Motley Fool Hidden Gems Investing - Time to Buy Industrial REITs?

Episode Date: August 4, 2022

Global travel, comfortable footwear, and industrial REITs are on the menu. Pull up a chair! (0:25) Maria Gallagher discusses: - Mixed 2nd-quarter results from Booking Holdings - Why CEO Glenn Fogel's declaration about upcoming record revenue may be grounded in reality - Crocs struggling with gross margin pressure and inventory management - Whether buying the Hey Dude line of footwear was a good use of capital (10:41) Amazon's decision to sub-lease warehouse space caused some industrial REITs to fall. Deidre Woollard and Matt Argersinger discuss the potential for buying opportunities in this group. Stocks mentioned: BKNG, ABNB, CROX, WMT, TGT, STAG, EGP, PLD, RHP, PEB Host: Chris Hill Guest: Maria Gallagher, Deidre Woollard, Matt Argersinger Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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so pull up a chair. Motley Fool Money starts now. I'm Chris Hale. Joining me today from New York City, Motley Fool Senior Analyst Maria Gallagher. Thanks for being here. Thanks for having me. Let's start with travel, shall we? Booking Holdings, the parent company of Priceline and Booking.com. A mixed second quarter, I think that's fair to say. Revenue was a bit light, adjusted profits were higher than expected. We can get into the CEO's comments in a minute, but in terms of the results for booking, what stood out to you? So I think it's showing a pretty good picture for travel recovery in general in the U.S. So

their gross travel bookings were up 57%. The room nights booked were up 56%, which are both the highest quarterly amounts ever for those metrics. The room nights for quarter two surpassed their 2019 levels for the first time. Their customers booked about 246 million room nights, which is up 16% from 2019. So we are seeing this travel recovery, which I think is obviously important for booking, but is also just in a more interesting macroeconomic way, something to look at. Something else that I think that I'm paying attention to that they're working on is enhancing the benefits of their loyalty program. They're trying to build out this idea of a connected trip vision. So they're trying to increase engagement with customers from downloading

their app and utilizing their app to book flights, as well as hotel, as well as kind of that broad experience. And I think that that's an important and interesting thing for them to focus on. And it seems that they're executing that pretty well. And yeah, again, I just think that almost 75% of Americans plan to travel domestically for their summer vacation. So I do think that's also something to pay attention to is both the macro kind of travel habits of the consumers and where they're going. And I do think booking is still a predominant place people go. So I would say I thought it was a pretty good quarter overall. Yeah. The experiences that you mentioned, I mean, we see that with Airbnb as well, you know, in that sense, both these companies

are looking to provide more than just be a place to transact, and you know, we'll keep watching both of them in terms of how much they're able to build that up, because it seems like that can be, particularly in the case of booking holdings, that can be, sort of a powerful lever for them in building out that loyalty program. I'll just speak for myself, I have almost no loyalty when it comes to booking travel. It's easy to click around at different sites, but I think the business that can provide that value proposition so that they become the default place and people like me get rewarded for using the platform, then yeah, that's going to work in their favor. Yeah. I think that that's an important thing.

And that's what we saw a lot for hotels for such a long time was those loyalty rewards members, especially if you're doing business travel. So it's getting those customers to say there's a benefit for me just utilizing this one platform. I do think it's interesting. I don't know why no one's tried to acquire Groupon recently. I feel like it's an experiences platform that people know it has a good brand name. And I think both Airbnb and booking both would kind of benefit from having that more broader experience base on their platform. I think booking is a bit better at it than Airbnb is as of now because they have so many other options, whereas Airbnb kind of has ideas for you, but not necessarily the lengths of saying, here's where you can book a boat for

your next trip or whatever that might look like. So I do think that booking holdings is a little more sophisticated with their kind of holistic travel booking than Airbnb is. But I do think it makes sense that both of them are kind of striving for that right now. I agree with everything you just said, except for the part about Groupon having a good brand. I think that if either of these companies were to, or if anyone was to acquire Groupon, then you're ditching that name and then it becomes like booking experiences. It becomes a separate division, that sort of thing. I love Groupon. Do you think it has a bad brand name? I love a deal. I don't think it has a bad name. I don't think there is, wrapped up in that business,

I don't think the brand name itself, just the name itself, I don't think it is so great and so positive that an acquiring company would not get rid of it. I don't think it is some sacred cow in that business. If it were, the stock price would probably be higher. That's fair. I just personally love Groupon. Glenn Fogle, the CEO of Booking Holdings, give him credit for not holding back. He said in an interview this morning, we expect record revenue next quarter. I got to say, in this environment, Maria, I'm a little surprised that he would say something like that out loud. Well, I think it's based on, so quarter three is usually their best quarter anyway with seasonal

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

I think he's coming from a place of a lot of knowledge before he says something like that. All right. Let's go from global travel to comfortable footwear. Here's the good news for Crocs. Second quarter revenue was up 51%. Record revenue for the second quarter. Profits were higher than expected. Here's the bad news for Crocs. Almost everything else. Their gross margins are getting hit. They cut their full year guidance by mid single digits and the stock is down more than 10% today. Yeah. I think what's interesting with Crocs right now is their acquisition of Hey Dude for over $2 billion. So we're seeing that impact of that acquisition this quarter. So like you said, revenue was up 51% ish, which is inflated because of that recent

acquisition, but their Crocs brand quarterly revenue was up about 14%. Their digital sales were up 16%. Their gross margin was hit a bit because of their fright headwinds as well with that acquisition increased inventories. So I think that that's what's really interesting with Crocs right now is that Hey Dude brand, their revenues exceeded $232 million, which was up 96%. And they are exceeding expectations with that new brand. They are expecting their revenue to be about a billion for the year. They're also working on expanding more in Asia, which they're hoping to be about 25% of revenues long-term. But I do think that the financial picture just isn't the same as it was a year ago with that acquisition of Hey Dude. They have $2 billion more in debt. They

have $400 million of new inventories. And I think in this current economic environment, that's not something that a lot of people are maybe as excited about as they would have been a couple years ago if they had made that big of an acquisition and taken on so much debt, say, two years ago. And I don't personally know the brand Hey Dude. I don't know how well it's going to fit into the overall ethos of Crocs. So I think it's going to be interesting to see that and how that plays out in the next couple of years. One other thing for Crocs that's going against them, their inventories were up pretty significantly in this last quarter. And Broadening beyond Crocs, I feel like this is one of the most important questions right

now for retailers and apparel makers. How is the inventory management going? Later this month when Walmart and Target report their earnings, after we get the top and bottom line numbers, as far as I'm concerned, that is the key question. Like, okay, great. Talk to me about your inventory management, because it seems like that is making all the difference in the world right now for some businesses. Yeah, I agree. And I do think something that's on Crocs' side within inventory management as well is, one, that the price point for Crocs aren't too high, and two, that the look is pretty similar throughout time. Crocs have a pretty distinct look. They've looked the same way for a long time, as opposed to you see fads and trends

where then you have all this leftover inventory of something nobody wants. I do think that kind plays within Crocs' favor. They quoted in their earnings that they were featured in a Vogue article that was titled, These Ugly Chic Sandals Have Gotten Me the Most Compliments This Summer. And so I think Crocs are really self-aware. They know who they are. They know that they're here for comfort, not necessarily for fashion. So I do think that is a bit in Crocs' favor, but I do think it's definitely one of the most important things to look at is the inventory management, for sure. You're absolutely right. That's a great point. And it ties back to what you were saying earlier about the Hey Dude brand of shoes. Because you're right, that goes in the

plus column for Crocs. They know who they are. They're not trying to be anything else. And that's what makes sort of the Hey Dude acquisition both an opportunity and a challenge at the same time. Yeah, I think, and I was looking at the Hey Dude website. I don't know, they look kind of similar to a lot of other things. I think Crocs is pretty distinctive and they know what they do and they do it well. So I think it was, I don't know. I don't understand necessarily why they paid so much for it. I don't think it's that well-known. I've never heard of it. So maybe that's just me using my own personal worldview and conflating it, but I've never really heard of Hey Dude. I don't know anyone who knows it. So I think it's going to be interesting to see

how well that acquisition does over the next couple of years. Maria Gallagher, great talking to you. Thanks for being here. Thanks so much for having me. Amazon said it was going to sublease warehouse space, and that announcement caused some industrial REITs to drop. Could this create a buying opportunity? Deidre Woollard and Matt Argersinger have more. I'm Deidre Woollard. I'm here with Matt Argersinger, who's the senior analyst at The Motley Fool, lead investor on our mogul and real estate Winter Services. How are you doing today, Matt? I'm great, Deidre. Glad to be with you. Yeah, so you and I have been talking a lot this week, which I love, and we've been talking about

earnings. So I heard one of the Motley Fool analysts say something about earnings season that I really loved, and that this is the triumph of the boring companies this quarter. You know, real estate kind of gets lumped in being boring. Not true for either of us, I know. And among real estate's boring sectors, maybe the most boring of them all is industrial real estate. until the pandemic. And then it became like the hottest sector, rents going up, prices going up, inventory going down. Now we're kind of getting back to normal. Is it going to be the way it was before? Well, that is a good question, but I'll start by saying real estate is definitely not boring. If you've heard Deidre and I talk before on the show, you know that we don't certainly

think it is. And industrial real estate, what we think of these days as properties like warehouses, distribution hubs, cold storage facilities has definitely not been boring since the pandemic, especially. We know we had this incredible surge in e-commerce activity. Many Americans who had previously not shopped online very extensively were essentially forced to in a lot of cases after the beginning of the pandemic. Many were buying groceries online, ordering takeout to agree that they hadn't before. We are seeing these activities level out and you are seeing some consumers return to traditional brick and mortar shopping. However, I do think there's been at least a partial sea change. It's not just about the consumer, Deidre. As we've witnessed,

the pandemic exposed a lot of vulnerabilities with supply chains, semiconductor manufacturing, drug and medical device manufacturing. There's a lot of talk about the need to move a lot of manufacturing back to the US. You've got buzzwords like on-shoring or near-shoring. and many industries would prefer to move to a place of just-in-case manufacturing versus the just-in-time paradigm that was dominant for decades. I think the recent passage of the CHIPS Act could also be a long-term catalyst. I think some of that e-commerce froth is going to come off, but the need and demand for more industrial space, especially that warehouse, that distribution space that we talked about, I think in most markets across the country,

it's going to remain quite strong for a long time. So, yeah, we've been pretty excited about industrial in the recent few months. But then we got a little bearish for a second because Amazon CEO Andy Jassy, a few months ago, he started talking about scaling back warehouses and logistics, and the whole market kind of freaked out on industrial a little bit. But then I saw a report, I think it was last week, that Amazon's moving forward with two like monster-sized warehouses, a 4.1 million square foot facility outside of Los Angeles, another 3.9 million square foot facility in Loveland, Colorado. What's going on with this? Well, I think, yeah, Amazon definitely sent a chill to the market. A lot of industrial rates

fell sharply after those comments by Jassy, as much as 30% from the highs in a few weeks, which is really unusual for REITs, which generally don't have that kind of volatility. The key thing to know, I think, is that while Amazon, they're by far the biggest e-commerce player, it still only makes up a fraction of a typical industrial REITs rent roll. For example, if I love talking about Stagg Industrial, as you know, it's a mid-size industrial REIT, I follow it pretty closely. It's an Amazon landlord, but Amazon only makes up about 3% percent of Stag's base rents on an annual basis. You just mentioned two examples of where Amazon is still moving ahead with massive facilities. If I had to guess, despite those comments and maybe

despite some short-term noise, I'd say Amazon's overall industrial footprint is still going to climb for many years to come. But you have to think about all the other companies involved in this space, FedEx, UPS, Target, Walmart, Costco. I'm thinking of all these big Lowe's, Home Depot, the big-box retailers that are really expanding their e-commerce footprint as well, they need more distribution and fulfillment space as well. It's far from just an Amazon story, which is why I think this whole industrial REIT trend that we've seen has a lot of legs to it. Yeah, totally agree. You mentioned one of your favorite industrial REITs, so that sets me up perfectly to mention one of my favorites, the biggie in the spaces, which is Prologis.

we've seen a bunch of REIT earnings come in. And one stat I really liked from Prologis is that they said that 71% of the leases expiring in the next 12 months are either already pre-leased or in negotiations. This compares to their pre-pandemic average of 56%. So that made me feel pretty optimistic. What kind of stats are you loving from this earnings season about industrial real estate? Yeah, that's really strong. And of course, Prologis is the giant in the space. I think for it was just seeing the rents on new leases. For example, I just reviewed the results from East Group Properties, which is much smaller than Prologis, but they reported a 37% increase in rents on new or renewal leases in the second quarter. If you were an industrial tenant

that was looking to lease space at an East Group property, your rent climbed 37% compared to whoever was previously leasing that space. That is incredible growth. I think Prologis put up a similar number. We're also seeing occupancy for most of these industrial REITs in the 97% to 98% range. That is any kind of REIT that's really high, but even for industrial REITs especially. They've never really been more utilized or generating more revenue than they are today. It's pretty incredible. Absolutely. Let's switch into an area that probably everybody finds more exciting, which is hospitality. We've talked before, we're in the midst of this everyone on vacation thing. It's August, of course, but it's also just

that revenge spending thing happening. But I'm wondering about the impact of inflation long-term. What are you thinking about hospitality right now? Right. I think this year, like you said, it's the revenge spending. It's so much pent-up demand. I love hospitality. I think it's one of the more compelling parts of the real estate sector if you're an investor. Because most Americans spent the better part of the last two years not traveling, not going to events or conferences, not having weddings or family reunions. There was this huge pent-up demand that's just being released this year. Then when the vaccines became widely distributed, people felt safer traveling, especially this year. The demand for

hotels and resorts went through the roof, pun definitely intended there. But you mentioned inflation. I think that might be a later story, but I think right now, most consumers, most travelers are willing to put up with those high rates, big spending, because they just haven't done it the last two years. They've saved for these kinds of things. They might be getting sticker shock in other parts of the economy, like at the grocery store, gas station, or if they're trying to buy a used car. But I think when it comes to travel, booking flights or booking hotels, they're willing to spend the money right now. Yeah, I think you're right. The data bears that out. I was looking at the recent data from STR. They published news on hotel occupancy,

and they had occupancy at 72.8%, highest number since August 2019. And what's even more interesting is prices, average daily rate, almost $159, revenue per available room, $115. Really strong compared to where we've been. And the most interesting thing I saw was that Hostel gross operating profit per available room at its highest level since October 2019. So, all great news for hotels. Are we going to see more hotels? Is there going to be hotel development happening? Well, yeah, the industry has really bounced back. The few hotel rates that I follow are all, you mentioned average daily rates. They're actually reporting daily rates that are above 2019. Nice.

So actually higher than pre-pandemic levels. Occupancy is still below 2019 generally, but coming on strong. I've even seen some reports suggesting that business travel is coming back. Would you believe that, Deidre? Wow. something a lot of people, I mean, including myself, I think you as well, we were really worried about that, that that would actually never fully recover from the pandemic. But I don't know about on the development side. I don't expect we'll see a big resurgence there. Building costs are so much more expensive. We have supply chain issues. Replacement costs have gone way up. I think what you'll see is a pickup in transactions. You're already seeing that. I think

private equity is getting more involved. They're seeing the values in the space. We've seen some mergers and consolidations. We'll see that. We'll also see, I think, an increase in valuations, which have been really beaten down. Yeah. Well, one company that can scale without developing is Airbnb. They had their recent earnings. They reported the most bookings in a single quarter, most profitable Q2 ever. They announced a massive $2 billion share repurchase program. How should investors be thinking about all of this information? It was good news all around for Airbnb. I'm still skeptical in the long run of how much a disruptor the company can really be. It's added a ton of uniqueness to the guest experience.

I love what they're doing in various markets with going there and the experiences that they're offering. But I think that uniqueness also has made for a lot of inconsistency. What you're seeing at least anecdotally is that travelers are being really frustrated by sudden cancellations, experiences and amenities not living up to what the listing had promised. You're seeing increased regulations. I know this as an Airbnb host, you're seeing increased regulations and taxes on hosts in many markets, which makes it costlier to really do business. I think for people who are getting back to traveling in a big way, I don't know how you feel about this, Deidre, but they sometimes value the consistency that you get with a hotel and a

resort and the embedded customer service that hotels have there, where you hear some nightmare stories about people dealing with Airbnb's customer service when they have a bad experience. The stock has had a pretty severe haircut to its stock price, I get it, and the results were fine, but I think you still have a stock that trades for about 50X forward earnings. That's expensive, even for a company, I think, growing like Airbnb is. If not Airbnb, is there any hotel or hospitality company that you have your eye on? Yeah, two hotel REITs that I've talked about in the past, Ryman Hospitality Trust, ticker RHP, and Pebble Brook Hotel Trust, ticker PEB. These companies own really

large-scale resorts or really unique boutique hotels in cities. I think that's where you're seeing the pricing power, that's where you're seeing a lot of the demand resurgence. I just just love how these companies are managed. They cut their dividend big time after the pandemic. I see those dividends coming way back probably as early as this year, but certainly next year. I think those are two I'd look to probably before looking at Airbnb. Makes sense. Can't argue with Ryman. I get a great view of it from my balcony every day. All right. Well, thank you so much. It was great to chat, Matt. Thanks, Deidre.

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