Ugly Turnaround Attempts
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This is a business where we think about the demographics. They have a huge invisible demand tail. And so that eighty year old and over demographic is what matters for this business. And that demographic growth is rapping up willing materially through the end of the decade.

Is IT butterscotch Candy?

Maybe it's a bingo .

card maker that's your stereotyping the over eighty group and I won't have IT. Hello and welcome to the barren street wise podcast. I'm jack how and the voice he just heard is greg queue. He's the global property equities portfolio manager at janus henderson son and the businesses talking about it's senior housing. Of course, in a moment, greg will share some of his favorite great ideas that real estate investment trust before that will talk about some of the ugly liest turnaround and of two thousand and twenty four and one turn around that so far as working at just fine.

Listening in is our audio producer, Jackson haj Jackson.

are you eating right now? D nia.

i'm going to eat during the podcast, but I was, I got a ginger bread house that my boy put together. And I was kind of, I took the roof off the thing I was going to we are going to have a one of these episodes to take down of the whole ginger's bread house industry because you put them, that sounds nice. In theory, you've got a confection house, little house you can need. You put IT together, looks great and then go to eat to think the rock heart there are always rock. It's in the front to the package food industry and really the home building industry.

So you try to outsmart them this year by eating IT as quickly as possible and not waiting to Christmas. Got IT.

I'd like the day after IT was set up. Yeah IT doesn't matter. Still hard.

That expose will have to wait until another day. What do we want to start with here? Let's start with the good news.

A and t, right? They had a big investor day presentation this past week with a slide deck. You know how I love a slight deck, says our future, the best connectivity provider in america. And they talk about fiber broadband service and they don't really talk about anything else, which is great news. If you've been a long suffering nt shareholder who was lately getting a bounce in the stock.

No, no peacock acquisition in their future.

Definitely not, let's hope not. We don't see any signs of anything like that. You're referring, of course, to eight ends passed to doing some deals that never really paid off for shareholders.

One of those was time Warner foregone company getting in the show business. They got into satellite television, putting a dish on the top of your house to get TV. Turns out that is not really the way of the future to figure .

out what we're going to do with all those dishes.

Bird feeder. And we have to give some credit here, much as i'd like to pretend that was all my idea when things go right. This came to us this past spring from Peter sapo over a wolf research. And we did an episode on A T. N, C, and IT was titled Jackson .

the bull case for a nt.

And I remember Peter saying, well, go and have him say Jackson eight .

and t just might make for the best stock even though it's not the best to tell our company.

And around the time that episode, I also did a column on this embarrass magazine. And the stocks since that column has returned forty six percent, that's more than double return for the S M. P.

Five hundred is way more than verizon, which is return thirteen percent. It's just shy of t. Mobile, which has returned fifty two percent sy T T, wasn't quite the best stock, but it's a great performance nonetheless.

They're still a giant dividend yield over four and a half percent company. Its presentation talked about the four years ended two thousand and twenty four IT posted about reducing debt by twenty five billion dollars and investing around one hundred forty billion dollars into the business. And five g and fiber, it's now bearing the fruit of that investment.

Subscribers are up. Revenue from those subscribers up turn is at a reasonable level at the percentage of customers were leaving eighty. And probably the best news about this presentation is that the company talked about really just doing more of the same.

So a little less splash, a little more well behaved dolly, as Peter called the .

as a fair way to put IT, there are capital allocation return priorities here from now through two thousand twenty seven. In other words, where is the company going to spend the dull twenty billion dollars plus on dividends, twenty billion dollars on sharing purchases? And there's a target.

It's only a target, but it's eighteen billion dollars plus of free cash flow by two thousand twenty seven. And if you look at the stocks, recent market value, that would work out to over a ten percent free cash flow yield based on recent Prices. So we'll see if A T N T can keep the good news coming.

And I wanted to bring you that upbeat note first because everything I say from here forward will be piling on companies that are already struggling. We had two key CEO departures this past week, intel and atlantis. The car maker pat gelsinger is out at intel. He was on the podcast Jackson when he talked about his turnaround plan.

This is back in july of twenty twenty one.

That was the year after the stock peaked. It's been declining pretty much ever since we gave pat and his plan. I thought a fair hearing, but the one thing I remember about IT was there was a promise that I would catch up with AMD advanced microwave ices on technology, but the investors would have to wait a few years to see that plan play out.

And a few years is just a long time and that business to wait for a new CEO planned to work. So IT was hard to get super excited about the stock even at eleven times earnings back then. Here's the briefest of explanations of what went wrong at intel and what pack telling you did to try to fix IT.

L is a company that designs chips, computer processors, IT, also manufacturer or fabricates chips. Those sound closely related, but they're really not the very different jobs, and that has become a problem. Intel has been losing share in both servers and personal computers, including to the powerful combination of A M, D.

And a company called taiwan's semiconductor AMD designs the chips. It's nimble and fast moving. Taiwan semi doctor has vast scale and really unmatched ability to fabricate leading edge designs.

Another words is nice to be able to design chips without having the burden of also having to make them, and it's nice to be able to invest, Richard, in making chips efficiently without the burden of having to design them. So that combination of these two companies has really leapfrog intel. And intel plan to fix that has been to build up its own factories, its own uv turing business.

It's done that with the help of A U. S. Government push to spur domestic chip manufacturing. But here are some problems. First of all, it's very expensive to do that.

So over the two years and to two thousand twenty, intel generated positive free cash flow of thirty eight billion dollars. But over the two years ending this year, it's likely to burn through twenty five billion dollars in cash. That's all that money there is spending to build up manufacturing.

What's supposed to happen is intel is supposed to make up for all that spending by doing third party contract manufacturing. In other words, not just making its own designs but making the designs of other chip makers. The problem is, if you're a rival of interest in designing chips, do you really want to be dependent on IT for your manufacturing? It's not clear how many companies will.

So that business is still losing loads of money. Intel itself still uses taiwan semi for its latest chip designs. We're supposed to reach a moment sometime next year where intel catches up with AMD on its chip designs.

Its plan was the race through designs quickly to retake the lead. But then you have to wonder if that's what we're headed for next year. Why would pat gelsinger leave early? That thought is causing investors to lose confidence, not that they had a ton of bit going into this last week.

Intel stocks is down around fifty eight percent year to date. It's an atrocious performance, especially if you consider what else is going on. And chips, of course, I haven't yet mentioned artificial intelligence.

And in video, we've had a video founders, son wong, in this podcast. He talked about setting out to build a supercomputer company. But the market that was ready for him back then was video games.

We didn't yet have an artificial intelligence market. So in video was known as a maker of chips for computer graphics for years. IT turns out that the highly parallel processing that you used to draw a lot of video game pixel at the same time.

That's also useful for the job of artificial intel. At one point, two decades ago had an opportunity to buy in video for twenty billion dollars IT turn that down. And today in video's market value is over three trillion dollars that is so much larger than intel is mark of value peak summer, over two hundred seventy five billion in two thousand.

And it's recently hanging around the one hundred billion dollar area. Intel has made its own AI chips. They have not set off of buying franzy. Now intel needs a new CEO.

And you might think we wait if they're spending all this money and losing all this money in the manufacturing business, won't they just sliced that off sallet, get back into the chip design to become leaner? That's a great idea, except that the company was recently awarded nearly eight billion dollars by the us. Government to build up that domestic chip production.

So l might be stuck doing what's not working for a while, and I could go on here. The company is still highly dependent on the PC business. And that industry looks, quote, grim as according to b of a security.

And a note this past week even went demand for pcs rebounds. They might increasingly run on smart phone type chips. That's the market that entire left years ago.

So I recently wrote a column of burns about the ugliest turnaround of two thousand twenty four. And intel is the ugliest on my list. I mention three others right now. Intel is the most load. Among them is covered by forty five analysts on wall street, just seven percent said by the stock.

So if fl isn't working out, does this mean that chips act is fAiling?

I think this is sty on intel. I think it's early to say what's going to become of all that chips x spending. Clearly, a lot of money is being spent on a company that's not doing great.

Maybe that manufacturing business will end up being separated somehow down the road with intel still retaining a stake. But I think the thought behind promoting chip production here in the us was not just about, hey, let's create jobs, let's do something for the economy. I think it's more to do with way to second, the world suddenly seems incredibly dependent on taiwan for the production of high and chips for A I and all sorts of things.

And if china says the taiwan is part of china, and if we're telling china, hey, you can't buy the latest AI chips from NVIDIA, might that cause a problem down the road where china says, well, if we can buy them, then you can make them because we're going to more forceful exert our control over taiwan and maybe the power is the beer thinking. Let's try to circumvent that process by just kind of moving more cheap production over here into the U. S.

Or are not as dependent on taiwan down the road. Taiwan's semi has built a big manufacturing plant in arizona, and the early reports are the things they are going well. So I can't remember if I answered your question or dance around IT, but I guess the answer is IT remains be seen on the chips act.

But things aren't going very well for intel. We have three more companies to get to the candidates for second ugliest turnaround of two thousand and twenty four, our atlantis and bowing and one that I talked about already, C. V.

S. And i'm picking stentz, whose CEO also left this past week. Does everyone know what atlantics? It's based in the netherlands. It's a master of Francis puzo and italy's fiat, but fiat came with chrysler ler. So there's an american car business there too. And IT was run until recently by a porch his executive named Carlos to virus, and he's best known for helping to turn around a japanese company. Lisa.

we are the .

world back. you. I was surprised with intel that I had hit a high just four years ago. How recently that the clent happened with atlantis. IT had record sales and profits just last year.

And both measures are now plumbing, in hindsight, during the pandemic when there were shortages of cars to lantis became too fixated on high Price vehicles, especially in north america. That's where the profit is. There are some jeep grand wagoner S.

U. V models, that one above one hundred thousand dollars. Jackson, who out there is paying more than one hundred thousand dollars for a jeep. I want names, one hundred thousand dollars. That's two loaded under pilots who's buying one jeep instead of two loaded under pilots.

Someone with a lot of money, not much driveway space.

I think the very supposed be all about adventure, not obsolete. But anyhow, i'm not a car marketing expert. All I knows that atlantics U.

S. Dealers have been complaining about inventory. They can sell that stock is also allows you perform this year down thirty nine percent.

I think customers right now are looking for cheaper cars. I about two cars during the pandemic, Prices were weak up for people who take out loans to buy cars. Interest rates are way up.

Insurance costs. I've gotten crazy too, Jackson. I haven't had an accident. I haven't had a speeding ticket, haven't live a good, clean automotive of life over here. And my insurance costs way up at one point, I went from one to two cars in my family.

And you would think, I mean, i'm pretty sure the way the insurance business works, the whole idea of risk pooling is that when I get my second vehicle, i'm a lower average risk across those two vehicles for the insurance companies. But they don't treat that like that. They treat IT like i'm likely to get in an accident with both cars at the same time.

How would that even happen? Yeah, I just change my insurance every six months .

and and your identity, you're just your hurts you .

you wait. It's a lot of time on hold all say.

and a lot of putting those new slips in your dash, your grow box. Anyhow, don't get me sidelight. The point here is that people are feeling the sting of high insurance costs and high low rates, and they want cheaper vehicles.

And when you look, install lantus pipeline, there are premium vehicles and loads and loads of electric vehicles. Even though we've seen a recent trends that customers are shying away now, theyd rather buy hybrids for now. So the let this makes the number two spot on my list of ugly two thousand and twenty four turnaround just because there's not an obvious fix for this problem soon.

Santista is also unpopular on wall street. Just thirty seven percent of analysts say to buy the other two companies. I won't go in the great detail on we've talked about them before.

One is bowing and just over half of analysts who cover that stock say to buy IT, even though there's a long list of problems. There were fatal crashes years ago. The grounded a key model and halted production that LED the years of cash burn just as the company was doing its way out.

There were mechanical mishaps this year that restarted the process. There was a working strike. Bowen came to a deal on that. IT changed CEO this past summer. It's finishing large amounts of stock to raise money.

So why would investors be less disgusted with this dog than the other two I mention? Why would slightly more than half of analysts say to bye res bit? Here's one idea.

There is no alternative to jumbo jets for mass travel over long distances. I'm not aware of a star track teleportation device in the works. And there are only really two viable suppliers of jumbo jets in most market, european airbus and boeing, an airboat booking to place a decade out.

So the stretch in the world definitely still needs boeing plains. There is a company in china called comment that makes jump out jets, but those are mostly for its home market. And there is a course, brazil embrey.

They make narrow body jets for regional flights. So even though bowings turnaround seems far off, IT also seems inevitable. Boying stock has lost thirty nine percent year to date.

The last company on the list is C, V, S. That one has lost about twenty five percent. I will refer you to past episodes of this podcast where we focused on cbs in its problems.

Basically, the drug store chain business is lousy, and C, B, S. Is planned for the retaliation ation of health care, where people would go to with clinics in stores for their health care needs. That hasn't really taken off.

That's not making a lot of money for the company. People are still going to doctor groups and hospitals for care. And that favors is a company like you not at health group, both IT N C V S own big medical insurer, but you not at the true health care business.

C B S has been buying some more traditional medical practices, but that's gonna expensive and take a long time. The good news is, even though cbs is free cash generations, but cut by more than half, is still projected to generate close to six billion dollars in cash this year. Shares go for eleven times earnings.

The company has a big medicare advantage business, and analysts say that the incoming trump administration could be good for margins. That business will see. And that is my list of the ugliest turnaround attempts of two thousand and twenty four.

I tried to pick only companies, was still quite large market values, not companies that are in bankrupcy proceedings or anything like that, and comply with iconic brands. Someone asked, why did you put nike on the list? At a fair point, probably a subject for us to tacco in a future episode.

But right now we have to get to rats. I want to know whether rats look good here, in which types of reads and which reads in particular. And we ve got just the person to ask about that is name is greg and he global property equity portfolio manager at janus henderson will hear from him after this quick break.

Welcome back, reads are real estate investment trusts investors by them for some capital appreciation but also dividends. I'm looking at the swap U S read etf that's a bundle of reads trace under the ticker symbol S C H H. And the recent dividend yield, there is three point six percent.

Just actually think people know the basics of how reads work. These are smart listeners that we have. You think I should give up the brief east of explainers?

Ah i'm not sure I know entirely how reads .

work a read at its course. Basically, I don't want to use the phrase tax dodge because this ends like something dog, but it's based the deal is you could avoid taxes at the corporate level if you pass all of the income from your assets on to shareholders as dividends and you're allowed to do this with real estate.

But typically, when we talk about reads, we're talking about companies that on office buildings or parking garage or hotels or hospitals, data centers is a big category. Now is an easy way for investors to basically become landlords economically without having to look after the properties themselves. Okay, that's enough for me.

I've got a ginger red house of non like an old dog bone here. Jackson want to we get to my conversation with Green. Janus henderson .

sounds good.

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running at nine percent year over a year like IT was a couple years ago, it's awfully hard for anyone in the Marks to say I think that the fed gona stop hiking. I think that interest strates are high enough now that we've come back down, that has changed. And if you think about the listed reads you we be bottom just about a year ago, in the end of october twenty three.

Since then, U. S. Reads are up about forty percent. So we've seen in the bottom, and we think we're in the early stages of what probably is, is a new real state cycle is .

IT similar to how home buyers, people shopping for homes will think like boy with life for these mortgage race to be lower of the week can get Better financing terms when we buy a house? Or is there more to IT for reefs that matters when IT comes to the level of interest rates?

So I think that's part of the dynamic. It's just the cost of debt. Um but if we think about listed reads, you know different than they were twenty years ago, they actually don't Operate with that much leverage.

Um so you know thirty percent long to value is the ball park for the list reads. So you know I think really the bigger deal on interest strates has to do with the way that real state is valued. So if you think about just simply list cally the value of a building, you take the cash flow divided by what's call the cap rate.

So that's uh sort of an interest rate that you you value the building at. Its a little bit like a valuation of a bond, right? So um cap rates tend to be higher than, let's say, the ten year treasury.

So tell your treasuries at five, you might say cap rate, tes, you know the return I get on the building needs to be one hundred or two hundred basis points above that, right? So the overall level of rates comes down at discount rate. Your value, your building, that also comes down. So values go higher just mathematically with lower rates uh.

in real state. Which parts then of the universe look particularly attractive to? And now when you weigh those things together.

yeah so I think there's there's two really stand out property types at the moment. One would be senior housing. So this is assisted living. IT tends to be higher and private pay, meaning not government remembers product.

But you know somewhere you might send your mom or dad if there if they are getting on in years and have in trouble with sort of daily activities. This is a business where we think about the demographics. They have a huge invisible demand tayer.

And so that eighty year old and over demographic is what matters for this business. And that demographic growth is rapping up really materially through the end of the decade. It's going to be rapping up to four to five percent per year demand growth.

And then if you think about the next layer of that is really kind of the penetration within that group, how many people of the eighty plus are gone to use this product? Well, this this group of eighty plus year old, this is more wealthy than the one that came before IT. So this is an expensive product for a lot of people, but there should be more of that group that can afford to do this.

That's the demand side of things. On the supply side, you know, one benefit of higher interest in environment that we've seen the last few years was developers couldn't really access capital to build new buildings. So in the face of what is the highest demand that we've seen in, in generation, almost for this product, there is literally almost nothing under construction for senior housing.

So if you play this out over the next five, six years, their scenario where the entire industry is just effectively fall of these buildings because of that supplied to and mismatch, um we think there will be development that will start. But even if you know if you meet today, decided pay, this is a really great idea. Let's go build a few of these buildings. IT would take us, you, at least three years to find a site, get IT entitled, build the building. So you ve got a run way here.

So I guess the two things that means is that if you're a customer for one of these places, you can expect Prices to stay high and push higher because there is more demand than supply. But if you're an investor, uh, in them, I guess that would be good for for your reads in the underlying value of the portfolio. Give me some, some ballpark metrics.

If you're investing the space, what kind of yields are you seeing? What do you expect to return to come from just the dividend yields? You expect there to be some capital appreciation too?

yeah. So these are going to be capital appreciation and growth stories at this point. Um I think what we've seen the last couple years as this story has, has gotten pretty well understood.

The dividend yields ds on these stocks are you know two to three percent looking at the two biggest named in the stocks. So that's below average. Uh, at the same time, the cash flow growth from these properties is growing you know well into the double digits year on year, and we think that will continue. So occupancy growth and growth and the expenses have have been relatively controlled. So it's going to be an earnings grow story that could be double dish earnings growth plus a lower dividend.

Are you allowed to name any the ones that, that are your favorites?

yes. So I think look, well, tower is is a name that we hold in, in our different products, one of our larger positions and it's also the uh the most concentrated exposure that we can get. Uh in reads to a singer housing and .

you mentioned that there were two groups that you find particularly tracked. Now this is one senior house. What's the other?

So the other one, uh, again, going back to supply and demand is data centers. So this one is a little bit different in that it's not entirely is to supply constrain story. Right now.

There are certain markets where you can see a lot of construction happening of data centers. The supply constraints may come into play in a year or two from now because there are issues with power availability and and transmission. Um but it's truly a demand story. So you you can see different people have different approaches for forecasting demand here.

But you know one that intuitive ally makes sense to me is thinking about the biggest player upstream from the data centers in video, right? And so like we see how much product they are shipping out a recorder and all of those machines are going somewhere, right? A lot of them are going into data centers so you can forecast, okay, we know how many machines they sold.

We know how much power those use, roughly speaking. So once they're installed, the demand is except of of power. That's how data centers are rented. It's you basically buying power from the landlord. So you can then have a decent forecast of demand, which if you think about that over the next two, three, four years, uh, IT far outstripped all the supply is being built.

And then if you get past the current cycle of construction and data centers, IT becomes less obvious where some of the players in the data center space are going to be able to source power to build more buildings. So that's again, pricing power know should be pretty good for those landlords especially. You know twenty five, twenty six.

This is interesting to me because i've i've heard about nothing but artificial intelligence and data centers for like a few years now. And so when I I know the data center reads out there, but I think to myself a way to second is this is that all baked in because everybody's already talking about IT, but you're saying that you think that the average investing public has not yet fully grasp just how much demand we're talking about. Is that the idea?

So there's two things here. I think yes, the answer is probably that there's a bigger and baLance into the future than people appreciate. Um the other part of the answer is you know that the most attractive investment opportunities from a stock don't always align with where the most tractive fundamental stories are, right?

So there I think to your point, uh, maybe there is a fair amount rise into these. We'll see what happens in the next year. You know it's interesting there's only two public data center rates in the us, despite how much you hear about IT there used to be in five or six. They i've got taken private several years ago, but we think we'll actually see some reiki of of those private and is just because they need so much capital to build out these data signers. And there's really, really it's more capital than you could source just from the private market.

What's your favorite one here? And can I assume that these also are are reads to have kind of smaller, different and yields but more growth potential?

Yeah, that's right. So the very similar type of diving and yellow plus growth that we talked about with the health care names. So lower dividend yelled but probably double digit growth. Um the two names that exists, our digital reality and echo ics uh and the one that that we you know generally across the board's is econic .

s why do you prefer IT to digital reality?

Uh, I so I think there is reasons to like both of just candidly, I think clinics for us is it's been in under performer versus digital over the last uh, year and a half or so. So we just think on a relative value basis, a little bit more interesting.

What about someone out there says, well, I like reads, but I D like IT because I go after income, I am looking for these dividends that are the four, five and six years, you know percent range are, is that the groups to pay that much you don't find them particularly attractive? Or are are there still groups out there that yell that much you think look okay here?

I think there are. They're not those sort of exciting fundamental stories. It's more story with those ones of stability.

And you're not expecting A A lot of growth, but that could be fine. And we like several of those. There's a couple of examples in terms of property types there. One, broadly speaking, could be retail.

So you you pick your spots within retail obviously these days, but think about shopping center reads so that in your igbo hood, wherever you may love, you might have a shopping center, you get your groceries go for lunch once in a while. That's a stable business. And those are, you know, higher yields like you're talking about and lower growth.

There are some interesting opportunities there. There's also a group called single tenant, net least retail. So that would be you know think that could be like a chick fully standalone restaurant could be um you know car wash.

This is maybe the most boring sector in real state part of the conversation earlier. They have long term leases with annual rent bumps, and they can to just be steady and actually feel look at a long term basis. This is one of the Better performing property types in all of reads.

Are you able to share your name or or two from from these types? Reads the jone that you think good, where you think the outlook is good?

Yeah, sure. So I think you know a couple there would be on the on the retail side, federal realty is a really high quality retail landlord has kind of been left behind uh, over the last few years versus its peers that that's pretty interested in to us today.

You know another one that may be a little bit more more controversial and getting into another area of value is, is my rich, which is a more read that wants a little bit more of know what we consider a little bit of a special situation or sort of a turnaround story. Mls, as you know, have been tough. That's one that we thinks little bit more deep value ah and has some lovers they can pull unlike that value.

There was a thought that a lot of this mall space would just be refer, posed into different stuff, and that some of these, you know, some these troubled mls would have second lives.

Is that kind of thing that may orchises is involved? And do you see that happening? Like what where we stand in terms of amErica having too many walls and needing to closed some but finding some uses for other ones? Are we in recovery there? What what do you see when you look out across the mall space?

Yeah, that's interesting. I mean, I think so roughly speaking, there is about thousand walls in the U S. And we probably don't need a thousand malls, right? So maybe there's um in my town were .

halfway in between two and the one is closer to the big city is like bustling and always busy and the one is further away. It's like there's that to go. Aod.

that's exactly that's how IT is, I think across the board, right? And actually probably eighty percent of those walls are just honestly, we think about mich, uh, for example, though they have A A really high quality portfolio of mills, we actually think it's the highest quality portfolio of mills. And in the public markets, the issue is more with the baLance sheet, uh, they have too much leverage and sort of prior you prior management at that company made uh some capital allocation decisions that the market didn't like.

So they have a new CEO new management team as of this year, and they've already started to execute on, to your point, if they do have a few walls that maybe don't have a future, the new management team said, look, we're not putting more capital into these walls, were not throwing good money after bad. We're going to give these back to the lenders, and we're going to focus on portfolio that we have that can grow. And you know growth from walls is not growth for senior housing or data. Us know the best malls are going to do load amid single digit type a cash low growth but at the right Price. Um that that could still be pretty interesting.

Thank you, greg, and thank all of you for listening. Jackson control is our producer. You can subscribed to the podcast apple podcast potty fy. Where have you listen? If you list on apple, you can write us a review.

If you have a question you'd like answer on a podcast, something about stocks or high finance, Christmas baking, just record IT on the voice memo APP on your phone, and you can email us a jack out. Hell, that's H O U G H T baren 点 com。 See next week.

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