The Week Ahead on Wall Street

Economic Data

The October NAHB home builders' index is due this morning. In September, builder confidence jumped 5 points to 83, posting its highest reading in the survey's 35-year history. Demand for housing has surged due to COVID-19, but developers are having a hard time finding finished lots and labor. They also have to contend with the rising cost of lumber, which has caught some builders off-guard. Since mid-April lumber prices have spiked 170%. According to the NAHB, this has added more than $16,000 to the price of a new single family home.

Tomorrow, September housing starts and building permits are published. In August, housing starts fell 5.1%, pulled down by a 22.7% drop in the multi-family sector. New activity jumped in the West and Midwest but slid in the South and Northeast.

On Wednesday, the Fed's Beige Book is released in the afternoon. This report is published eight times per year, highlighting economic conditions across the various districts. Investors parse through it to glean additional color about the state of the US economy.

September's leading economic indicators index is published on Thursday along with existing home sales. The weekly initial jobless claims report will also be released. In the week ending October 10th, another 898,000 Americans filed for first time unemployment benefits, which was much higher than analyst expectations of 830,000. In fact, this is the highest level of initial claims since the week of August 22.

Flash readings of October manufacturing and service data are due on Friday. In September, the IHS Markit composite PMI index dipped to 54.4 from 56.6 in August. The services PMI slipped to 54.6 from 55 the month prior. Any reading above 50, however, represents economic expansion.

Earnings

International Business Machines Corp (IBM) reports its latest results today. The 109-year-old company just made waves with the announcement that it is spinning-off its IT infrastructure services unit into a separately traded public company. The blue-chip company wants to focus on its cloud-computing and artificial intelligence business units instead. Investors will be looking for more details surrounding this strategic decision.

Netflix Inc. (NFLX) is scheduled to report earnings tomorrow. Last week, Goldman Sachs (GS) raised its price target on Netflix to a new Street high of $670 per share. Analyst Heath Terry says the company will report results well above guidance and consensus expectations due to more people spending time at home. Investors focus on subscriber growth when it comes to Netflix, and Terry is projecting that the streaming giant will add around six million net subscribers.

Tesla Inc. (TSLA) hands in its latest report card on Wednesday. The electric vehicle maker, led by its high-profile CEO, Elon Musk, is always closely watched by investors. Tesla is now the world's most valuable automaker and its stock has surged over 430% this year. Goldman Sachs analyst Mark Delaney said improving vehicle demand will benefit the carmaker, raising his price target on the stock from $400 per share to $450 per share. However, Tesla bears like GLJ analyst Gordon Johnson aren't so sure. He thinks the company will miss consensus estimates due to foreign exchange headwinds and lower regulatory credit sales.

Coca-Cola Co. (KO) reports earnings on Thursday. The beverage giant, like others, saw sales suffer from stay-at-home orders earlier in the year. However, as lockdown measures eased and people started venturing further from home during the summer, they believe a sales uptick might be in the works. The company is also continuing to slim down its product line and recently announced plans to discontinue Zico, its coconut water brand. Other “zombie brands” at risk include Diet Coke Feisty Cherry, Coke Life, Northern Neck Ginger Ale, and Delaware Punch. Eventually, Coca-Cola will shrink its brand ownership by more than 50% to focus on its most popular products.

On Friday, the week wraps up with an earnings announcement from American Express Co. (AXP). Some analysts think more movement this past summer could help the credit card giant. Others, however, think American Express has an uphill battle because it is “over-indexed” to travel, according to Bank of America's Mihir Bhatia. “We believe travel spend needs to recover for billing momentum to resume and shares to outperform,” Bhatia wrote. “We suspect travel will be among the last categories to recover to pre-COVID levels and the slower than expected recovery in billings could weigh on AXP shares.”

The Week Ahead at SoFi

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Hotel Operators Eye Subscription Models

Netflix, Peloton, and Hotel Rooms

The next hot thing in travel might just be subscription services—for hotels. At InterContinental Hotels (IHG) in Singapore and Indonesia, for instance, remote workers can pay a monthly fee between $1,100 and $1,970 for a “work from hotel” package with access to workspaces, hotel rooms, and other facilities.

The offering comes as subscription services for television, exercise, gaming, and even groceries have boomed since the start of the COVID-19 pandemic. As hotels struggle under travel bans, brands from the luxury platform Inspirato, Marriott (MAR), and even Chateau Marmont are looking to memberships and subscriptions as a possible way to alleviate the financial strain.

The Verdict is Still Out

While this creative form of monetizing empty rooms makes sense for the hotel companies, would-be customers are less convinced. Some in the industry say it could be challenging to persuade consumers to sign on to recurring travel payments after they watched the travel industry shut down completely in March. Some people also don’t feel comfortable traveling yet, especially because restrictions are still in place in 156 countries. More broadly, the economic crisis has prompted many people to rein in their travel and leisure spending.

The Inspirato Group faced a challenge in the first three months of the pandemic when many members couldn’t see the value in paying for their subscriptions while under lockdown orders. In exchange for those first three months of payment, Inspirato paused charges for members in July, August, and September.

Time to Try New Things

While the value proposition might be somewhat fuzzy right now, these hotel subscription plans reflect a trend that was already in motion before the pandemic started—and that could mean it will return once the pandemic passes. Take BeRightBack, for instance. The London startup offered travelers three trips per year for $65 per month, redeemable at 60 locations around Europe.

Some analysts see this as a great time for hotels to try out payment plans like BeRightBack’s, billed as subscription services. “Changes in consumer behavior—social distancing leading to reduced travel and increased remote work, for example—create opportunities for new offerings and to establish new habits,” said Peninsula Strategies consultant Robbie Kellman Baxter.

If there is any silver lining to the turbulence caused by the pandemic, it’s that some companies see less friction in the market, giving them room to experiment.

Pandemic Increases Appeal of Life Science Buildings

Blackstone Sells BioMed to Itself

In a first for Blackstone (BX), the investment giant announced it will sell its life-science property holding company, BioMed Realty Trust, to itself. The fund that currently owns BioMed Realty Trust needs to exit its holdings and return cash to investors. However, these investors said that, rather than taking proceeds from a sale or IPO, they would like to continue to own the Trust. Therefore Blackstone is selling BioMed Realty Trust to another one of its funds for $14.6 billion.

The nuanced transaction highlights investors’ appetite for life-science backed buildings such as those where startups rent lab space in BioMed Properties. Wall Street appears to believe these companies will continue to innovate and be integral to the fight against COVID-19 and other health issues. As part of the deal, investors had the option to cash out. According to Blackstone, most stayed in and some even invested more money.

No Vacancy

When Blackstone first acquired BioMed in 2016, its properties stood at 91% occupancy. Now, BioMed’s 93 properties are 97% occupied. About half of those tenants are at work on COVID-19 testing or vaccine development, and all have paid rent in full since the start of the pandemic.

However, life science buildings do come with their own set of risks. Research and science companies often require new ventilation systems as well as proper disposal for hazardous waste. This can be costly, but at a time when many office buildings and retail centers are sitting vacant, science-backed buildings look more attractive. Furthermore, Blackstone analysts think demand for these buildings could grow even more as some move their operations back to the United States.

Global Trends Put in Real Estate Context

With traditional commercial real estate in flux since the pandemic’s start, Blackstone’s real estate group has adapted to changing market dynamics. Over the past several months, e-commerce, streaming services, and life science companies have been booming under stay-at-home orders in a health crisis. Alongside life-science properties like BioMed’s, Blackstone has bought up fulfillment warehouses and media production centers to respond to that demand.

This strategy appears to be paying off. When the $14.6 billion BioMed sale is finalized, Blackstone will lock in a $6.5 billion gain from the purchase in 2016. This will be the third most lucrative deal of any Blackstone fund, behind its disposition of Hilton Hotels in 2018 and Equity Office Property Trust in 2019.