🎯 Real Estate Investors' Next Target

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THE STREET SAYS

Good afternoon everyone, happy Sunday. A few weeks ago, we asked if you think the price of oil will be above $140/barrel by April 11, 2022. 55% of you said No, while 45% of you said Yes.

On Friday oil prices rose 2% but posted their second straight weekly decline after countries announced plans to release crude from their strategic stocks. Brent crude futures settled at $102.78 per barrel. US West Texas Intermediate (WTI) crude futures hit $98.26.

This week we will get more inflation data. Economists polled by Reuters think consumer prices grew 8.3% year-on-year in March so here's our question for you:

Do you think March's year-over-year CPI reading will be higher or lower than 8.3%? Click here to share your thoughts.

REVIEW

US stocks were mixed Friday, initially driven lower by weakness in the technology space following hawkish comments from the Federal Reserve.

Last Wednesday, the Fed released minutes from its March meeting. The commentary highlighted the central bank's plans to shed about $95 billion a month from its balance sheet beginning as soon as May. The minutes showed that Fed officials may also be strongly considering rate hikes of 50 basis points at upcoming meetings in order to combat runaway inflation.

The Fed's aggressive tone caused rates to race higher. The 10-year Treasury yield hit a new three-year high Friday, topping 2.7%. For context, it started the year at 1.63%. When rates rise, growth stocks tend to soften. This correlation weighed on names like Tesla, Alphabet, and Apple in morning trading.

Rising rates aren't the only topic on investors' minds. Every day Wall Street is trying to digest what's happening overseas between Russia and Ukraine and its potential impact on both the region and the global financial system, commodities, and international relations. Microsoft said it had blocked Russian military spies from hacking into Ukrainian, European Union, and American targets. Western think tanks and Ukrainian media organizations were in the digital crossfire.

Earnings season also kicks off in earnest this week, with big banks leading the way. JPMorgan, Citigroup, Goldman Sachs, Morgan Stanley, and Wells Fargo will hand in their latest report cards, giving traders a sense of how financial firms performed during the first three months of the year.

On the economic front, all eyes will be on Wednesday's inflation data. In February, the consumer price index jumped by 7.9 percent, the fastest pace of annual inflation in 40 years. Another high reading will only further the Fed's case for escalated policy tightening which will impact everything from mortgage rates to equity prices.

For the week as a whole, the Dow Jones Industrial Average lost 0.3%. The S&P 500 dropped 1.3% and the Nasdaq Composite fell 3.9%.

PREVIEW

On Monday investors will look to get more clarity on the ways rising prices are affecting consumers, and how the Fed plans to respond. Consumer inflation expectations for March are due. Federal Reserve Bank of Atlanta President Raphael Bostic is also set to give a speech, as is Charles Evans who is head of the Chicago Fed.

Tuesday, more inflation data is on the way, with the Consumer Price Index for March scheduled to be published. Last month’s number showed prices rising by 7.9% year-over-year, the fastest rate recorded in 40 years. Core CPI which strips out fuel and food prices is also set for release, as well as the NFIB small business index for March, and last month’s federal budget deficit.

Wednesday, March’s Producer Price Index is due, which tracks the prices domestic producers are receiving for their products. This is also an important inflation gauge, given the fact that manufacturers are raising prices to cover increased input costs. In February, the PPI rose by 10% year-over-year. MBA mortgage applications are also something to watch for, as they’ve been declining amid higher interest rates.

Thursday, jobless claims are due, after last week’s number fell to 166,000, the lowest recorded since 1968. Additionally, retail sales will be posted for March.

Friday, watch for March’s industrial and manufacturing production numbers, as well as this month’s Empire State Manufacturing Index which tracks activity in the New York region.

Here’s what’s on deck for this week’s earnings reports:

On Tuesday look for Pure Cycle Corporation (PCYO) to post its latest quarterly data. The company owns and develops water rights as well as land in the rapidly growing Denver area, where water is scarce. Wednesday, two titans of the financial world are among the companies scheduled to report earnings. JP Morgan Chase (JPM) will hand in its Q1 2022 report card. Additionally, investment management firm Blackrock (BLK) will share results for its first quarter.  Thursday, Taiwan Semiconductor (TSM) will report earnings, following last week’s announcement that it will be making graphics processing units for US chipmaker NVIDIA (NVDA). Also Thursday, UnitedHealth Group (UNH) is scheduled to share its latest data, after the healthcare giant recently agreed to buy LHC Group for $5.4 billion.

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In The Starry Sky: Internet Delivered Via Antennae

Bringing Homes Speedy Internet

If ever there was an industry ripe for disruption, it was cable. With the rise of streaming, we now have different options to consume entertainment, but we still need wifi to access this content. For decades the local cable or phone company was the only option if you wanted to have high-speed broadband Internet in your home. That’s changing, however, and Starry Group (STRY) is hoping to be part of the shift. The company, which just went public via a SPAC deal, provides high-speed broadband connections to homes without the need for a cable box or phone service.

Starry relies on what’s called “millimeter wave technology,” which utilizes a wireless spectrum that delivers super speedy broadband connections. Starry estimates about 40 million households in the US could be covered by its millimeter wave spectrum. The company also maintains it has an edge on cable and fiber since there is no need to build out additional infrastructure in order to bring its product to US homes. Starry makes its own equipment and antennas that deliver broadband to the rooftops of buildings and homes.

Sales Expected to Soar By 2026

Starry’s service starts at $50 a month for 200 megabits-per-second internet connections. The company doesn’t lock users into long term contracts. Some costlier plans boast top speeds that exceed those offered by cable and telecom companies.

The company still has plenty of room to grow, ending 2021 with just 63,000 subscribers. It operates in six cities and currently has a waiting list that includes an additional 150,000 potential customers. Starry aims to have 1.4 million subscribers by 2026. At that point, the company also expects revenue of $1.1 billion and EBITDA of $519 million. Last year, Starry reported sales of $22.3 million and an EBITDA loss of $98.7 million. 

The SPAC transaction brought around $176 million of fresh funds into Starry’s coffers, which is much lower than the $452 million the company hoped to raise. Starry could extend a debt offering to raise capital and hopefully bankroll growth. It’s expected the company will provide an update on that front when it reports quarterly earnings in May.

Starry is Still in the Early Innings

There are risks to the Starry story. For starters, the technology behind its Internet connection doesn’t travel long distances. That means there needs to be several antennas packed together to guarantee coverage. That’s cheaper than laying cables, but still requires planning. Starry estimates that building out its networks costs around 1% of what fiber companies must spend in order to achieve the same coverage.

Meanwhile, there’s robust competition in the form of Verizon Communications (VZ), T-Mobile US (TMUS), and AT&T (T). Verizon and T-Mobile offer wireless broadband across the country and AT&T has coverage in some areas. All three services are similar to Starry, but customers sometimes report slower internet speeds at certain times of the day, because their networks share space with mobile phones. Starry doesn’t have that problem, offering high speeds consistently. 

Disrupting the cable and fiber industries is an uphill battle but Starry thinks it has an edge. Only time will tell if this newly trading upstart can be the disruptor it's aiming to be.

Soaring Energy Prices has Texas Pacific Land Standing on Jackpot

Benefitting From Demand and Diminished Supply

Texas Pacific Land (TPL) seems to have an oil jackpot on its hands, as the Russia-Ukraine war has energy prices soaring worldwide. 

Remember, the US and the UK banned Russian oil and gas imports in mid-March, which threw global supply out of whack. However, demand didn’t slow which then caused prices to soar to a 14-year high of $140 a barrel on March 7. The oil and gas ban had ripple effects elsewhere. More specifically, the value of Texas Pacific Land’s 880,000 acres in the Permian Basin vaulted higher as a result.

The company’s share price has risen as well, at least partially in response to the global oil run. Since the middle of February, the stock is up 45%. Texas Pacific Land is now valued at around $11 billion, which is higher than its rivals, who generate revenue from oil and gas royalties.

What’s going on globally means there is now an increased likelihood that more development will occur on its acres, where Texas Pacific Lands holds the royalty rights in perpetuity. The company forecasts development in the Permian Basin to be strong during the coming years, which bodes well for its bottom line.

Texas Pacific Land Flexes its Muscles 

As it stands, Texas Pacific Land is one of the largest landholders in the state. Energy sector giants such as Chevron (CVX) and Exxon Mobil (XOM) produce oil on its acreage. Roughly two-thirds of its revenue comes from those royalties. Another 30% is derived from supplying and then disposing of water used for fracking. In the future, its acres could be used for the development of renewable energy such as wind mills, generating even more royalty revenue.

The company has been around since the 1870s, but in the past ten years the value of its real estate has appreciated as production in the Permian basin increased. And as oil prices rise, so does the perceived value of Texas Pacific Land’s property.

Governance Key to Share Appreciation 

A key aspect of what’s driving Texas Pacific Lands involves changes to its leadership structure. The current management team began running the royalty trust more like a business in 2017, but a group of large shareholders called for more change. They waged a proxy battle in 2019 that resulted in board seats going to activist shareholders. The trust was also converted into a corporation at the beginning of last year.

More change could be in the cards, as some shareholders have called for directors to face elections each year, as opposed to the current system that uses staggered terms. As of now, only three board members can change in any given year. The company’s executives have opposed the election idea, but 56% of shareholders voted in favor of the nonbinding resolution. If the board is up for reelection each year, Texas Pacific Lands could become an easier takeover target, or see frequent changes to management, both of which could drive the stock higher. 

Despite the drama, bulls seem to think Texas Pacific Land is sitting on assets that can only appreciate over time, even though prices for oil and gas are highly volatile.

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Real Estate Investors' Next Target: Small Businesses

Doctors, Delis, and Gas Stations

Real estate investors looking to acquire discounted properties are setting their sights on small businesses, buying up buildings that house doctor’s offices, delis, and gas stations. With historically low interest rates and limited supply sending prices for residential properties soaring, investors are turning to less traditional property types as they hunt for yield.

For example, Withco is a real estate investment shop hailing from New York that offers small businesses rent-to-own deals. It just raised $30 million in venture funding led by celebrity athletes Venus Williams and Kevin Durant, among other high-profile names. Meanwhile, New York-based Keyway raised $70 million in a debt facility, which it plans to use for acquisitions. The company focuses on purchasing medical office buildings from small businesses, which are then in turn leased back.

Big Investors Staying Away

Real estate startups are going after the small business market because they know most large asset management firms aren’t chasing these types of deals. Small businesses are risky, as many shut down and eventually stop paying their rent, which scares away risk-averse institutions. The pandemic highlighted this even further with months-long shutdowns and numerous permanent closures.

Despite the risk, the industry is attractive to some real estate investors, chiefly because the building prices are lower. Plus, smaller tenants are typically more willing to disclose financial information, which can provide property owners with more clarity.

Due Diligence Mitigates Risk 

In a bid to reduce vacancies, Withco lets tenants purchase properties for a fixed price. According to the Wall Street Journal, “For each year that a tenant pays rent over an initial five-year lease, they get 2% of the purchase price credited toward a down payment.” Withco argues tenants who plan to become owners treat the property better and are less likely to vacate. The company is also hoping the path to ownership appeals to socially conscious investors, who the startup plans to target as part of its fundraising efforts.

Meanwhile, Keyway is highly focused on medical tenants, betting the sector as a whole is more likely to succeed than storefronts or eateries. During the pandemic, doctor’s offices didn’t shut down as often as other small businesses.

With the residential market pricing many investors out, some are setting their sights on the sometimes forgotten small business sector. Of course, if successful, it may be just a matter of time before the trend starts attracting the attention of larger firms.

This communication from The Street Sheet is for informational purposes only. It is not intended to serve as a recommendation to buy, sell, or hold any security and is not an offer or sale of a security.  Information contained within should not be perceived as a research report and is not intended to serve as the basis for any investment decision. Any third-party views reflected herein do not reflect the opinion of The Street Sheet. All investments involve risk and the past performance of a security does not guarantee future results or returns. There is always the potential for financial loss when investing in securities or other financial products. Investors should consider their investment objectives and risks before investing.