Motley Fool Hidden Gems Investing - Big Drama At Paramount

Episode Date: April 29, 2024

Ahead of earnings at Paramount, potential deals and rumors are flying. At 00:21, Jason Moser and Deidre Woollard discuss what’s happening at Paramount as well as strong earnings from Domino’s Pizza and SoFi. At 16:58, Invitation Homes CEO Dallas Tanner shares his vision for housing’s future. Companies discussed: SOFI, INVH, DPZ, PARA Host: Deidre Woollard Guests: Jason Moser, Dallas Tanner Producer: Ricky Mulvey Engineers: Chace Pryzlepa, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Great news! The Federal EV Rebate is back! Eligible customers get up to $5,000 with the Federal EVAP Rebate on select 2027 Volt and 2026 Equinox EV models. Visit your local Chevrolet dealer today for more details. At Paramount, the drama is coming from inside the building. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Willard here with Motley Fool analyst Jason Moser. Jason, how's your Monday going so far? Hey, Deidre, so far, so good, right? We have a nice little warm stretch here in Northern Virginia. It's going to be actually hot today,

but hey, I'm not complaining about that. How about you? I'm doing okay. But you know who's not having a great day is the CEO of Paramount. This was a dramatic weekend. And this is a story that's still evolving. The company reports earnings tonight. CEO Bob Backish may not be on the call. He may resign before then. You know, it's interesting because he's been the CEO of Paramount since the end of 2019, been at Viacom since the late 90s. and all of this comes down to the fact that he's not interested in supporting Sherry Redstone's plan to merge with David Ellison's Skydance. This is all very complicated and very dramatic, isn't it? It really is. I'm glad you said that up front, because for folks who are looking for

an answer here, I don't know that we have an answer. I mean, we could certainly go through all of the possibilities. But yeah, it does seem like Sherry Redstone kind of has this idea in mind, a way that she wants to take the business. And if you're not on board, then you may as well go ahead and just take off. But ultimately, yeah, this is a really complicated situation. The thing is, you've got this Paramount deal with Skydance, but when you consider Paramount in the context of national amusements and then Redstone's ownership interest in at all. There are a lot of properties at stake here. I think that's at least partly what makes this such a difficult deal to figure out, not to mention the fact that there have

been a number of different solutions proposed. The initial deal here is one where Skydance would buy out National Amusements, which is the ultimate property there, and then Paramount would acquire Skydance with stock after that deal, it seems like other options out there were trying to split apart this Paramount business to sell off the pieces. I think that raises the bigger question, and it's a very good one, I think. Is Paramount going to be worth more in pieces than as a whole? We're just not to the point where we know that answer yet. Yeah. There's also another deal from Apollo to try and take it private. I'm assuming if they took it private, then they would absolutely break it up as as it stands with the Skydance

deal, which is definitely the one that that Jerry Redstone wants, even if a lot of institutional investors don't. Paramount will still remain a publicly traded company. So it's it really seems like nobody nobody knows what's what's going to happen here and what happens to the company afterwards. The other factor here is Larry Ellison, because, of course, David Ellison is Larry Ellison's son. You've got that element here, too. And now they just added a $3 billion cash infusion to the deal, I think, like an hour ago. So they're trying to make this happen, it seems like, very quickly. Yeah. Well, I mean, I imagine the TV series for this story is probably already in development, right? I mean, this really does feel like a succession

2.0. I mean, this really does kind of follow that storyline. It's a very familiar story, right? Legacy entertainment business, trying to adapt to the new streaming world. A lot of financial considerations. When you consider these businesses on the whole, particularly Paramount, it's a business that's somewhat challenged. There's some fundamentals there that need to be considered. They have $14.6 billion in long-term debt, just $2.5 billion in cash and equivalents. It's a business that's not really prospering. There's not really the growth. But then, when you flip that coin on the other side, Paramount's global assets are very valuable. There's a lot to it. That goes back to that pieces vs. the whole thing.

But when you look at Paramount Global, you've got Paramount Pictures, you've got CBS Network and all of its own local stations, you have cable networks like Comedy Central, BET, MTV, Nickelodeon. Now, some of those seem like maybe their best days might have passed. But you never know, right? Having strong brands like that, you can reinvigorate them. So, again, with the Apollo deal, it seems like it offers a little bit more certainty. It certainly seems a little bit more shareholder-friendly. Whereas, what Redstone may be pursuing, and this is totally understandable, but it seems to be more tilted towards her family's self-interest.

Again, I mean, you look at that greater space, right, and we've seen all the challenges with these legacy companies trying to sort of evolve into this newfangled streaming-type business. I mean, there are just a lot of costs that come with it, and those costs result in some serious lost money in the near term. Still a very, very open-ended question as to whether Paramount and the properties that it owns would actually be able to monetize moving into that streaming world, right? I mean, at least monetize to the extent where it's an attractive asset. So again, yeah, I mean, it seems like this is one where we're going to hear a lot more about it before this deal is ever

struck. True. And so you've got the earnings call this afternoon. It's probably going to talk about this. It's probably not going to give us as much as we'd like to know about it. You know, when you're investing in a company and they're in this sort of space, it feels like you're just kind of along for the ride, right? Yeah, well, it definitely feels that way here. I mean, you look at what's going on with leadership. I mean, I think that we probably will find out on the Zerny's call. I mean, it does feel like we should prepare ourselves, investors should prepare themselves for a big change in leadership. I mean, they're talking about now putting in place an office of the CEO, which ultimately would be just made up

of divisional heads. Then you have a lot of people in a room offering up their opinion and telling you the solution. That's not really leadership. Leadership is someone getting in there and saying, this is what we need to do, and this is what we're going to do. Whether it's right or whether it's wrong, we'll figure that out when we get there. but leadership by committee oftentimes can be very, very difficult. And my suspicion is, in this case, that probably would also ring true. Yeah, makes sense. Let's move on to a simpler business, pizza. Domino's Pizza earnings came out today. The market was pretty happy about this. U.S. same-store sales were up about 5.6%. What I found was interesting is that 3% or more

of the sales are expected to come from Uber Eats. And that's small, but, you know, we're building that engine. The market liked these earnings. You've got a strong base here. One thing I'm worried about, though, is promotions were a big part of the revenue. Strong loyalty program. That's awesome. But are they constantly having to use these promotions to boost sales? Yeah, I think so. You know, it always cracks me up with companies like these. And I'm not saying Domino's is the only one. Domino's is one of many. But they come up with these thematic strategies of how they're going to take the business forward and continue to grow. They typically come in the form of clever acronyms.

In this case, for Domino's, it's Hungry For More, capital M-O-R-E. M stands for Most Delicious Food. O stands for Operational Excellence. R stands for renowned value, and E stands for enhanced by best-in-class franchisees. The thing is, I don't know that you really needed to come. Isn't this how you should have been running the business from the very beginning? That seems like that's the strategy that should be in play. I think in regard to promotions, it is a concern for companies when they're overly reliant. One that stands out to me, and it's not a food company, but it's similar in retail,

and it's so hinged to the consumer. Think about Bed Bath & Beyond, right? The ongoing joke was, well, I'll go to Bed Bath & Beyond once I get that card in the mail that tells me how much I'm going to get off for that next purchase that I go make. In regard to Domino's, it's something to keep in mind, but it's intentional on their part. It's something they referred to in the call. They talk about promotion, but they talk about this renowned value concept, which essentially means it's more or less reinforcing the value proposition affiliated with the brand, promotions or not. It's not just about having the lowest prices in the market, but it's about providing value and innovation and things that are memorable. I think maybe with a company like Domino's,

it is probably that memorable or right experience. It's something that makes you want to come back and buy from them again. They talked about the promotional environment of the call. They refer to the fact that customer responses to deals are always strong, and they're stronger now than ever because of the fact that we're living in such an inflationary environment, the cost for everything is going up. They see this as an opportunity to really focus on presenting that value proposition. There's something to that, there's no question. It's obviously working out, it shows in the numbers. But it's always something to keep in mind in regard to companies like this, because when they start relying, or when they overly rely on promotions, then you start to

wonder, well, when things correct and we see prices start to normalize a bit, inflation abates, is Domino's going to hold that same dominant position? I don't know. I'll have to wait and see there. It does feel like they've done a pretty good job of building out a pretty loyal customer base. And it speaks a lot to not only building terrific technology in the form of that app, but then also the rewards program and keeping people coming back for more. So far, so good, but absolutely something to keep an eye on. One more earnings I wanted to get to. another big quarter for SoFi, revenue up 37% year over year. But what really impresses me is what they call member growth, which is, of course, accounts up 44% year over year.

Some of that is, I think, attractive yields. But it's interesting, you know, switching costs, people don't like to switch banks, and yet a lot of people are choosing SoFi. Yeah, well, I think in this case, you know, when you look at SoFi, I think you made a great point People don't like to switch banks. It's just a hassle. There's no way on this earth that I'm going to go in there and switch banks at this point in my life, unless something just dramatic occurs. With SoFi, I think they've done a very good job in focusing on the new generation of users. I think this is something where they're focused on not necessarily me, maybe not necessarily you, but they're focused on our children. They're focused on even our

grandchildren. They're focused on developing new relationships with folks that are just coming in to needing a banking relationship. When you think about what SoFi offers today, I know a lot of that revenue growth comes from the lending side of the business, but what they did note at the call, the financial services and the technology platform segments actually really contributed to these results this quarter. It was 42% of adjusted net revenue in the quarter, and that was up from 40% last quarter and up from 33% a year ago. And when you talk about financial services, that's things like SoFi Money, which are the different accounts that they have, SoFi Credit Card, SoFi Invest, SoFi Relay, which is a budget app that they have. And then

You look at the technology that they're building, and it's ultimately vertically integrated technology, which ultimately helps merge their company with financial and non-financial companies. Being a bit more widespread in that regard, I think, is a good thing, ultimately, for SoFi. But yeah, it feels to me like, with SoFi, it's more about the bankers of tomorrow as opposed to us, which I guess we would qualify as the bankers of yesterday. I'm not sure. Or at least we're the bankers of today. And I think some of that newness may be what makes the market a little bit uncertain about SoFi, because so many companies have been lowering guidance. They're actually raised the revenue guidance and their net income guidance. They're

still calling this a transitional year. It feels like they have a lot of runway ahead. And yet, the market feels tentative. Is it the words transitional year? Are those a bit of a red flag? Well, it always feels like a red flag. And then I think you need to kind of dig into that to understand better, is it really transitional or is it just an excuse? I think in this case, I don't think it's an excuse. I think it really is something that holds some water there. Again, I kind of go back to building relationships with the bankers of the future, right? The younger bankers who are just coming into the market. There are a lot of really strong incumbents out there that have our business. But there are a lot of folks coming into needing a banking

relationship that either they're not familiar with all of the options, or clearly, a lot of the options have changed considerably since many years ago. I think a lot of that boils down to uncertainty. I understand the market's trepidation there. I think it's just a matter of you need to take that longer view. I think with something like SoFi, it's just going to require being able to think truly out, not just five years, but 10 years and beyond, trying to understand what does the banking environment look like 10 years from today, 20 years even from today versus today. It obviously is changing considerably, but it does seem like SoFi is making good investments in order to bring those new bankers into their

ecosystem. And then, their ecosystem, because they provide so many different things, they provide all of the banking that you really need. Yeah, they're a one-stop shop. Yeah, they really are. There's a lot to be said for that. The company itself, look, they grew tangible book value 14% from $3.43 a year ago to $3.92 today. I know that doesn't sound like a whole heck of a lot, but remember, this is a new company. It's a really young and new company that's just finding its way. I like the investments that they're making. It doesn't mean that everything is necessarily going to pay off, but I think they're looking at it from the right angle. They are looking to figure out a way to create

that overall banking relationship. We know that's very sticky, and we know that the longer you're enmeshed in that banking relationship, the less likely you are to go ahead and bail and go somewhere else. While that may not necessarily pay off on the bottom line today, I think 10 years from now, we could be looking at this and thinking a little bit of a different thing here. And I think that's just it. You've got to be able to take that longer view. And for some folks, they just don't want to do that. For others, they're happy to remain patient. And I guess time will tell. That sounds good. Thanks for your time today, Jason. Invitation Homes owns a portfolio of 80,000 single-family rentals. I talked to CEO Dallas

Tanner about the logistics of property management and where the company could be headed next. Well, I want to sort of flesh out the scale of this business because it is massive. Invitation Homes has over 80,000 homes in about 16 core markets. And it's interesting because I've studied the single family rental business for a while. It's still a mom and pop business to the most part. Tell us a little bit about the market as a whole and where Invitation Homes fits in. Yeah, you nailed it. It's fun to talk about how big our company is, but in the grand scheme of things, relative to how big the marketplace is, you're exactly right. There's somewhere around

47 million households that lease something in the U.S. today. Single-family rental is probably about 18 million of those and in the 18 million to your point we own and operate you know around 105 000 units today of which you know the company itself is owns about 80 call it 83 000 of those homes the rest is in call it our professional management services business but we are just a very small part of a very small industry and it is a big a mom and pop business it has been for hundreds of years in the country. And what you've started to see professionalized really only in the last decade is this desire for more professional services like we've seen in the apartment industry over the last 30 or 40 years. And so while the company has grown pretty quickly and we keep

getting better as an organization in providing these services, we've really scratched the surface of what the company can become over time. And I think how the industry will grow over the decades to come. It's going to continue to professionalize and get better and better. Yeah. And it's interesting because I think there's some demographic trends that work with you there too, because a lot of those landlords are older. So you've, you've got, you've got some cycles coming up. It seems like. Yeah. And look like anything in life, like, you know, a lot of the things we all enjoy in our own, you know, call it consumer life. You know, we all order things on Amazon and some of these other companies because of ease and because they can drive down costs and ultimately

Invitation Homes wants to focus on some of those core principles. We want to, through the use of our scale and the size of our platform, create better efficiencies and additional opportunities for our families that live in our homes and bring down the cost of other things in their life as well. If we do that well, it should provide us a better experience, a stickier, what we call a resident experience, and they'll want to stay with us longer and longer, which will lend itself to better performance for the company. Well, and I think you've also discovered something interesting too, which is a single family home tenant is a desirable tenant. They tend to stay longer. They generally take good care of the property. Tell us a little more about the tenant

base. Well, today our customer on average stays with us about three years and we keep seeing that continue to tick higher and higher, which is a better customer profile than what the multifamily companies have seen historically. They're making decisions around things like school districts, transportation corridors. Most of your multifamily customers aren't making key decisions around which schools they want to have their kids in because it's a much more flexible customer. Our average customer age is 39 years old. It's usually a married family or a couple or a partnership with one to two kids. They're thinking about longer-term decisions. They need a yard. They have dogs. They want to stay put somewhere, or they want to park cars and have security for their

cars in a garage. And so that is a different customer profile to your earlier point, that millennial cohort of like people between the ages of, you know, 30 and 40 right now is a massive demographic. And so for us being our average age is 39, we have a lot of tailwinds in terms of momentum coming our way of customers that want those same things. So we need to continue to tailor not only our product and how we, you know, build and construct new homes toward that segment, but we also need to provide services that kind of angle on that side of their life and how can we do things locally and in some of these markets that will provide, you know, compressing of costs in other categories in their lives. That's what we're really focused on right now is that resident

experience, making it unique and making it more than just a landlord relationship. You had this announcement recently of building that property management platform for large portfolios, which of course makes total sense. So I'm wondering about both the impact on earnings and for the potential for this to really be a stream to get more of those smaller portfolios maybe under your wing a little bit. We love the idea and we've been listening for a couple of years to the marketplace and hearing sort of frustration for some of these professional owners or investors that had, you know, called built two or three or 4,000 doors. And they were like, Oh, we're just not getting, you know, the returns or the margin profile or the efficiencies

in the customer experience. And so, you know, a couple of years ago, we, we sat together as a team and thought, is there a way that we could be effective? Because it's, it's for a lot of people, property management's the loss leader. And for us, it isn't, we can run so efficiently that it's profitable business for us. But really, we want to do it with strategic partners. And there's a lot of reasons for that. One, we want scale. Not really interested in smaller sort of accounts. Or we want professional capital that will do the right thing behind it. And the second thing is, to your point, Dietrich, we get smarter. And we get really smart around how these homes perform. And we can also blend and extend our own efficiencies to those

portfolios. And then those portfolios in turn do the same for us. And so it should actually enhance our operating margins as we grow and get more scale. And look, this has been done very effectively in multifamily for decades. There are big operators of multifamily that both own and operate for others, significant size portfolios. And I think this is the natural evolution for the next couple of really good single family businesses that want to provide both services. I hope that it ultimately lends itself to opportunities for us to grow our own portfolio, where we could be a natural buyer of some of these businesses over time. If not, that's okay, too, because it's a profitable business and it helps us make our own business

even more profitable. I want to dive into your acquisition strategy, because I know it changes over time, changes with the market, of course. You touched a little bit briefly on build-to-rent earlier, you know, I've been studying this. It seems to, it's, I thought it was going to be bigger than it, than it started to be. And now it's, but seems to be picking up. What are you looking at? Are you looking at more build to rent? Are you working with home builders? Where, where is your supply coming from? Great question. And if you take a step back and you think about why, why are we all building new homes for the purpose of for lease, right? And it's because there's just an immense amount of a lack of supply in the marketplace today, both for fee

simple and for ownership, and also for the people that need or want to lease. I think what we've focused on is partnering with some of the best and brightest home builders in the country and using our balance sheet to invest in building new housing together. I probably can't build a home as efficiently as some of the big companies that are just professionals and have been doing it for decades. But we certainly can take our balance sheet and work with them and partner with them to build best-in-class product at our specs and in the markets we want to belong in for a variety of reasons. And so, today, we work with probably anywhere from 10 to 12 different builders, both public, private, and regional. And we are leaning in hard on investing and building new

product together. And I would reserve the right to say, over time, our philosophies could adjust. Maybe we, you know, take on more of a role of being a builder, but in today's market, it is sure felt, you know, prudent and also reliable to sort of partner with these best and brightest drive down costs for each other, both in the way that they build a home for us, because we're a very particular client. We can do the same thing over and over. And for them, because it's, it's a much easier process. We're like sort of part of their fleet program at this point, right? Very similar to what you see in the car business. You know, Ford, I drive an F-150 pickup truck. They sell a car to me, correct? But at the same time,

they sell to Hertz and Avis and all these super users of cars. And I think there's sort of a similar relationship that we'll see continue to evolve between operators, companies like us, and homebuilders, where we can fit into a small portion of their overall sales strategy, but at maybe a cost that is maybe a little bit different than what the retail market might pay. And so I think using our balance sheet to be a good operating partner for them is a win-win for kind of both sides of that transaction. And then I think for us, we're getting so much smarter at what the customer wants. Like we're building a community in California right now. It's all solar, Deidre, and it's all, you know, extremely efficient. And we pride ourselves on that. And

that's much easier to do in a new build. And so we can kind of incubate all that into these homes going forward. I think the growth in our industry will be very much so tilted toward new construction for the foreseeable future. Interesting. Yeah, because, you know, I've been watching the real estate market and right now, as you know, existing home inventory is super low, remains super low, although there are pockets where it's starting to get up a little bit. But I mean, right now, about 30% of the homes that are selling are new homes. So it seems like there's a shift happening. Do you see any potential shift in the existing home market that might make it attractive for you to start buying homes there? Or do you see that as, like you said, less of a

concern going forward? Not really. We've actually been more of a net seller. We've been selling homes. We've sold something like just under 13,000 homes maybe in the last five years back into the marketplace. And those are all going primarily to end users, people that are buying the home with a mortgage or whatever. I think where you will see institutional investors or professional capital invest is going to be in this BTR and in this newer product. There's economies and efficiencies of scale in doing it that way. I think your CapEx risk is a little bit lighter, especially if you're a new entrant into the marketplace. Who doesn't want to lease a brand new home in a cool community with amenities? It's not like rocket science to invest our capital

there. It's actually, you know, sort of the natural evolution of where professional leasing is going. And it has, again, I keep pointing at apartments, but they've done this forever. When a new apartment building comes out in a really cool area, what happens? There's a lot of demand. People want it. They want the amenities. They like, you know, the new furnishings or they like the fit and finish standards. It's the same for BTR. And I think as we get a little bit smarter on what makes the lifestyle easier for a customer, it's not always just the cosmetic fit and finishes. it's more the product and the structure of the product. Can I make my lease more flexible? Are there things I can do to move a home from here to there if my needs change for my family? That's

where I think this gets really dynamic. And I think nobody's even scratching the surface yet of what that business can actually be over time. Housing is cyclical. We're at high interest rates right now. High mortgage rates are, I think, around 7% now. So how does that cycle impact you at this point? Well, it's interesting, right? Like it's much more expensive to own right now than it is to lease. So if you look at our markets and you just kind of took median numbers, it's about a thousand dollars a month cheaper, maybe even a little bit more to lease than it would be to own that same home in that community. So you think about savings of $12,000 a year and you can be down payment light. It certainly is going to help, like it'll lead itself into a little bit

more demand for our product. Now, that being said, two-thirds of the country have always wanted to own something and have. The homeownership rate, if you look at today, is very healthy from our view. I've been following this pretty closely for about 20 years. I saw what it did leading up to the GFC. I lived in Phoenix, Arizona, which was probably the poster job for too much homeownership and people qualifying on mortgages that didn't make sense. and it got, you know, as high as pushing 70 or low 70% and then got down to like 60. I think the home ownership rates somewhere today in like the mid 60s, 66, sometimes, sometimes 67 depends on the market. It's pretty healthy. So, you know, the, what's buoyed up home prices has really been

this lock in effect. Most of the country is in a pretty affordable mortgage rate right now. And you brought up a very interesting stat earlier, you know, 30% of all home sales right now are new construction. That's about double of what it is traditionally, right? And so, it makes you sort of scratch your head and sit back and go, okay, why? And it's because there's just not that much resale activity. One, people that have a cheap mortgage have zero intention of moving right now. It feels costly to upgrade or to move or to do this or that, the other. And two, if you want to find something, the only place to really go is to some of these new builders. And a lot of the new product that's being built isn't the traditional entry-level product that everybody likes to talk

about. And it's because your point on demographics earlier could not be more spot on. The younger generation doesn't want to be an hour outside of town. And it's interesting, that narrative of entry-level buyer, and they do exist. I'm not saying they don't, but it's not the same as it was 20 or 30 years ago. Preferences have changed. People are delaying decisions like getting married in starting families. They're doing this later. The data tells us all that. So, you know, if you, if you're more stable in your professional life, there's things you're doing before you're making those decisions. You're probably not looking to move an hour and a half outside of Atlanta to start a family. You're pretty well set in Midtown or downtown or the perimeter. Right.

And so you're like, wait a second. I don't know that I necessarily need to own, but I want a house. I want flexibility. So I think that's been a positive kind of trend for our businesses. but it'll be interesting to see how those lifestyle decisions adapt over time. 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.

So don't buy or sell stocks based solely on what you hear. I'm Deidre Willard. Thanks for listening. We'll see you tomorrow.