Motley Fool Money - 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

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At Paramount, the drama is coming from inside the building. Motley Full Money starts now. Welcome to Motley Full Money. I'm Deidre Willard here with Motley Full analyst, Jason Moser. Jason, how's your Monday going so far? Hey, Deidre, just 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 Guidance. This is all very complicated and very dramatic, isn't it? It really is. I'm glad you said that up front because it is, 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, I mean, Sherry Redstone kind of has this idea in mind sort of 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, I mean, ultimately, yeah, this is a really complicated situation because the thing is, I mean, you've got this, this paramount deal with Skydance, but when you consider paramount in the context of national amusements and then Redstone's ownership, interest in it all, I mean, there are a lot of, a lot of properties at stake here. And I think that's what, 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 kind of split apart this Paramount business to sell off the pieces. And 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? And we're just not to the point where we know that answer yet. Yeah, and there's also another deal from Apollo to try and take it private. And I'm assuming if they took it private, then they would absolutely break it up.

As it stands with the Skydance deal, which is definitely the one that Sherry 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, they 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, because when you consider these businesses on the whole particularly paramount, I mean, it's a business, just, it's somewhat challenged, right? I mean, there's some fundamentals there that need to be considered. I mean, they have $14.6 billion in long-term debt, just $2.5 billion in cash and equivalence. And it's a business that's not really prospering, right? There's not really the growth. But then when you flip that coin on the other side there, you look at Paramount's

global assets are very valuable. I mean, there's a lot to it. And that kind of goes back to that pieces versus the whole thing. But when you look at Paramount Global, I mean, you've got Paramount pictures. You've got the CBS network and all of its own local stations. You have cable networks like Comedy Central, BET, MTV, Nickelode. Now, some of those seem like maybe their best days might have passed, but I mean, you never know, right? Having strong brands like that, you can reinvigorate them. So again, I mean, with the Apollity, I mean, the Apollity seems like it offers a little bit more certainty. It certainly seems a little bit more shareholder-friendly, whereas what Redstone may be pursuing, I mean, and this is totally understandable,

but I mean, it seems to be more tilted towards her self-interest or her family's self-interest. So, 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. It's 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 has 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 a long for the ride, right? Yeah, well, it definitely feels like 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 this earnings call. I mean, it does, It does feel like we should prepare ourselves. Investors should prepare themselves for in some sort of 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. And that's not really leadership, right? I mean, leadership is someone kind of getting in there and saying, this is what we need to do and this is what we're going to do, whether it's 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 we're building that engine. The market like 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 the only one. I mean, Domino 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. And they typically come in the form of clever acronyms. And in this case, for Domino's,

is hungry for more. Capital M-O-R-E, right? And M-O stands for most delicious food. O stands for operational excellence. R stands for renowned value. And E stands for enhanced by best- and 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 kind of just seems like that's the strategy that should be in play. I mean, 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 Bedbath and Beyond, right? I mean, sort of the ongoing joke was,

was, well, I'll go to bed, bath, and 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. And in regard to Domino's, it is something that, it's something to keep in mind, but it's intentional on their part. And 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 it's reinforcing the value proposition affiliated with the brand. And, 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 that's maybe with a company like Domino's. It is probably that memorable word, right?

Experience is something that makes you want to come back and buy from them again. And so, you know, they talked about the promotional environment in 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. And they see this as an opportunity to really focus on presenting that value proposition. There's something to that. There's no question.

I mean, 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, you know, inflation of bates. Is Domino's going to hold that same dominant position? You know, 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, when you, when you, you look at SOFI, I think you made a great point there. People don't like to switch banks. It's just a hassle. And I mean, there's no way on this earth that I'm going to go on there and switch banks at this point in my life, unless something just dramatic occurs, right? And with SOFI, I think they've done a very good job in focusing on sort of the new generation of users, right? I mean, 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, right? They're focused on developing new relationships with folks that are just

coming in to needing a banking relationship. And when you think about what SOFI offers today, I mean, I know a lot of that revenue growth comes from the lending side of the business, but what they did know at the call, you know, 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 cards, SOFI invests, 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. And so being a bit more widespread in that regard, I think, is a good thing ultimately for SOFI.

But yeah, it just, 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. Yeah. And I think some of that newness may be what makes the market a little bit uncertain about so-fi. Because, you know, so many companies have been lowering guidance. They're actually raised their 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 are just kind of coming into the market. I mean, 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.

And so I think a lot of that kind of 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 a lot of the market's able to think truly out in not just five years, but 10 years and beyond, sort of trying to understand what does the banking environment look like 10 years from today, 20 years even from today versus today. And 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, I mean, they really are, they really are. They provide all of the banking that you really need. Yeah, they're a one-stop shop. Yeah, I mean, they really are. And there's a lot to be said for that. And I mean, the company itself, me, look, they grew tangible book value 14 percent from $3.43 a year ago to $3.92 to today.

I know that doesn't sound like a whole heck of a lot. But remember, this is a new company. It's really young and new company. and new company that's just kind of finding its way. So 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, right? They are looking to figure out a way to create that overall banking relationship, because

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. And 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. 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. Sounds good. Thanks for your time today, Jason. Thank you. 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. And single-family rental is probably about 18 million of those. And in the 18 million, to your point, we own and operate around 105,000 units today, of which the company itself 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 professionalize 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 got some cycles coming up, it seems like. Yeah. And look, like anything in life. 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, you know, 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. And so 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, right? 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, you know, a married family or a couple or a partnership with one to two kids.

and 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 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 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, 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 four thousand doors. And they were like, God, 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 sat together as a team and thought, is there a way that we could be effective? Because it's, for a lot of people, property management's a

loss leader. And for us, it isn't. We can run so efficiently that we, 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 we'll do the right thing behind it. And the second thing is, to your point, Deidre, 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, you know, 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. And I hope that it ultimately lends itself to opportunities for us to grow our own portfolio, where we could be, you know, a natural buyer of some of these businesses over time. And 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 mentioned, 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 started to be. And now it's, but seems to be picking up. What are you looking at? Are you, you looking at more build to rent? Are you working with home builders? Where is your supply coming from? Great question. And if you take a step back and you think about 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. And so 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 been doing it for decades. But we certainly can take our balance sheet and work with them and partner with them to build best and class product at our specs and in the markets we want to be long 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 in building new product together. And I would reserve the right to say over time our philosophies could adjust. Maybe we take on more of a role of being a builder. But in today's market, it is sure felt 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 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. 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 evolve between operators, companies like us, and home builders, 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 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, remain 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, you know, 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 and doing it that way. I think your CAPX risk is a little bit lighter, especially if you're a new entrant into the marketplace. And 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 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? Or the 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? 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 $1,000 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. And so the homeownership rate, if you look at today, is very healthy from our view. And 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 as high as pushing 70 or low 70 percent and then got down to like 60. I think the homeownership rates somewhere today in like the mid-60, 66, sometimes, sometimes 67 depends on the market. It's pretty healthy. So, you know, 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 like entry-level buyer, and they do exist. Like, 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 and starting families. They're doing this later. The data tells us all that. So, you know, 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. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have four more recommendations for or against. So don't buy ourselves stocks based solely on what you hear.

I'm Deja Woolard. Thanks for listening. We'll see you tomorrow.