The Trade That Made Us Go “Hmm…” And Countdown to Netflix Earnings 4/17/23

0:01Right now in fast fears building about the trouble ahead in the 20 trillion dollar commercial real estate market with office space in major cities sitting empty. The economy is slowing and prices for many of the major REITs getting rocked. It has one of our traders wondering if the sector is so bad it's good. Plus, search substitutes. Shares of Alphabet falling on worries that Samsung could hang up on Google and switch to bidding for its mobile phones. What kind of dent would this have on Alphabet's search dominance? And later, Merck's$11 billion biotech buy, Nordstrom's swoosh-related surge, and Netflix chilled ahead of tomorrow's results.

0:33I'm Melissa Lee. This is Fast Money Live from the NASDAQ Market Side. Full House here tonight. Steve Grasso, Karen Feinerman, Dan Nathan, and Tim Seymour. We start off with that trade that made us go, hmm, someone on this desk dipping their toe in the much-beaten-down office REIT space, buying small stakes in a couple of stocks that have already been hit hard this year, Vernado Realty and Boston Properties. Though both were up today, they've each lost more than 20 % in 2023, the two worst-performing REITs in the sector, in fact. And both faced continued headwinds from the regional banking crisis and the looming recession.

1:07So, Karen, what sparked your interest in these two? Well, just the so bad it's good. Like if you thought, where should I short something now? This would come first to mind, right? Which makes me think, all right, it must be really crowded. There's a lot to hate. Sentiment is terrible. We all know the macro interest rates are high. You have debt refinancing coming up. You have work from home. And you have tech companies laying off tons of people. All of that's terrible. and yet i do feel like maybe it's so bad that it's good i mean the stocks have absolutely gotten crushed and i think they'll bottom before the actual business turns so that's one thing to like about it it's interesting to me also that new money is coming into distressed real estate space right so you had blackstone i think it was a 20 billion dollar fund i think double line started two funds um so that's of interest to me and i think you know the this sort of i always think of Tim saying, you know, you make the most money when things go from terrible to just bad.

2:09So they're deeply enmeshed in terrible right now. And I think that the risk reward here is compelling. We know there's debt here. We know that, you know, a lot of bad things, particularly a Vornado, which is very New York centric, very office centric. That's a bad place to be right now. But the stock has lost a quarter century of value. They're back to where they were 25 years ago. although I do. Obviously, they have paid dividends all the way along the way. But I think that here I'm never going to pick the bottom, but it's starting to get interesting. Things could change. I think, you know, Roth is a super smart guy and he'll come up with something.

2:45He's you know, he's got a big stake here. So all that together. Time to start. I'm not going to pick the bottom for sure, but put some put my toe in the water. Yeah. You mentioned the short interest actually rates are the most shorted sector in the S &P 500 and the most shorted subsector is office REITs specifically. So maybe the sentiment is so bad that it's time for some sort of a turn. I don't know. And I forgot the yield. The yield, yes. Which may or may not happen. No, good for Karen. Karen does her work. And therefore, you know, this isn't just throwing a dart and saying, hey, this is, you know, why not?

3:17It's down a lot, so I should probably be by it. I also think that if you think about New York City real estate, there's no surprise here. And that's well into this price. I mean, what's going on with all the office and the dynamics from work from home, I think, are in New York City. It's interesting when you look at the REIT space, obviously you need to look at the underlying and really what you're investing in. So if you look at an SPG or Simon Property Group, I mean, look, blue chip, best properties and certainly in a mall space where a very different dynamic, although some of the same secular trends have been going on as well.

3:48People have been leaving the malls, they've been going into the open air, there's a discretionary element of what's going on. Simon Property, there's, you know, the short interest is, I don't know, less than 2%. It's down small on the year. It pays a nice div. And to me, this is, again, a case where do they have pricing power, do they not? It just seems to me it's been an outperformer in a difficult environment. And that's a place I feel safe, again, based upon we've heard this story about what's going on at the mall over and over again. Yeah. Can you have, though, you know, a really let's say there's a really hard recession and there is a crunch in lending to commercial real estate in general.

4:22Can you have a crunch in the bottom tiers of commercial real estate and not have that crunch? in the top tier even if it's blue chip i'd be very surprised i mean like i listen i don't know jack about this sector i'll just say this but i'd be absolutely surprised to see if these stocks bottomed before we have a recession okay like like given the different dynamics that we have right now and then when you talk about where rates are you talk about cost of capital you talk about all the debt so to me i i don't find it that compelling i'd rather buy any one of your money center banks that that we're down 15 percent than this right now like those no i don't So I think I'm somewhere in the middle on this between Dan and Karen.

5:00And Tim was more on Karen's side. The problem is the reset of the loans. How much is coming reset? Well, Bornado, I think 2024 is the first major one of their corporate debt. But the properties are ring-fenced. So if they default on one, it's not going to take the whole thing down. Yeah. So the problem is most of these things don't trade outside. They trade as a block. So if 1.6 or 1.5 trillion is being reset over the next year and a half, it'll drag the entire space down. Guilty by association. So that would be the reason why I would. Oh, no, definitively. But when you when you keep spreading that chart out, stocks can always go lower.

5:42So so to Tim's point, I don't know if picking the bottom is the right thing. I don't think you said that. We want to scale into something, start buying something. Now, I don't disagree with that. You're getting a yield on it. And all of these names have guided lower. So that's already in the price. And they definitely kitchen sinked last year because they were all beating up last year. So a lot of that is already in the price. So I don't disagree. You know what else is in the price? There are interest rates. I mean, the biggest story, and I realize that's part of the whole fundamental bottom up here.

6:14But a lot of this is just an interest rate move. If you look at REITs and utilities and the moves that the biggest move in some of the names we're just talking about happened from January of 22, really through kind of the end of last year. And all of that was pricing and lower interest rates, excuse me, higher interest rates. And I think that's the story as much as any. I realize that's also a dynamic of asset allocation. You've seen a lot of people find other places to go get the yields they were getting from REITs. At this point, again, I think you're going to see people stepping back into that.

6:44And they took a leg down after SVB as well. So which, you know, anything financially related did. But I don't know. So a lot of negative things altogether. So many bad ones make me think it reminds me when oil just got absolutely slaughtered. And remember that contract that went negative and that was sort of the bottom and things were terrible. It's possible to thread the needle on this trade. The problem is we're going to be talking about commercial real estate resetting for the next six months. And it's going to be front and center. So while I think a lot of it is factored into the names, I think you have to be really quick on this trade.

7:19So do you think that we need to see some sort of a bottom where the worst is behind us for regional banks in order to have a recovery in any way, shape or form in commercial real estate? I think that would help. I think that a stabilization of rates would help also. And I think if there were any deals that got done, commercial mortgage-backed securities, securitization is dead right now. If you start to see any deals come in and any properties trade, there are no properties trading in New York. Anything like that, I think, would be some life. Yeah. But in terms of the crunch we were talking about before, and if credit really seizes up for the lower tiers.

7:55It's seized up already for the, you know. So you think that it's not going to have any sort of knock on impact on blue chip properties? I think blue. So BXP Boston Properties is blue chip. I think it's a different. It's one Vanderbilt. That building is 100 percent leased. It's prices are fantastic. I think that's an SL Green property, among others. But I think for the B and C and D buildings, that it's Armageddon. All right. Let's get more on the challenges in the office REIT space from Uma Moriarty. She's senior investment strategist at Center Square Investment Management. Uma, great to have you with us.

8:34I was reading through a Stiefel note earlier today, and it said that, you know, office REITs specifically don't perform well in a recessionary environment, which is where we are right now. So will this time be different? Thanks for having me. And a lot of what you have been talking about with this group of people, so far in terms of the impact of the rates, what that has done from a repricing perspective, thinking about the utilization of office as we think about work from home. There are a lot of different factors building into office in addition to a recession. On the REIT side, though, we've talked about this a little bit here.

9:09It's already been repriced, right? It has. We've felt a lot of that pain already come through for publicly traded REITs in the office space. The important thing to remember, though, as we think about commercial real estate broadly and the REIT space broadly, office is only 3 % of the overall investable universe for REITs. There are so many other areas in commercial real estate, call it industrial, single family rentals, health care, data centers, a lot of these areas with really fantastic structural demand tailwinds that will help really offset the impacts of the economic recession. So office is definitely one thing, but we have the other 97 percent of the commercial real estate space across REITs.

9:52That's really interesting today. Office seems to have taken it the hardest, Uma. I mean, the two that Karen actually bought small stakes in are the worst performers in the REIT sector in the first quarter. So I'm wondering, would you be more inclined to put fresh money into the storage space, for instance, which has done much better? So as it relates to the storage space, right, we have seen a very different dynamic play out as it relates to pricing over the three plus years, right? So call it since COVID. Within storage, very different than what you've seen across office. These office rates are down, call it 50, 60%, trading at very, very deep discounts to their evaluations on the private side.

10:32And so that creates an interesting opportunity for investors that are looking to deploy new capital today, right? So if you have the option to deploy that capital across the listed market where you've been already repriced and significantly more de-risked from a valuation perspective compared to the private market, your incremental dollar is much better invested today in that listed REIT space. Uma, it's Tim. Thanks for joining us. And putting it in terms that I think, at least for a guy like me who doesn't spend all day in REITs and maybe for some of our audience, going back to kind of the factory of building of a REIT and the dynamic around higher interest rates, I would just get back to a lot of these trades just don't work.

11:10So think about, you know, forever when rates were at zero, it made a lot of sense to go out and buy property and to be in a long duration asset, et cetera, et cetera. How much does this dynamic of rate change just change structurally the return profile of some of these office REITs? Great question. You know, that's something that we've been thinking about a lot here. And I think broadly speaking, our, you know, our estimate is that we're really past this kind of free money era that we've been experiencing for the last decade plus, it means that you have to reprice real estate for it to make sense in terms of an investment, right?

11:44We've seen that already happen across the REIT space, which means it's a really attractive investment today for us as we think about where prices have already been reset. You talk about office here, the yield on these properties across these office portfolios on average today in the REIT market is about 10%. When you've got rates on the interest rate side at, call it six, six and a half, even seven percent, that still makes a little bit of sense. But on the private market, you're still looking at yields on these properties priced as they are today below five percent. And that's where the math kind of stops working.

12:15And so as long as you've got the pricing right in this new rate environment that we're living in, real estate makes a lot of sense. And we've seen that happen across the rate space today. Uma, it's Karen. Thanks for being on. Let me ask something in terms of sentiment to the space. Are you seeing any change? And, you know, it's been absolutely toxic. Don't touch it. But I'm wondering if you're seeing any change. Great question. And to your point, there has just been so much bad press, right? The headlines all about commercial real estate, how that's such and such trouble. And that's where we kind of go back to and talk to our clients a lot about what's actually out there in the commercial real estate space, especially across REITs that are currently priced in a way that makes them fairly de-risked.

12:59We're talking about areas that have a lot of great demand tailwinds that should do really well. And that's 97 % of the U.S. listed REIT space, right? So areas like data centers, you think about what's really happening out there from the perspective of AI, chat GPT. That requires a ton of computing power that's going through these data centers. They're seeing pricing power unlike they have seen in the last 25 years today. And that's a really great opportunity across the REIT space, right? So you're seeing a lot of these areas in the REIT space that you want to be cognizant of, want to have exposure to as investors, looking for some of the stability that you get from the real estate asset class, but in the REIT market today at a much better price.

13:41Hey, Uma, real quickly, you mentioned the private REIT market. And I saw a chart today earlier showing just kind of like the public markets, what they've done this time. We all know that. That's what we've been talking about. You just mentioned private, and they are not mark to market. Is there a potential knock-on effect when the private market stuff gets repriced more in line with the public markets? Absolutely. You're going to see a couple different impacts of that play out, right? So you're going to see transaction markets finally open up when you have some sort of price discovery on the private market side.

14:14Everybody knows that the assets are valued too high. They need to come down. But you're still seeing a pretty big bid-ask spread, which means that transactions are pretty much at a standstill. So until you start to see some of that price discovery happen in the private market, you're not really going to see a lot of movement from a capital perspective. But there is so much capital waiting on the sidelines to be deployed today across the rural estate space. And so once we see that price discovery actually happen in the market, I think a lot of that capital is really going to come into the space and provide a little bit of support from the perspective of valuations.

14:47Uma, thanks. Appreciate it. Uma Moriarty, Center Square. So why did REITs rally today? Because regional banks were up today? Because the banking sector was up today? Interest rates have also been higher. I mean, there's some sense that we're seeing the yield curve stabilize a little bit. Again, that pricing discovery dynamic. I mean, it is fascinating to think about tons and a wall of money sitting on the sidelines waiting to deploy. And we hear this in VC. We hear this in private equity. It just seems like it is a different world. Yeah. coming up a search switcheroo shares of alphabet dropping a samsung ways a replacement for google and microsoft's bing is looking like a top contender what it could all mean for these companies next plus a fired up biotech deal mercs scooping up one name for a whopping 11 billion dollars and the heads of both companies are weighing in on the deal so what do they say we'll have that when fast money returns back in tune

15:53Welcome back to Fast Money. Buzzkill on Alphabet. Shares dropping more than 2 % on a New York Times report that Samsung is considering switching its default mobile search engine from Google to Microsoft's Bing. Alphabet's seeing its worst day in more than two months. Let's get to Steve Kovak, who's got the details. Yeah, Mel. Alphabet did fall today after that New York Times report, saying Samsung at least thought about changing the default search engine on its phones to Bing from Google after seeing Microsoft's phone. chatbot in action. That reportedly set off a scramble within Google to get its own chatbot, which it calls BARD, integrated into Google Search.

16:27Now, here's how these search deals work, Mel. Google shares search ad revenue with companies like Samsung and Apple if they make Google the default search engine. And it's a lucrative business, too. Apple reportedly gets about$20 billion a year from Google, making up a big chunk of its services business. Samsung gets a few billion a year. Though Samsung seems to be sticking with Google, the notion there's a better alternative out there gives more leverage to companies like Samsung and Apple to negotiate better terms, or Google risks losing its position to Microsoft. That means more upside for the platforms and more costs for Google.

17:00Now, it's still early. Google has already said it plans to integrate BARD into Google search, and if it can pull that off, it may be able to stave off any threats to its dominance in search. Mel, I'll send it back to you. Steve, you used the word scramble to integrate BARD into Google. Is that your word, or is that award from the New York Times. It just it reminds me of when they were scrambling to get barred and launch that. I mean, it's a sort of scramble. Yeah. Yeah. It reminded me when the New York Times reported this, it reminded me of what we heard several months ago when everyone was talking about ChatGPT and Sergey and Larry, the founders of the company, had to kind of come in and say, hey, guys, we need to get on this.

17:37This is part of that scramble now. All right. Steve, thanks. You got it. Steve Kovac. Karen, you watched this on our Pichai interview at 60 Minutes. Right. How much of that is part of this move lower, do you think? It wasn't great. I mean, I also was wondering, did was, you know, just the way the the Bard introduction was sort of a flop. But if you went back and look at looked at the chat GPT being one in hindsight, it wasn't so great either. I think that was I don't know. I was surprised at how seemingly nonchalant he seemed about, wow, could this really spin out of control? You know, do we even know what the implications of this technology is?

18:14And he didn't seem to have great answers for that. I wonder if it was maybe edited in a way that wasn't so flattering to him. Nonetheless, he didn't do a great job, I felt, in that interview, which is too bad. And then on top of that, the Samsung news, which even though the dollars aren't that much, it's this idea of the impenetrability of Google's, you know, moat. Right. And if that... And perception is reality, where they were thought to be the king of the hill on top of it. And that's why the barred flop was so surprising to me, because they're usually so ready for every task. And I think it really casts dispersions on them that maybe they're not as good as people think they are.

18:57So I kind of agree with both of what you're saying. I think about this as Samsung is less than three billion in terms of revs for Google. Apple is. So if you've now cast some shadow over how impenetrable Google is, Apple's the one you worry about. Apple is north of$20 billion in revenues for them. And despite the fact that their traffic acquisition costs have been going down, and it's been a very good trend for them, especially because of mobile, Apple really controls the shots here, as they do in so many places, by the way. It's a topic for another show, but it's one of the reasons why I think Apple gets into anti-monopoly territory because they are so dominant for so many different people.

19:37They can do whatever they want. If they wanted to get into this business themselves, you know, and I don't think they're going to. But Apple, I worry about, even though maybe you don't have to worry about it because Samsung's not that big of a deal right now. Maybe this is more of a Microsoft story. I mean, if Microsoft captures just a tiny increment of the Google search, that goes straight. I mean, that's basically it's just additional revenue, right? They already have Microsoft stock already has captured. You know, Google stock has has no AI in it. Right. Microsoft, I think, is a lot. Yeah, no, I think that's a great point.

20:09I mean, I think we've talked about it around the edges. It would be great for Microsoft. But as far as Google is concerned, I mean, like, here's the bigger issue. In 2015, they had 79 % gross margins. They're expected to have 60 % gross margins this year. So you talk about moats, you talk about monopolies. It's already been chipped at for a while now. And so could you see further margin degradation if they start losing pricing power? Because that is what Steve just mentioned this all about. Now that you have a good, even if you don't think you would even use them, why wouldn't you go and try to make that threat?

20:41You know what I mean? And so to me, that's the issue with Google. And I know that a lot of you guys will say it's really cheap relative to the mega caps. It's expected to grow double-digit earnings in sales. It's traded about 20 times this year, 17 next. If those margins remain under pressure, it's going to look expensive pretty quickly. But one last thing. Maybe the big takeaway from this is how important artificial intelligence is. because that's what this decision was probably made on. And things don't happen immediately in 30 seconds. This was on the basis of BARD, the BARD flop. And now we're seeing companies, company by company, starting to factor in how much artificial intelligence actually has the finger on the scale.

21:20It's not ready for prime time yet, but certainly it's entered into the calculus of these corporations. There could be a lot riding on it. All right, a lot more Fast Money to come. Here's what's coming up next. Merck making moves The drug maker is scooping up one biotech name And the news has shares skyrocketing What the CEOs are saying about the deal next Plus, can stocks look past an economic downturn? Our next guest, ready to tell us how the markets can turn a blind eye To any coming recession You're watching Fast Money Live from the NASDAQ market site in Times Square We're back right after this

22:06welcome back to fast money a drug deal on wall street well a pharma deal at least merck buying prometheus biosciences for nearly 11 billion dollars the ceo is appearing on mad money with jim kramer tonight here's what they had to say about the merger one of the things that really attracted us to to prometheus was the fact that they had the the Prometheus 360 biobank. And just to give a sense of what this is, it's basically over 200 ,000 tissue samples across 20 ,000 patients who have suffered from IBD. And it allows you to look at the genetics and match the genetic markers to the disease, which allows us to do better jobs of picking patients and driving how we prioritize and ultimately study and bring new therapies forward.

22:51Of course, IBD being irritable bowel syndrome. Be sure to catch that full interview top of the hour on Mad Money. Let's trade it. When he said, when the Merck CEO said the reason why we're looking at this, I thought he was going to say because Keytruda loses patent protection in 2028, because that's a huge reason why they're looking to do a deal. And they're 43 percent, I think, is the exact number that they're levered to revenues as far as they're dependent on them. and they're segwaying away from that. But Keytruda is definitely their goldmine that is losing the patent protection. I think the real takeaway for me is the XBI because now you're going to see, we hear about these marquee deals.

23:29We don't hear about the little deals that will be tucked in along the way. XBI is underperformed. I think this shines a light on that. I'd be a buyer of that. Yeah, it's funny because Keytruda was another one of those acquisitions though that people thought was way overpaid by Merck and it paid for itself. And I hear you. and they have to replace an asset. So here they go. I don't think anybody questions that it's not a great asset and a great area of growth to be in. But the question is, how much did they pay? And at what point is it accretive to EPS? And at what point, you know, Merck, which certainly trades at a premium to some of the other big cap pharma peers.

24:02I'm long, Merck, I'm very happy. But, you know, I think that's really the dynamic. Did they pay too much? That's the only criticism here. And in the past, a couple of these acquisitions have proven to not be, you know, The thing that was taking them down was the price and proved to be fine. But you're OK with the price as a Merck shareholder. What do I say? They don't have any approved drugs. But they... There's a price exchange without any approved drugs. But it's... I mean, Merck is, you know, almost a$300 billion company. So the$11 billion deal, how badly could they go wrong, right? Even if it went to zero, it's not...

24:39So, but Merck, which I own also, started when it was... The PE was really low. it's actually appreciated quite a bit now. I mean, this, I don't think, changes the calculus for me at the moment, but I don't know what to make of it, to be honest. Coming up, the nitty-gritty on Netflix. Results do out after the bell tomorrow, but is this name still a good place to invest? We'll dig into that trade ahead. But first, could stocks ignore a recession? It's happened once before. RBC's Lori Calvacino will join us next to lay out how markets can deal with a downturn. More on that when Fast Money returns.