January 22, 2020
It’s that time of year that only Yogi Berra could put in perspective with one of his quotes. My three favorite Yogi Berra quotes below capture this time of year when we try to figure out: i) what lies ahead at the onset of a new year; ii) meaning from quarterly earnings on the year just ended; iii) the news from the annual pilgrimage of CEOs and world leaders to Davos Switzerland for the World Economic Forum; and iv) interest rates from the Federal Reserve’s first-of-the-year FOMC meeting. Those three quotes to help make sense of it all for this week’s WIN are:
- It’s like Déjà vu all over again (same events with different characters)
- The future ain’t what it used to be (the explanation CEOs will proffer to explain earnings results)
- You’ve got to be careful if you don’t know where you are going because you might not get there. (self explanatory).
This week’s WIN commentary will segregate the economic news and CRE trends along the lines of theses Yogi Berra quotes:
“It’s Like Déjà vu all over again:”
Small Business Optimism: A good starting point is the good news from the latest NFIB Small Business Optimism Survey (Dec 2019 period) which showed once again a reading over 100, and that small businesses are optimistic and inclined to expand more in 2020. The December reading, although down a bit to 102.7 from November’s 104.7, represented the 37th consecutive monthly reading above 100. The dip to 102.7 was attributed largely to a rise in the “uncertainty” component of the monthly survey. The 37 months above a 100 reading is an achievement not seen in this index in more than a decade.
Trade: It remains in the headlines, for good reasons this past week. The China Phase-I agreement has been signed, and for the time being it looks like things are calmed down. In addition, the USMCA (NAFTA 2.0) agreement was passed by the Congress and signed by the President. And if USMCA and a China trade deal were not enough good trade news, the dust up with France over its proposed “digital tax” was resolved over the weekend prior to the start of the World Economic Summit in Davos Switzerland. Could more trade be on the agenda for 2020? In a word, yes. Europe and the UK are next up on the trade front.
Earnings: The easy forecast is that: “Some will beat and some will disappoint.” I can do better than that and will go out on a limb and forecast: i) a 6th consecutive quarter in which the majority of public companies beat expectations and prove headwinds can still be navigated with technology and efficiency solutions. Just as tariffs didn’t tank earnings - and companies learned how to mange supply-chain differently - the same will occur in 2020 with whatever headwinds develop. There will be a continuation of disappointments from the “Self-Inflicted” - such as Boeing, Wells Fargo, Under Armour and a host of retailers struggling with “Retail e-Volution.”
“The future ain’t what it used to be:”
Climate change, the sustainability movement, and ESG (Environmental, Social, Governance) lead this Yogi Berra-ism. These three items will dominate the conversations among world leaders and CEOs in Davos Switzerland this next week. ESG is coming to our commercial real estate industry in much the same way “Green” and Leed certification came to it over the past two decades. The intentions are good, but the execution and unintended consequences warrant monitoring. A couple of recommended article on ESG regarding: i) how the two dominant proxy advisors are driving this debate and public policy is a December 2019 feature in the WSJ titled: ESG Funds Draw SEC Scrutiny; and the second is a BizNow feature highlighting how ESG is impacting CRE titled: CRE Companies Hunt For New Ways To Meet — And Quantify — ESG Goals. If you learn about just one new topic in 2020, I recommend ESG.
On the earnings front, “The Future ain’t what it used to be” for banks, energy companies, railroads and retailers. Note the recent earnings release by Halliburton on the heels of Schlumberger and Chevron with $12 billion and $10 billion in charge-offs, respectively. These energy companies face huge charge-offs for asset impairment and reductions in CapEx spending due to weakening in North American shale activity. According to Halliburton Chief Executive Jeff Miller on this week’s earnings call, "The U.S. shale industry is facing its biggest test since the 2015 downturn, with both capital discipline and slowing leading edge efficiency gains weighing down activity and production."
Railroad companies face a different future as well with less coal transport and more energy in pipelines than moved by rail. Gains in efficiency is the name of the game as they shift to more intermodal transport. CSX’s recent January earnings release noted: i) Volume fell a steeper-than-expected 7% in the December quarter led by a double-digit decline in coal; ii) it projects another challenging year in 2020, following a steeper-than-expected 3% revenue decline for the full 2019 year; iii) it’s all about efficiency gains and reducing the operating ratio. For those in our CRE industry focused on industrial real estate and logistics, follow the railroads to understand the where and why they deploy CapEx and invest in certain coastal and inland ports. On the other end of the railroad performance spectrum is Kansas City Southern (KCS). The company just released its fourth quarter earnings and revealed a strong performance in a pretty tough economic environment. The company did report contracting shipments (again) but was able to offset this by raising prices and enhancing profitability. Railroads face a different future that is less bulk cargo like coal and petroleum and more intermodal and containers. How they react has material implications for industrial real estate. Below is a slide from current presentations that highlight the latest RailTIme Indicators performance metrics from AAR.org.
Summary from AAR.org:
2019 was a challenging year for U.S. rail traffic. Total carloads fell 4.9% (668,075 carloads) and intermodal fell 5.1% (740,240 containers and trailers) from 2018. Total carloads of 12.97 million in 2019 were the fewest for any year since sometime prior to 1988, which is when our data begin. Intermodal volume of 13.73 million units in 2019 was the second most ever, behind 2018.
Banks & Retailers: It’s all about evolving as all goes digital and to some sort of e-Commerce model. More stores will close and banks will shed thousands of obsolete branch banks as more banking is done online. Augmented Retail is the newest thing, and bank mergers and consolidation will accelerate. The number of banks has shrunk from the Financial Crisis from 8,000+ to 5,300 – or about the same number as we have credit unions. The most shocking retail forecast I have read this new year is one by UBS Securities which forecasts “75,000 more stores would need to be shuttered by 2026 if e-commerce “penetration rises from 16% currently to 25%.” We closed 25,000 stores the past 3 years with records in 2017 and 2019, and in the ACRE/CCIM Insights October 2019 paper titled Retail e-Volution: Predictios for 2025, I forecast e-Commerce sales would rise to the 20% level by 2025. If UBS and I are correct, by 2025 “The Future Ain’t What It Used To Be” for the retail industry or physical real estate. The latest casualty in retail this past week was the bankruptcy filing by the iconic Southern fast-food chain Krystal.
“You’ve got to be careful if you don’t know where you are going because you might not get there.”
An interesting piece and graphic that fits into this Yogi Berra category is the latest Amazon map of its fulfillment warehouses. Clearly Amazon “knows where it is going.” As every commercial real estate property type is faced with rethinking highest & best use and goes where it hasn’t – like office to retail malls and Big-Box, or retail to hotel and warehouses, and farming from the outdoors to indoors in the aquaponics industry led by such vertical-indoor AG companies as Plenty – we all need to be visualizing the where and why of where real estate occupiers are going much like Amazon is doing.
What is Ahead to Monitor:
Economic Releases: Keep an eye on a plethora of new economic reports that include updates on existing home sales and mortgage applications Wednesday Jan 22 (I forecast both will be up despite bad weather and seasonality issues), Leading Economic Indicators (LEI – the economists weigh in) on Thursday and the Baker-Hughes oil rig count on Friday given the Haliburton earnings and charge-offs news this week. Those of you with CRE in the shale regions need to be paying attention as this count has employment implications.
Corporate Earnings: These are the real harbingers of what lies ahead – especially in the forward guidance provided that hint at capital spending and hiring plans. Below is a listing of what earnings releases are on my radar this month and for early February:
Last Week it was all about the Banks: All but Wells Fargo (one of the “Self-Inflicted”) posted good results. Up this week on the banks is ServisFirst (Jan 21), Synovus (Jan 24) and the newly created Truist Bank (Jan 30) from the merging of legacy SunTrust and BB&T).
This Week we get some indications on the consumer, housing and more rail from bellwether industrial real estate, consumer staples and housing companies, such as: ProLogis (Jan 22) and UPS (Jan 30), Johnson & Johnson, Procter & Gamble, Union Pacific RR, and DR. Horton (Jan 22)
End of January key Consumer Staples, Housing and Manufacturing companies: Proctor & Gamble was a most valuable proxy in 2019 as to tariffs and trade and reports Jan 22nd; very important aircraft manufacturing and our largest exporting companies Boeing & GE on Jan 29th. Boeing is a big deal to our economy as the #1 exporter and it impacts employment well beyond Washington State and South Carolina.
Retailers: They always come later in the reporting cycle and will start with the likes of Levi Strauss on Feb 4th. Then pay attention to O’Reilly Auto Parts on Feb 5th, CBL Properties on Feb 6th (a retail REIT hit by a lot of anchor store closings in recent years), Auto Nation Feb 11th (nation’s largest auto dealer), Shopify Feb 13th (small retailer alternative to Amazon), and then biggies like WalMart & Home Depot on Feb 18th.
Try to distract yourself from the impeachment trial in the U.S. Senate and dial into the World Economic Summit in Davos Switzerland, and some of the economic news. If you can’t do that, get ready for Super Bowl 54. Congrats to the Kansas City Chiefs – 50 years is too long, and that is coming from a life-long Denver Bronco fan of a rival AFC team. So glad New England Patriots are taking a breather this year and giving someone else a chance. A great new crop of NFL teams on the rise from the likes of the Texans, Tennessee Titans, and Kansas City Chiefs. The “Future Ain’t what it used to be for them.” Oh, and congrats to LSU Tigers on their amazing year and NCAA Football championship win.
Finally, If you are in the Birmingham metro area Friday February 7th, consider attending our annual CREcom 2020 - Building the Future commercial real estate conference where I will reveal all of my economic and CRE insights for 2020. This year is ACRE’s 20th anniversary of our the conference. The theme is “Building Your Future” and a link to the agenda is below. All my insights for 2020 will be presented the morning of February 7th during my opening Outlook - followed by panels with all-star industry leaders from the capital markets (Hunt Mortgage, Protective Life and Regions Bank), leading CRE industry group CEOs including CCIM (Greg Fine), Appraisal Institute (Jim AMorin), IREM (Denise Froemming), and SIOR (Tom McCormick) etc. Additional sessions from ULI Emerging Trends, Opportunity Zones, LinkedIn and the CEO of World Games 2021 (Nick Sellers) will fill out the day.
Have a great week! -KC
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