The Wall Street Journal - 19.10.2019 - 20.10.2019

B14| Saturday/Sunday, October 19 - 20, 2019 ** THE WALL STREET JOURNAL.

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FINANCIAL ANALYSIS & COMMENTARY

Americans don’t own stuff like

they used to.

Fewer of them own the homes

they live in than in the past, opt-

ing to rent instead. A growing

share have opted to lease the car

they drive—if they drive at all—

rather than hold the car’s title.

And it seems only aficionados own

DVDs or music recordings instead

of a streaming subscription.

The shift away from ownership

to what KKR’s Paula Campbell Rob-

erts has called the asset-light con-

sumer represents a reshaping of

the economy, borne of a confluence

of factors, including the scars left

by the 2008 financial crisis and

the advent of new technologies. It

is giving households increased

flexibility in how they finance their

lives, lowering the debt burden

that often comes with ownership.

Investors are loving the rental

economy too, paying up for busi-

nesses with steady cash flows. But

the asset-light consumer’s behav-

ior remains largely untested in a

downturn—a rising risk—and could

hold nasty surprises.

The homeownership rate—the

share of U.S. households that own

the home they live in—peaked at

about 69% in 2004 and fell during

the financial crisis. It never recov-

ered, now standing at about 64%,

or about six million fewer owned

homes than at the peak.

That shift to rentals represents

big income streams. Investors such

as Blackstone Group bought up

heavily discounted homes follow-

ing the financial crisis, turning sin-

gle-family rentals into a big busi-

ness. Just two companies,

Invitation Homes, which Black-

stone helped bankroll, and rival

American Homes 4 Rent own

133,000 homes combined.

One reason more people are

renting may be that, after the fi-

nancial crisis, homes aren’t seen as

such a safe investment. In an eco-

nomic downturn it can be easier

for renters to lower their housing

costs by moving into a lower-rent

home or to move for job opportu-

nities elsewhere. Homeowners,

stuck with mortgage payments,

have it harder.

That flexibility comes at the

cost of not building up home eq-

uity, which can help create wealth

and provide a financial cushion in

an emergency. But it also means

the new crop of landlords faces

their own risks. Following reces-

sions, rents can stagnate or even

fall, while the number of vacant

rental units often rises. Investors

in rental properties may not have

accounted for lean times.

One might point them to the

auto-leasing market for clues

about what can go wrong, but that

industry also seems to have forgot-

ten the lessons of the last reces-

sion. Leasing deals have doubled to

32% of new vehicle purchases over

the past 15 years, according to Ed-

munds.com. Leases come with

lower upfront costs and typically

require lower monthly payments

than car loans. They benefit car

companies too, offering a steady

income stream and a stable supply

of used cars.

As with homeownership, flexibil-

ity comes at a cost. The car owner

has an asset after paying off loans

while the lessee doesn’t. But the av-

erage lease length is about half the

average length of a car loan. In a

downturn, lessees can more easily

lower their car-payment costs and

avoid the losses associated with

selling a used car into a down mar-

ket. The company financing the

ment, which compares with $9.8 bil-

lion a decade earlier. Over that same

period, spending on recording me-

dia, like CDs and DVDs, slipped to

$16.2 billion from $25.8 billion. As

with other rent-like services, stream-

ing provides the steady income that

investors love—Netflix briefly sur-

passed the value of Walt Disney this

year—but is also something that

consumers can cut back on.

Will they? Netflix’s streaming

efforts didn’t even start until 2007,

right before the last recession.

Now it is a much bigger company

financed by billions in junk bonds.

It isn’t alone. JPMorgan Chase

calculates that the corporate-debt-

to-income rate for the domestic

nonfinancial corporate sector now

exceeds the level before the last

recession. Household debt remains

a concern, but debt-to-income lev-

els are down sharply from where

they were before the rental revolu-

tion. If times get tough, how many

companies will find that the rental

checks they were counting on

aren’t in the mail?—Justin Lahart

The Risks of

Renting Everything

Businesses that rent homes, lease cars and stream

music or movies are largely untested in a recession

U.S.homeownershiprate

Note: Seasonally adjusted

Source: U.S. Census Bureau via St. Louis Fed

Quarterly

70

60

62

64

66

68

%

1980 ’90 2000 ’10

Generic Drug Firms

Face New Legal Peril

A familiar threat for pharma stocks returns after

UnitedHealth sues over alleged price fixing

Generic drug makers are rallying

as a possible comprehensive settle-

ment in opioid-related litigation

draws near. One forgotten and po-

tentially very costly legal worry for

generic drug stocks has quietly re-

surfaced, though.

Collusion allegations have plagued

the sector for several years. An

amended civil antitrust complaint

filed in May by more than 40 state

attorneys general alleged that 15 in-

dividuals and 20 corporate defen-

dants conspired to fix prices of more

than 100 generic drugs.

That matter has faded from the

headlines, but there is fresh reason

for investor concern: A subsidiary

of UnitedHealth Group, the nation’s

largest health insurer, filed a civil

lawsuit over the issue in federal

court last week. Companies named

in the new complaint include Teva

Pharmaceutical Industries, Mylan,

Lannett and Sandoz, the generics

unit of Novartis. On Friday, rival in-

surer Humana filed a similar law-

suit. None of the companies has ad-

mitted to any wrongdoing and the

allegations are several years old.

That might be of limited comfort.

The UnitedHealth lawsuit asserts

that the insurer is entitled to treble

damages for any amount it was over-

Suit alleges Teva colluded with rivals to raise the price of at least 86 drugs.

GEORGE FREY/REUTERS; MAP: ANITA POUCHARD SERRA/BLOOMBERG NEWS

AT&T Needs No Static

On Its Investor Call

The telecom giant should settle with Elliott

to avoid distractions at a critical juncture

and an event the following day, at

which the company’s WarnerMedia

unit is expected to unveil the de-

tails of its much-anticipated HBO

Max streaming service. That offer-

ing is expected to cement the com-

pany’s place in the increasingly

competitive streaming media uni-

verse. The next few months will

see Disney, Apple, Comcast and

AT&T enter a field already featur-

ing the likes of Netflix, Amazon

and Google.

AT&T also still has to manage

the demanding transition of its

wireless business to the next-gen-

eration standard known as 5G.

That work is already under way,

but will need to accelerate next

year as compatible devices enter

the market and draw consumer in-

terest. AT&T has 5G in a handful

of select markets now, but said in

its last earnings call that it intends

to have a “nationwide footprint” in

place by the middle of next year.

That is quite a lot to accomplish

even in the absence of an activist.

The sooner Mr. Stephenson can

put Elliott in a chair, the faster he

can roll up his sleeves.

—Lauren Silva Laughlin

and Dan Gallagher

Totalreturnsinceannouncing

DirecTVdeal

Source: FactSet

AT&T

S&P500

Weekly

80

–20

0

20

40

60

%

2015 ’16 ’17 ’18 ’19

lease could be left on the hook. In

2008 a glut of cars came off lease

and had to be sold at deep dis-

counts, causing sharp losses.

Lately younger people in partic-

ular have eschewed personal vehi-

cles altogether. That is a boon to

companies such as Uber and Lyft.

How will the nascent ride-hailing

industry fare in a recession,

though? Nobody knows.

Entertainment is increasingly

rented too.

Last year, consumer spending on

services that stream and rent video

and audio came to $28.2 billion, ac-

cording to the Commerce Depart-

The homeownership rate

fell after the 2008

financial crisis and

never recovered, now

standing at about 64%.

SAM ISLAND

charged, which is currently unknown.

It could be a significant figure: For

instance, UnitedHealth alleged in the

complaint that Teva colluded with

competitors to raise the price of at

least 86 drugs over a period of 19

months ending in 2015. The rate of

those increases topped 1,000% in

some cases, the complaint alleges.

And UnitedHealth’s reach is mas-

sive—it has nearly 50 million mem-

bers on its rolls.

It is also possible that other in-

surers could file similar claims.

While the damages are subject to

discovery, the sums across the in-

dustry could conceivably reach bil-

lions of dollars.

That could be a big problem

for stockholders because the

manufacturers aren’t exactly in a

position to open up their wallets.

Teva’s debt load is now more

than six times trailing earnings

before interest, taxes, deprecia-

tion and amortization, according

to FactSet data. Meanwhile, My-

lan and Lannett each weigh in at

about four times Ebitda.

Investors’ celebratory mood

may intensify if the opioid cases

do indeed settle. That euphoria

shouldn’t be confused with a clear

road ahead. —Charley Grant

How do you make peace with a

nag? Appease them, perhaps.

That might be best for AT&T,

which is in the midst of a battle

with activist shareholder Elliott

Management. The hedge fund run

by Paul Singer wants the telecom

giant to sell assets and may negoti-

ate to get representation on the

company’s board, according to The

Wall Street Journal, which reported

late Thursday that the two sides

are in talks over a settlement.

AT&T might be able to swat

away a few of Elliott’s more dra-

matic ideas if it just settles on a

few of its lesser asks now.

AT&T’s stock has languished as

Chief Executive Randall Stephen-

son launched ambitious deals to

grow both distribution and con-

tent, including its most recent deal

to buy Time Warner for $85 bil-

lion. Even including a generous

dividend, the total return on

AT&T’s stock has lagged behind

the S&P 500 since the company

announced its $49 billion acquisi-

tion of DirecTV in mid-2014, ac-

cording to S&P Capital IQ. That

has fueled the gripes of investors

who think the company may have

bitten off more than it can chew.

Integration of that deal and some

others hasn’t been up to snuff, ac-

cording to Elliott, who recently

urged the company to sell several

assets, including DirecTV.

But selling DirecTV would be a

herculean task. Buyers may be

limited. Meanwhile, heavily in-

debted AT&T, which also pays a

hefty dividend, benefits from the

satellite company’s cash flow.

Elliott, with a relatively small

stake, doesn’t in principle de-

serve a hearing.

But suffering through a

lengthy battle, which Elliott has

the stomach to push through,

also could prove to be more of

a distraction than it is worth—

especially if AT&T can make

less dramatic moves to mollify

the fund.

AT&T has good reason to bury

the hatchet ahead of its third-

quarter earnings report on Oct. 28

OVERHEARD

Sometimes a solid thesis gets

stretched when you try to fit too

much into it. The recent “mega-

lopolis” report by market-re-

search firm Euromonitor Interna-

tional is a case in point. It makes

the valid but familiar observation

that the global economy is in-

creasingly being driven by huge

areas of adjacent cities. Twenty

such megalopolises now account

for 35% of the world’s economic

output, the firm estimates.

But the report’s authors may

have overreached with some odd

and overly broad definitions of

what constitutes a megalopolis.

Some examples are clearly valid,

like the Boston-Washington D.C.

corridor in the U.S., which as the

report points out was the first

entity called a megalopolis in a

1961 book. But others seem a bit

too big and dispersed. Consider

the alleged “Great Lakes”

megalopolis of Chicago, Detroit,

Cleveland, Minneapolis and

Pittsburgh. Similarly, the oddly

named “Am-Mun-Par” contains

Amsterdam, Munich, Paris,

Brussels and Frankfurt, but

somehow not Berlin.

In other places, the authors

seems to be overthinking things.

Instead of just naming London,

they introduce readers to “Lon-

Car-Lee,” which refers to Lon-

don, Birmingham, Manchester,

Leeds and Cardiff. They also call

out a “Tainan-Taipei” corridor.

That one is generally referred to

as “Taiwan.”

A metro station in Paris.