Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller.
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Find the Bloomberg Markets podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. David Welch, Detroit bureau chief for Bloomberg News, and Jordan Fabian, white House reporter for Bloomberg News.
They join us. We're going to round table this thing a little bit.
So, David, I want to get the latest reporting out of Detroit.
What's the expectation.
Will there be a strike and if so, is there any expectation of how long it may last?
I think there certainly will be. All of the the vibe coming out of the union right now is the president is itching destroyed. He says he's not, but he's making plans. The writer has still really strong against the car companies, against rich executives, all of that, so he's getting people riled up. He says they're far apart. Sound like they are if you look at the numbers. So I think they will and look, it could go on
for a while. I don't think it'll be something like three months, but I could see strike going on for weeks, and it could vary by car company too. It doesn't necessarily two days at one and three weeks at another, right, I mean, if he gets the deal he wants from specific companies.
So, David, how far apart are they?
Because I've read now that the union has lowered its demand for pay increases slightly, and the last I saw from automakers was about double what I had seen a week ago. So how far apart are they right now?
Yeah?
So look, Forward is up to twenty percent and GM is at eighteen percent pay raises over four years, which is I think better than they've ever gotten, so, you know, I think, and it's not the thirty six percent they asked for, but I think that was sort of a high ball offer from the union to begin with.
But they asked for that because the chief executives have gotten those kinds of pay increases over the past four years as well, haven't they.
That's right?
And look, you know, CEO's got to kind of be careful what they wish for it, right, because you know, suddenly they might have a union saying you got forty percent and why didn't I? And didn't get great raises over the last contract. And I'm sure some labor negotiators that the company's got bonuses for negotiating a pretty low cost contract last time. And they used to be careful what they wish for, because now they've got an extremely
angry union. But they do, and they and with a president who wants to make a statement about labour's role in America. This isn't just about this contract with him, he wants to bring the labor movement back to prominence in America.
All right, and all.
Right, so that's where we are.
Yep, Jordan Fabian, let's bring you in. You covered the White House for Bloomberg News in Washington, DC. The President Biden, he has said twice that there won't be a strike here. What are you hearing out of the White House.
I think that's the President being his usual optimistic self. Other people I've talked to aren't so optimistic. And you know, they see what we're all seeing, which is a union and management still.
A part on a contract.
And you know, they have encouraged the side to stay at the table. But you know, some people I've talked to have said, look, we don't know how this is going to end. It's all we can do is kind of encourage them to keep talking. But there's really not much we can do to force them to get a contract. So they're crossing their fingers and hoping there's not a strike, and if there is, that's not a long one.
You So, Jordan David points out that this president wants to bring unions back to prominence. At the same time he has backed up truckloads of subsidies and dumped them on the automaker's doorsteps to try and encourage them to build more electric vehicles for which, by the way, we don't even know how much demand there is that is going to require far fewer workers. So is he working at cross purposes?
This is the central dilemma for Joe Biden is this clean energy transition is one of his biggest domestic priorities. But guess what, so it is empowering the US labor movement, and in this negotiation he's found himself caught in the middle of those two priorities and they're really.
No easy answers.
They've done the administration has done something recently, they've released this fifteen billion dollar tranch of money from the Energy Department to incentivize factory retooling, and they've, you know, they've put some strings attached there. They're encouraging car companies to use that money on unionized plants and make sure the benefits go to union workers, but they're not forced to.
And this has been the bane for Sean Fain, which is he doesn't think the administration imposed enough conditions on all this money that's going to the car companies. And so in addition to the pay and benefits, this ev transition issue has been at the backdrop of this negotiation and it's really, you know, causing political problems for Joe Biden because he needs all the units support he get going too twenty twenty four, and here you have this major union on the side saying, not so.
Fast, Hey, David, do we know how this union will strike? Will they strike one automaker all three? Do we know kind of their strategy?
I think they'll they will strike all three. And what they're what they said they're going to do is they will strike individual plants. They're not going to walk out on the entire company. That's one way of minimizing the payouts from the strike fund, which pays workers some money while they're striking. And if they strike all three at every plant, they'd run out of money in about seven weeks. They don't want to do that, so they'll they'll strike
individual plants. And what I think they'll do is they'll strike the plants that make the most profitable vehicles, which would be the large pickup truck and suv plants, because that you know, if you were to take down Ford and GM's large suv and pickup plants and it's something like seventy or eighty percent of their profits comes from those vehicles, you do a lot of damage and put a lot of pressure on the companies very quickly while
paying minimally out to your strike fund. And then if they don't get a deal, they can kind of keep, you know, adding another plant here and there. They could strike parts plants that supply the dealers with replacement parts for customers. That could create a lot of chaos. There are a lot of ways they could with individual plant strikes. They could apply a lot of pressure.
Hey, David, just person on the street in Detroit, which way are they leaning?
I mean, like that kind of runs the gamut. But I think, you know, it's it's a union city, so there's going to be a lot of sympathy for them. It's also the Detroit city proper. There's a lot of poverty there, so you know, strikers trying to get what they think is their fair share would probably have a lot of sympathy. You move further out in the state and you start to see comments on social media like thirty to our work. You guys are on crack up bread,
stuff like that. So Michigans, Michigans are a very biver hated place in that.
I mean, forty seemed like a lot to me at first, also until I read that the chief executives were getting that. You know, and this is an industry that was bailed out by the US government. There you go during the Great Financial Crisis and a union that gave a lot of help frankly that that accepted a worse contract in
order to help the automakers stay alive. Now, the automakers have made a ton of money over the past ten years, and Jordan, does you know from that perspective, doesn't the president from Scranton, Pennsylvania, who cares about the scrappy workers. Doesn't he go march with the with the union when they strike.
That would be quite the image, wouldn't it, Joe Biden holding a picket sign.
But that's what he wants us to think of him, right.
No, he absolutely does.
He's repeatedly called himself the most pro union president in US history. He did put out a statement about a month ago that did voice support generally for some of the union demands, like I better pay and betterfit's making sure if there's a factory tooling or closing down, that the members are taken care of and that they keep jobs.
In union communities.
But look, he also needs these corporations like he needs them for the clean energy transition, not to mention, he needs to Corporate America on side to give him campaign donations for his re election campaign. So that's why you're not going to see him wearing that red shirt that Sean Fame was wearing in that image.
All right, fellows, thank you so much for joining both of you. Jordan Fabian he covers the White House for Bloomberg News, and David Welch, Detroit bureau chief, out there giving us kind of the feel for the two sides here again. Midnight tonight Eastern time is the deadline.
You're listening to the Team Ken's Arline program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app, and the Bloomberg Business app, or listen on demand wherever you get your podcast.
We had the European Central Bank hike interest rates for the tenth time to quash inflation at the posit rate now four percent, up from three point seven three point seventy five percent.
Where do we go from here? They've done?
Let's check in with doctor Richard Portis, professor at the London Business School. Professor, thanks so much for joining us here. A.
What do you make of the ECB move? ECB's move today and then B are they done?
I'm disappointed. I don't think they should have hiked today. The pressures on the European economy are very great now and growth forecasts are just falling and falling. The latest European Commission forecast, independently of the ECB, has cut back their forecasts considerably so that I think they're pushing us into a recession, pushing the Eurozone into a recession, and that seems to be unwise. What they should have done
is wait. In my view, the data are mixed. Otherwise, the inflation data are mixed, and it would have been better to hold on.
They only have one mandate, though the European Central Bank, unlike the FED, doesn't worry or isn't supposed to be focused on the labor market and I guess economic growth altogether. Their only job is to keep inflation at a steady level.
Excuse me, they're talking about their big into climate and all that. They're criticizing the Italian government for their windfall profit tanks on banks. Their single mandate has a very broad scope and actually, if you look at it, they are required to take account of their actions on the overall level of economic activity in the Eurozone.
All right, So you're worried that they essentially push the Eurozone into a recession. We're already seeing, you know, we're already seeing that in some of the biggest economies in Germany for example. But they have said this is their final rate hike. Does that, well, they haven't said it. Actually, let me let me. In fact, in fact, Christine leguards that she can't say that, which she can't obviously, but we kind of you can read between the lines and
see that this is their final rate hike. So does that kind of blunt the does that kind of reduce the damage effectively?
Well, if it's if it ready is final, yes, that's that reduces the prospects of damage. But still I think they've gone too far and we'll just we'll see what happens.
The inflation data are not.
Particularly good, that's for sure, but you know it's turning around. It has been turning around for a while, and I think the wisest churus is to wait. But there are people, several people with strong views in the Council Governing Council of the ECB who think, no, we must stamp on inflation dramatically, and that's what they're doing.
Professor.
Here in the US, the talk has been about a soft landing. That is not the case in Europe. Can you give us your view of kind of where the European economy is, how we should think about it.
Maybe on this side of the pond.
It's certainly not a soft landing here in Europe, and I include the UK and that of course as well. But I think that's where we've got to the labor market is holding up fairly well as in the US for that matter, but economic activity is slowing down very considerably.
And how long you can how they can take that? Uh, the politicians are coming European elections are coming up, not in just in individual countries, but also the European Parliament elections are coming up, and there's gonna be a lot of criticism of the ECB if indeed we find the Arizona going into a full scale recession.
I wonder.
You know how hesitant you are to include the UK when you talk about Europe, because aren't there very big differences? And to some extent, the UK has you know, kind of repeatedly shot itself in the foot.
Well, I mean depends which which gun you're talking about.
Was that the left foot or the right foot or both the same time?
Yes, I'm afraid we have done, and right now there seems no prospect of that reversing. But but here too, I believe we should not be raising rates any further. The data are turning around. They're turning around for inflation. They're turning around slower than one would like, for sure, But the cost of the restrictive policies is high.
And that I think is unwise.
The the otherwise, you know, the banking sector is in pretty good shape, both in the Eurozone and in the UK. How long that will last we don't know. But the rise and interest rates as of course widened that interest margins for a while. They will they will come down as as banks have to pass on some of the
interest rate rises to the depositors. But the financial sector is in pretty good shape in general, and it's just the main suffering is in manufacturing and to some extented services, and that's that's serious.
Yep.
And Professor, when you talk about manufacturing, European manufacturing, I think most US investors think Germany. Can you tell us about how we should be thinking about the German economy here?
And maybe the outlook it's not.
A pretty picture.
The problem is partly a slow down in external demand from China in particular, and that is very substantial and very severe and has a big impact across a wide range of German engineering firms.
So that's a big deal.
The unions have push wages up and German manufacturing is there's not a sector I can think of right now that is balancing this trend downwards and If you look at the data, they're pretty they're pretty depressing, so uh so, and.
It's it's not it's not easy to see how that's going to turn around.
Actually, the the finance minister is a very uh conservative shall we say, uh uh minister, and he certainly has no intention of any fiscal expansion. Indeed, just the other way around, the prospect for next year for Germany is fiscal contraction. Uh in the face of this uh, in the face of this gathering recession.
That seems to me very foolish.
What do you think the solution? The solution is to the problems that the European Union faces in terms of monetary policy. You have got this one uh you know, organization setting monetary policy for so many different and diverse economies. Does that you think work? Has it worked out so far? Does it need to change?
It's always Look if you look at the United States, you have a single monetary authority setting policies for states as diverse as Mississippi and California, not to mention Illinois, where I grew up a long time ago. So it's this one size fits all problem is a problem you have in any large, single economy. And to the extent that the European Eurozone is a single economy, it is.
Diverse, and you're going to have.
Areas where even in the UK we've had this conflict in part with monetary policy having different impacts on London and say the Northeast, and there's nothing you can do about that. You have to have a single monetary policy. You can't have different interest rates for different zones. So the one size fits all problem is there. It's no more acute in my view, in the Eurozone than it
is in any large, geographically diverse economy. But it's true that you have very different, for example, in the Eurozone, very different rates of inflation. In the Baltic countries it's been much higher.
Than the rate in.
France, say, or Spain and Spain where Spain has been very low.
So you know, that's something they can't they can't do much about it.
They can't do anything about But it's not it's not special to the Eurozone.
Okay, doctor Richard Porters, thank you so much for your time. You really appreciate getting your thoughts and analysis, Doctor Richard Porters.
He's a professor at the London Business School.
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All right.
When I first learned about this whole reek thing years and years ago, fun flows from operation. That's the profitability metric that these people focus on FFO.
I thought this, you're talking about a real estate investment.
Trust.
I know, it's kind of the thing. I thought it at the time was a scam, but now I understand how it works.
That's free cash flow.
No, it's like their ebitda oh, I think, I don't know. Our next guest can help us out, Christine Mostandria.
She is the COO of white.
Stone Rate that trades on the New York Stock Exchange ws R. Christine Whitestone read tell us about your company.
What kind of real estate do you guys own or do you guys focus on?
So primarily we focus on neighborhood retail. So this would be your high visit great corners with traffic and pretty much based on convenience versus soft goods.
So I think about the pandemic in my home, in my town in Jersey, lots of and we have a very vibrant downtown in New Jersey. Lots of businesses went out of UH one went out of business, so a lot of you know, for sale for rent signs. What is the short Hills Summit Summit and better town than Short Hills, Better train Station. So which is why I chose somewhat over Short Hills Better train Station. Some people choose the name.
I just wanted to make it clear because I can imagine properties like that in Short Hills or Summit. I can imagine property in Scarsdale and Bronxville.
You know this is where?
So what happened to your properties then? And kind of where are you now?
So we have the fortune of being into very strong markets. So we're in Texas and Arizona.
Oh nice.
So our rebound from COVID which was much much quicker, In fact it probably I think we're affected maybe for six months really, So yeah, we had very few tenants to fall.
Because you guys didn't shut down do the mess. Things just partied right, well, I mean on the Ozar.
Yeah, there was a little bit of that going on, I'd have to say, and our restaurants for a while, there was a little bit of spacing, but you know, they rebounded really quickly and then quickly after that same thing with Fitness and all of other operators.
So what is this.
You're not just the CEO of Whitestone, reed, you're also a professor of commercial real estate and strategic management at Rice Business School. What does this fun flow from operations? What's the significance of that for a rate?
So it's a little bit different than even up right, I mean as far as profitability. So what you have to take into context is where an asset have you business and so that means you have to reinvest capital into the business, and so that takes that into account. So it's a little bit different as far as getting to a bottom line.
I was thinking maybe it's somewhere in the middle.
Maybe somewhere in the middle, but anyway, they buy off on it.
All right, So at Whitestone Rerate, your Texas, your Arizona, what's the growth story for your company?
Is it?
Is it acquisition? Is it just increasing the the you know, the numbers, the vacancies and all that kind of stuff.
I mean not to make it the occupancy.
So I think there's a couple of different components of our business. So first of all, occupancy, and the big part about occupancy is is you don't just want to fill the space. You really want to serve successfully serve the neighborhood. So making sure that you are the right merchandise mix is very important to what we do. That's number one. Number two, we also take a number of centers. We have a number of our centers in our portfolio that we redevelop so that's improved the look, the feel,
the customer convenience for that center. It may also be taking out some parking because now you don't need as much parking, you don't need that same in building in some density as well. And then along with that we do acquire and so there's always that opportunity for our acquisition. It's been a little challenging right now because the pricing for product hasn't quite adjusted yet with cap rates. But we're starting to see that loosen out.
You're the tiny house people of real estate of commercial real estate, right you're looking in smaller spaces, less parking and what and I guess or are closer to each other. What's the benefit of that over big?
So I think small is beautiful And one of the reasons why is because if you look at so our our space size is about twenty five hundred to three thousand square feet and our centers are around fifty to one hundred and fifty thousand square feet in size, So that to you know, twenty five hundred and three thousand square feet has the widest range of uses out there,
So it's the most flexible real estate. So when you think about them all, it's not really that flexible, right, it's large, it's big box, There's not a lot of users that can go in and out of some of those spaces, especially a power center. But in our case, we primarily are service based and necessity based, so this gives us the most flexibility to meet the neighborhood needs with that size space.
So what are some of the typical tenants or maybe an anchor ten or what are some of the areas of growth in terms of tenants?
Now we've sounded really so I found that what has transitioned the most going in twenty years in this business is that number one grocery anchored used to be where things are, but if you think about where the competition is for grocery, it's really restaurants and that has everything to do with convenience in the experience. So we've seen this real explosion in the restaurant uses in most of our centers, and so that's been the primary driver.
Is that like a Chili's or something like that as an anchor or more local.
More local in fact, so many people that that's part of the experiences that people are looking for right now, is the taste of food and chef inspired and so on and so forth. So especially in Texas, we have a very, very broad range of restaurant uses all the way. Houston in particular is very international.
Texas is I mean, it's a country in and of itself. I mean, I know you guys like to think of yourself as not even part of the country, but in Texas, I mean, it's it's so big. Is there certain parts of Texas that you guys focus on more urban airs or.
More world So Texas was its own country.
The team proud of that.
So primarily we stay in the fastest largest growing cities, So we're in Dallas, San Antonio, Austin, Houston, and then we're in Phoenix and you know the Phoenix East Valley as well, so which is also FASc.
You want to have a neighborhoody neighborhood.
Everybody's moving, I mean, what's the what's it like in your market? Everybody's moving there.
That's it is very very exciting. So I think we jokingly call Phoenix Chicago West to California East so because that and that's really changed. So finally in Phoenix you have really good Italian food, thank you for Chaga. But on the other side of that, I think that in particular Dallas has had such such a gross strength because they've really focused on the job market and Fortune five hundred to one hundred companies, so they've gone after that
group of that job market. Austin has done extremely well, and because of that, San Antonio is people are starting to move to San Antonio. So you have, of course the educational system that really pushes that. And you have high tech there. I mean with Michael Delhi has you know, created his own ecosystem.
There of tech.
Yeah.
So, and then Houston has been you know viewed primarily as willing gas but it's really changed with Houston is that they've gotten heavily. It's the largest medical district in the world, so that shifted as well. So you know a lot of people are moving there because it's a business friendly state, but it also is the job drivers that just the job growth has been tremendous. And then we're seeing the same in Phoenix and especially there it's
getting younger. Used to be a retirement community, but you have ASU which has been a huge, you know, proponent of change there as well.
It's a little hot in your markets though, but it's a dry heat.
Yeah, their entire summer was like one hundred and twenty degrees.
It's been a little steamy in Houston and then Arizona it's just it's very hot.
So wow, all right, but the great market's great growth markets. Christine messt Andre, thank you so much for joining us. Christine is the CEO of white Stone Reit the New York Sock Exchange. Take her to put into your Bloomberg terminals w s R.
You're listening to the team Ken's are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app, and the Bloomberg Business app or listen on demand wherever you get your podcast.
Andrew Silverman, government analysts caring tax policy for Bloomberg Intelligence Joints is Andrew, how are you looking at this arm IPO in the context of just the IPO bus in general.
Yeah, thanks, Paul. I actually I wanted to respond to your comment about companies going public at all. I think you're onto something. I mean, the number of companies that are public in the United States has is almost half of what it was in nineteen ninety six. It's dropped down to something like forty three hundred. And you know, companies can get cash in lots of lots of ways. They don't have to go public to get their cash. I mean, there's about what six point three trillion in
assets that the private equity funds have. Compliance costs are really high right now, it's about an average of four percent of a company's market cap. There are more regulations than ever, not just the thirty three and thirty four Acts, but Sarbanes Oxley and DoD Frank and companies have to take a short term view in the sense that they have to put out quarterly filings and make distributions to their shareholders, and so they have to take the short
term view over long term priorities. And a company like ARM really has to prioritize a long term view. It has to invest in R and D, so thinking short term not the greatest. And one other thing that I would bring up, there's going to be this new standard which comes out pretty soon from from fasby the Accounting Standards Board called Noklar, which experts believe will double or even triple the fees that companies have to pay to
their auditors. And what it does is it essentially says to the auditors, if there's any regulation, law, anything around the world that's going to have a material impact on a company's filings, it has to be included. And so that means that others are responsible for checking everything everywhere in any country that the company operates in order to make sure that all material risks are covered. So it's not a great time to be a public company.
Those are all the reasons you wouldn't want to go public. And I mean clearly, if you're a billionaire and you don't have a fantastic valuation, you take your company private. That's the smart move. Andrew Silverman, hang tight for a second, because I want to bring Kunjon Sabani leads semiconductor analysts for Bloomberg Intelligence cou John. Having said all that, and I'm sure you know all the reasons why you wouldn't
necessarily want to go public. Why is massa son? Why is SoftBank taking arm public right now rather than any other exit exit strategy?
Yeah, I mean, simple reason is they just need liquidity right now given what's happening in their parent business, Softmak. So they're just in need of some cash and this is one of their biggest assets, which might not be the perfect time, but still relatively in the pass, it's
a better time today to go public with this. The other thing to keep in account, they're limiting their flow to really like only five billion dollars, less than ten percent, so they are holding on to get a higher price later in the future.
Hey, Kun John, you know, as I looked at this perspectives, it looks like this is a company that designs chips for telephones. Great, but they are pitching this company now as hey, we're going to be an AI company going forward.
So they're asking me.
To pay an AI ish type multiple for a phone chip manufacturer. Is that kind of what they're asking the market to buy off on.
Yes, that's exactly right. I mean, look, they're pitching, they're asking the market to underwrite the future, sort of the next in media moment, and their current business is primarily, like you said, smartphones and consumer electronics and to some degree IoT, but the AI server and the automotive market is where they've had recent designments which they expect to or they share there, and that is what they're selling to the investors, like, hey, you can bet on us
for this coming in the future, so you don't miss out.
Hey, Andrew, back in today, you know, I could take a company public with not much more than a business plan, But today it seems like the market once not only revenues but profits. I mean that also maybe thins out the herd for potential IPO candidates.
Yeah, that's exactly right. And in this case, I mean, well, so, I mean why to invest in a company. I mean, on the one hand, you want to get your returns.
On the other hand, you have an expectation you're going to have some sort of control over over the company that you're investing in, and this is not one of those cases because soft Bank is going to keep controlling it after the IPO, and it's going to be what's called a foreign private issuer, and so the shareholders won't even know as much about it as a typical US company, won't have to make quarterly filings, won't have to have quarterly shareholder calls, and not subject to reg AfD, so
it can share material non public information selectively, not just to a select group of shareholders, not all shareholders. So yeah, I mean, if the only thing that people are investing in ARMED for is a shareholders distribution, I think they're also going to be disappointed in the fact that this company has to invest so much and it's R and D, and it also has such high operating expenses.
So and it's a good point that this is all about soft Bank, Kunjohn. ARM isn't reaping any of the proceeds from this IPO, right, It's not like they're going to be able to reinvest and build their business. This is just cashing out from Masa Sun.
That's exactly right.
None of the proceeds are going to ARM to be invested in the business.
Kunjun, Just real quick thirty seconds of the chip makers out there which ones do you think are best positioned for this AI move?
I mean in Nvidia, of course we all are aware of this second closes as AMD, they are also betting big on AI, and I would go broad common Intell also have significant air exposure.
And do you expect can a company like arm make that pivot?
Do you think? How do you view that opportunity?
They could?
I mean, look, they currently they have low single digit share, but they have had recent massive wins Amazon, Google, startups like mpere adopting ARMED technology Apple, so there's room to leverage and build on those wins, and they can. I mean, look, they don't need to beat the dominant player even if
they grow their market share. But another five percent, that's talking about billions of dollars adding to a company which is a low three billion in revenue, So significant growth from just a little bit of an increment share games.
All right, thanks so much for joining us.
Conjoen Sapani he is the technology analys for Bloomberg Intelligence based in San Francisco. And Andrew Silverman government analys covering a tax policy, looking at the IPO market in general. He does all that stuff for Bloomberg Intelligence based down in Washington, DC. We've got bi analysts basically everywhere.
They need to be.
If you need tech, we got folks in San Francisco. If you need the policy stuff, we got folks down in DC, right where it all happens. So this bifolks know what they're doing down there.
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It's called gaming.
My favorite sectors to cover the casinos. But we're not gonna be talking craps or blackjack.
Or any of that kind of stuff. We're talking hacking.
I think some of these casino companies have been hacked over the past couple of days. I'm talking to big ones like MGM and Caesars. Let's break this down, see what the risk is here to these companies. Brian Egger, Senior Gaming Analysts and Lodging Animals, Bloomberg Intelligence, joins Us and Jody Lori credit analysts with Bloomberg Intelligence. She joins us on via zoom both via Zoom here and in
our Princeton office. Brian, let's just start with you what's going on with these big casino companies and some hacking.
So it came about we found out a couple of days ago that MGM has been the target of an ongoing cyber attack TEMP that has resulted in systems shutdowns across a wide range of services. That's casino, hotel, other systems that have had to revert to manual operations. Obviously, it's been significantly disruptive, so there's an ongoing effort to remediate this, but it has certainly been an ongoing topic of interest to anyone following the industry.
Hey, Jody, from the balance sheet perspective, from the talk to us about these two companies or the industry in general, about kind of where we are in terms of the capital structure and the debt loads and the leverage. Are these balance sheets in decent shape?
Yeah, so, I think I think that's definitely a great question. These companies have been very much improving their balance sheets since the pandemic. But it's a little bit more complic that and a little bit more nuanced. If you take
someone like Caesar's, they've been directly deleveraging proactively MGM. It's a little bit touch and go because they opted to sell out of their assets through a sale lease back, and so a substantial portion of their of their quote unquote debt or if you consider adjusted lease back debt is leasebacks. I mean, that's about half of their debt load outstanding. So from a debt perspective, you say, all right, look,
these companies are actually pretty good shape. But if you add leases, it makes MGM look less favorable than Caesar's.
But there's no issue here.
Jody just kind of like, if there's gonna be a material hit to their profitability or the cash loads for either of these companies, do you think yeah?
So, I think that's the key is that you know, and Brian and I have been talking about it all week, is at least for now, the expected effects for their cashlows from a long term perspective might not be so grand. It's really a question of what is the sort of echo effects for these companies over time that could impact
March and therefore cash flows. And I think you know, the issue is you know, if if insurance is going to cover a good portion of it, what sort of knock on effects to things like reservations might might be affected.
You know, if MGM site is down all week and it's right during their peak season of bookings, because we have a lot of events going on that Brian has talked dead nauseum about, does this mean that MGM is going to lose out to competitors when people are starting to book for things like Formula one and things going on in the in the fourth quarter.
Brian, Jody is sick of hearing you talk about the events. Come on, man, thats absolutely so. But in terms of I just just to wrap up the the hacking side of this, are MGM or any of the other casinos more at risk of hacking than other you know, I guess financial companies.
I mean, we've begun to view this as at very least an industry wide risk. Caesars had an AK report out this morning indicating that they were the target of another effort to hack into their systems. Along with that some of their loyalty program members information was tapped. So this is an ongoing where Caesars managed to whether that particular or incident without the very visible systems wide outage that MGM.
Is still undergoing.
But I think it's fair to assume this is going to be an industry wide risk required and really coordinating remediation and containment efforts, and you will get some offset presumably from MGM, from cyber insurance. We just do not know the degree to which we'll get those offsetting streams.
All right, let's step back and look at this just this industry in general, Jody. When you talk to creditors out there, credit investors, how did they view the gaming business? Is this something that is a really solid credit out there for a lot of investors? Do they buy the industry? Do they buy individual names? How do they approach it?
I think if you like gaming, you're in gaming. You're full fledged in gaming, and then you're just picking names. I think there's a lot of creditors who say, I don't even want to touch the space because it's too cyclical. I mean, let's remember that back in two thousand and eight, MGM got a little bit over over levered with City Center.
They were able to get themselves out of it. But comparison to that, Caesar's and we're not talking to Caesars of today, because the Caesars of today is El Dorado, But historically Caesar's was lbo'ed taken private and then they ended up going through restructuring. So it's definitely an industry that if you like it, you really like it and you're involved in it. If you don't like it, you don't really go near it.
But to be clear, I mean Paul was talking about craps and blackjack, and I mean that's not is that still the lion's share of their revenue or is their revenue more like you know, Banker's booking conferences.
At the resort.
They're definitely shifting, shifting their mix, and we're seeing that with with Sands over in Macau. I mean, they're focusing so much on their non gaming portion of their business, and I think you're seeing that in Vegas as well. And they would hope for the regional casinos that obviously gaming is the bread and butter of the business, but they want to give people the other element. They want to give people the shows and the shopping and the
experiences because that's what's going to keep people. That's also going to bring other types of individuals than just your dedicated slot users or craps tables players.
Vegas of course, But Brian, I understand and reading your research and talking to you, that the regional gaming business is a big, big part of it. Talk to us about some of those kind of like non Vegas aspect to the US gaming business. How's that performing? Because gas is expensive, It's going to cost me a lot to get to my Mississippi River kind of casino.
Yeah, the regional gaming trends that performed well, we've probably webbled off certainly above prevend netic levels, but compared to last year, things that become or perhaps flatten. I think the bigger challenge, not only for Vegas but for regional properties is on the cost side. As the companies are reinstated full pre pandemic service levels, they may find it trperts to sustain the very significant margin gains to get
relative through pre pandemic experience. I will point out that this cyber incident is affecting MGM's regional properties as well as its Vegas properties. So this is really kind of a national issue for MGM.
In terms of, you know, where they're getting their revenue. You mentioned Jody mcau is Las Vegas dwindling as a you know, revenue source. Are they getting more revenue overseas now the bigger companies.
So if you look at it from more than revenue, we care more on Ebadah, especially from a debt perspective, and from an Ebadah perspective, MACAW is still coming back. So MCAW was roughly twenty two percent of mgmbadar which includes rent in before the pandemic, So twenty nineteen they're not quite there yet. They have seen a significant uptick, but Vegas and regionals are still certainly the lion's share of what's going on in their business. No pun intended
on the line because that's MGM's logo. But I think that's the key, is that MCAW is this source of momentum that's happening, but it's not quite two pre pandemic levels, and that's a function of the fact that it's only been open since the beginning of the year. I think that that provides some nice tailwes for MGM to make up for the fact that the US business is having
this little blip of an issue. And even if things start to slow down in the US and people aren't doing this revenge spending that we saw over the past year and a half, two years, we might see mcau helped to sort of offset that.
A little bit.
Hey Brian, is there any new property coming online in Vegas?
There's a public things that are underway for future developments, nothing like really.
Imminence the right.
There's that very cool orb where like you two apparently the Spears.
The Sphere is interesting a non gaming attraction, but it's highly significant. A lot of the recent additions to Vegas have been not to diminish the importance of large term resort development, but a lot of the additions to Vegas have been in the form of non gaming entertainment. So you've got the Sphere entertainment venue. Jody earlier mentioned the Formula one Grand Prix, which I'll mention again. But also you've got sports teams significantly, you have the the Golden
Knights playing at the T Mobile Center. You've got a Legion stadium hosting the Raiders, and of course you have the A's moving to Vegas at a site that will be on the stadium, uh buddying the current Tropicano. So not to diminish the importance of potential long term resort developments. But these non gaming developments related to entertainment sports conferences, those are all rather significant additions to draw tourism that don't necessarily a room capacity.
All right, great stuff as always, Brian Nagger, Jody Lori.
There. You're analyst at Bloomberg Intelligence covering the gaming biz from the equity side and the credit side. It does not get any better than that. We got full equity and credit coverage.
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Eleven thirty high school friends I have not talked to in a long time, who are saying you never told me? I think as we're watching this on TV. But most of all, I'm so thrilled for the employees of ARM thirty three year old company. Great heritage, but watching all the employees in Cambridge celebrate simultaneously, that was magical.
And they might continue to celebrate as we see what seventeen eighteen percent increase. How has that journey of going out to investors the road show, the story that you've been able seemingly to successfully sell the fact that you're trading well on this day.
What was the vision? They wanted to hear revenue growth?
I hear of eleven percent up to twenty five percent in the next couple of years.
What drives you?
I think it was a great process. Investors really wanted to understand the opportunity we had in front of us, and of course AI, which you can't really talk about our industry without talking about AI. And I think helping them understand that you can't really run AI without ARM, without a CPU, and just pointing out to them that it's in everywhere, in every device that people touch was a big part of the process for.
Us because everyone has made the equivalent of you're a smartphone, it's completely absorbed more than ninety percent of phones is where your CPUs are. But the design, the fact that you now want to be integral to data centers, and they're like, how certain are you on the revenue vision, on the profitability vision, even though we see concerns about our environment still and whether or not we're in an AI hype cycle.
Yeah, so AI is everywhere, and if it's your edge device like the Assistant or the Alexa, or your autonomous vehicle, that's all AI. And now we're seeing it in the cloud in the data center with all the growth of d in Vidia announcing one of their newest products, grace Hopper, that is based on ARM. So ARM is everywhere relative to AI, we also have a very unique business model that gives us the ability to have a very very good vision in the future in terms of when people
use our products. So relative to our confidence in the outlook, we have a very very high confidence that the growth rate that we have talked about will be sustained.
How word were invested about China and your exposure.
I think there were a lot of questions, as you can imagine about China in general, given all the geopolitics, Our business there looks a lot like the rest of the world. We have great growth in the data center, we have great growth and automotive China's huge on electric vehicles, so it's been terrific there for us. I have the same kind of headaches that every other tech CEO has regarding how to navigate through this, but no different.
Do you think there will be more pressure now that you're public again?
Ultimately?
I mean you came to ARM in twenty thirteen, you were listed at that point, but it's not been since twenty sixteen that you have been How does the game change as a leader of that business now?
Yeah, I think there's some things that we were able to do as a private company that will just be different. Right, quarterly earnings, making sure that we hit all our commitments. But ARM is not a business you measure from quarter to quarter. You measure us over years and decades, and the long term vision is something that I am very, very passionate about and will continue to drive the company the same way, private or public.
You have a lot of key vested interests, whether they be your clients, APPLETSMC and TEIL taking big stakes in the company today. How important are those voices? Visa v Masses, the head of soft Bank. I'm sure you're on the phone too daily.
Yeah.
So one of the challenges of our industry, and prely with ARM, is that the fact that we're everywhere, none of this works unless we play nice with others. So we have to have a lot of engagements with strategic partners and making sure that we're managing that balance, including Masa, our chief shareholder.
Do you think he lets more of ARM become public? Is that something you'd like to see?
Now?
Massa and I talk quite frequently, but it's really not about the day to day. It's about the long term vision, the passion that he and I have about the future, and really about what this company can be long term. So I don't expect that to change being a public company.
Do you think you go public in the UK?
I'm sure it's been a bitter sweet for the London Stock Exchange today.
Yeah, so today obviously we're in New York, but we're incredibly proud of our UK heritage and we are opening to considering that down the road.
Okay, any sort of timeframe for that.
None that we can talk about today. I'm trying to get through.
Today a little bit well before you get through today. In that respect, Investors do love all things regarding artificial intelligence. But how have you managed to land that your story is different? People have been so exuberant about in Nvidia, where you used to work, but they're really exuberant about GPUs. How have you said that you are able to claim a larger rule share of how AI continues to be said.
Yeah, So one of the benefits of the roadshow was spending a lot of time with the investors talking about AI and where we fit. And I think one of the misconceptions is that a GPU can run without a CPU, which is just not the case. The CPU is central to every electronics device and there are devices that ship
with a CPU and a GPU. So once investors kind of got that, then explaining where the puck was going relative to gosh, and Vidia's next generation host advanced product, Grace Hopper, is using ARM CPUs instead of the competition, the light bulb went on that, oh my gosh, you need the CPU. And at the same time, in Vidia has made a big bet on ARM in their most sophisticated product, And once that message kind of sunk through, the light bulb went on as, oh my gosh, I get it.
There has been this moment though, at which we're trying to understand how the landscape works with global demand and that translating into revenue. When you think of Oracle's numbers that came in and look, they delivered thirty percent increase, and it comes to their cloud provision and their AI bet, but it doesn't always immediately turn into revenue in the here and the now. How convinced are you that it is going to be in the bottom line evident in the next coming quarters.
As far as AI, oh, I think it's a questionable that AI, which has already been here right for a number of years. The chat cheap D moment taught us that, oh my gosh, the capability of what this can do going forward has gone up a level. And I think we've seen that over and over in our industry. There tends to be lightning bolt moments that greatly accelerate the adoption of technology. And I think with AI, as you move towards AGI computers that can think, I think we
now have seen an accelerant for that. Ultimately down the road how people make money off that. It'll get figured out. But AI is here to stay. That's unquestionable.
And it seems as though you're integral to soft banks vision of AI and Massa's vision of AI. How can you announce it a little bit? You say, he's talking to him daily, what his vision of ARM within ecosystem going forward really is?
He and I share a very same view that ARM is one of the most important technology companies in our industry. Foundational if you will, and I would like to see us over the next five to ten years really be recognized that way, and he and I are very aligned on that. As you can imagine when you think about five to ten years out, there's a lot of things to talk about in terms of the art of the possible, but that's really where he's focused on when his conversations with me.
Long term thinking but then near term action. We understand he was pretty integral to calling the shots on price points for today's listing. How was that as just an IPO experience? Did he end up being like, no, we need to leave a little bit of money on the table. This needs to be a successful trade.
But all I can say is this is my first road show, so everything was a leterning experience. We wanted to be at the high end of the range that we set forty seven to fifty one, and that's where it ended up. So we're happy.
We're very thrilled with today.
You said that school friends are going to in touch. Can why have you been hiding this from them?
How do you feel differently now as a CEO of a publicly traded company.
Do you feel differently today?
I feel a little bit differently, and looking ahead at this number than what the share price is, that wasn't something we looked at before. But you know again when and I told this to employees. While the IPO is amazing and I could not be more proud of it, I am far more excited about the next five to ten years. And that's where my head is focused. Obviously we needed things as a public company CEO, but I don't feel too much different.
And sometimes these are marketing exercises. Arm is B to B, but do you think you've become more relevant? B to see Now you're saying how people had no idea all this, because largely people don't realize that every day they are interacting with your designs, with your blueprints.
The people who need to know what we do do know. Obviously, just giving the fact that all the global partners that we work with going forward, how to market ourselves as a public company. That's one of the things as a public company CEO, I'll spend some time thinking about. But right now we're just kind of focused on today and what that means.
And meanwhile, within there's exuberance of today. Yesterday we saw basically every key chief executive of an AI company, AI related company, indoors and a closed hearing with Senate Majority Leader Chuck Tchuma. Can you tell us about regulation? How do you see the landscape evolving to ensure that you can harness that AI moment.
I think it is one of those areas that is an unknown moment. And I remember talking to an executive about the analogy or metaphor we used was when cars were invented, you didn't have driver's licenses, you didn't have lanes, you didn't have rules of the road. There was a lot of things that people had to figure out in terms of taking a device that was going to be very very productive but could be very dangerous in terms
of automobile accidents. AI is a little bit of the same in the sense that we're now in a new paradigm. Were some rules and regulations and need to be figured out. And that's why I think you're seeing all this activity around that area.
Is the US leading the charge and regulation is Europe? Is the UK was getting it right?
From your perspective, I think all the governments are trying to figure it out. I know the EU has spent a lot of energy on this, as said the UK, so in terms of who's getting it right, I think it's still early days and everyone's really just trying to learn how technology and this new powerful algorithm will work together.
Keep teaching us. Great to have some time with you.
Thank you so much.
Cool's the CEO of ARM the day they're listening.
Thanks for listening to the Bloomberg Markets podcasts. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
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