Motley Fool Hidden Gems Investing - di-Spirit Airlines and Uber’s Schnapsidee

Episode Date: January 17, 2024

The DOJ logs a win against airline consolidation, and Uber takes a sober look at a 2021 acquisition.  (00:21) Asit Sharma and Dylan Lewis discuss: - Why JetBlue’s $3.8B acquisition of Spirit Airlines hit a snag. - Elon Musk’s comp package at Tesla, and what investors should think of his desire to have 25% voting control. - Uber’s plans to shelve Drizly two years after buying it for $1.1B. (13:36) Dave Holeman is the CEO of Whitestone REIT, which focuses on open-air retail centers. He talks to Deidre Woollard about why restaurants are the new anchor stores and how shopping habits are changing. Companies discussed: SAVE, JBLU, TSLA, UBER, WSR Host: Dylan Lewis Guests: Asit Sharma, Deidre Woollard, Dave Holeman Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. Dylan Lewis. Spirit Airlines, this is your captain speaking. Your trip to JetBlue is going to be rerouted. Motley Fool Money starts now. I'm Dylan Lewis and I'm joined over the airwaves by Motley Fool Analyst, Asit Sharma. Asit, thanks for joining me. Asit Sharma. Dylan, thanks as always for having me. We've got a look at the new age of anchor stores in malls, but we're going to kick off today with

a deal that is not happening and an acquisition that maybe doesn't look as good as it did a couple of years ago. Asit, let's start with the news of Spirit Airlines and JetBlue. Shares of Spirit Airlines down 50% after a federal judge blocked JetBlue's planned $3.8 billion acquisition of the discount airline. This looks like a major win for the Justice Department, who sued to block the acquisition. Are you surprised to see us hit pause on this one? Not really. This is something, Dylan, that the Biden administration has been pushing on many fronts, the idea that competition is decreasing in some marketplaces. We see this in tech with the FTC challenging Amazon. We see it here. The ruling isn't so surprising to me.

I want to quote from Judge William Young's ruling. This is really great stuff. He says, Spirit is a small airline, but there are those who love it. To those dedicated customers of Spirit, this one's for you. That has the ring of a beer commercial, doesn't it, Dylan? It does. This is the working person's ruling here. That's basically what the government wants, is to make sure that the consumer has a place in an airline industry, which has been consolidating for years and years and years. But of course, there are some other parts and pieces to this story. You mentioned the airline consolidation there. This seemed like, from JetBlue's perspective,

an attempt to stand up with some of the larger airlines, gain some share, be a little bit more competitive in a more consolidated industry. Does this feel like a blow to some of those ambitions? I think it does. The legacy airlines all have pretty decent hub-and-spoke networks. They've got a lot of transatlantic coverage, which JetBlue doesn't have quite as much of. They're very well diversified among different types of airplanes in their fleet. So this was a way, I think, for JetBlue to get a little closer to being somewhat legacy-like, get some more routes, and then be able to take over those planes, make them more JetBlue-like than Spirit-like. So, not super, super cost-cutting aggressive airline, but really mold it over in JetBlue's

image. So, this route now is temporarily and perhaps permanently closed off. I don't know if there is an appeal to this, but having said that, JetBlue should be able to do okay on its own, it just isn't going to quickly get to that near-legacy status, which is important to them when they think about loading their airlines and improving the load factor, that is, how much of traveler traffic they have in their capacity. It may be a blow to them strategically, but I had to do a bit of a double-take when I looked at the market cap for Spirit. Given the $3.8 billion planned acquisition price

after the sell-off on this news, Spirit is a $700 million company. I can't help but think, regulators just save JetBlue a lot of money? Because over the last couple of years, we've seen Spirit decline even knowing this acquisition was coming. Maybe. There's some argument to make that the routes that these two respective airlines have aren't too dissimilar. There's a way for JetBlue to make money on the routes, but Spirit has been struggling. They spread themselves a bit thin in terms of geographic coverage. That's expensive when you're a small budget airline. The shorter routes in smaller markets are profitable. I think for Spirit, the problem is the price of fuel, the price

of labor, the cost of maintenance. Again, going back to that load factor, they have a load that's currently below that of JetBlue's. I think it's something like 80%, 81%. When you're at that level of filling capacity, only at 80%, 81%, those economics become really hard, even for a bigger airline, much less a small, scrappy airline, which depends on people paying full price on its discounted fare. I should close this by saying, management has been calling out discounting in their conference calls. Spirit, which itself tries to discount, doesn't like it when the rest of the industry is in that mode, it's hard for them to make a buck. Alright, Asit, our second story of today is one on a familiar theme.

Not a week goes by that we aren't talking about Elon Musk because he's in the news so much. This week, it is because of his comp structure. Musk posted on X saying, I am uncomfortable growing Tesla to be a leader in AI and robotics without having around 25% voting control. Enough to be influential, but not so much that I can't be overturned. You follow Tesla quite a bit, Asit. I'm curious, how did you feel seeing that news? Well, this is a lot of fun, Dylan. The first thought that came to my mind was that Elon Musk is jealous of Mark Zuckerberg, who has that dual-class voting structure at Meta and is able to do exactly what he wants. Musk used to have close to 25% of shares,

but of course, he had to sell some shares to buy that phenomenally lucrative investment we all know as Twitter, now X. Just kidding, for those of you who don't follow Tesla very closely, that has not been a profitable investment. But what Elon Musk is doing here is trying to push the board in public opinion in the favor of him having more control over Tesla, which I think is sort of a nothing burger. If I were the board, I would be saying, so what, Elon? All of the tech that you're talking about, the AI tech is based on the supercomputers you built here at Tesla. It's based on all the silicon you bought to run all of our supercomputer models. If you go elsewhere, you'll have to start from scratch. I don't think that Elon Musk is quite as an

attractive capital raiser in today's market, which is a tough market to ask for money, versus the Elon Musk of, say, five years ago when he was much more focused on the business of Tesla and less inclined to wake up one morning and espouse his very interesting views to the world. I think as it stands, Musk owns roughly 13% of Tesla. I think voting control moves with that in proportion. I don't think they have any super-voting shares or anything like that in place. What's interesting is, you're saying, you can call that bluff a little bit if you want to board. He has several other companies and doesn't seem too afraid to start things up when he is passionate about something and really wants creative control and the upside that comes from

that work. I agree with that. I've said in the past that there's probably some mathematical limit on the number of companies that Elon Musk can productively participate in as a leader or an owner. Maybe he hit that with X, although I think that's arguable. X is such an emotional drain for him as well as a bad business investment. I think the complaints about his being spread among different companies were much less loud a few years ago. Today, see is a business leader who I think is not quite as prominent as he wants to be. I think that the whole explosion of generative AI caught him by surprise. Part of this is, again, as it always is with Elon, perhaps an ego thing. He wants to be associated with future technologies. He wants

to be seen as someone as central to the development of AI as Sam Altman. Before chat GPT burst onto the scene, Elon Musk was often thought of as one of the people who was pushing AI with the Dojo supercomputer over at Tesla. So some of this, again, I think comes back to some personality traits, which make him one time both an amazing and innovative and fearless business leader, and also someone who you just as a shareholder feel so uncomfortable with day in, day out. It's part of the package, right? True, true. Alright, our final story in the news roundup today. Uber announced it is closing Drizzly, the alcohol delivery service it purchased

back in 2021 for $1.1 billion. Asit, I saw this news, and I had to reflect a little bit on all the different reasons a company may choose to acquire something and then sunset it. Sometimes it is because the acquisition just is not working out as it was originally planned and the value is not there. It is throwing bad money after good money. Sometimes it's because they acquired it knowing they were going to sunset that thing, and it was more of an IP or an acqui-hire type play. What is your read on the Uber move here? I think it's a schnappsy day. Bear with me. You're going to have to define that. Yeah. This is a term that I just was taught a few weeks ago when my family was

together during the Christmas holiday. One of my kids explained to me, when you get together with friends and you drink a cheap bottle of wine, a bottle of schnapps, and then you come up with this crazy idea. In Germany, that's called a schnappsie day. I hope I'm pronouncing that correctly. I'm sure I'm mangling it. But I think this was that thing for Uber. It sounded great at the time during the pandemic when we're all stuck at home. Hey, let's buy this delivery company, which has got a ton of customers, because this is probably one of the great ways to buy alcohol in the future. I mean, we can see it during the pandemic, people want some booze, so what better thing to tack on to our service than this?

And I think as the world has changed back again, there isn't such a need for people to have alcohol delivered directly to their store. But going back to the rest of your question, Yeah, I think this was probably a decent tack-on type of investment for Uber. They saw they could get some margin out of it if they had enough coverage, which it seems to be in a surprising number of states. I think maybe 30-40 states is the coverage of Drizzly. As to why they would sunset it now, it looks different in the forward mirror than it does in the rearview mirror. When we think of Uber today, we find a company that has reached scale. A few years ago, they were losing money, still trying to get to that critical mass. Now, today,

they're generating positive cash flow. This $1.1 billion price tag, in the context of what Uber generates today, just in cash flow, makes the numbers seem very reasonable if they want to sunset it. I'm looking at some estimates for free cash flow next year, $3.2 billion, or sorry, that's 2023 estimated free cash flow, 2024 estimated free cash flow. This year, 2024 year, $5.2 billion in free cash flow, Dylan. When you start generating those kinds of numbers, it makes it a lot easier to say, okay, we rolled the dice on this one a little bit, but let's shut that out because it doesn't have the margin or the revenue potential of all this other business we're doing. I think it makes perfect sense today. I'm not sure

that we'll ever have that kind of demand for booze delivered to our house unless we have another pandemic, God forbid. So maybe something that fits in better to the offering of an Uber app as a piece rather than a standalone service that they're going to offer. Yeah, I think that they are much more inclined now just to build internally the parts and pieces of the app to be that everything type of delivery service, getting more in the mode of a door dash with their drivers. So I don't see them making another acquisition of that magnitude, but you know, they could. Asit, never a schnappsy day having you on the podcast. Thanks so much for joining me today. Thank you, Dylan. This was a lot of fun.

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Sign up for exclusive access today, rippling.ai slash fool. Coming up, massive department stores like Macy's and JCPenney used to anchor shopping centers. Now, restaurants are increasingly playing that role. Dave Holman is the CEO of Whitestone Reit, which focuses on open-air retail centers. Motley Fool Money's Deidre Willard caught up with Holman to find out how shopping habits are changing and what differentiates his company. Well, traditionally, a lot of the open-air retail centers, they're anchored with a large

footprint property, usually a grocery store or something else with a big footprint. You have a lot of centers that are anchored by restaurants. You have grocery stores, too. But how do you think about those as anchors? The shopping center today is very different than it was 10 years ago. Traditionally, retail centers were developed. The developer needed a large tenant to really be able to obtain financing. That large tenant was typically a grocery store, maybe a department store. The property owner typically didn't make a lot of money on those spaces as they came with low rent, longer leases, and minimal increases in those leases. So what we've seen is consumers' habits have changed. Lenders now recognize that a

you know, well-curated mix of tenants that causes more traffic at a center is as valuable as a large anchor. One of the things you've seen, I think I saw a recent survey that said Americans now spend about 30% more on restaurants than groceries. So you've continued to see a shift to people looking for, you know, looking to pick up takeout, to eat in restaurants. I think that, you know, groceries, restaurants are probably the biggest competitor to grocers. And we believe that, you know, well-located, local, strong operating grocers can provide great traffic to a center. When I think about anchors, you know, I think about what's going to drive you to a center, what's going to drive you for repeated visits, what's going to cause you to go there and spend time with other

tenants. So as we think about putting together a tenant mix, we think about anchors, but we also think about, you know, complementary tenants, tenants that help each other and drive traffic for each other. And then, likewise, you know, if we've got a tenant that's not, that's maybe drafting off of the other tenants, we look to upgrade that tenant. I think I said earlier, what we do, you know, the need we try to meet is we try to serve the needs of the surrounding community. And if we're not doing that well, we're not doing what we should. Well, it's interesting because you've got some centers that have specialty markets that are sort of complementary to each other, which sort of speaks to that trend. And it's this trend that

I've noticed in general is there's so much more takeout, like you mentioned. There's so much more people want to get different types of meals. Maybe you have two or three family members who don't want to eat the same thing tonight. So, is that something that you're seeing? You're seeing more of that, the takeaway rather than the traditional, you know, once a week grocery visit? Absolutely. I think there's been a, you know, a generational movement really away from eating on plates and moving toward, you know, consuming out of cups and bowls. I mean, you think about Cava and Starbucks and other, you know, phenomenons out there, but we've seen other restaurant concepts like Flower Child and the hot pot phenomenon. But consumers today look for

convenience and they look for people that provide good, healthy food in a convenient way. It comes down to, you know, knowing your customers' needs and voids. One of the things we do, and we look for tenants that really understand their customers, and then we, through our research, try to help them. So it's important to understand who's in the surrounding community. Is it families with young children? Is it older retired folks? And then, you know, what are the tenants you put in your center? Are they meeting the needs? We have seen a lot of specialized food concepts coming up. It's fun. We're in markets that are also very diverse in that we have different mixes of folks. I know in Houston, we have a couple concepts. We have a bishala grocery store and restaurant that

provides specialty Indian foods and does very well. And then similarly, we have an African market that has a kitchen and meets the needs of a surrounding community. So we love to find folks that really specialize and do things a little differently than the others. You'll find probably less of the national brands in Whitestone centers. We look for unique local operators that are well-experienced and well-capitalized. Interesting. And you're also doing something that I noticed is that you've got smaller tenants overall. So you mentioned in your last earnings report, you had a sweet spot of around 1,500 to 3,000 square feet. So So is that restaurants? What other types of tenants are you looking for in those spaces?

So one of the things that differentiates Whitestone probably from some of the others in our space is the percent of our leaseable square footage that's in that smaller space range. We have about 5 million square feet that we lease to businesses, and probably 70% of that is in those smaller spaces. Many of our peers, that ratio would be about 70% in the bigger spaces, and 30% in the small spaces. So we really specialize in the smaller spaces. We're continuing to see a shift. I think I saw the average store size in the U.S. is the smallest it's been in the last 17 years. And that really reflects the profound changes in the way Americans now shop. Almost every retailer you see is looking for ways to operate in a smaller footprint,

looking for ways to be more efficient. So the small spaces we've found have tremendous demand and we're seeing it in a lot of different areas. I think you continue to see food being a big category with different types of restaurants and food services. Health and wellness is an expanding category. I think medical uses that traditionally were in office towers, dentists, chiropractors uh and others you see in retail centers fitness is a huge category between the like the flex kind of stretching people you see cycle bar orange theory so we really see a multitude of uses in the small spaces they're also very flexible so we're able to uh to move a new tenant in very quickly uh require minimal capital on the landlord's part and just see a tremendous

amount of demand for those spaces. And as you can imagine, that compares to a larger big box traditional grocery or department store where there are less and less of those users and the ability to release that space takes much longer. The move to MedTail is one that I find particularly fascinating. I also noticed that you're doing shorter leases, so three to five years. And this is not traditionally what we see. We usually see larger spaces and longer leases. So how is the shorter-term lease more advantageous for you? At the most basic level, it's really important for us to be in sync with the businesses that operate in our centers. We want them to have skin in the game, and we want to have skin in the game. We want to help them succeed, and then when they

succeed, we'd like to participate in that success. It doesn't do us any good to have long leases with tenants that really aren't meeting or serving the surrounding community. Years ago, we adopted the shorter leases, I think typically three to five years. As I said, it allows us to share in the growth of tenants, which is great in good times. Some of our peers have longer leases and maybe a little bit shorter debt maturity. So one of the things we try to do is match up our cost of capital with our tenant stream. And then probably the less obvious benefit is it's important for us

just to consistently evaluate our offerings. You know, we have to know what consumers are looking for. So, you know, it's a bit like gardening to me. Occasionally you need to go pull some weeds and make sure what remains is exactly what you want it to be. You know, I'd hate to sign a 20-year lease with Radio Shack or Toys R Us and be figuring out what to do with those at the end of 20 years. So, the shorter lease concept for us is very important. We're confident in the quality of

our real estate. And we want to be shoulder to shoulder with the businesses that operate there. As always, people on the program may own stocks mentioned, 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. Thank you for listening. We'll be back tomorrow.