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AutoNation’s Outspoken Chief Executive to Step Down Next Year

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Chief Executive Mike Jackson, who stood out in the tight-lipped auto industry for his outspoken personality and willingness to challenge auto makers publicly, will step down in 2019 after leading the U.S.’s largest dealership chain for nearly two decades.

Mr. Jackson, 69 years old, will stay on as executive chairman, and AutoNation’s board will conduct a search for a new CEO.

A New Jersey native who got his start fixing cars at a Mercedes dealership, Mr. Jackson is known in the industry for his bluntness. A frequent commentator on CNBC, his outspokenness has served as a contrast to most auto executives, who tend to steer clear of controversy.

As CEO, Mr. Jackson slimmed down operations, added more imported and luxury brands and led AutoNation’s push into the digital era. The company’s stock price has more than quadrupled since he took over in October 1999. The shares closed at $43.09 Tuesday, giving AutoNation a market capitalization of nearly $4 billion.

“I’m very proud of what we’ve built here,” Mr. Jackson said in an interview. “Next year, I’m 70 years old, and with 20 years as CEO, it’s a good time to hand the baton to the next CEO. I’m kicking myself upstairs.”
His transition comes as U.S. auto sales are starting to cool, following a seven-year growth streak that lifted profits for both car makers and dealers.

AutoNation, with more than 325 locations coast-to-coast, is in the midst of expanding its business beyond traditional new-car sales, aiming to reduce its dependence on auto companies for profits.

In 2017, the dealership chain opened its first stand-alone used-car center, AutoNation USA, aiming to build a chain of preowned stores to compete with CarMax Inc. The company has also launched a line of AutoNation-branded car parts, auctions and collision centers, and has joined with Alphabet Inc.’s driverless car unit Waymo LLC to service robo-vans that are being tested in Arizona and California.

Mr. Jackson, who grew up in a large Irish-American family, quickly rose through the auto retailing ranks, eventually owning his own Mercedes dealership and later joining the German luxury brand to run sales and marketing in the U.S. By 1992, he was president of Mercedes’s U.S. operations.

AutoNation hired Mr. Jackson in 1999 to revive the company’s stock price and boost its credibility with Wall Street. In the next few years, he sold underperforming dealerships, shut the retailer’s chain of used-car megastores and expanded its offerings from mostly domestic brands to include imports such as Toyota, BMW and Mercedes. Mr. Jackson was an early proponent of the dealership chain having a strong digital presence as more buyers migrated to the internet to do their car shopping.

Over the years, Mr. Jackson developed a reputation for speaking his mind, even if his views weren’t always popular with his colleagues.

He has been pointed in his criticisms of President Trump, citing his ascent to the White House as a reason he quit the Republican Party. Mr. Jackson also has come out in favor of higher gasoline prices, arguing they are needed to spur innovation on fuel-saving technologies, such as hybrids and electric cars.

In the years leading up to the 2008 economic crisis, Mr. Jackson criticized U.S. car makers for overbuilding their inventory and then using steep discounts to move cars off dealer lots, a practice that erodes profits and damages a brand’s image. More recently, he has chided car manufacturers for inciting a pricing war that has hurt dealer businesses.

Mr. Jackson said he feels it is his duty to speak out on behalf of consumers and dealers who otherwise wouldn’t have a voice in the auto industry. It is a role he intends to maintain as executive chairman.

“That came from my father, who said ‘Mike, always do the right thing,’” Mr. Jackson said. “’If you always do the right thing, at the end of the day they will respect you, and respect is more important than likability.’”

Source: https://www.wsj.com/articles/autonations-outspoken-chief-executive-to-step-down-next-year-1537354575

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Amazon Plans to Split HQ2 Between Long Island City, N.Y., and Arlington, Va.

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After conducting a yearlong search for a second home, Amazon has switched gears and is now finalizing plans to have a total of 50,000 employees in two locations, according to people familiar with the decision-making process.

The company is nearing a deal to move to the Long Island City neighborhood of Queens, according to two of the people briefed on the discussions. Amazon is also close to a deal to move to the Crystal City area of Arlington, Va., a Washington suburb, one of the people said. Amazon already has more employees in those two areas than anywhere else outside of Seattle, its home base, and the Bay Area.

Amazon executives met two weeks ago with Gov. Andrew M. Cuomo in the governor’s Manhattan office, said one of the people briefed on the process, adding that the state had offered potentially hundreds of millions of dollars in subsidies. Executives met separately with Mayor Bill de Blasio, a person briefed on that discussion said. Long Island City is a short subway ride across the East River from Midtown Manhattan.

“I am doing everything I can,” Governor Cuomo told reporters when asked Monday about the state’s efforts to lure the company. “We have a great incentive package,” he said.

“I’ll change my name to Amazon Cuomo if that’s what it takes,” Governor Cuomo said. “Because it would be a great economic boost.”

The need to hire tens of thousands of high-tech workers has been the driving force behind the search, leading many to expect it to land in a major East Coast metropolitan area. Many experts have pointed to Crystal City as a front-runner, because of its strong public transit, educated work force and proximity to Washington.

[Crystal City’s upsides: good transit, diverse residents, a friendly business climate and a single developer with a big chunk of land.]

JBG Smith, a developer who owns much of the land in Crystal City, declined to comment, as did Arlington County officials.
Amazon declined to comment on whether it had made any final decisions. The Wall Street Journal earlier reported Amazon’s decision to pick two new locations instead of one.

About 1,800 people in advertising, fashion and publishing already work for Amazon in New York, and roughly 2,500 corporate and technical employees work in Northern Virginia and Washington.

Amazon narrowed the list to 20 cities in January, and in recent weeks, smaller locations appeared to fall out of the running. For example, although Denver made the initial cut, Gov. John Hickenlooper of Colorado said last month, “Wouldn’t they rather have their second big hub on the East Coast?”

Amazon announced plans for a second headquarters in September 2017, saying that the company was growing faster than it could hire in its hometown Seattle. The company said it would invest more than $5 billion over almost two decades in a second headquarters, hiring as many as 50,000 full-time employees that would earn more than $100,000 a year on average.

HQ2 would be “full equal to our current campus in Seattle,” the company said. If Amazon goes ahead with two new sites, it is unclear whether the company would refer to both of the locations as headquarters or if they would amount to large satellite offices.

Picking multiple sites would allow it to tap into two pools of talented labor and perhaps avoid being blamed for all of the housing and traffic woes of dominating a single area. It could also give the company greater leverage in negotiating tax incentives, experts said.

“Even if the most obvious reasons appear to be about attracting more tech workers, the P.R. and government incentives benefits could help, too,” said Jed Kolko, chief economist at Indeed, the online jobs site. With big presences in two cities, the local governments “might feel pressure to increase the incentives they are offering Amazon, and the surprise is yet another news cycle for the Amazon headquarters process,” he said.

The HQ2 search sent states and cities into a frenzied bidding war. Some hired McKinsey & Company and other outside consultants to help them with their bids, investing heavily in courting Amazon and its promise of 50,000 jobs. Even half of that would amount to one of the largest corporate location deals, according to Greg LeRoy, executive director of Good Jobs First, which tracks corporate subsidies. “These are very big numbers,” he said.

As Amazon’s search dragged on, residents in many of 20 finalist cities worried about the impact such a massive project could have on housing and traffic, as well as what potential tax incentives could cost the community. The decision to split into two sites could alleviate some of that resistance.

Seattle has been one of the fastest growing cities in the country, in part because of Amazon’s growth. The company has about 45,000 employees in the city, and the company said it needed to hire more employees than the city could attract or absorb.

“Not everybody wants to live in the Northwest,” Jeff Wilke, the head of Amazon’s retail division, said at a conference last year. “It’s been terrific for me and my family, but I think we may find another location allows us to recruit a different collection of employees.”

Amazon gave cities six weeks to pitch themselves in a public courtship. Almost 240 municipalities responded, trying to lure the tech giant with marketing gimmicks, promises of new transit lines and, as proposals trickled out, billions in tax incentives.

The details of most bids are not public, to the frustration of even some lawmakers. A few elected officials from the short list of 20 cities signed what amounted to a mutual nonaggression pact, trying to avoid a bidding war that would give up too much from taxpayers.

But mostly, cities continued their hard sell, showing Amazon executives around their proposed sites and trying to assure the company that the region had sufficient housing and transportation. Since wrapping up visits with cities in the spring, Amazon has been almost silent on the search. That led journalists, residents and politicians to look for clues in new job postings and the flight path of the corporate jet used by Jeff Bezos, Amazon’s chief executive.

To meet its own deadlines, Amazon will need to move fast. It had said it wanted 500,000 square feet of office space — enough for thousands of employees — available for use next year.

Jay Brodsky, who lives in Arlington, Va., said about a week ago that his wife took part in a 45-minute phone survey about her opinion if Amazon moved to the area. “It was everything from, ‘What do you think about the local government,’ to ‘Are you concerned about traffic?’” he said. She received an Amazon gift card for participating.

“People are sort of on pins and needles,” Mr. Brodsky said. “It’s almost like people want it to happen, and are afraid of what would happen if it does.”

Source: https://www.nytimes.com/2018/11/05/technology/amazon-second-headquarters-split.html

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Tesla Reports a Rare Quarterly Profit, Its Biggest Ever

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Tesla on Wednesday reported its first quarterly profit in two years and its biggest ever. But for the electric-car maker and its unpredictable chief, the question is whether it can keep making money.

The company’s third-quarter earnings were helped by cost-cutting, spending less on future models, delaying payments to suppliers and, most important, rushing to sell as many cars as possible. It may not be able to do all those things quarter after quarter.

The company declared it a “historic quarter” and its chief executive, Elon Musk, promised that future would be brighter still, telling analysts on a conference call he expected Tesla to be profitable in the fourth quarter and in “all quarters going forward.” He was saying in effect that his company was no longer in start-up mode.

Tesla reported a $312 million profit for the three months that ended Sept. 30, thanks to a surge in production and sales of its Model 3 sedan. The company has long promised that the model would help make electric vehicles and Tesla itself a mass-market phenomenon.

The report is a milestone for Mr. Musk, whose leadership was cast in doubt in recent months as he faced a lawsuit by regulators over his musings on Twitter about taking the company private. He had also hurled insults against short-sellers and admonished analysts on a call for asking “boring, bonehead questions.” He agreed last month to step down as chairman of the company to settle a lawsuit in which the Securities and Exchange Commission accused him of misleading investors about his plans to take the company private.

On Wednesday, he was even-tempered on a conference call with analysts. He declined to answer a question about the makeup of the company’s board, saying he would discuss only operational issues. (In the agreement with the S.E.C., Tesla agreed to appoint two new independent directors to its board.)

In the 15 years since Mr. Musk and his partners founded Tesla, the company has never reported an annual profit. In previous quarters, the company’s costs increased as it made more cars. To finance its operations, Tesla, which also makes solar panels and batteries, has had to sell stock, take out loans and ask customers to make $1,000 refundable deposits for cars and energy products that they might not get for many months.

The profit the company reported in the third quarter will help stabilize Tesla’s finances and end a streak of quarters in which the automaker used close to $1 billion in cash. In the second quarter, the company reported a $718 million loss.

Tesla ended September with $3 billion in cash compared with $2.2 billion at the end of the previous quarter. The company generated $881 million in free cash flow — cash produced through operations less capital expenditures. “The cash-flow number is impressive,” said David Whiston, an auto analyst at Morningstar. “That’s a lot of cash for a company their size.”
But the company could face difficulties ahead. The increase in sales of the Model 3 could cause demand to soften in the fourth quarter.

The company, which until recently only sold tens of thousands of luxury cars a year, will need to find many more buyers for the Model 3, which sells for $46,000 to $64,000 before federal and state tax incentives. Mr. Musk said that the company expected sales to remain strong as it starts shipping the car to Europe in the first three months of next year and Asia after that.

Tesla produced more than 53,000 Model 3 cars from July to September, nearly twice as many as in the previous three months. Deliveries of the Model 3 totaled more than 56,000, about three times as many as in the previous quarter.

“As long as they keep producing more cars than the previous quarter, there’s a good chance they can keep profits going,” Mr. Whiston said.

In a sign that buyers are still interested in the car after months of waiting for it, Tesla said that of the 455,000 Model 3 reservations it reported having in August 2017, fewer than 20 percent had been canceled.

Tesla next year is supposed to start making a more affordable version of the Model 3 priced at $35,000, and Mr. Musk has said that Tesla would lose money on that model if the company produced it now. The cheaper Model 3 is important because the $7,500 federal tax credit available to buyers of Tesla cars will be cut by half on Jan. 1 and phased out entirely over the course of 2019, making the company’s cars more expensive.

Tesla recently began offering a Model 3 priced at $46,000 as an interim step before it can produce the $35,000 version. “We don’t really have the ability to get to $35,000 right away,” Mr. Musk said, but he said Tesla was “probably less than six months from that.”

Even though Tesla is finally hitting its stride in production, “the company isn’t out of the woods yet,” said Jeremy Acevedo, manager of industry analysis at Edmunds, a market researcher. “The $35,000 Model 3 remains a fantasy, and with the full tax credit for that car now off the table, it will be interesting to see how many buyers are willing to keep waiting for it to be a reality.”

The company is still struggling to deliver cars to customers, which Mr. Musk has described as “delivery logistics hell.” The quality of the Model 3 has also come under question as many customers have complained about receiving cars with scratched paint, cracked windows and other defects.

Consumer Reports on Wednesday lowered Tesla’s reliability ranking by six places, to 27th out of 29 automakers. The magazine said its members complained about the suspension in the company’s full-size Model S sedan.

If sales falter, the company could quickly find itself in a financial squeeze. It has to make bond payments of $230 million in November and $920 million in March. It can use stock for the second payment but only if its share price is above $360. At the same time, Tesla hopes to build a factory in China, which will require hundreds of millions of dollars in capital expenses.

As of Sept. 30, Tesla owed its suppliers $3.6 billion, up from $3 billion at the end of the second quarter. The company’s debt totaled more than $10 billion.

Tesla shares closed at $288.50 on Wednesday before its earnings were released, down more than 20 percent from early August. The stock was up 10 percent in aftermarket trading.

Source: https://www.nytimes.com/2018/10/24/business/tesla-third-quarter-earnings.html

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City developers turn lenders chasing profits in construction boom

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New York developer Silverstein Properties Inc. built a $4 billion pipeline of real estate deals just weeks after starting. None of the money was for buildings it will own.

The developer of prominent New York city skyscrapers such as 3 World Trade Center has jumped into property lending as demand for financing grows and yields are more attractive. Silverstein set up its first lending venture earlier this month and already has a slew of potential deals going to projects in New York City. Others, including Oxford Properties Group, also have big plans to finance other builders.

“Supply and demand characteristics in New York and throughout the country are good—we think that there’s years to run in this cycle,” Michael May, president of Silverstein’s new lending venture, said in a telephone interview. “In New York, the dollars are big enough and Silverstein’s footprint here is big enough that I think we could run the entire business just doing New York if we wanted to.”

As big banks have pulled back, a flood of more lightly regulated non-banks has rushed in to fill the void across industries. In real estate, that includes debt funds, mortgage REITs and developers, often backed by private equity or other institutional capital. Property research firm Green Street Advisors LLC estimates that U.S. originations by these lenders surged more than 40 percent in 2017 compared with the year before to almost $60 billion, and should rival that of life insurance companies and commercial mortgage-backed securities this year.

The opportunity is partly due to what Silverstein sees as a “gap in financing” that has its origins in the 2008 financial crisis. Since then, large banking institutions have faced heightened regulation and become more stringent in underwriting projects. That has taken a toll on their ability to lend to the construction industry, where there tend to be more risks and higher costs.

“You end up with accounting treatment reserves and with regulatory capital treatment on a lot of these asset classes, which has become extremely challenging for banks,” said May, who had previously worked at Credit Suisse Group AG and Cantor Commercial Real Estate Lending LP, overseeing the origination and distribution of real estate products. “We can be more nimble, move more quickly and we’re not impeded by an overlay of rules and regulations that challenge our assessment of risk.”

Silverstein hasn’t closed on any lending deals yet. The company is also looking at financing projects in other U.S. markets including Los Angeles, Seattle and Boston.

Big money
Blackstone Mortgage Trust Inc., managed by a subsidiary of Blackstone Group LP, the biggest private-equity real estate investor, originated a $1.8 billion construction loan earlier this year for an office tower in Manhattan’s Hudson Yards.

Silverstein’s lending platform is backed by a sovereign wealth fund and a pension fund with “deep pockets” and has no maximum loan amount.

Then there’s Oxford, the property unit of Canadian pension fund OMERS, which has invested more than $3 billion in loans and plans to more than double that amount in three years.

Ares Faces Onslaught of Rivals After Pioneering Direct Lending

A key opportunity for Silverstein is lending to projects that are too pricey from an equity perspective. The returns they get are still attractive, but less risky, May said.

“There’s a lot of demand for capital and there’s a lot of good quality assets being built, but maybe at pricing that we think is higher than we would want to operate,” May said. “Those projects need capital, in a spot where we’re very comfortable lending.”

Foreign investors have also been betting on higher-risk loans to developers as increases in Libor, a major benchmark for global interest rates, make yields on U.S. developments more attractive, and help add liquidity to the debt market — more than “at any point in this cycle,” said Aaron Appel, Jones Lang LaSalle Inc.’s vice chairman and head of New York City capital markets debt & equity.

“Despite the political environment, the U.S. is still the most stable place to invest globally of any country.” He added that national property rights laws and federal efforts to elongate current economic growth have also favored foreign investment.

“If there’s a decline in asset values, the lender is more protected than the equity investor,” Dave Bragg, managing director at Green Street, said by phone. “The incentive for many players is the perception that returns on debt are higher than what one could underwrite on the acquisitions of real estate today.”

Construction boom
The growing number of lenders has resulted in a market where capacity outweighs demand, especially for assets that already are generating income, Bragg said. Yields for riskier construction loans are higher and there are fewer lenders competing to provide them. Banks are still the primary source of that financing but are limited by regulation because of the longer time line and and larger amounts of capital required.

“Construction is one of the few spots where you can get to double-digit yields in this market as a lender,” Silverstein’s May said, adding that the company has a competitive advantage because of its experience as a developer and better understanding of the underwriting risk. Oxford’s head of New York and global credit Kevin Egan also sees a gap in construction loans and high-yield loans and plans to make more.

Lenders in real estate have for the most part been prudent, but as more lenders rush in to capitalize on this opportunity, there are concerns that could lead to a decline in lending standards and a construction glut. The non-bank lenders are more lightly regulated, which means there is less transparency, said Peter Muoio, chief economist at Ten-X Research.

“Most real estate cycles ultimately reach a period of excessive construction,” Bragg said. “If that happens in the cycle, the debt funds and mortgage REITs would be contributing to that and would ultimately lead to weaker fundamentals and perhaps lower asset values several years down the road.”

Source: https://www.crainsnewyork.com/real-estate/city-developers-turn-lenders-chasing-profits-construction-boom

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