In this podcast, Motley Fool analyst Jason Moser and host Deidre Woollard discuss what's happening at Paramount as well as strong earnings from Domino's Pizza and SoFi.
Then Invitation Homes CEO Dallas Tanner shares his vision for housing's future.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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Deidre Woollard: At Paramount, the drama is coming from inside the building. Motley Fool Money starts now.
Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool analyst Jason Moser. Jason, how's your Monday going so far?
Jason Moser: Hey Deidre. So far so good. We have a nice little warm stretch here in Northern Virginia. It's going to be hot today, but I am not complaining about that. How about you?
Deidre Woollard: I'm doing OK. 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 Bakish may not be on the call, he may resign before then. It's interesting because he's been the CEO of Paramount since the end of 2019, then at Viacom, since the late '90s, and all of this comes down to the fact that he's not interested in supporting Shari Redstone's plan to merge with David Ellison's Sky Dance. This is all very complicated and very dramatic, isn't it?
Jason Moser: It really is. I'm glad you said that upfront because it is, if folks who are looking for an answer here, I don't know that we have an answer. We can certainly go through all of the possibilities, but it does seem like Shari Redstone has this idea in mind, a way that she wants to take the business, and if you're not on board, then you may as well go ahead and just take off. But ultimately, this is a really complicated situation because the thing is, you've got this Paramount deal with Sky Dance but when you consider Paramount in the context of National Amusements and then Redstone's ownership interests in at all, there are a lot of properties at stake here. I think that's at least partly what makes this such a difficult deal to figure out. Not to mention the fact that there have been a number of different solutions proposed. The initial deal here is one where Sky Dance would buy out National Amusements, which is the ultimate property there, and then Paramount would acquire Sky Dance with stock after that deal. It seems like other options out there were trying to split apart this Paramount business to sell off the pieces. I think that raises the bigger question, and it's a very good one I think, is Paramount going to be worth more in pieces than as a whole, and we're just not to the point where we know that answer yet.
Deidre Woollard: There's also another deal from Apollo to try and take it private. I'm assuming if they took it private then they would absolutely break it up as it stands with the Sky Dance deal, which is definitely the one that Shari Redstone wants. Even if a lot of institutional investors don't, Paramount will still remain a publicly traded company. It really seems like nobody knows 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, and you've got that element here too, and now they added a $3 billion cash infusion to the deal, I think like an hour ago. They're make this happen. It seems like very quickly.
Jason Moser: I'd imagine the TV series for this story is probably already in development. This really does feel like a succession 2.0. This really does follow that story line. It's a very familiar story, legacy entertainment business trying to adapt to the new streaming model, a lot of financial considerations because when you consider these businesses in the whole predict of Paramount, it's somewhat challenged. There are some fundamentals there that need to be considered. They have $14.6 billion in long term debt, just $2.5 billion in cash and equivalents, and its a business that's not really prospering; there is not really the growth. But then when you flip that coin on the other side, you look at Paramount Global assets are very valuable. There is a lot to it. It does back to pieces versus the whole thing. But when Paramount Global, you have Paramount Pictures, you have CBS Network with all of its local stations, you have cable networks like Comedy Central, BET, MTV, Nickelodeon. Now, some of those seem like maybe their best days might have passed, but you never know. Having strong brands like that, you can reinvigorate them. Again, with the Apollodyne, it seems like it offers a bit more certainty. It certainly seems a little bit more shareholder-friendly, whereas, you know what, Redstone may be pursuing, this is totally understandable, but it seems to be more tilted toward her self-interests or her family's self interests. Again, you look at that greater space, we've seen all of the challenges with these legacy companies trying to evolve into this new-fangled streaming type business. They're just a lot of costs that come with it, and those costs result in some serious lost money in the near term. Still 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. At least monetize to the extent where it's an attractive asset. It seems like this is one where we're going to hear a lot more about it before this deals ever struck.
Deidre Woollard: True. 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. When you're investing in a company and they're in this space, it feels like you're just along for the ride?
Jason Moser: Well, definitely feels that way here. You look at what's going on with leadership. I think that we probably will find out on this earnings call, it does feel like we should prepare ourselves, investors should prepare themselves for some big change in leadership. They're talking about now putting in place an office of the CEO, which ultimately would be just made up of divisional heads. So then you have a lot of people in a room offering up their opinion and telling you the solution. That's not really leadership. Leadership is someone kind of getting in there and saying, and this is what we need to do and this is what we are going to do, whether it's right or whether it's wrong, we'll figure that out when get there. But leadership by committee, often times can be very difficult. In my suspicion is in this case that probably would also ring true.
Deidre Woollard: 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. US same store sales were up about 5.6%. What I found was interesting is that 3% or more of a sales are expected to come from Uber Eats, and that's small, but we're rebuilding that engine, the market like these earnings, you've got a strong base here. One thing I'm worried about though, is promotions were big part of the revenue, Strong Loyalty Program. That's awesome. But are they constantly having to use these promotions to boost sales?
Jason Moser: Yeah, I think so. It always cracks me up with companies like these. I'm not saying Domino's is the only one. Domino's one of many, but they come up with these thematic strategies of how they're going to take the business forward in continuing to grow. They typically come in the form of clever acronyms, and in this case, for Domino's is "Hungry for MORE". M-O-R-E, an M stands for Most delicious food, O stands for Operational excellence, R stands for Renown value, and E stands for Enhanced by best-in-class franchises. 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 just seems like that's the strategy that should be in play. I think in regard to promotions, it is a concern for companies when they're overly reliant, one that stands out to me and it's not a food company, but it's similar in retail and it's so hinged the consumer, think about Bed Bath and Beyond, I mean, the ongoing joke was we'll all go to Bed Bath and Beyond. Once I get that card in the mail, that tells me how much I'm gonna get off for that next purchase that I go make. In regard to Domino's, and it is something that It's something to keep in mind, but it's it's intentional on their part and it's something they referred to in the call. They talked 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 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 is probably that memorable war. Experienced is something that makes you want to come back and buy from them again. They talked about the promotional environment in the call. They refer to the fact that that customer responses to deals are always strong and they're stronger now than ever because of the fact that we're living in such an inflationary environment, the cost for everything is going up. They see this as an opportunity to really focus on presenting that value proposition. There's something to that. There's no question. I mean, it, it's obviously working out. It shows in the numbers. But, but it's always something to keep in mind in regard to companies like this because when they start relying or would they overly rely on promotions? Then you start to wonder, well, when things correct and we see prices start to normalize a bit. Inflation of Bates is Domino's is going to hold that same dominant position. I don't know what we'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. 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, but absolutely something to keep an eye on.
Deidre Woollard: 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, switching costs. People don't like to switch banks and yet a lot of people are choosing SoFi.
Jason Moser: Well, I think in this case, when you look at SoFi, I think you made a great point there, but people don't like to switch banks. It's just a hassle. I mean, there's no way on this earth that going to go in there and switch bags at this point in my life, unless something just dramatic occurs. With SoFi, I think they've done a very good job in focusing on the new generation of users. I 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. They're focused on developing new relationships with folks that are just coming into needing a banking relationship. When you think about what, what SoFi offers today. Then I know a lot of that revenue growth comes from the lending side of the business. But what they did note the call the financial services and the technology platform segments, actually really contributed to these results this quarter, it was 42% of adjusted net revenue in the quarter. That was up from 40% last quarter and up from 33% a year ago. We can talk about financial services, that's things like SoFi money, which are the difference of accounts that they have. SoFi credit cards, SoFi vess, SoFi relay, which is a budget app that they have. Then you look at the technology that they're building. It's ultimately vertically integrated technology which ultimately helps merge their company with financial and non-financial companies. Being a bit more widespread in that regard, I think is a good thing ultimately for SoFi. But it feels to me like what SoFi, it's more about the bankers up tomorrow as opposed to us, which I guess we would qualify as the bankers of yesterday.
Deidre Woollard: Or at least where the bankers of today. I think some of that newness may be what makes the market a little bit uncertain about SoFi because so many companies have been lowering guidance. They're actually raise the revenue guidance and their net income guidance. They're still calling this a transitional year. It feels like they have a lot of runway ahead and yet the market feels tentative, is it the words, transitional year, are those a bit of a red flag?
Jason Moser: That well, it always feels like a red flag. And then I think you need to 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 go back to building relationships with the bankers are the future. The younger bankers and we're just 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 unclearly, a lot of the options have changed considerably since many years ago. I think a lot of that boils down to uncertainty. I understand the market's trepidation there. I think it's just a matter of, you need to take that longer view, I think with something like SoFi, it's just going to require being able to think truly out in not just five years, ten years, and beyond. Trying to understand what does the banking environment look like ten years from today, 20 years even from today versus today? It obviously is changing considerably. But it does, 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 r they provide all of the banging.
Deidre Woollard: The airline shop.
Jason Moser: I mean, they really are. I mean, there's lot to be said for that. I mean, a company itself people, if they grew, they grew tangible book value 14% from $3.43 a year ago to $3.92 today. I know that doesn't sound like a whole heck of a lot, but remember this is a new company. It's really young and new company that's just finding its way. I like the investments that they're making. It doesn't mean that everything is necessarily going to pay off. But I think they're looking at it from the right angle. They are looking to figure out a way to create that overall banking relationship. Because we know that's very sticky and we know that the longer you are meshed in that banking relationship, the less likely you are to go ahead and bail and go somewhere else. While that may not necessarily pay off on the bottom line today, I think ten years from now, we could be looking at this and thinking a little bit of a different thing here. I think that's, you got to be able to take that longer view. For some folks, they just don't want to do that for others. They're happy to remain patient. I guess a tomato.
Deidre Woollard: It sounds good. Thanks for your time today, Jason. Invitation Homes owns a portfolio of 80,000 single-family rentals. I talked to CEO Dallas Tanner about the logistics of property management and where the company could be headed next.
Well, I want to 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 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.
Dallas Tanner: 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 US today. Single-family rental is probably about 18 million of those. 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. What you've started to see professionalized really only in the last decade is this desire for more professional services like we've seen in the apartment industry over the last 30 or 40 years and so while the company has grown pretty quickly and we keep getting better as an organization in providing these services. We've really scratched the surface of what the company can become over time and I think how the industry will grow over the decades to come. It's going to continue to professionalize and get better and better.
Deidre Woollard: 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. You've got some cycles coming up that seems like.
Dallas Tanner: Yeah, look like anything in life. A lot of the things we all enjoy in our own, call it consumer life. We all order things on Amazon and some of these other companies because of ease and because they can drive down costs. Ultimately Invitation Homes wants to focus on some of those core principles. We want to, through the use of our scale and the size of our platform, create better efficiencies and additional opportunities for our families that live in our homes and bring down the cost of other things in their life as well. If we do that well, it should provide us a better experience, a stickier, what we call a resident experience and they want to stay with us longer and longer, which will lend itself to better performance for the company.
Deidre Woollard: Well, I think you've also discovered something interesting to 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.
Dallas Tanner: Well, today, our customer on average stays this about three years and we keep seeing that continued tick higher and higher, which is a better customer profile than what the multi-family companies have seen historically. They're making decisions around things like school districts, transportation corridors. Most of your multi-family 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 ages 39 years old, it's usually 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 30 and 40 right now is a massive demographic. 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. 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 angle on that side of their life and how can we do things locally and in some of these markets that will provide compressing of costs in other categories in their lives. That's what we're really focused on right now, that resident experience making it unique and making it more than just a landlord relationship.
Deidre Woollard: You had this announcement recently of building that property management platform for large portfolios, which of course makes total sense. I'm wondering about both the impact on earnings and for the potential for this to really be a stream to get more of those smaller portfolios maybe under your wing a little bit.
Dallas Tanner: We love the idea and we'd been listening for a couple of years to the marketplace and hearing frustration for some of these professional owners or investors that had called built two or three or 4,000 doors and they were wow, we're just not getting the returns or the margin profile or the efficiencies and the customer experience. A couple of years ago, we sat together as a team and thought, is there a way that we can be effective? Because for a lot of people property management is a loss leader and for us it isn't, we can run efficiently that it's profitable business for us. But really we want to do with strategic partners and there's a lot of reasons for that. One, we want scale, not really interested in smaller accounts we want professional capital that will do the right thing behind it. 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. It should actually enhance our operating margins as we grow and get more scale. Look, this has been done very effectively in multi-family for decades. There are big operators multifamily that both own and operate for others, significant sized portfolios and I think this is the natural evolution for the next couple of really good single-family businesses that want to provide both services. I hope that it ultimately lends itself to opportunity for us to grow our own portfolio where we could be natural buyer of some of these businesses over time and if not, that's OK too, because it's a profitable business and it helps us make our own business even more profitable.
Deidre Woollard: I want to dive into your acquisition strategy because I know it changes overtime changes with the market of course. You touched a little bit briefly on build-to-rent earlier. I've been studying this it seems, I thought it was going to be bigger than it started to be but seems to be picking up. What are you looking at? Are you looking at more build-to-rent? Are you working with home-builders? Where's your supply coming from?
Dallas Tanner: 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. It's because there's just an immense amount of a lack of supply in the marketplace today, both for fee-simple and for ownership and also for the people that need or want to lease. I think what we've focused on is partnering with some of the best and brightest home-builders in the country and using our balance sheet to invest in building new housing together, I probably can't build a home as efficiently as some of the big companies that are just professionals and been doing it for decades. But we certainly can take our balance sheet and work with them and partner with them to build best-in-class product at our specs and in the markets we want to be longing for a variety of reasons. So today we work with probably anywhere from 10-12 different builders, both public, private, and regional and we're leaning in hard on investing in building new product together. 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 partner with these best and brightest, drive down cost 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. For them because it's a much easier process we're like part of their fleet program at this point. Very similar to what you see in the car business.
In Ford, I drive an F150 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. I think there's a similar relationship that we'll see continue to evolve between operators, companies like us, and homebuilders where we can fit into a small portion of their overall sales strategy. But at maybe a cost that is maybe a little bit different than what the retail market might pay. I think using our balance sheet to be a good operating partner for them is a win-win for both sides of that transaction. Then I think for us, we're getting so much smarter what the customer wants. Like we're building a community in California right now. It's all solar Deidre and it's all extremely efficient and we pride ourselves on that and that's much easier to do it in a newbuild. We can 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.
Deidre Woollard: Interesting. Because I've been watching the real estate market and right now, as you know, existing home inventory super-low remains super-low, although there are pockets where it's starting to get up a little bit. But right now about 30% of the homes that are selling our new homes. 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 less of a concern going forward?
Dallas Tanner: Not really. We've actually been more of a net seller. We've been selling homes, who sold something like just under 13,000 homes, maybe the last five-years back into the marketplace and those are all going primarily to end-users, people that are buying the home with a mortgage or whatever. I think where you will see institutional investors or professional capital invest is going to be in this BTR and in this newer product. There's economies and efficiencies of scale and doing it that way. I think your CapEx risk is a little bit lighter, especially if you're new entrant into the marketplace. Who doesn't want to lease a brand new home in a cool community with amenities like, it's not like rocket science to invest our capital there. It's actually, the natural evolution of where professional leasing is going. Again, I keep pointing at apartments, but they've done this forever. When a new apartment building comes out and really cool area, what happens? There's a lot of demand. People want it. They want the amenities, they like 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 of the product and the structure of the product. Like, can I make my lease more flexible or the things I can do to move a home from here to there if i if my needs change for my family, like 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 overtime.
Deidre Woollard: Housing is cyclical where we're at high interest rates right now. I'm mortgage rates there, I think around 7% now. So how does that cycle impact you at this point?
Dallas Tanner: Well, it's interesting. It's much more expensive to own right now than it is to lease. If you look at our markets and you just took media 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. Anything about savings of $12,000 a year and you can be down-payment light. It certainly is going to help, like it'll lead itself into a little bit more demand for our product. Now that being said, two-thirds of the country have always wanted to own something and have. The homeownership rate, if you look at today, is very healthy from our view 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 is probably the poster child. Too much homeownership and people qualifying on mortgages, that didn't make sense. It got as high as pushing 70 or low 70% and then got down to like 60. I think the homeownership rates somewhere today in the mid-60, 66 sometimes sometimes 67 depends on the market. Pretty healthy. The what's buoyed up home prices has really been this lock-in effect. Most of the country is in a pretty affordable mortgage rate right now. You brought up a very interesting stat earlier.
The 30% of all home sales right now are new construction. That's about double of what it is traditionally. It makes you scratch your head and sit back. Why? 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. Two, if you want to find something, the only place to really go as to some of these new builders. The lot of the new product is being built isn't the traditional entry-level product that everybody likes to talk about. 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. It's interesting that narrative of like entry-level buyer and they do exist. I'm not saying they don't but it's not the same as it was 20 or 30 years ago. Preferences have changed. People are delaying decisions like getting married and starting families. They're doing this later. The data tells us all that. If you're more stable on 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. And so you're like, wait a second. I don't know that it necessarily to own, but I want a house, I want flexibility. I think that's been a positive trend for our businesses. But it'll be interesting to see how those lifestyle decisions adaptive.
Deidre Woollard: As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.
Deidre Woollard has no position in any of the stocks mentioned. Jason Moser has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Domino's Pizza and Invitation Homes. The Motley Fool has a disclosure policy.
