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US GDP Rises, Airline Earnings · Bloomberg Intelligence

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Speaker 2: All right, let's get to the bond market for a moment.
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Speaker 2: It's been a really interesting a couple of days. So
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Speaker 2: yesterday you had a lot of buying on the front end,
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Speaker 2: and you had some selling on the back end. Today
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Speaker 2: buying pretty much across the board. It's really that Bull
0:37
Speaker 2: Flattner that we're seeing joining us now as Ira Jersey.
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Speaker 2: He's chief US interest rate strategist over at Bloomberg Intelligence.
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Speaker 2: First question goes back to yesterday. Was the long end
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Speaker 2: selling a reaction to like needing to liquidate to cover
0:51
Speaker 2: shorts in the end?
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Speaker 3: Well, I don't know if it was only the en
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Speaker 3: it was also that a lot of people wanted to
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Speaker 3: get into the front end because of the idea that
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Speaker 3: you know, we'd see deeper interest rate cuts and and
1:03
Speaker 3: because of that, you have to if you're a real
1:05
Speaker 3: money investor, you have to raise that money from somewhere
1:07
Speaker 3: because you might not have all of the all of
1:09
Speaker 3: that in cash, so you have to sell something to
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Speaker 3: to fund your your purchases in the front end. I
1:16
Speaker 3: think part of it too was you had a decent,
1:18
Speaker 3: a decent five year auction, and so you had some
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Speaker 3: people who were saying, you know, again buying the belly
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Speaker 3: and the front end and you know, selling the back end.
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Speaker 3: And then secondly, and this was really interesting, is that
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Speaker 3: there were some people who maybe were hoping and dealers
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Speaker 3: who were hoping to get rid of some inventory into
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Speaker 3: the a treasury buyback that occurred yesterday, and the Treasury
1:40
Speaker 3: didn't buy anything. They were you know, people were expecting
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Speaker 3: them maybe to buy about a billion dollars worth of
1:46
Speaker 3: seven to ten year notes and they didn't buy any
1:49
Speaker 3: because I guess that sector was rich. So when you
1:52
Speaker 3: didn't have that, dealers have more more inventory than they
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Speaker 3: thought and basically had to you know, back up their
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Speaker 3: prices and that means higher yields.
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Speaker 4: I right, we had that really strong GDP print this morning.
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Speaker 4: Tom Kane was making the point earlier this morning that
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Speaker 4: how can a FED cut into something like that? Economy
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Speaker 4: doesn't need it right now? What do you think?
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Speaker 3: Yeah, Well, it's it's a momentum issue, right, because keep
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Speaker 3: in mind that that the third quarter, the second quarter
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Speaker 3: GDP report was for April, May and June. So April
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Speaker 3: and May, we know were reasonably strong, and and you know,
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Speaker 3: clearly you know June wasn't terrible by any stretch of
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Speaker 3: the imagination. Economic momentum is slowing, so at some point
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Speaker 3: the Federal Reserve might cut interest rates. But I agree
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Speaker 3: with the idea that you know that, And we've always
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Speaker 3: been skeptical about the about a September cut being the
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Speaker 3: first one, And again I don't really care. I think,
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Speaker 3: big picture, if it's the September's the first cut, in
2:45
Speaker 3: November's the first cut, doesn't really matter at least unless
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Speaker 3: you're trading instruments that it happened to mature in those months.
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Speaker 3: So yeah, I think I think it is difficult, and
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Speaker 3: it just shows and what this report shows is that
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Speaker 3: the economy, while it's not where it was a year ago,
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Speaker 3: it's still not weak. And and that's the that's the
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Speaker 3: challenge that the Fed has is how can they cut
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Speaker 3: while the until the economy is actually weak, And you
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Speaker 3: just don't see that very much, even with four point
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Speaker 3: one percent unemployment that's not crazy high end employment by
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Speaker 3: any stretch of the imagination.
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Speaker 2: So based on that, what what kind of curve do
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Speaker 2: we expect, as in, is it going to be buying
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Speaker 2: the front end or is it going to be selling
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Speaker 2: the long end?
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Speaker 3: Well, eventually it's going to be I think a bull steepener.
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Speaker 3: So that means that front end yields are going to
3:29
Speaker 3: go down much faster than longer term yields. But it's
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Speaker 3: you know, that's it that's going to come and fits
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Speaker 3: and starts because of the same reason that we've seen
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Speaker 3: it the last couple of quarters quite frankly, and that's
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Speaker 3: what we don't know when the fed's going to start.
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Speaker 3: And once the FED starts, then the question is how
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Speaker 3: how fast do they go? And we've been on the
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Speaker 3: opinion at at b I rates that we're that the
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Speaker 3: longer the FED waits to cut, the deeper.
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Speaker 5: It's going to have to cut.
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Speaker 3: And and and we do think that you know, they
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Speaker 3: are going to cut probably once this year, maybe twice.
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Speaker 3: Once they do, they'll keep on going and keep cutting
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Speaker 3: at least one hundred and fifty or two hundred basis
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Speaker 3: points in a pont over over the course of a year,
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Speaker 3: and as that occurs, that's when you see the front
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Speaker 3: end really start to gain some traction. But keep in mind,
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Speaker 3: you know, we yesterday was interesting because the curves steepened
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Speaker 3: ten basis points. It only had steepened eighteen basis points
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Speaker 3: the whole year, right, So you're talking about a massive
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Speaker 3: move in terms of of you know, just this relative
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Speaker 3: to how much we'd moved this year in terms of
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Speaker 3: the two versus ten year curve.
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Speaker 4: All right, looking at that two year word four forty,
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Speaker 4: we weren't you know, five percent just recently. Is that
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Speaker 4: sixty basis point moved? Is that a reasonable kind of
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Speaker 4: move in that timeframe or is this a market? But
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Speaker 4: that's been moving pretty quickly.
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Speaker 3: It's not that unusual. If you go back in time
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Speaker 3: and you don't include the twenty twelve to twenty eighteen period,
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Speaker 3: it's usually the range of ten year treasury yields is
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Speaker 3: is somewhere around one hundred basis point a year. So yeah,
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Speaker 3: you know, seeing moves of forty to sixty basis points
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Speaker 3: over six month period is not that unusual. In fact,
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Speaker 3: we've had three of them just in the last two years.
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Speaker 3: You know, you go back to the last October. You know,
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Speaker 3: we went from in August we were you know, near
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Speaker 3: four percent. In October we were near five percent, and
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Speaker 3: then we've rallied all the way back down to under
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Speaker 3: four percent. Right, So so you're talking about one hundred
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Speaker 3: bases point range that we're in, an now we're headed
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Speaker 3: towards the lower end of that. I think ultimately we
5:28
Speaker 3: will see by the end of the year a more
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Speaker 3: substantial and obvious slowdown in the economy. So that's where
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Speaker 3: you can see ten year yields actually fall below four
5:37
Speaker 3: percent once again. But it's not what It's going to
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Speaker 3: be choppy, it's not going to be one way straight.
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Speaker 3: It's not one trade that's going to.
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Speaker 4: Bring us there, all right, Ira, The men's Olympic soccer
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Speaker 4: team lost three nil, See what I did there? Three
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Speaker 4: nil to France. What do you make of that game?
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Speaker 4: And what are your expectations for the US team?
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Speaker 3: Well, I have to so keep in mind on the
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Speaker 3: men's side, this is it. The the Olympic team is
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Speaker 3: the under twenty threes and we don't And a lot
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Speaker 3: of our best players are actually under twenty three and
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Speaker 3: not at the Olympics because they play in the first
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Speaker 3: team and they played in Copa America earlier this year.
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Speaker 3: So it just shows you that the depth of talent
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Speaker 3: in the US versus some of the other big countries
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Speaker 3: like France. You know, France has very deep talent pool
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Speaker 3: that and they have a lot of under twenty threes
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Speaker 3: who are who are outstanding players. And for US, we
6:24
Speaker 3: have some players that are outstanding at under twenty three.
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Speaker 5: But the talent that that there's a talent.
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Speaker 3: Gap there from the top to the bottom in the
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Speaker 3: US clearly in that age group.
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Speaker 2: And how and again why do they play before the
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Speaker 2: Olympic opening games? They're just too many?
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Speaker 6: Is that?
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Speaker 2: Is that the thing? And like if you play earlier,
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Speaker 2: do you not get to go to the Olympic opening
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Speaker 2: ceremony or not?
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Speaker 7: World I mean the.
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Speaker 3: No, no, they used to be until the World Cup
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Speaker 3: came around in uh, you know, one hundred or so
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Speaker 3: years ago, just about one hundred years ago.
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Speaker 7: The one of the.
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Speaker 3: Reasons that the Olympics soccer starts early is because you
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Speaker 3: can only only have two games a week, so and
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Speaker 3: the Olympics itself is only two weeks. So unless you want,
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Speaker 3: unless you had eight teams only going to the Olympics
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Speaker 3: it'd be hard to finish the tournament before that, So
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Speaker 3: that's why you have you know, if you have sixteen
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Speaker 3: teams like they do.
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Speaker 7: I think it's sixteen.
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Speaker 3: If memory serves you know, you basically have to start
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Speaker 3: a week before or a couple of days before the
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Speaker 3: actual opening.
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Speaker 4: Ceremony, adding more more value every day. Irid Jersey with
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Speaker 4: a soccer talk. He's also has a side gig chief
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Speaker 4: US indust rate strategist for a Bloomberg Intelligence.
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7:55
Speaker 2: Let's stay on earnings and things for a moment. Southwest
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Speaker 2: airlines up by over three percent and they are changing
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Speaker 2: their open seat is huge. This is huge.
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Speaker 4: I never really flew Southwest that much, and I don't
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Speaker 4: know the reason behind the open seating, but I know
8:12
Speaker 4: that people like it.
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Speaker 2: Yeah yeah, and also then you can pay for like
8:15
Speaker 2: where you stand online and stuff right right.
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Speaker 7: Lets like the fact that you can get on an airplane,
8:20
Speaker 7: then you have to scramble.
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Speaker 2: I don't I don't know budgeting then yeah, maybe that
8:26
Speaker 2: would be something. But they are keeping their bags for
8:29
Speaker 2: fly for free policy. But George Ferguson is Boomberg Intelligence
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Speaker 2: and your aerospace defense and airlines analysts and joining us. Now,
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Speaker 2: what did you make of them scrapping this open seating policy.
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Speaker 8: Yeah, it's all about revenue generation, right, So I think
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Speaker 8: they're trying to put a little more distance on themselves
8:48
Speaker 8: and the low cost and ultra low cost carriers, you know,
8:51
Speaker 8: Frontier and Spirit. I agree with you. I don't know
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Speaker 8: that all of us enjoy sort of scrambling for a
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Speaker 8: seat when we jump on an airplane. So customers maybe
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Speaker 8: will take this better than scrapping bags fly free or
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Speaker 8: no change fees, you know. So to me, it seems
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Speaker 8: like could be a good evolution in the strategy. Makes
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Speaker 8: them look more like their full service competitor, you know, Brethren,
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Speaker 8: United American and Delta. And again they need to generate
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Speaker 8: some more revenue, so they're going to sell you aisle seats,
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Speaker 8: window seats, exit row seats, premium seats. Yeah, they're starting
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Speaker 8: to look like their big airlines are starting to look
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Speaker 8: more like the other big airlines.
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Speaker 4: And Alex I note from the YouTube video that George
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Speaker 4: is in our Queen Victoria Street offices which are just spectaculum,
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Speaker 4: because he was at the Farnborough air Show slash boondoggle
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Speaker 4: in London this week. So good for George. Hey George,
9:48
Speaker 4: every plane I got on, I don't worry. I won't
9:50
Speaker 4: tell them because they're not in the office your management team.
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Speaker 4: The reason I go onto a plane every seat is full.
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Speaker 4: So that implies to me that demand is there. That
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Speaker 4: implies to me that the airlines would have pricing power.
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Speaker 4: But I keep reading that they're not getting good yields
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Speaker 4: and that the fact that the fares are coming down.
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Speaker 4: Can you explain how this economics works?
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Speaker 8: Yeah, well, so I think this economics is the airlines
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Speaker 8: put too much capacity in the marketplace, and this business
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Speaker 8: is one where you don't let an airplane roll down
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Speaker 8: the runway without it being eighty five percent or more full. Nowadays,
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Speaker 8: the revenue generation officers, they just keep selling tickets as
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Speaker 8: long as it's covering the marginal costs. Right, And so
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Speaker 8: just because you saw all that volume didn't mean you
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Speaker 8: were seeing all that You know, revenue is as good
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Speaker 8: as it should have been. Now, look, they're all at
10:42
Speaker 8: record levels of revenue, and that's because they got to
10:44
Speaker 8: find a way to pay for higher pilot wages. They're
10:48
Speaker 8: not anywhere near record levels of profit. So again, I think,
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Speaker 8: you know, they were kind of counting on an even
10:54
Speaker 8: stronger revenue environment, you know, as they might say. We
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Speaker 8: saw yields at American down six percent, you know, which
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Speaker 8: is that's pretty so, I mean, yields look like they're
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Speaker 8: nosing over and that's a lot about the concern here.
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Speaker 8: Right We're seeing negative yields at all the airlines, and
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Speaker 8: that's the concern that there's just too much supply. Consumers
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Speaker 8: kind of is tighter and not willing to pay anything
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Speaker 8: to go to, you know, go on vacation, and that's
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Speaker 8: a challenge here.
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Speaker 2: You got to hop in like thirty seconds. But American
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Speaker 2: Airlines stock is now up over two percent. So what
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Speaker 2: led that to the upside?
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Speaker 8: Now, Yeah, so some of the guides I'm seeing is
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Speaker 8: increases of two to three percent of capacity in three Q.
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Speaker 8: This could be the beginning of getting the capacity growth
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Speaker 8: in the right area. I don't think it's going to
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Speaker 8: be a great quarter three Q but it could be
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Speaker 8: better than we all expect.
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Speaker 2: All right, thanks so much, George, appreciate you. George Fergus
11:45
Speaker 2: and Boomerg Intelligence Senior Aerospace, Defense and Airlines analyst joining
11:48
Speaker 2: us on Southwest as well as American.
11:52
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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Speaker 1: you get your podcasts, or watch us live on YouTube.
12:08
Speaker 2: Let's get back to earnings here Astrosenica. That stock over
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Speaker 2: in London is now down by almost two percent. The
12:13
Speaker 2: company did report earnings that were pretty solid. The company
12:16
Speaker 2: came in with core earnings per share at one point
12:19
Speaker 2: nine to eight cents one dollar ninety eight cents. Let's
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Speaker 2: say it that way. Operating profit coming in about four
12:25
Speaker 2: point ten billion dollars. So we want to check in
12:28
Speaker 2: with the chief financial officer, Aradna Saran over at Astrosenica
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Speaker 2: on this. It's great to get your perspective. We always
12:35
Speaker 2: appreciate the busy day that you have on earnings. Thank
12:37
Speaker 2: you very much for joining us. Give us some clarity
12:40
Speaker 2: on that top line growth and the upgrade that you had,
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Speaker 2: you're raising that revenue, what is driving it in terms
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Speaker 2: of product sales and how much of that's collaboration income,
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Speaker 2: So actually all.
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Speaker 9: The upgrade is being driven by product revenue. This year
12:56
Speaker 9: we had this quarter was actually a record quarter twelve
13:00
Speaker 9: point nine billion in revenue, and it was driven across
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Speaker 9: the board with record revenues in all our therapeutic areas.
13:08
Speaker 9: So oncology, which is about forty one percent of our
13:11
Speaker 9: business five point three billion in revenue, growing nineteen percent,
13:17
Speaker 9: cardiovascular medicines growing twenty two percent, Respiratory and immunology growing
13:22
Speaker 9: twenty six percent, and our rare disease business, which is
13:25
Speaker 9: about a two point one billion dollar business, growing fourteen percent.
13:29
Speaker 9: And same geographically, you know, we're seeing very strong growth
13:33
Speaker 9: in the US, double digital growth, also in emerging markets
13:38
Speaker 9: and in China both growing around eighteen percent, Europe twenty
13:42
Speaker 9: four percent. So it's really demand for all our innovative
13:46
Speaker 9: medicines across different geographies and across different therapeutic areas. So
13:51
Speaker 9: we raised our guidance for the year both on revenue
13:55
Speaker 9: and EPs to now mid teens and it's almost in
14:02
Speaker 9: some ways you could consider a double raise, because we
14:05
Speaker 9: also said that we would meet these guidance without any
14:09
Speaker 9: increase in collaboration revenue that we were anticipating earlier in
14:13
Speaker 9: the year. So it's really driven by fundamental underlying growth.
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Speaker 4: So doctor, I know, I'm just looking at the Bloomberg
14:20
Speaker 4: terminal here. So you have a run rate revenue of
14:22
Speaker 4: about fifty billion right now, and you guys have said
14:25
Speaker 4: that you're targeting eighty billion in sales in twenty thirty.
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Speaker 4: What's going to bridge the gap, what's going to get
14:31
Speaker 4: you there? What should we be keeping an.
14:32
Speaker 9: Eye on, So you know, there's a lot going on
14:38
Speaker 9: in the pipeline. What's the ambition that we set for
14:43
Speaker 9: twenty thirty of eighty billion is driven by I would
14:47
Speaker 9: say three different elements. The first element is the products
14:52
Speaker 9: that we have today and the indications we have today
14:54
Speaker 9: and growth in those and that's sort of sort of
14:57
Speaker 9: what you see in the quarterly performance today. The second
15:00
Speaker 9: element is the current products that are on the market,
15:04
Speaker 9: but what we call life cycle extension, so entering into
15:08
Speaker 9: for example, additional indications or expanding indications and other tumer
15:13
Speaker 9: types c that's a second element. And then the third
15:17
Speaker 9: element is new molecular entities. So these are brand new
15:21
Speaker 9: molecules which you know we've discovered we're working on that
15:26
Speaker 9: are in phase two or phase three clinical studies and
15:30
Speaker 9: hope that will be successful in them and will launch
15:33
Speaker 9: them by twenty thirty. We have set an ambition of
15:37
Speaker 9: achieving this revenue but also launching twenty new molecular entities
15:42
Speaker 9: by twenty thirty, having twenty five blockbusters, so that's products
15:48
Speaker 9: over a billion dollars in revenues in the year by
15:52
Speaker 9: twenty thirty. And you know what's going to bridge the gap.
15:56
Speaker 9: If you look at the studies we have ongoing, we
15:59
Speaker 9: will have probably about forty studies in the next eighteen months,
16:03
Speaker 9: so I end up twenty twenty five that we hope
16:06
Speaker 9: to read out and that will give us more confidence
16:11
Speaker 9: with the trajectory that we're on on achieving that twenty
16:14
Speaker 9: thirty ambition. So you know, this is a it's a
16:17
Speaker 9: risk business. Obviously, we take risk every day. We invest
16:21
Speaker 9: twenty two percent of our R and D of our
16:24
Speaker 9: revenue in R and D, so it's a very R
16:26
Speaker 9: and D heavy business. And you know, we hope that
16:31
Speaker 9: you know, our studies are successful to achieve those goals.
16:35
Speaker 2: Our governments your friend or foe right now in terms
16:38
Speaker 2: of the UK being an unfavorable or favorable environment. There's
16:43
Speaker 2: also the threats of IRA potentially being rolled back under
16:47
Speaker 2: President Trump. How do you guys sort of think about
16:49
Speaker 2: government interaction with your company?
16:54
Speaker 9: You know, governments are a very important stakeholder for us,
16:58
Speaker 9: you know, in the US as well as outside the US.
17:02
Speaker 9: You know, many many systems, healthcare systems are single payer systems,
17:06
Speaker 9: so we do work very closely with governments. You know,
17:10
Speaker 9: the most important thing for US is to make sure
17:12
Speaker 9: that we have you know, once we've spent the money
17:16
Speaker 9: and developed innovative medicines, whether it's for cardiovastlar disease or oncology,
17:20
Speaker 9: that patients actually get access to those medicines, you know,
17:25
Speaker 9: and we can make an impact in their lives and
17:29
Speaker 9: you know, from from diseases they're suffering from. And in
17:33
Speaker 9: that way, we need to be able to demonstrate that
17:36
Speaker 9: these drugs have value and are bringing value to the
17:39
Speaker 9: patients and to the healthcare system. And we work very
17:42
Speaker 9: closely with with governments and with systems to make sure
17:47
Speaker 9: we get access to those medicines.
17:49
Speaker 4: Doctor Saron, you know, I always joke on the show
17:51
Speaker 4: that when I come back in the next life, I
17:53
Speaker 4: want to be a healthcare M and a banker, because
17:55
Speaker 4: it seems every Monday we come in and there's another
17:57
Speaker 4: deal out there. How does how do you and your
18:00
Speaker 4: company think about M and A to kind of drive
18:03
Speaker 4: top line growth versus the R and D that you've
18:05
Speaker 4: already talked about.
18:08
Speaker 9: So the ambition that we set for twenty thirty, the
18:12
Speaker 9: eighty billion does not include any major M and A.
18:16
Speaker 9: You know, we are always looking from a scientific standpoint,
18:20
Speaker 9: not only within our own labs and identifying what could
18:24
Speaker 9: be the next most promising molecule, but also looking outside
18:28
Speaker 9: and science that is happening in universities and biotech companies
18:33
Speaker 9: and so forth. Over the last year and a half,
18:36
Speaker 9: we've invested close to seven billion in doing licensing transactions
18:42
Speaker 9: and partnerships and smaller M and A transactions that you know,
18:48
Speaker 9: keep help to build our pipeline and really you know,
18:52
Speaker 9: fit very well strategically with us in terms of the
18:55
Speaker 9: ambition that we have, and particularly in new therapy areas
18:59
Speaker 9: where you know we've made some investment, but it can
19:02
Speaker 9: help us leap frog into the field. For example, in
19:07
Speaker 9: the case of cell therapies or in the case of
19:10
Speaker 9: radio pharmaceuticals, and accelerate the investments that we're already making.
19:15
Speaker 9: So you know, we're always looking for those types of partnerships.
19:19
Speaker 2: So this is a really uncfo question to ask you,
19:22
Speaker 2: what's the coolest drug that you guys are working on
19:24
Speaker 2: right now, the one thing that you're most excited about
19:28
Speaker 2: and a potential breakthrough there.
19:32
Speaker 9: That's a I don't know if it's an un pool
19:34
Speaker 9: or maybe it's unfair. You know, it's hard to pick
19:37
Speaker 9: from pick from your children, right, so there are just
19:39
Speaker 9: so many exciting things happening and every you know, every
19:43
Speaker 9: few weeks, we we get some new data that makes
19:46
Speaker 9: us excited. So it's really hard to pick a favorite child.
19:51
Speaker 9: But you know, there's a there's a lot going on,
19:53
Speaker 9: and you know, we live in very exciting times where
19:57
Speaker 9: not only is you know, what we do in astrosenic
20:00
Speaker 9: is important, but science is evolving so quickly and technology
20:05
Speaker 9: is evolving quickly, and you know we're we're sort of
20:08
Speaker 9: at the forefront of that innovation.
20:11
Speaker 2: All right, Thank you so much. We truly appreciate it.
20:14
Speaker 2: A Radne Sarah and chief financial officer over at AstraZeneca,
20:17
Speaker 2: joining us on earnings. Really appreciate that. Now I'm an
20:20
Speaker 2: only child and I only have one daughter.
20:22
Speaker 4: Okay, but I'm always.
20:23
Speaker 2: Assuming that as a parent you have a favorite. Where
20:26
Speaker 2: does that not work like that?
20:27
Speaker 4: Well, you have multiple kids. My kid, my four kids
20:29
Speaker 4: are youngest has always told us that he is the favorite.
20:32
Speaker 4: And this is when he's a little little boy, because
20:33
Speaker 4: he gives the best presence in the best hugs. So
20:35
Speaker 4: I'll stick with He's now twenty years old, but I'm
20:37
Speaker 4: gonna stick with that.
20:38
Speaker 2: It's amazing.
20:39
Speaker 7: I still get a grief from the two saying, well,
20:42
Speaker 7: you have more pictures of him than me.
20:45
Speaker 2: Okay, so you may not actually pick a favorite, but
20:48
Speaker 2: they think you do.
20:49
Speaker 7: Yeah, I like the way you put that.
20:51
Speaker 4: So drugs are incentient being that once I graduate college,
20:55
Speaker 4: they're done, you know, so they're on their own. So
20:57
Speaker 4: that's equal opportunity.
20:59
Speaker 2: Equal opportunity to tough love from Paulsmeeny.
21:03
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
21:07
Speaker 1: weekdays at ten am Eastern on applecar Play and Android
21:10
Speaker 1: Auto with the Bloomberg Business app. You can also listen
21:13
Speaker 1: live on Amazon Alexa from our flagship New York station
21:16
Speaker 1: Just say, Alexa playing Bloomberg eleven thirty.
21:21
Speaker 4: All right, Alex Deelauls when you were live here in
21:23
Speaker 4: our Bloomberg Interactive Brokers studio. We're streaming live on YouTube
21:25
Speaker 4: as well, so head over there and check us out
21:27
Speaker 4: on the video side. One of the topics that Alex
21:29
Speaker 4: and I love to focus on, we think it's really
21:31
Speaker 4: important is commercial real estate. The opportunities, the risks out
21:35
Speaker 4: there and the risk are are big time. We talk
21:36
Speaker 4: about that a lot. Today we're going to focus on
21:39
Speaker 4: I think that the hotel business, the hospitality business, the
21:41
Speaker 4: resort business. Great guest in our studio today, Sean harr
21:45
Speaker 4: He's a principal and managing partner Trinity Investments. The office
21:48
Speaker 4: is in Honolulu, Los Angeles, London. I don't see Cleveland here.
21:52
Speaker 4: He's based in Miami, A good place to be with
21:55
Speaker 4: everybody else in financial services. Sean, thanks so much for
21:57
Speaker 4: coming into our studio here. Let's start with the pandemic
22:01
Speaker 4: because your industry literally shut its doors locked and through
22:05
Speaker 4: away the key here. Tell us about what happened in
22:07
Speaker 4: your business and maybe opportunities coming out.
22:10
Speaker 5: Sure, thank you and thank you so much for having
22:12
Speaker 5: me today. So i'd say, the start of the pandemic
22:15
Speaker 5: was which was truly devastating. We typically own brand managed
22:19
Speaker 5: hotels that are four hundred rooms and larger, and typically
22:23
Speaker 5: in the smile states of Florida, Texas, Arizona, California, Hawaii,
22:27
Speaker 5: Carbo and we had to close all of these properties.
22:30
Speaker 5: And I've likened it to stopping a super tanker mid
22:34
Speaker 5: stream trying to close these hotels. But we used that
22:37
Speaker 5: time to really complete renovation work to accelerate repositioning of
22:41
Speaker 5: the assets. We also use that time to raise our
22:44
Speaker 5: first commingled fund, which was a GP fund and became
22:48
Speaker 5: one of the largest most active buyers of hotels in
22:51
Speaker 5: the US during that time. I will say that all
22:54
Speaker 5: of these properties that were closed during the pandemic have
22:56
Speaker 5: come roaring back. They're are renovated, they're seeing in credible demand,
23:00
Speaker 5: having record months of a month performance. So we've come
23:04
Speaker 5: out of it well. But it was scary at the
23:06
Speaker 5: start of the pandemic.
23:07
Speaker 2: Do you foresee that kind of demand continuing. We've just
23:10
Speaker 2: been trying to figure out what that leisure travel budget
23:14
Speaker 2: winds up looking like for those that have budgets and
23:17
Speaker 2: for those that don't.
23:18
Speaker 5: I just read a statistic today alex That said that
23:21
Speaker 5: in June, luxury demand was up for hotels nine percent,
23:26
Speaker 5: and I think there's a two percent decrease in demand
23:28
Speaker 5: for the economy segment. What we're seeing with the work
23:32
Speaker 5: from home phenomenon in the US is that every weekend
23:34
Speaker 5: is now a three or four day weekends, so people
23:36
Speaker 5: are traveling more. At the same time, with the companies
23:41
Speaker 5: having to shrink their office space, they can't hold off
23:43
Speaker 5: sites and their offices anymore, so they're holding more off
23:46
Speaker 5: site meetings to bring their teams together in the types
23:48
Speaker 5: of hotels that we own, so we're seeing compression between
23:51
Speaker 5: the leisure traveler and these off site group, corporate type travelers.
23:55
Speaker 5: So it's baded well for our properties.
24:00
Speaker 4: If you wanted to go out and buy a property,
24:02
Speaker 4: or if you wanted to refinance a property today, or
24:06
Speaker 4: the bankers pick up your phone calls, I mean, are
24:07
Speaker 4: the banks lending here.
24:09
Speaker 5: We've been fortunate, I'd say our business more and more
24:12
Speaker 5: relies on relationships, and fortunately for us, we have tremendous
24:15
Speaker 5: relationships in the lending market and in the you know,
24:19
Speaker 5: the private equity A lot of our partners are large
24:21
Speaker 5: private equity funds, We've completed well over two billion dollars
24:25
Speaker 5: of financings and refinancings over the last eleven twelve months.
24:29
Speaker 7: So we see it robust.
24:30
Speaker 5: There has been more of a shift towards CNBS or
24:34
Speaker 5: SASBY loans, but we've had loans as large as one
24:37
Speaker 5: hundred and fifty million all the way up to seven
24:39
Speaker 5: hundred and fifty million that we've been able to execute
24:42
Speaker 5: in the last twelve months.
24:43
Speaker 2: And are you getting that from banks or is it
24:45
Speaker 2: private credit? Like where do you go for that?
24:48
Speaker 5: So it's a mixture of sasby and then non bank
24:50
Speaker 5: banks is SASBY.
24:51
Speaker 7: I'm sure it's.
24:53
Speaker 5: The CNBS market, so single asset, single bar CNBS market,
24:58
Speaker 5: and so yeah, with that market is very active right now.
25:01
Speaker 5: We just refinanced our Diplomat resort in Hollywood, Florida. There
25:05
Speaker 5: was a five hundred and seventy five million dollar transaction
25:08
Speaker 5: about two months ago. We bought a resort for that
25:12
Speaker 5: a Core, which is a non bank bank. They financed
25:14
Speaker 5: us in Scottsdale, Arizona. But it's all down to relationships.
25:18
Speaker 4: You recently expanded into Europe. Tell us about that.
25:21
Speaker 5: We're very excited about Europe. So Ryan Don, one of
25:23
Speaker 5: our partners, moved to London about a year ago, really
25:26
Speaker 5: at the request of some of our joint venture partners
25:29
Speaker 5: who wanted an operating partner like Trinity in Europe. We
25:32
Speaker 5: completed our first acquisition about two months ago. We bought
25:36
Speaker 5: the Parkhayatt hotel in Zurich in partnership with oak Tree
25:40
Speaker 5: and Ubs and Ryan now is the core team of
25:42
Speaker 5: a head of development, acquisitions, asset management, etc. So we're
25:48
Speaker 5: we're very excited about the prospects in Europe.
25:50
Speaker 2: Who are your competitors? Is that a really silly question?
25:54
Speaker 5: We definitely we compete with all of the private equity funds,
25:57
Speaker 5: but they tend to be our joint venture partners as well.
26:00
Speaker 5: So we've done a lot of business with oak Tree,
26:02
Speaker 5: We've done a lot of business with Partners Group, with UBS,
26:06
Speaker 5: with Elliott Management, and so we partner with these groups.
26:10
Speaker 5: They rely on us for our in house expertise. We
26:12
Speaker 5: have forty five professionals who live, breathe, and sleep hospitality.
26:16
Speaker 5: That's what they do. We're hospitality real estate experts and
26:20
Speaker 5: fortunately our competitors also collaborate with us.
26:23
Speaker 4: What's a typical property that you guys that screens well,
26:27
Speaker 4: for you guys, in terms of an acquisition, what do
26:28
Speaker 4: you guys really look for, whether it's size or location
26:31
Speaker 4: or capital structure, how do you screen that?
26:33
Speaker 5: In the US, we typically focus on brand managed so
26:36
Speaker 5: mainly Hilton married or Hyatt, and we typically focused on
26:40
Speaker 5: properties that are four hundred rooms and larger, that are
26:42
Speaker 5: more destination type properties. And these tend to be in Florida, Texas, Arizona, California,
26:49
Speaker 5: and Hawaii.
26:50
Speaker 4: So you would own the property, but Hilton would manage
26:52
Speaker 4: it correct, Okay.
26:53
Speaker 5: And we were so fortunate with the relationships we have
26:56
Speaker 5: with the brands who really trust us with the assets,
26:59
Speaker 5: and we also buy from the brand. So we've we've
27:02
Speaker 5: bought three assets from Hyatt as they've you know, gone
27:05
Speaker 5: on an asset light strategy. So Zurich was one, Greenwich,
27:09
Speaker 5: Connecticut was another one, and then Indian Wells and California
27:12
Speaker 5: was a third one.
27:12
Speaker 4: But yeah, I'm not here in Cleveland here, I'm not
27:16
Speaker 4: hearing des Moines.
27:17
Speaker 2: Do you want to go to DesMoines? And of course,
27:21
Speaker 2: I mean, like sure, but I mean from what you're
27:23
Speaker 2: saying these are I'm not dissing the places. I'm dissing
27:27
Speaker 2: the location for hotels in that if I'm going to
27:30
Speaker 2: go to a destination and I'm going to extend it
27:32
Speaker 2: and I'm gonna send a work trip or something, I'm
27:35
Speaker 2: not gonna go to Des Moines. I'm going to go
27:36
Speaker 2: to a place where i can soak up sun and
27:39
Speaker 2: be in a pool and that kind of stuff.
27:41
Speaker 5: Well, what we've learned is that you need multiple levers
27:43
Speaker 5: because things do happen like COVID that are unforeseen. So
27:47
Speaker 5: when you have one of these destination type properties, you
27:50
Speaker 5: have multiple levers between group, corporate, leisure, meeting space, et
27:55
Speaker 5: cetera that you can that you can play with to
27:57
Speaker 5: induce demand to the assets.
27:59
Speaker 4: So are you guys net buyers today? Are you net sellers.
28:06
Speaker 7: All of the above?
28:08
Speaker 5: We're definitely net buyers. You know, I think we're going
28:11
Speaker 5: to see the debt market stabilized. While we've been successful
28:14
Speaker 5: in them, you do need a more robust debt market
28:17
Speaker 5: to induce buyers. I think the minute we see hopefully
28:21
Speaker 5: an interest rate cut, you'll see a lot of demand
28:24
Speaker 5: coming back into the market. So we do have assets
28:26
Speaker 5: that are approaching stabilization and in the right conditions we
28:29
Speaker 5: will sell.
28:29
Speaker 4: Well, you know, Alex and I often when we talk
28:31
Speaker 4: about commercial rule stay, we just think about here the
28:33
Speaker 4: third Avenue of Manhattan, and we're hearing from experts that
28:37
Speaker 4: when these things trade on the third Avenue Manhattan, their
28:40
Speaker 4: b office kind of properties thirty forty cents on the dollar. Yeah,
28:44
Speaker 4: if you go out and make an acquisition tidy of
28:46
Speaker 4: a hotel, are you think you're getting You're not getting
28:48
Speaker 4: a discount, are you? I mean, there are these things
28:50
Speaker 4: trading about where they were trading or are they trading
28:53
Speaker 4: at a discount of pre pandemic.
28:55
Speaker 5: I would normally walk into a convention or a conference
28:58
Speaker 5: as the hotel guy, and you know, you'd be sort
29:01
Speaker 5: of the afterthought in terms of an asset class for
29:04
Speaker 5: real estate, what we've proven in coming out of COVID
29:07
Speaker 5: is that a we've been able to stay ahead of
29:09
Speaker 5: inflation because you essentially reprice on a nightly basis, so
29:13
Speaker 5: you can reprice your rooms, your food, and beverage. The
29:15
Speaker 5: other side is that we typically trade at wider cap rates.
29:18
Speaker 5: So if we're buying at a seven cap and we're
29:21
Speaker 5: financing at an eight percent all in interest rate, there's
29:24
Speaker 5: slight negative leverage and it's a value add investment that
29:27
Speaker 5: we normally do. So we work our way into positive
29:29
Speaker 5: territory pretty quickly. If you're predicated on buying the other
29:33
Speaker 5: real estate ASCID classes at a four percent cap rate,
29:36
Speaker 5: which used to need a three percent interest rate to
29:38
Speaker 5: make it work, you're way under water in terms of
29:42
Speaker 5: that spread between whether cap rates and the interest rates
29:45
Speaker 5: are now interesting.
29:47
Speaker 4: Go ahead, and I'm just fascinating stuff. There's so many
29:49
Speaker 4: different areas in little tranches and slices of the.
29:52
Speaker 2: Yeah, it is really interesting. Sean, thank you so much.
29:54
Speaker 2: I really appreciate it. Sean Air is principal managing a
29:57
Speaker 2: managing partner at Trinity Investments, talking a lot about the
30:01
Speaker 2: state of commercial real estate when it comes to luxury hotels.
30:05
Speaker 2: I don't remember the last time I feel like I've traveled.
30:08
Speaker 2: It's been so long.
30:09
Speaker 4: We were down in the Nashville. Yeah, we were were
30:13
Speaker 4: the Lord I mean Operland Resort.
30:16
Speaker 2: I mean I clocked like fourteen thousand steps one day,
30:19
Speaker 2: just like being a person walking around that hotel.
30:22
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
30:26
Speaker 1: weekdays at ten am Eastern on applecar Play and Android Auto.
30:30
Speaker 1: With the Bloomberg Business app. You can also listen live
30:33
Speaker 1: on Amazon Alexa from our flagship New York station, Just
30:37
Speaker 1: say Alexa playing Bloomberg eleven thirty.
30:41
Speaker 2: And here we go. One of my favorite stories of
30:43
Speaker 2: the last forty eight hours is what's happening in luxury
30:47
Speaker 2: retail or? MEZ is going to be reporting after the
30:49
Speaker 2: closing bell in Europe, so that's after eleven thirty Eastern
30:52
Speaker 2: our time. We had the likes of all the other guys.
30:57
Speaker 2: Who are the other guys now? Richmond not doing really well,
31:00
Speaker 2: Gucci sales disappointed, and that wound up hurting, carrying their
31:04
Speaker 2: parent company LVMH also struggling. I mean it's grim out there.
31:10
Speaker 2: Debora Aigan is Boomberg Intelligence Luxury Goods analyst and she
31:13
Speaker 2: joins us on this topic. Deborah, how much of the
31:16
Speaker 2: weakness is a China problem versus a broader problem?
31:22
Speaker 6: Hi, Yes, some of the weakness is a China problem,
31:28
Speaker 6: but I would say it's around ten percent of the
31:30
Speaker 6: problem at the moment, because we were already against a
31:34
Speaker 6: difficult base last year where we saw only the market
31:37
Speaker 6: only open in January last year doing well until it
31:41
Speaker 6: took a while for stores to build again in China,
31:45
Speaker 6: and then we saw a drop off May June picked
31:48
Speaker 6: up a little bit more. By September three, December it
31:51
Speaker 6: contracted again, and I would say that into Q two
31:54
Speaker 6: were actually probably flat in China.
31:58
Speaker 2: Year on year.
31:59
Speaker 6: But what we have is actually some of the Chinese
32:02
Speaker 6: cohort some travel to Europe, but especially and particularly travel
32:08
Speaker 6: to Japan, and that is skewing numbers. And there's there's
32:12
Speaker 6: more into that that we can talk about.
32:14
Speaker 4: So, I mean, I guess the question is what are
32:17
Speaker 4: these luxury brands? I mean, they've had a good run.
32:19
Speaker 4: Is this just kind of getting back to maybe a
32:21
Speaker 4: more normalized spending pattern by typical luxury consumers or is
32:27
Speaker 4: there something else going on here? Because I can get
32:29
Speaker 4: a Gucci Jackie nineteen sixty one medium shoulder bag for
32:33
Speaker 4: thirty nine hundred bucks?
32:34
Speaker 7: Would you want you?
32:35
Speaker 6: What?
32:36
Speaker 4: How about?
32:37
Speaker 2: What just happened here? Did you look up luxury retime?
32:39
Speaker 4: I'm looking at the Gucci site here, the Gucci Jackie
32:42
Speaker 4: nineteen sixty one medium shoulder bag. Tom Keen was looking
32:44
Speaker 4: at this this morning, thirty nine hundred bucks. So what
32:47
Speaker 4: happens here?
32:49
Speaker 6: Right? So probably two stories here. So well, let's tooch
32:52
Speaker 6: on Gucci afterwards, but let me just run through some
32:55
Speaker 6: numbers to put what's happening in this quarter and this
32:58
Speaker 6: half year into contact. So we started twenty twenty four
33:02
Speaker 6: by saying this would very much be a tale of
33:04
Speaker 6: two halves, and so I want to remind about what
33:07
Speaker 6: that means, because in the first half of twenty twenty three,
33:11
Speaker 6: the luxury marker grew twenty percent twenty percent in Q
33:15
Speaker 6: one and nineteen and a half percent in Q two.
33:18
Speaker 6: By Q three and Q four because of the skew
33:20
Speaker 6: year on yure it grew ten percent average. So as
33:23
Speaker 6: we head into the second half, we'll be looking at
33:25
Speaker 6: it facing ten percent rather than twenty percent which are
33:28
Speaker 6: faced in the first In the first half of this year,
33:31
Speaker 6: and so in Q on this year it came through
33:33
Speaker 6: with almost seven percent growth. In Q two, we've only
33:36
Speaker 6: got six numbers so far, six of the big reporters,
33:40
Speaker 6: and they're at one percent. So that's what you're referring
33:42
Speaker 6: to when you say, you know, Richmond's only a one
33:45
Speaker 6: percent ALVIU majors of one percent, because they're up against
33:48
Speaker 6: nineteen percent and seventeen percent respectively four quarters ago. So
33:53
Speaker 6: that's the issue there. The second thing on China, so
33:56
Speaker 6: we know that China numbers are about flat where double
34:00
Speaker 6: digit year on year, but about flat, and that we're
34:03
Speaker 6: seeing actually the Chinese cohort a lot of that spend elsewhere.
34:06
Speaker 6: And then if we think about Gucci, Gucci, I'm going
34:09
Speaker 6: to put that aligned to a Burbery which is also
34:12
Speaker 6: very difficult, or a Ferragamo which comes out next week,
34:15
Speaker 6: where it's about really rebuilding and elevating the brand. And
34:19
Speaker 6: for me, Birbery, you have got it most wrong. And
34:22
Speaker 6: Gucci could do something by Q three Q four with
34:25
Speaker 6: new product in the marketplace, but it's a difficult area
34:28
Speaker 6: when you're trying to persuade not your own retail stores
34:31
Speaker 6: but the wholesale store. So a boutique could department store
34:36
Speaker 6: to take the risk of new, untested design on board
34:40
Speaker 6: at a time when there's real uncertainty about new designers
34:43
Speaker 6: and whether they've made it or not.
34:45
Speaker 2: It's such a good that makes sense. It does make sense.
34:47
Speaker 2: The one outlier, though, has been our maz has continued
34:50
Speaker 2: to deliver, albeit maybe at a slower pace. They're going
34:54
Speaker 2: to report earnings in it's about fifteen minutes, give or take.
34:57
Speaker 2: What do you think we're going to see there?
35:00
Speaker 6: I think much of the same from MS, there will
35:02
Speaker 6: be some slight slowdown I think in things like accessories
35:08
Speaker 6: for example, silks for example, maybe a little bit in
35:12
Speaker 6: perfumes and cosmetics. It depends on where they are. You're
35:15
Speaker 6: on your category by category with growth rates. But there's
35:18
Speaker 6: another one too which we can use to add some
35:20
Speaker 6: confidence for MS. That would be Brunello Cucinelli, which was
35:23
Speaker 6: one of the first to report and it came through
35:26
Speaker 6: with twelve percent growth of twenty eight percent last year.
35:29
Speaker 6: So it's very high end. So anything that's high end.
35:33
Speaker 6: The consumer at the very high end is not so
35:35
Speaker 6: worried by prices having gone up eight to ten percent
35:39
Speaker 6: over the last couple of years. They're not so worried
35:41
Speaker 6: by monthly income coming in. Those with high spend and power,
35:46
Speaker 6: they're still looking for, you know, to treat themselves for
35:50
Speaker 6: that luxury feel, and that's what's holding out. We also
35:53
Speaker 6: saw the rich Monozoni up, as we said, one percent
35:57
Speaker 6: in this quarter. If you look behind those numbers, Cartier
36:01
Speaker 6: was still very strong and Van Kleef and Arpels very strong.
36:04
Speaker 6: It was more their accessories and fashion side of things
36:08
Speaker 6: that saw more of a dip, you know, not so
36:10
Speaker 6: strong growth because the middle ground is just contested. There's
36:14
Speaker 6: uncertainty there around elections, the macro view, it's all tying together.
36:19
Speaker 6: But second half structurally becomes a lot easier for these companies.
36:23
Speaker 4: When I was back in my tiwering days, I was
36:25
Speaker 4: at RMEZ type person that was my go to super
36:28
Speaker 4: solid brand. Yeah, saw that's a Wall Street standard back
36:31
Speaker 4: in the day.
36:32
Speaker 6: And then you know there's another thing that runs on
36:34
Speaker 6: this because I'm going to I think, be like really
36:36
Speaker 6: focusing on what happens on operations. Some of these companies
36:39
Speaker 6: have forty percent margin down to twenty five percent average
36:43
Speaker 6: across the sector. I think where we're getting a lot
36:46
Speaker 6: more of Asian you know, Asia and overall is around
36:49
Speaker 6: a third of the luxury market, and we're getting a
36:51
Speaker 6: lot more of that spend into Japan. And if you
36:54
Speaker 6: think about the translation of these big euro companies, Euro
36:57
Speaker 6: based companies, the end being so week has kind of
37:00
Speaker 6: given you an equivalent one to one eurot yen in
37:04
Speaker 6: terms of pricing, whereas if you were buying in China
37:06
Speaker 6: in Hong Kong, you were getting one point two, so
37:09
Speaker 6: the conversion was one point two. So that also hits
37:11
Speaker 6: the top line in terms of value growth.
37:15
Speaker 4: Yeah, back in the day, Hey rock Quicks, how about
37:19
Speaker 4: like Saudi Arabia, United Arab Emirates do buy that part
37:22
Speaker 4: of the world. It seems like there's lots of cash
37:24
Speaker 4: there is that a big, big market for luxury.
37:28
Speaker 6: If we bring it, if we bring it all together,
37:30
Speaker 6: it's probably moving towards six to seven percent, So you
37:33
Speaker 6: would say it's one of the bigger or just above
37:35
Speaker 6: the biggest European contingent. But it's certainly growing. A huge
37:41
Speaker 6: amount of investment moving into their more so money coming
37:45
Speaker 6: in from from Russia, from a different parts of Eastern Europe,
37:50
Speaker 6: from parts of Middle East into into where you know
37:55
Speaker 6: where they can't spend in particular areas. So there's a
37:59
Speaker 6: lot of infrastr actually taking place in a lot of
38:01
Speaker 6: new joint ventures and others being written in those areas too,
38:05
Speaker 6: which I see has been strong over the next three
38:08
Speaker 6: to five years. Similarly, we'll be looking five years on
38:10
Speaker 6: India as well as an upcoming market.
38:13
Speaker 4: All right, thanks so much for joining us. That making
38:15
Speaker 4: Bloomberg Intelligence covers all the luxury brands for us. I'm
38:18
Speaker 4: looking on Themez site pre pandemic. When I was wearing
38:22
Speaker 4: ties two hundred dollars for now they're to sixty. So's too,
38:28
Speaker 4: mach no, and I think any last you know, for
38:31
Speaker 4: amount time, Yeah, they're good, and you know it's but
38:33
Speaker 4: that's you know. But I'm just looking at the inflation
38:35
Speaker 4: because again I was at two hundred. John's laughing.
38:38
Speaker 2: I mean, I'm looking at Bruno Cucinelli. Where you're gonna
38:41
Speaker 2: pay two grand for a man Cardigan. I mean, really,
38:44
Speaker 2: that just blows my tiny brain. I just don't get it.
38:46
Speaker 7: You're luxury.
38:46
Speaker 4: I'm like, I don't know. Magic.
38:50
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