Motley Fool Money - "This is the most important company on planet Earth."

Episode Date: January 13, 2022

Taiwan Semiconductor posted record profits in the 4th quarter, but that's not why John Rotonti believes the company is so important. He analyzes their commitment to invest more than $40 billion this year to increase their manufacturing capacity, as well as the latest news from homebuilders KB Home and Lennar. Plus, Deidre Woollard and Matt Argersinger discuss Sun Belt migration, remote work, and other big trends in real estate, along with some investment opportunities to consider. Stocks: KBH, LEN, TSM, AAPL, QCOM, VNQ, MAA, META, ROKU, ARE Host: Chris Hill Guests: John Rotonti, Deidre Woolard, Matt Argersinger Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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app, which makes it so much easier to stay on track. And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax full service experts. Today on Motley Full Money from Housing to Office space, we'll take a look at real estate trends and investing opportunities to go along with them. All that and more coming up right now. I'm Chris Hill, joined by Motley Full Senior analyst John Ratati. Thanks for being here.

Thanks for having me on the show, Chris. We've also got an update on semiconductors, but let's start with a big day in the housing industry. Shares of Homebuilder KB Home up more than 12% this morning. After fourth quarter profits came in solidly higher than expected, revenue was a little light, but KB Home says that 2022 is going to be a good year. And when you consider how much we've all been talking about supply chain issues, John, this kind of guidance out of KB Home, I understand why the stock is up. You know, I consider this a beat and raised quarter.

Like you said, revenue was a little light, but they crushed earnings, and then they raise their guidance. expecting guidance of midpoint 30% sales growth, 30% revenue growth for 2022. They've also increased their guidance for return on equity, which is a measure of profitability. In 2021, they did 20%. They're expecting to do 26%. So a 600 basis point improvement year-over-year. That's just incredible. And I think it shows the pricing power that home builders have right now, given the supply, demand imbalance. If we go back to microeconomics 101, almost the first day of class, you learn about how supply and demand affects price. And right now, Freddie Mac estimates were four million

homes short in the U.S. because we underbuilt coming out of the global financial crisis. And so, you know, I've seen estimates that were anywhere from four million to actually six million homes short. At the same time that we're seeing a surge in demand, because millennial, are now at that prime home buying age. That on top of the fact that COVID and the pandemic has changed living patterns. And now people want to move outside of the cities. Some people want to move outside of the cities and to more suburban rural areas where they have more room and more space to work from home, play from home, exercise from home in a socially distanced way. And so the combination of massive shortage of supply,

and surging demand is giving homebuyers, I mean, home builders pricing power. And so we're seeing an increase in ASPs, average selling prices. And yeah, that's the story with KB. Homes. And hopefully this is a read-through for the rest of the industry that the other home builders will have a good quarter as well. We'll get to the other home builders in a second. You know, for a brief moment there, when they were talking about their guidance, I had this crazy idea that it meant good things for people looking to buy,

homes because much like the used car market and therefore the new car market, the home buying market has just been on fire. And anecdotally, I think we all know people out there who have tried to buy a new home, a bigger home, and have gotten priced out very quickly or ended up paying more than they probably would have in normal times. But to your point on sort of the deficit in homes, I mean, it really does seem like when you're talking about nationwide, four to six million homes short, are we going to see the housing market on fire like this for years to come?

Or does it start to cool off at some point? So there's two views to this. I do think that we're going to see an extended upcycle, Chris, an extended upcycle because inventory is so low, because supply is so low. if you look at where KB. Homes is trading, it's trading at a price to earnings ratio of six. Six. That suggests that the market thinks we could be at peak earnings. So it's an interesting enigma with the home builders right now. I'm of the view that we're going to see an extended up cycle for all the reasons we just discussed, the supply, demand, and balance. But the market

seems to think that we are approaching a peak and that earnings could start trailing. off. Because a P.E. of 6, that's the only explanation I can think of. Let's move to a home builder that is nearly 10 times the size of KB home, and that's Lanar. No earnings report out of Lenar, but they're increasing their annual dividend by 50%. How good are they at capital allocation? Because I can't imagine you make a move. You know, we've seen plenty of times where the news is someone is increasing their dividend by a penny. a couple of percentage points. You've got to be confident you're going to make this stick if you're going up 50% for an annual dividend, right?

This is a signal that the management team has a lot of confidence in the company's ability to generate strong and stable cash flows across the cycle so that they can sustain this dividend. No management team wants to have to reduce, suspend, or cut a dividend because that's going to across the stock. I mean, no management team wants that. And so, yes, this is a signal that they think they're going to have really strong, robust cash flows going forward. It is a 50% increase. It's an increase I love to see because this is a company that I actually admire a lot, Lenar. But to put it in a perspective, their dividend payout ratio is very low. So they had a lot our room to increase. Before this announcement, I think their dividend payout ratio was well less

than 15%. So they, meaning they're paying out less than 15% of their earnings, of their net income as a dividend. This increase will take Lenar's dividend yield, which is different from the payout ratio. The payout ratio is the percentage of earnings that they pay out as a dividend. The yield is the dividend divided by the stock price. This will take their dividend yield from about 1% to about 1.4%. So it is a nice boost in the dividend yield, but that dividend payout ratio is still very low. And so actually, that indicates they have room to improve this dividend much further over time. You mentioned, I think you used the word admire with respect to Lanar. We talked previously about KB Home.

D.R. Horton is a major home builder. What is it about Lamar and the way they run their business that makes you like them? More so than the others. So if I had to put one thing on Lenar that I like more than the others, they have a division which is called Lenox or Lenar X, which is basically a venture capital division, where they invest in different home-related technologies. one of which is Open Door, the leading eye-buying company in the world. Now that Zillow has closed its eye-buying business, we're left with Open Door and Redfin,

and they own a minority stake, but a substantial stake in Open Door. And then a variety of other venture-like investments as well. I like the industry as a whole because they're moving from an asset-heavy, land-heavy business model where they would own and develop the land, which required a lot of debt, to one that is much more land, light. So they're owning and developing less land and focusing more on returns on investment capital and returns on equity. And we saw that in KB's guidance, where they're increasing their return on equity from 2021 levels by 600 basis points. Before we move on to semiconductors, I need you to cure me of something. And that is, when I,

And you reference Zillow. When I hear the phrase eye buying, unfortunately, I think of Zillow and the debacle of Zillow attempting to roll up their eye buying program and then cutting it back and then suspending it. I mean, it was breast taking the speed with which they launched and shut down their eye buying program. I feel like eye buying is one of those things. I shouldn't, my default thought should not be Zillow and its debacle was eye buying. How should investors think about eye buying, either on the consumer side or just as something to watch within this industry? I don't know. I was bullish on the potential for eye buying to really transform the home buying and selling experience from the consumer standpoint until the Zillow debacle. Now,

I'm much less bullish on eye buying. One thing I'll say about Open Door is they are a pure play eye buying company. Zillow started as something else. Zillow started as a basically advertising-driven search engine for homes. Then they tried to shift into iBying. Maybe Open Door will have a better go at it because that's all they do. And maybe they're just better at it. Maybe they're better managed when it comes to that, better organized when it comes to that. The thing I like about Lanar and owning a stake, which I don't have a stake in Lanar personally, but the thing I like about investing through Lanar is you get some exposure to iBying through their investment in Open Door.

but you're paying once again like a PE of 7 or 8 or something like that. Taiwan Semiconductor posted record profits in the fourth quarter. They also offered upbeat guidance and said they planned to spend up to $44 billion this year to increase their manufacturing capacity. For those unfamiliar with Taiwan Semiconductor, their supplier for Apple, Qualcomm, and others of that size and ilk shares up more than 5% this morning. Is it the record profits, the guidance, the commitment to investing the money, or is it some combination of all three that's pushing this stock higher?

It's all three. Taiwan Semiconductor, and I don't like to speak in superlatives, is probably the most important company on planet Earth. Wow. Really? Yeah. Every electronic device in the world has something from Taiwan Semiconductor in it. They manufacture over 50% of all.

all the world's contracted semiconductors, but they manufacture 90% of the most advanced technological chips. 90%. So they're a really, really important company, especially as we get more and more digital, and we start, and electronics start pushing into more and more of our daily lives. The other thing I'll say is $44 billion in CAPX is probably, I'd have to check this, the most capital-intensive business on earth. So not just the most... I don't... I'm not aware of another company spending $44 billion in property plan equipment in one year. There may be a few, but I could count them on my hand, so there's not a lot. What that signifies, Chris, what that signals, $44 billion in CAPX is that's the demand that they see for their products.

They need to build this capacity in order to satisfy demand. And so along with that increase in CAPEX guidance for 2022, they also increase their long-term revenue guidance from 10 to 15 percent up to 15 to 20 percent. That's a substantial jump. And you see how important a company is when they need to invest 40-plus billion dollars a year in capital to satisfy demand. This is a demand story. It's incredible. The world is short semiconductors, and Taiwan semiconductor is trying to take share

and fill that demand. This seems like one of those bits of data that, whether you're bullish or bearish on semiconductors and the global supply chain, you've got something to work with here, because on the bullish side, you look at them raising guidance. You speak of the demand. On the bearers side, they're investing this money, it's not going to increase capacity in the next 12 months. I mean, this is a long play. And I think that for a company of this size, you want to see this type of investment. But this isn't going to dramatically move the needle on semiconductor production in 2022, is it? No. You're exactly right. Some of this CAPX is going to go towards building next-gen

chips, which they aren't even selling yet. So these three nanometer and these two nanometer chips. Right now, the size of the chips they're selling are in the seven nanometer and five nanometer space. So a lot of this is very, like you said, far out. It takes over a year and between $10 and $20 billion to build one of these fabs, one of these fabrication facilities. It's extremely capital intensive. By the way, there's, currently Taiwan Semiconductor only has one competitor for the world's most leading edge chips, and that's Samsung. They will, soon have Intel as well. Intel says they're going to get into this space, but right now it's a duopoly, and Taiwan Semiconductor is far and away the leader. They have 90% market share

of the world's most advanced jobs. Last thing, and then I'll let you go. Taiwan Semiconductor, I kind of feel like they are akin to NVIDIA in the sense that both companies are worth more than $600 billion each, but they're not nearly as well-known. to consumers and even investors as other companies of that size. When you think about sort of consumer names like Facebook, I'm sorry, meta platforms that we're supposed to call it now. But these are enormous companies. From a stock perspective, it's had a tremendous run.

Do you look at Taiwan Semiconductor as a stock people should look at right now? Or is this one of those times where it's like, it's a tremendous run? I don't want to say you have to have a strong stomach, but it's a little frothy right now, maybe. No, sure. If you have a long enough time horizon, which I'll define as at least five years, you're willing to hold the stock for five years, yes, I think now is a good time to look at Taiwan Semiconductor. 30 seconds, I'll just say you mentioned in Midia. So Taiwan Semiconductor is a platform that they allow their customers to acquire much more value than Taiwan Semiconductor. Semiducter keeps for itself. For example, Jenshin Wong, the CEO of NVIDIA, has a quote.

And it's, there's basically Air and Taiwan Semiconductor. That's how important, that's how important NVIDIA sees Taiwan Semiconductor to its own business. Yeah. It's a really, it's, it's, it was a platform before Amazon Web Services was a platform. This is why I love talking to John Rottaki. Thanks for being here. Thank you, Chris. I hope I can come back soon. After an historic year for real estate investing, what can investors expect in 2022? Among other things, a sea change in commercial real estate. Deidra Woolard has more. Chris, I'm Deidra Willard, and I'm here with the lead real estate analyst Matt Argersinger.

Matt, 2021 was a pretty strong year for real estate in the stock market, huh? It certainly was, Deidre. I mean, if you look at the Vanguard Real Estate ETF, which is a benchmark that we follow when we're looking at estate investments. It was up over 40%. It was its best year ever, and that index has been around for about 16 years. If you look at the National Association of Reitz, which is another index, it had its second best year on record of 41%. So, extraordinary year for real estate and Reets in 2021. And, you know, Reitz have a great track record. For those listening who might not be familiar with Reits, Real Estate Investment Trusts, if you factor in 2021, they've returned

on average, 13.5% per year since 1972. So almost 50 years worth of data, that outperforms the S&P 500. So it's a great year for real estate in 2021, but really real estate investing has been doing well for investors for decades. And Reitsport bouncing back from a pretty hard 2020 and some of the impact of COVID-19. Yeah, fair to point that out. I think 2020 was a difficult year for real estate. It was one of those sectors that was more acutely affected. In other industries, just because if you think about retail, real estate, hotels, hospitality, office is one that's still suffering from the effects of the pandemic.

So 2020 was a very, very difficult year. Reets were down in the high single digits on average that year. So I expected, I think, as you did, that 2021 was going to be better, and it certainly was. I don't think we thought it was going to be this good or historically good as it was, though. Exactly. Well, let's talk about some of those trends that we're most interested in. The first one I feel like is one that's both pandemic-driven, but also was already in process for years before that.

That's Sunbelt migration. People moving to Texas, Florida. Redfin came out with their hottest neighborhoods recently. I think most of them were in Florida. A lot of really interesting activity happening in the Sunbelt right now. Yeah, that's right. I mean, as you said, this was happening before the pandemic. We saw all kinds of trends, population.

If you look at U-Haul data, which is a cool data set that you and I look at now and then, it was all heading down toward the Sunbelt markets, the southeast, the southwest, away from the coasts. What the pandemic did is it really just accelerated that trend. Suddenly, you had a lot of workers who were used to living in sort of the big coastal gateway markets, your San Francisco's, Los Angeles, your New York's, your Boston's, and all of a sudden, they had a lot more flexibility with their job, and they can kind of work remotely wherever they thought would be best for them.

And that meant looking for, in a lot of cases, cheaper places in the South, Southwest, or in the inner parts of the country, or just places that they have a better life. They prefer to live and still be a productive employee. And so those trends really, really took off with the pandemic. They have not ceased. And we've continued to see this sort of big population swell down to those other markets. And what you're also seeing in a lot of those places is there's just not enough houses. They're not enough houses at all in the country to meet the markets.

demand out there, but especially in those markets, those hot demand markets. You mentioned Florida and Texas. If you look at places like Austin, Texas, Houston, Dallas, Fort Worth, or if you go to Florida and you look at Miami or Tampa, there's just so much demand for housing. There's not a lot of it. There's a demand for apartments. So you're seeing home prices go up. You're seeing apartments, apartment rent surge. And unfortunately, development's just not going to be able to meet that kind of demand. So you're going to see, I think, again, rising home prices, rising rents, especially in those markets. So, cheaper rents, hopefully bigger apartments, warm weather. If investors were looking to bet on some of those trends, what's one idea they could take a look at?

Well, I think one idea that comes to mind is Mid-America apartment communities, tickers MAA. It's the biggest owner-operator of apartments in the country, actually, but they have so much exposure, about 90 percent of their assets are in the quote, Sunbelt region. And that's where they've been focused for decades now. And so as the largest apartment, we have, owner and operator in those markets. I think they've been a huge beneficiary of this demand. Their occupancy rates are at record. Rents in a lot of their markets are up double digits, if not even 20 percent more in a lot of places. And I think that's going to continue. So mid-American apartment communities, it's had a nice run as a stock, but I could see more upside

as this trend plays out. Now, our last trend, I feel like, is pretty much COVID-driven, and that's the impact of remote work on the office real estate sector. A lot of companies were planning to have people come back in January, that's been pushed back. Some companies have just given up on announcing deadlines of return at all. And yet at the same time, I've seen a flurry of big office leases from companies like Meta, Roku, in markets like New York and Los Angeles. What's going on here? It is the most confusing part of the real estate market for a lot of reasons. As you pointed out, teacher, I mean, we know what the pandemic has done with the work from home and hybrid work schedules

and what that means for office occupancy, which is so low right now. Yet, a lot of these technology companies out there and life science companies out there are leasing office space at record paces. And maybe that's not surprising. But I think if we step back and look at the office market, I really do think we've passed peak office, so to speak. I mean, no matter where you look, what surveys you read or which economists you read, the prevailing thought is that companies are going to lease less office space today. and in the future than they did prior to the pandemic.

It's a real major C change for the industry. And so, and I don't think we understand the full implications of this, but the real short-term implication is that we have too much office square footage in this country. A lot of it needs to be transitioned to probably apartments, as you're seeing in certain cities, or maybe even to hospitality, or maybe that office just gets converted to kind of co-working spaces. So, you know, it's not necessarily a dedicated corporate office or corporate headquarters anymore. It's a place where employees come to collaborate, you know, on maybe not an off-routine basis.

And so that's kind of the state of office right now. Now, there are parts of the office market that I think can do well. Technology, R&D, life science, medical offices. So we actually, in a position after the pandemic, to actually need more of that kind of office. And so there are parts of the office market that I think are going to work. Again, co-working is probably going to do well. Medical office, flex spaces. But the traditional office building, I think, is going to probably become a thing of the past, believe it or not.

Well, you can't do your medical research at home. And that's one of the reasons that you and I are both excited about life sciences and the growth in that sector. I know that you and I both have a favorite in this category. Let's talk about it. Sure. Well, my favorite has always been for a long time. And that's Alexandria Real Estate Equities, ticker A-R-E.

It's the leading real estate reed for life sciences and technology. I mean, they really cater to, if you think about companies like Moderna or Pfizer, who kind of led the vaccine front or companies like Facebook that are doing all kinds of innovations, I'm sorry, meta, I keep calling it Facebook, Google. These are the companies that really lease from Alexandria real estate. And we see that demand has not fallen off. Alexandria real estate's occupancy has never been higher. It had no problem collecting rents throughout the entire crisis, which is such a departure

from other office reeks, which did suffer. I love it. It's got a founder-led management team. They've been outperforming the market for decades now at this point. Even though the stock has had a really nice run, it's a little bit expensive, maybe from just some valuation points of view, but it's one that I like very much. It's really taking advantage of this trend towards Life Science Office. Absolutely.

Yeah. a recent big deal with Moderna in Cambridge, Massachusetts. They're really focused in all of the markets where life science is booming. That's right. I mean, yeah, you mentioned Moderna there. I think it's a 500,000 square foot new headquarters of building in Cambridge, and it's going to be owned and operated by Alexandria Real Estate. Love it. Well, always a pleasure to talk real estate with you. Thanks, Matt. Thanks, Deacher. That's all for today, but coming up tomorrow, earning season officially kicks off with financials. Jason Moser and Maria Gallagher will be here to break it all down.

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.