultimately net income of $14 million. That was up from a net loss of 2.1 million dollar just a year ago. So they're making a lot of progress there. Digital revenue mix, that's something we talk about a lot with Chipotle. In CAVA, definitely taking advantage of that space, digital revenue mix was 37% that was up slightly from 36% when they reported their first quarterly results from the second quarter of last year, right? That was their first quarter as a publicly traded company. They saw a 3.5% increase in ticket. From some modest price increases, and that was partially offset by a 1.2% decrease in traffic. But restaurant level profit margins performing very well, considering the pricing environment 25.2% just down modestly from the first quarter of fiscal 2023. But they opened 14 net new restaurants and ended the quarter with 323 in looking at that 1,000 goal. Clearly, a lot of runway to go there. But I think all things considered, the company's doing very well, especially when you consider the environment today. We've seen fast food restaurants all around starting to really feel the pressure of a lot of those price increases. When you talk about that fast casual space, CAVA has been able to maintain pricing pretty nicely.
Matt Argersinger: I like the Chipotle comparisons. I mean, there's so much about this story, as Jason mentioned that rhymes with Chipotle. One area that is a little different, though, for me, J. Mo mentioned, the end of the quarter with 323 stores. I'm doing the math right now. After the big move this week after earnings. It's now a $10 billion market cap company. If I'm doing my math right, that means each CAVA store is worth more than $30 million.
Jason Moser: Wow.
Matt Argersinger: If you go back in time to when Chipotle came public in January 2006, it had right around 500 stores, so it was a little bigger of a concept at that point in 2006. But it came public at a market cap of roughly 2 billion at that time. That means each store for Chipotle was worth about 4 million. So companies that come public tend to be pretty expensive. A lot of people talked about Chipotle being expensive at that point in its evolution. At 4 million a store, here we are with CAVA at 30 million store. I would just say there is a ton of excitement built into this stock. I am a shareholder, I love the concept. I love the restaurant itself, and I love the Chipotle comparisons, I would just say, be prepared for a story that's not always going to be up and to the right for this business.
Dylan Lewis: Some big expectations for sure Matt, for the time being at all time highs. A different milestone being hit over at Salesforce this week. Shares down over 15% immediately following earnings, a historic report, Matt, because in a few bad ways, it's historic, I should say. First time the company is guided for single digit revenue growth, and the market reaction led to one of the worst single days for the stock in a decade. Why was the market so down on these results?
Matt Argersinger: Right. A $20 billion actually closer to a $50 billion hit to Market cap for this company, which is huge. It's interesting. I mean, if you take earnings at face value, it was a pretty strong report. A revenue was up 11%. The remaining performance obligations, RPO, which are essentially services that have been booked but not delivered upon. That was up 15%, so that bodes well for future revenue growth and operating cash flow, even if you add back stock based compensation, which I think all investors should do, operating cash flow was still up 22%, year over year. They just initiated dividend recently. So what gives here? But again, as we've seen, it really came down to the guidance. Management did slightly reduce its full year estimate for subscription and support revenue. That's the core business, earnings, RPO growth. CFO, Amy Weaver did point to things like deal compression, which I think is a fancy way of saying customers are just buying less right now. She also mentioned that customers are either delaying or slowing down projects using Salesforce's Cloud based infrastructure. It just points to me that I think the market is extra sensitive right now about big tech companies, especially companies in the Cloud AI space because they've been such huge beneficiaries of this growth wave that we've seen with AI, et cetera. Any slight reduction, especially if we're talking about single digit revenue growth, as you pointed out, Dylan, is a reason to sell the stock. I think that's what happened. But I don't know. We're now talking of stock after the fall that's trading for around 22 times earnings. Only a slight premium to the overall market doesn't seem very expensive right now for for Salesforce?
Dylan Lewis: Jason, we are looking at an earning slate that still has a few as a service type companies reporting later this earning season. Matt mentioned the deal compression, quite a euphemism there, for the selling environment being a little tough and people just not being as eager to increase their spend on some enterprise-as-a-service offerings. Do you expect that we'll see that pop up when CrowdStrike, DocuSign, Adobe, Brae. Some of these other companies report later in the season?
Jason Moser: I think it's absolutely something to look out for. We may not see that from every business, but we've been seeing that from a lot of these businesses over the last several quarters. It's always amazing to me when you look at Salesforce, when you listen to their earnings call. I mean, Mark Benioff, he could take a glass half empty situation and make it sound so glass half full. That's one of the things I love about him is he's just a tremendous optimist. Back to that point about elongated deal cycles, deal compression, high levels of budget scrutiny, those are quotes from the call. With shares, these shares have just consistently valued at a premium multiple. When the forecast changes, the market changes with it. Consequently, we see shares doing what they're doing today. But I think when you look at it from the longer term perspective, Salesforce has done a very good job, assembling a tremendous portfolio of tech tools for their customers to use to develop those customer relationships. That's what they do, CRM, customer relationship management. This does strike me as potentially an opportunity for investors who are interested in the company because the guidance was a little bit light, and yeah, the near term future may may look a little bit blurry, but the Salesforce is going to be around for a long time to come.
Dylan Lewis: All right, rounding us out here for this segment, a nice 25% pop post earnings for Chewy this week, giving the pet supply company its best single day move in its history on the market. Jason, looking at the results, it seemed like the financial results were OK, but that the excitement here was a little bit less about the reported quarter and a little bit more about some of the company moves and tailwinds for the business.
Jason Moser: Yeah, and it's coming off of a very tough stretch, too. I mean, shares are down over the last year, about 30%. That's after the pop that we saw on Wednesday. But this has always struck me as an interesting opportunity, one, because I'm a customer, and darn it, they're just really good at what they do. But I mean, that singular focus on pets is just I think that's a big deal. We're seeing signs in the business that there's still some bark in this dog or meow in this cat, if you prefer. The numbers, not lighting the world on fire. Hang on. Wait 'til my dog start barking. The numbers are OK, sales up 3%, adjusted earnings up 55%, far more encouraging. They're doing more with less. One of the big stories with Chewy, every quarter, it's the autoship. The autoship customers, those sales achieved record levels, $2.2 billion. That represents almost 78% of net sales now, and net sales per active customer reached $562. That was up 9.6%. We're seeing strong performance on a margin side, gross margin of 29.7%, that was up from 28.4% a year ago. Now they're bringing new facets into the business. This Chewy plus paid membership program, which will give you free shipping and other rewards. So think of it like a Chewy prime deal. Opening vet care clinics where I think there's something to keep an eye on there. We've seen the private vet care clinics, that's a very difficult business to run. Corporate medicine is a way to really spread those costs around and provide more services to more folks. They initiated their first ever share repurchase program of up to $500 million. That'll likely just offset dilution. But again, guidance going forward looks encouraging. Again, I go back to just this company's singular focus. They want to do one thing and do it really well. I think they're on the right path.
Dylan Lewis: All right, coming up after the break, everything old is cool again. Abercrombie and other mall names looking pretty good after earnings. Stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money. I'm Dylan Lewis joined on air by Jason Moser and Matt Argersinger. A slate of names in retail reporting this week. We're digging in to see what's going on at the mall and in consumers closets. First up Dick's Sporting Goods, Matt. An absolutely stellar week for the company, stock up over 20% following earnings, bringing the company to fresh all time highs. What's behind the excitement?
Matt Argersinger: This one was fascinating to me. If you look at results from other big box stores, and many we've talked about on this show, and what management in places like the Home Depot or Target have harped on, it's this idea that they are seeing a spending slowdown, especially when it comes to discretionary items or big ticket items. I guess that just doesn't apply to sporting goods because if you look at Dick's, comp growth up 5.3%, that's on top of growth of 3.6% last year. So Dick's growth is actually accelerating this year, and both transactions and average ticket size were higher in the quarter. How many retailers have been able to pull that off this year? Double ditch of growth in operating profits, and they hit the trifecta of raising guidance. So coms are now expected to grow 2-3%. That's up from a range of one to 2%, and EPS is now expected in the range of $13.35 to $13.75. They raised the bottom end of that by $0.50 for the year. What does Ron Gross usually say on this show?
Jason Moser: Firing on all cylinders.
Matt Argersinger: There you go. Dick's firing in all cylinders. It's more evidence of this peculiar state of the consumer more reluctant to spend on things like furniture and appliances and home goods. But sports, entertainment, travel experiences, still spending very strongly. I think Dick's is benefiting from that.
Dylan Lewis: Yeah, I think it is interesting. I look at a company like Dick's and I say, There are maybe some seasonal elements that we're seeing some spending that people are willing to put out there because it's getting warm, there's an interest in golf, Jason. What do you think of that?
Jason Moser: Well, no question. There's a seasonal aspect to it. I think another thing that separates Dick's Sporting Goods from some of your other standard retailers. We often talk about disruption and how is this company Amazon-proof. I think we're seeing as time goes on. There's a handful of companies out there that really are Amazon-proof, and some that come to mind, I think of companies like the Home Depot. I think of companies like Etsy. I think in regard to Dick's Sporting Goods, that rings true as well, because oftentimes, customers want to go in there. They need to see the equipment. They need to hold the golf club or swing the baseball bat or try on different shoes to see which ones are going to work best. So it's just a little bit more difficult for them to be Amazoned. That clearly is making a big difference. I'm just really astounded. Looking at the five year chart here. Dick's Sporting Goods is up 564% over the last five years. That tells us a lot right there, and it sounds like things are just getting better.
Dylan Lewis: Let's stick with some of the retail winners. Abercrombie and Fitch streak continues, shares up 20% immediately following earnings this week. Results had revenue and earnings ahead of expectations, and they raised their foliar outlook to double digit growth. Jason, this has been one of those companies that has just crushed it over the last five years, 960% increase over the last five years, 480% over the past year. It's hard to believe given some of the depths that this business has fallen to in recent years.
Jason Moser: Kind of amazing. I tell you, I've been here at the Fool for a little bit over 14 years. I think for most of those 14 years, we've probably given Abercrombie a pretty good, hard time there. I mean, we've taken more of a glass to have an empty view on the company. But this is really one that it's taken a turn for the better. You noted the performance, I think you have to tip the cap to CEO Fran Horowitz. She's been with the company as the CEO since 2017, and I think she's really helped stabilize this business, she's helped return to growth and I know that growth might not be software type growth or anything. But at the same time, she's also really helped right size the business, manage the cost structure, and we're seeing that play out ultimately on the bottom line. The first quarter sales up 22% broad based growth across all regions. This is a company that benefits a lot from that back to school conversation. I think we're going to hear a lot more about that in the coming months. But you look at net income per diluted share, those $2.14. That's versus $0.39 just a year ago. To top it all off, guidance is encouraging. They're looking for operating margin to be in the range of 13-14%. That's versus 9.6% just a year ago. I think that when you think about Abercrombie, it's also Hollister. The Hollister brands, which is focused more on that teen segment, that part of the business is returned to growth as well. So I think there's a lot of really good things going on in this company right now. Again, I think you have to tip a cap to CEO Fran Horowitz because clearly she's doing a good job.
Dylan Lewis: All right, we've got another big mall brand up this week. Shares of Foot Locker spiked 25% following the company's first quarter release. An incredibly positive reaction, Matt, on what I have to be honest, seems like pretty uninspiring results. Is the story here that expectations were just so low that anything remotely positive was going to show up in a big reaction?
Matt Argersinger: I think that's exactly it, Dylan. Unlike Dick's or Abercrombie, where I think the positivity is just being compounded, I think this is relief that news just wasn't worse than it's been, because if you go back to February when the company reported its Q4 results and first gave guidance, Foot Locker lost around 30% over the course of a few days. Well, they gave the same exact guidance this past week with their first quarter results, so I don't know what the market got excited about, except I will point to the fact that going into this quarter, if you look at the shares that were short. It was about 11.5% according to SMP Global CP IQ. So I got a feeling the fact that comps were OK. They didn't reduce guidance again. Inventories have come down, which has been a focus of management. Those are a few positive things. A lot of investors who might have been short the stock said, it wasn't as bad as I thought it was going to be. It's not really that great of a short anymore. I'm going to cover my position, and that's probably a big reason why this stock is up. But this is a turnaround business. I don't think any investors should look at this and say, Okay, this is the beginning of good times for Foot Locker. They're guiding for flat sales. Comps are only supposed to be up 1-3%. They don't know what to do with the Champ sports brand, which has really been struggling. They still have got inventory issues even though they've come down. So I think this is very much a turnaround story. I won't get excited about this move. I think this is more short relief covering than anything else.
Dylan Lewis: Matt, putting the results from these three names together. We have two, I think, very strong companies Abercrombie and Dick's stability when it comes to Foot Locker. We'll call it that. But it's interesting to see all this given the death of malls, the post COVID foot traffic concerns. Are you surprised with any of this?
Matt Argersinger: I'm not surprised, and I think my radar stock will tell the story as to why I'm not surprised because, yes, believe it or not, The mall is not dead. People still like to go out there and shop. I think for a lot of reasons J. Mo has pointed out, it's just there's reasons to go into these stores, and that's what we're seeing with the consumer.
Dylan Lewis: Oh, I love that. You're going to have to stay tuned for the radar segment to get Matt's full take on that one.
Jason Moser: Great radio instincts.
Dylan Lewis: Matt, Jason. We'll see you guys a little later in the show. We've got more real estate convos coming up soon. Stay right here. You're listening to Motley Fool Money.
Welcome back to Motley Fool Money. I'm Dylan Lewis. It might not have felt like it for would be home buyers over the past few years, but the nature of real estate is cyclical.
Dylan Lewis: Over on the commercial side, some of those cyclical effects are being observed already. To help us wade through the great tightening in commercial real estate, why many sellers aren't quite ready to deal and what the rate picture looks like for the rest of the year. Last week, Motley Fool contributor, Matt Frankel talked with Willy Walker, CEO of Walker and Dunlop.
Matt Frankel: I feel like the real estate market is moving so fast that we need to talk pretty often these days, just to keep up with everything. Last time I talked to you, I believe it was the period when everybody assumed there would be six fed rate cuts this year. Interest rates were just going to plunge. Real estate was going to go through the roof this year. Like the activity was going to increase. Clearly, that hasn't happened. What does this higher for longer interest rate environment mean for the real estate market in general and for Walker and Dunlop?
Willy Walker: It's interesting that you say that we have to talk on a more consistent basis given everything that's going on in the commercial real estate industry, only in that this is a very slow moving industry in the sense that people make investments, clearly not in the OF Duty markets where someone might make an investment for a couple of minutes. This is a multi-year investment time horizon that most investors in commercial real estate have. As a result of that, while clearly over the great tightening, which started what? Just about two years ago, Matt? You know, it's been an iceberg, a slow-moving story. At the same time, we get these flash points where you'll get a bank that blows up and everyone says, "Oh, gosh, that's due to exposure to commercial real estate." We'll get occupancy numbers on offices going up precipitously, and people say, "Oh, office is under a lot of pressure." But even with all of that, it's still very slow-moving. There's things that don't happen overnight. For instance, I don't know whether you saw yesterday map, but there was a scathing article on Starwood's Sreit in the Wall Street Journal. It came out yesterday afternoon, written by a guy named Peter Grant, very good writer at the Wall Street Journal. He talked about the fact that the Sreit hasn't been selling assets, has a redemption queue that's very high, and were it not for their gates or the walls they could put up on redemptions that they'd run out of money. It's true. It's not a new story. It's the same thing that the BCRED at Blackstone has been dealing with for the last two years. I noticed I haven't looked at Starwood during the day to day, but it opened flat, it was up slightly over the day. Here's this big front-page article in the Wall Street Journal talking about the Sreit potentially running out of money, and equity investors sitting there going, what's new to that story, in the sense that unless you start selling assets to raise capital, unless your redemption queue falls off, or you stop repaying on redemptions. Something's going to happen with Starwood, but nothing's got to happen today. By the way, right after that article comes out yesterday, there's an article that says that Starwood is selling a big portfolio to Brookfield and that Brookfield is going to step in.
One of the big issues that we have right now is that it is not a matter of buyers. It is a matter of sellers being willing to sell at these price points. That is very different from the great financial crisis in past commercial real estate cycles. In the past, people want to sell, but there's no buyer. This time, there are lots of buyers and nobody wants to sell. Why? Because they think rates are going to go down and they think they're selling at too big a discount today to where the value of the property should be. But that doesn't mean that if Starwood needed to go sell to raise capital that they couldn't sell, they just turned around and did to deal with Pfeil today. People are trying to read the tea leaves on the market, and it's very difficult because A, it's a slow-moving story. There are data points that tell you that there's some distress in the market. But there's also a huge amount of equity capital waiting on the sidelines to jump in and get any discount. Particularly, in the housing markets, as far as Multifamily, in the industrial markets slash data center markets, where those two markets continue to be very healthy to a little bit lesser degree in retail and hospitality, but those markets still have quite an active both bid ask on the sale side and plenty of capital coming to it from a financing side. Then the final one is office. Office is the one that a lot of people are scratching their head about what's the solve for B and C class office? It's a good question. But as anyone who's watching this rather than just listening to it can see, I'm sitting in a brand new office in Cherry Creek, Colorado, we moved into these offices three weeks ago. It's as beautiful at office as you'll find anywhere. The reason we do that is because we're a professional services firm, and I want people in the office. I got to go invest an office space to bring people together. The office isn't dead. Office isn't going away. It's just, what do you do with B and C class office? Like I'm looking out my window right now at a building that was probably built maybe in the 1970s. As soon as Baird, vacates that office building. I cringe to think of what the owner of that office building is going to have to do with it. They're going to knock it down or do something, but that will not be leased to somebody after Baird moves out of it.
That's the real problem. Then the question is, does that have contagion on the rest of the market? Right now, not at all. J.P. Morgan came out yesterday on their investor day, as you may have seen, Matt, and they sat there and said, they're going to earn an extra billion dollars of net interest income this year because the Fed has held interest rates up where it is. $1 billion. Well, look at their exposure to commercial real estate. They've already provisioned and written off a ton of their exposure on commercial real estate, and they're going to make a billion dollars of additional NM, which is some eye popping number. It's hundreds of billions of dollars in NM and they're adding another billion dollars to it. Jamie Dimon isn't sitting around talking to his real estate group saying, we can't afford to take any more charge offs or write offs on our commercial real estate portfolio. While there are pockets of distress, it's not anything close to a distressed market. There's capital out there. At the end of the day, it's equity capital that's going to come in to rescue properties that have problems with their debt capital structure. Does that make sense?
Matt Frankel: Yeah. You brought up a good point there, the amount of cash on the sideline. That's the other side to this higher for longer thing is a lot of investors are willing to just keep their money in treasuries at 5% more so than they used to be. There is a lot of capital sitting on the sidelines. I think of the market as almost a loaded spring at this point. Especially, I was looking at your earnings presentation before this call, and saw just kind the dip. I was shocked to see the first quarter was the slowest for Multifamily sales since the second quarter of 2020, which, if you don't remember, that was when you couldn't literally leave your house to go buy a property. I think of it as a loaded spring in a way. Is that fair to say?
Willy Walker: It's very fair to say. I think the issue with it is, I'll give you one. I walked into my office today to meet with a client. This is a very active buyer of Multifamily. This is the head of acquisitions for that buyer. He's a very close friend of mine. Back in the aggregation days of 2021 and 2022, they were literally buying an asset a week. Right now two years ago, This gentleman and his team basically said, "We're going on vacation. We got nothing to buy. We're in a tightening cycle. Can't make the numbers work. We're going on vacation." I thought that would last for a couple of months. Then a year later, he said, "You back at it?" He's like, "No, still skiing." I'm like, "Man, that's tough." That's been a year since you told me that. Then come December of this past year, I said, "You back at it?" He's like, "No, plan on more ski vacations." Saw him in February, "You still skiing?" "Still skiing." He walked in my office today. I said, "You back in the market?" He said, "We are back in the market.". Said to me, "We've got six assets under contract, and we've got a seventh which Walker Doll is supposed to be awarding us today." That says to me that transaction volumes are going to start to come back. But you can't when you say loaded Spring Matt, what I want to be really careful not to do is you can't compare this to, for instance you used a good example of Q 2022 pandemic. Nobody can go outside to buy an asset, so investment sales fall through the floor. But remember, the moment that people could actually get outside and start to do either desktop underwriting or go actually see an asset because rates were at zero, they started buying. It was like, "Bang. Go." It was game on. For the rest of 2020 and into 2021, and into 2022, it was just game on. I don't think that's going to happen this time. I think it's going to come back and it's going to continue to have a really nice build, but it's not going to be unless drown pile surprises us and says, I'm cutting rates. But I expect I was asked yesterday on a webcast. Where do I think the fed funds rate is at the end of the year? I said, "475." They said, "We do I think the ten year will be at the end of the year?" I said, "410."
The reasoning behind that is that A, even if Jerome Powell understood how bad their data is as it relates to inflationary pressures coming from housing. You and I can dive into that rabbit hole if you want to Matt, but I'm not sure whether you want to. But there's literally no inflationary pressures in the system today other than shelter. If you look at our rents across Walker Nell's portfolio, which is very extensive, there's no rent growth. The last CPI print had 5.7% rent growth. They were looking back to July of 2023 on a one year look back between July 2022 to July of 2023. There's no inflationary pressure on rents in the system today, period. That's about 10% of the CPI shelter print. The other 25% of the CPI shelter print is on owner equivalent rent. That's the way that the Bureau of Labor Statistics calculates that is just foolish. But I don't want to get into that. The point being is, there's no really no inflationary pressure in the system. Jerome Powell should cut rates right now. I don't think he's going to because as he looks at the rest of the economy, he says, "Things are pretty good. We got full employment. We got good GDP growth. I got profits coming out of corporate America that have great growth to them." He sits there and he says, "Why would I take my foot off the pedal?" I think he thinks that he's probably needs to cut twice just to bring it down off of historically high fed funds rate at 5:25. But I don't think he thinks it says that he needs to get it down to four in 2024 to do something to accelerate the economy, accelerate employment. With all that said, unless the Fed does something, I don't think you get this massive just like bang, it all comes back, and at the same time, you are going to see consistently increased deal flow, deal volume, which will drive our overall revenue growth, earnings growth, Evada growth, as we recover, if you will, from the great tightening, which has been basically a two year tightening cycle.
Matt Frankel: You touched on something earlier. I wanted to circle back to. When you were talking about inflation, I don't want to go down the whole inflation data rabbit hole that you were talking about necessarily. But you mentioned that there's very little rent growth, if any at all, in Multifamily real estate. There's very little rent inflation. We're starting to notice some over supply concerns in some of the companies we follow, some of the Multifamily REITs that we follow. Do you see that as a headwind? Are you concerned about that? Is that why we're not seeing rent inflation? What's going on there?
Willy Walker: There's clearly over supply in some markets. Which has made it so that rents are flat to slightly negative. People need to keep in mind that the rent growth that we were seeing out of the pandemic, '21, '22 was, a supply and demand imbalance that you you're unlikely to see again. One of the things I find so interesting about the inflation conversation is that people are like, "We should have no inflation." We should always have inflation. The Feds own target is 2%. Like, if eggs don't grow in cost by 2% a year, the egg manufacturers, well, the manufacturers are the chickens. The egg sellers, they need inflationary pressure. They want their prices to go up. We need inflation. This concept that we should have negative numbers doesn't make any sense. We want inflation. We want prices to go up in a healthy economy. But negative 1%, negative 2% in the Multifamily space is in no way it's atypical, but it's not like, "Oh, wow, they're losing money on these properties", to the contrary. We've got investor after investor after investor who owns great Multifamily properties that are cash flowing amazingly right now at negative one, negative 2% rent. Reduction, not rank growth. They're servicing their debt. They can still invest in CapEX. They can still do all sorts of great things.
They know that at some point that asset is going to turn, the market's going to turn, the over supply is going to be absorbed, and they're going to start to be able to push rents. The other piece to it is that because we've had over supply, because we've been in a tightening cycle, the amount of construction that's going on in the United States has dropped dramatically over the last 12 to 24 months. What you've had is, for the last 12 to 24 months, you've had deliveries or a pipeline of somewhere around 500 to 650,000 units of Multifamily on an annual basis. That's what's created some of this over supply in places like Nashville, and Charlotte, and Austin. But now that number has fallen from 650 down to 250. Two hundred and fifty thousand units right now under construction to be delivered in 2025 and 2026. If you only have 250,000 units delivered in 2025 into 2026, you now have a constraint on supply. You now have the ability for those people who are at negative one and negative 2% rent growth to be able to push rents three, four, five, 6%. We're going to boomerang from one end of the spectrum to the other end of the spectrum pretty quickly here. By the way, that is going to present real inflationary data into the economy in a year or two. But It will also be a lagging indicator like it is today. Right now, what we're waiting for is the flat to negative rent growth to play through the CPI numbers. Similarly, when people start pushing rents again at four, 5% in 2025 and '26, it's going to be a lag effect for that to come into the inflation print, so you're not going to see that in the CPI at the end of '25 in beginning of '26.
Dylan Lewis: Listeners, you can catch Willy Walker's latest thoughts and outside opinions from guests on the Walker webcast on YouTube and wherever you listen to your podcasts. Coming up next, Matt Argersinger and Jason Moser return with a couple of stocks on their radar. Stay right here. You're listening to Motley Fool Money.
As always, people in the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis, joined again by Matt Argersinger and Jason Moser. We're going to jump right into rate our stocks this week. As usual, our man behind the glass, Dan Boyd is going to hit you with a question. Matt, you're up first.What are you looking at this week?
Matt Argersinger: Alright, well, I hinted at this one. Simon Property Group ticker SPG. I feel like we need to create a B quality movie and call it Revenge of the Mall. It needs to star Emily Flippen because she told me once, and maybe it was live on this show. I can't remember, but she told me once, she goes to the mall on an almost weekly basis. I think she's still under 30-years-old. Point being, people still love to go to the mall, even young people. They especially like to go to high quality malls and Simon Property Group, which owns, the highest end, best located malls, that's why they continue to put up solid results. If you look at the first quarter, occupancy was up 110 basis points a year a year, base minimum rent from tenants, up 3%. They raised their guidance again, raised their dividend for the ninth time in just the past three years. Yet the stock is still trading at a very reasonable valuation, 5.4% dividend yield. If you want to bet on the resurgence of companies like Abercrombie and Fitch, even Foot Locker, to a certain extent, I would say, you can do it a lot more safely with a REIT like Simon Property Group. Great valuation benefit from all those tenants doing well, and you can be very diversified within that. That is, I think, a great bet right now.
Dylan Lewis: Dan, would you watch an 80s mage Revenge of the Mall B movie and any questions about Simon Property Group?
Dan Boyd: I would not watch that movie, and I have a question for Matt. Are you out of your mind? A mall? You expect me to get in my car and spend some of my limited time on this Earth fighting traffic to go stand in a big building and look at crap? No way, dude.
Matt Argersinger: Wow. Alright. I have no argument to that.
Dylan Lewis: Hot take from Dan there. Jason, what's on your radar this week?
Jason Moser: Yeah, Dan seemed on the fence there. I guess we'll have to revisit. PayPal. Right ticker PYPL. It's obviously been a bit of a tough stretch for them as a try to right-size the business and continue growing new leadership. But an interesting headline out this week, Mark Grether has joined PayPal to help build out the company's advertising platform. He comes from Uber, where he helped grow Uber's advertising platform to a one billion dollar business with more than 500,000 advertisers globally. I know on the service, this may seem a little out of left field, but I think it makes a lot of sense is that it will help a company leverage its massive network of users and exposure to e commerce. In the context of a $30 billion revenue business. Yet, this is going to be incremental for some time to come but it has the potential to grow and think about what Amazon has done with their ads over the last several years, now, better than $40 billion in annual revenue. I'm encouraged by this.
Dylan Lewis: Dan, a question or perhaps a comment on PayPal.
Dan Boyd: Can PayPal provide the experience that a mall can provide where I can walk into a store and get disdainfully glared at by some bored teens who happen to be working there?
Jason Moser: No.
Dan Boyd: Interesting.
Dylan Lewis: Dan, which one's going on your watch list this week?
Dan Boyd: Do you have to ask?
Dylan Lewis: I have to ask. I think it's going to be PayPal. You're going to see PayPal or maybe they'll row that feature out for you. That's going to do it for this week's money radio show. We're out of time. We'll see next time
