What's Happening to the Retail Industry?

Donald Trump's presidency, and that is the retail sector. And here to tell us more as Chris Fulkei is the chief executive Store Capital Chris, thanks very much for being here. Now I just want to read you one note. This comes actually from a Credit Suite report, and this has to do with the deterioration in real estate investment trust but specifically in the mall A segment. It says this has to do with the associated mortgage backed securities and

CDs right swaps. Barely a quarter into seventeen, year to day retail store closings have already surpassed those of two thousand and eight. Is that scary? It is scary? There are probably close to nine thousand stores slated to be closed potentially this year. UM. Now, the good news for us is that we're into service space and manufacturing, so we have give or take exposure to retail, and of that, very few of our locations are anywhere close to any

of the chains that are suffering the big closures. Well, so let's talk about your firm, your chief executive officers officer of store Capital, which is a middle market real estate capital solutions firm. Are you going into some of these mid tier retailers and these mid tier malls and trying to help them structure their debts and their businesses that they can emerge from this uh, this deterioration and credit worthiness that we've seen on a broad based level

and retail. Uh No. So, so store is stands for single tenant operational real estate. So we focus on profit center properties. So we do business mostly in the service space. So think about health clubs and fitness or early childhood education, movie theaters, uh, you know, veterinary clinics, that kind of thing. So we do lots of lots of things in the

service space. We do about in the retail space. And we started the company in two thousand and eleven, which meant we had a little bit of foresight to know that, hey, the Internet is here. We know that you have to be an experiential retailer. And clearly there are retailers that

are expanding in today's economy. But uh, the the assets that we're owning would be let's say, in the furniture space, hunting, fishing, um uh, you know, home improvement, things like that hobby space uh and which is just a different kind of space, and and things that you would not typically buy over the internet, things you'd like to try out. Can you put numbers to just how different the fates of these

experiential stores are to their retail they're like physical retail brethren. Well, I would say that our average retailer is probably growing year to year about eight percent top line in sales, so uh, and some of that same store sales growth, and some of that's adding new locations. Um So, these are vibrant retail companies. And again it's only about fift

of what we do, but it's um uh. Typically people for example, want to try an mattress or they want to try a sofa there, and they have a hard time returning things if they're if they're delivered to them, and so on. So uh so these are the types of things that we think long term, uh will do well. We don't think that people will just stay in there on their sofa and order everything that they can. So would it be okay to classify you as an expert in credit? Uh? You know a little bit about it

right well? And the reason because I'm wondering if you could just walk us through the credit landscape right now and give us your thoughts not just as a as an investor, but as someone that is a practitioner about the consent deals you're seeing and the kinds of investors that are being courted because yields are as still historically low. Well, I mean, I've I've always thought in our space the credits miss priced. People have a tendency to think that

a strong credit equates to an investment grade contracts. So otherwise I have an investment grade tenant, I must have an investment grade contract. Um Uh. If I have a pretty piece of real estate, it must be a good investment. I mean, these are things that are not necessarily true. Good credit does not equate to a good contract. A pretty piece of real estate does not equate to a good investment. Just to give maybe given example so people

understand how that works. Well, Uh, you could have a company that's an investment grade credit, but you could pay twice what the real estate would cost to build for for for example, you may not have proper allianments of interest, so leases allow the tenant to go dark. Anytime. You

don't have master leases, you have no financial reporting. If you look at our company today, we get financial reporting from about nine percent of our talents, which is just staggering at the store level, not just the corporate level, the corporate level, but the store level. So that's just unbelievable. Where are the companies that you invest in the stores? Are they in a level malls sea level malls? Are they not in malls? I would say most of them

are not in malls. Um, So let's if I if I have three of our properties that are within a quarter of a mile roughly of Macy's, a Kmart, a Pennies, a Sears. That tells you that we're not really in malls. Where in strip center is more or less in front of Walmart's, in front of targets. Uh. Sometimes if it's a if it's a restaurant, or if it's another retail store,

we might be adjacent to one of those kinds of properties. Well, I guess I I What I'm trying to get at is we've heard a lot of hedge fund managers say that shorting mall related debt is the next big short, and we've seen a lot of big investors who are very respected go in and try to do this via derivative wagers, among others. Do you think that they're onto something based on what you have seen in your personal

investing experience. I think if you could find a pure way to short more related debt, it might be an interesting investment. Uh, it's it's far moved from what I do for a living, but it might be interesting investment. But what I've seen is that things that people are shorting tend to be somewhat blunt instruments, so they're not exactly pure more related debt. There is no pure thing to short in CDs as there was in residential real

estate prior to the Great Recession. Some of your customers might be restaurants, for example, right, like for Burger King Right. If you need some financing or some help with the franchise, then you're going to lend your expertise to that. You're in Scottsdale, Arizona. When I thought when I saw that, and I remembered, of course, what you have to live

through it to be in Scottsdale, Arizona. Let's say, back in two thousand and eight, if you can give us a little perspective as to why this cycle appears the way it does, and not to confuse it with what happened in two thousand and eight, right, well, to put it in perspective. We've been in this business for about thirty five years UM, and this is our third public company, so this is not my first rodeo. And every company

we've run is outperformed the benchmark. So it didn't matter whether a ten year treasury with six fifty four fifty. Today we're a two thirty, So we've always out performed

the benchmarks. Um Our Stores, the assets that we own are today in forty eight states, UH, the biggest state being Texas, at no other states north of ten UM, so we're all over the country and we're providing UH financial real estate net least solutions to middle market and larger companies and for them we're providing a financial solution for our investors, were providing them with the opportunity to

own some really good quality real estate investments. How many competitors do you have if you noticed that the field has gotten more crowded as an investment firms to look for new opportunities so far, I would say no, um uh and and I we sold our first public company in two thousand one to GE Capital. Uh. Today my office is actually in UH space that used to be occupied by the successor company to the first company were created.

G must have bought ten people in our space, so they almost like the oxygen out of the room, buying people and growing it in. Today G Capital has has ceased to exist, So I would say that there it's very very hard to create an institutional player in the space. Most of the people that are competitors of ours are small to medium sized landlords. They're privately held. They're very few of you know, good quality public you know landlords.

And in the marketplace. By the way, that our our market alone is about two and a half treeion dollars in size, so uh and and here we are with an equity capitalization that's just north of four bayon acquisitions, what are you looking for? Well, our guidance this year so far is to do nine million dollars net of sales, so we'll sell properties from time to time. Last year we did about a b in one fifty uh so

the year before that we did about the same. We've been in general doing somewhere around a hunter million hours a month worth of business. We've been doing thirty to forty transactions every quarter. We've been adding to our customer base, and about a third of the business we do is

repeat business with existing tenants. What do you think will be the hallmark to look for to indicate that the retail armageddon iss some people have been calling it with the incredible rush of stores that have been closed, that this that this retail blood bath is reaching a crescendo.

You know, I think that the retail blood bath that you're talking about is mostly going to affect malls where you're dealing with large anchors that are having issues, which can cause a lot of smaller retailers to also close down their shops. And some of those smaller retailers are also closing down their shops on their own. Um, if you look at strip malls, for example, most of those malls are filled with you know, a Walmart, and then lots of service providers could be taxed for fighters, could

be yoga studios, um. And I think that a lot of those malls are doing great. So but a lot of people say that we're not in the ninth inning, if you're going to use a baseball analogy, We're not necessarily nearing the end of the pain that we've seen in the retail industry. I mean, would you agree, I do agree. I think that you know, we're going to see the demise of some very old and um storied names and retail over time. Thank you so much, truly fascinating to speak with you, and thank you so much

for coming to the studios. Chris Volki is chief executive officer of Store Capital, talking about middle market investing in retail spaces but really focusing on experiences, not just selling stuff. Well, yesterday, Home Capital Group, which is Canada's biggest alternative mortgage lender, plunged more than sixty percent after disclosing that it needed emergency financing that was done and secured at very un

uh financially unpleasant terms. Let's just say now the stock is rebounding rebounding a bit, but I really want to get a sense of how much this company serves as a harbinger for the broader Canadian mortgage market which has been on fire. Doug Alexander, please join us and make sense of this. Doug Alexander is a Canadian financial service services reporter with Bloomberg and he comes to us from Toronto. Doug,

can you just put this into broader context? I mean, is Home Capital Group considered UH sort of a red flag a Canary uh that sort of signifies some deeper, broader pain in the mortgage market in Canada. Yes, good morning, UM, Home Capital H. A short answer would be uh no, Um. They are actually, UH, as you point out, the largest alternative lender UH in Canada. They do. They've been around for like thirty one years, um. And what they really do is they do specialize in a certain kind of mortgage.

It's not necessarily like the subprime that you'd see in the US that has what caused so many problems during the financial crisis, but they do provide loans to people that may have a bit more difficulty UH getting qualifications through the major Canadian banks, whether it be because they have more complicated UM income streams, or they could be

foreigners that have just moved into the country. But the bottom line, home capital has about twenty billion dollars or less than twenty billion dollars of loans UM mortgage loans, and the Canadian UH mortgage market essentially is about one point one trillion in Canadian Hey, hey, Doug, you know, I wonder if you could just step back into and explain a little bit about the real estate market, the residential real estate market in Canada, because, uh, the government

has I believed already proposed a tax on foreign purchases. Also, you've seen explosive increases in real estate values in cities like Vancouver and also in Toronto. You got a lot of speculators. What if you could just kind of pull it all together for Yeah, it's a very interesting market. So when it comes to real estate in Canada, UM and really, as you point out, there has been a huge price appreciation as of late. It's really am It's

really a market that is very, very lumpy. There are two areas in the country where you could argue that there's an overheated housing market, which is UH Toronto currently UM and Vancouver Vancouver is UM kind of eased off a little bit, but as you point out, in UM Vancouver last year, there were UH measures taken to curb UH some of that demand UM by targeting UH foreign investors with a with a tax UM that's been in pos is now in to cover the Toronto market as well.

But either very two very specific markets in the country. If you look across the country and that there are other markets that are are UH seeing a slowdown UM for whatever UM economic reasons, Calary being one of them. UM and other major cities like Much we all that really just haven't seen that UM that that same level of appreciation. So it's really a a country that has

two overheated housing markets. And let's be clear that's actually concerned policymakers UM and you know those in the financial services industry and UH and UH you know politicians at the local level as well well. I just want to bring this back to Home Capital Group because this UH is this company is based in Toronto, which is one of the overheated markets that you point to, and they have been the subject of a regulatory probe basically looking

into whether their lending standards were overly lax. Another words, they were letting me perhaps money to people who couldn't afford to pay it back. I mean, I guess that from that perspective, you have to wonder, is this a problem. Are we seeing a repeat, perhaps on a smaller scale, of what we saw leading up to two thousand and eight in the US? Yeah, I don't think that's what's what the you know, the analysts and UH and other

observers in the industry industry are looking at. They're looking at. Home Capital is really a very company specific issue, and I think to understand the current context that we're in with home Capital, we have to kind of go back a couple of years and really what their problem is is a problem of disclosure. UM. A couple of years ago, UH, they they had issues with some mortgages from outside brokers UH that UH that turned out to be approved by

because some of the information on their income was falsified. Now, as far as we've been told since, there's been really no problems with those mortgages. But a time in two thousand and fifteen, UH, the company cuts hies with about forty brokers. The problem is that initially they kind of downplayed that, they kind of hid that information UH in their UM quarterly results and when they were asked about it during the conference calls with the Analyston investor community,

they really kind of um sidestepped it. That brought concerns with the Canadian regulator, Ontario's regulator, and that's where their problems have surfaced as of late. Um Doug Alexander, I wish we could continue because it's a fascinating story. We're gonna have to leave it there. Doug Alexander is Canada's financial services reporter for Bloomberg. Coming to us from Toronto. We want to take a moment to let you know

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extension on the Chrome Store to try it out. Learn more at Bloomberg dot com. Slash lens Board is quote, having one foot in today and one foot in tomorrow. That's according to Chief executive officer Mark Fields. Today after Ford Motor Company reported earnings that underwhelmed UH certainly traders, the shares are down more than a percentage point based on the idea that the company is spending more on driver list technology now uh cost cutting more costs, and

trying to prepare for the future. To sort of explain the road ahead, I am very pleased bringing Bob Shanks, executive vice president and chief financial officer of Ford Motor Company, coming to us from Dearborn, Michigan. Bob, thank you so much for joining us. First, I just wanted to gauge the mood inside Ford headquarters. I mean, do people feel like it's kind of not fair that Ford is now pouring money into too uh driver list technology and uh

more electric cars and investors are not impressed. Whereas Tesla, all they have to do is say, you know, energy and everybody cheers. Well, I can tell you you know how I feel untrustrated frankly, because um, while we're creating value in terms of the core business today, uh and certainly our dividend is strong and it's sustainable even through

a downturn. UM. We we have laid out a plan to participate in what's what's going to be a transformation of the industry that will pay off as it will for others that are working on similar technologies UM in the future. There doesn't seem to be a much of our recognition of that because I think deeper focused more on the nearer term. I would just say, we're not pouring, uh, you know, resources into that. The vast majority of the

investments we're making are in the core business. But we we are investing appropriately imprudently in autonomy, electrification, mobility and so forth. That's that's true. But you know, we're going to continue to do what we're doing because we know it's right, and we know where the industry is heading and we have to be prepared for that, and we we plan to participate that and to create value by

doing so. Bob, I want to talk a little bit about the here and now with you and just get your thoughts on Lincoln and the Lincoln Navigator and the refresh that's going on. Yeah, that is, uh, that's a really big opportunity for us, the Navigator as well as the Ford Expedition We just revealed those products of the Lincoln at the New York Auto Show expedition to a bit earlier. This is the first complete ground up redesign in a long time. It's gonna They're both going to

take aluminum bodies. They're going to be on the same sort of platforms as the F one fifty, which has been usually successful and the re action to that product has been phenomenal. They'll be coming out. I think the launches are in the third quarter, probably hit the market in the fourth and they're very high margin products, so it's a big opportunity for us. Just quickly where they made are they say, in the same Kansas they're made the F as the F series. They're made at Kentucky

Truck which is where we make the Super Duty. But they have their own body shop and their own paint shop, you know, Bob, I do want to just a touch on used car prices and that Ford did say today that they see use car prices falling six percent this year. Can you put that into perspective whether use car values are falling faster than you've been expecting and the road ahead for the rest of the year. That's a good question. I would say, they're not falling faster than what we

have been expecting over the last number of months. What happened about a year ago actually this time, is that we started to talk about and guide to decline in use car values related to the fact that the industry has been leasing at the levels of you know, we've never seen before over the last number of years, and a rising industry and been you know, a lot of those vehicles. Now we're starting to come back off lease.

So we we expected a decline. We adjusted our view of that decline in November last year, and everything that we see today suggests that everything's happening and unfolding as we had expected. So we have seen a year over year decline of seven percent at Ford. That's in align with what's happened overall across the industry. And what I mentioned in the call today is that we expect on average, used car values to decline about six percent over the full year. But what about the charge offs in Ford's

credit unit. Have you seen delinquencies and write downs increase at a faster pace than you've been expecting. Well, they've been increasing from where they had been and they but they've been at historical lows. So when we look at the all the metrics around delinquencies, the frequency of defaults, the severity of those defaults, they're only approaching what you know,

we would consider to be historical norms. So they were extremely low when we came out of the downturn for a number of years, or just approaching what you know, we would call normal. Uh. And in fact, in recent periods we've seen you know, some slow down if you will, in terms of the pace of that change. So we feel that we've captured that appropriately in the outlook for

Ford Credit for the full year. Bob, just taking a look at the shares of Ford, I mean, they're down about five percent so far this year, but you're paying a five and a quarter percent dividend. And if you are talking directly to and I'm sure you are in a way speaking directly to shareholders who may be bought into the Ford idea, let's say to three years ago

after the financial debacle, what would you say to them today? Well, clearly, we've delivered seven years of very very strong performance right across the board. This is a different company than it was going into the downturn. We've done a lot of restructuring,

it's a much fitter company. It's ready for another downturn. Uh. And in particular relatives to the dividend, you know, we have staked very strong position that we intend and plan and believe we have the capability of paying that regular dividend at the level that it's at when we go into the downturn throughout that downturn. So, you know, for those interested in a good return, because as you said, five percent and you're paying what fifteen fifteen cents to

share exactly. Uh. And in addition to that, over the last two years, we've paid a supplement dividend UH. And that opportunity still exists as as we move forward, because we don't see any signs that the recession that ultimately will happen is on the horizon. So we think we've got a great story to tell for those that are particularly interested in in dividend a great return. Thanks very

much for joining us. As always, Bob Shanks is the executive vice president and the chief financial officer of the Ford Motor Company based in Dearborn, Michigan. Thanks for listening to the Bloomberg pm L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bluebirg Radio