Then the rent-controlled multifamily units, you've got the controlled rent coming in, and that's capped at about 3% annual increases. The upkeep and the loan servicing for these are much higher. Whereas the equation was perfectly viable in a low-inflation and low-interest rate era when both of those change but the rent that you can have coming in does not change by regulation. The math equation is working against you, and it's been working against this bank of late.

Deidre Woollard: Absolutely. It was interesting looking at those loans because about 44% of them are multifamily in total, only about 12% commercial real estate, so that's good. They tried to fix their problems on their own over the past month. It's been in and out of the news. They put in the former CEO of Flagstar, which was bought by New York Community Bank, and he was there for about a month. Now, you've got this whole new cadre of people. There's going to be four new members of the bank's board of directors including Steven Mnuchin, Joseph Otting, who worked with Mnuchin, previously Comptroller of The Currency, former CEO of OneWest Bank. He's going to be the new CEO. You've got this massive turn. You've got these people coming in. Mnuchin, he was on CNBC, and in the press release he said, the company can be $100 billion National Bank. That seems really ambitious to me, given the fact that they've just had this month of incredible turmoil, they lost 7% of their deposits. What do you think he's seeing here?

Bill Barker: Well, I don't know exactly what the 100 billion refers to, whether that's talking about loans outstanding. Sure, it can get there just by continuing to loan a bit more money but in terms of equity value, I'm sure that isn't the equation that we're talking about because it's a long way from there. Mnuchin's got a track record of working with banks in receivership and helping to turn them around investing intelligently in distressed banks. I think that his name, which is already known to many people much more so than the names that also are coming in but have experience as well. I think that he's the featured name. He brings a lot of I think calm to the equation.

Not only Mnuchin and his team of equity investors, but other private equity entities that are making similar investments have been able to look at the books and evaluate whether this is going to survive as a going concern and they like what they see, the price that has become available, which is very cheap compared to what it used to be. As long as you can establish credibility that this is going to be a going concern and you don't have a run of depositors fleeing the bank, then it's probably going to work out. It's the perception of stability which is maybe the most important thing and Mnuchin provides a lot of that.

Deidre Woollard: He does and he talked a little bit about that this situation is different than the situation we found ourselves in last year. This is a regional bank with a lot of branches, but there is that concern about the regionals now, we're looping back on last year. Doesn't seem like this is something where you have an issue of contagion or people feeling upset and maybe a bank run on regionals, but it's not out of the question. Does that make you nervous at all?

Bill Barker: I have been nervous about what appears to be a potentially huge problem, which is a lot of loans outstanding for commercial real estate to buildings that are not going to be able to fill up the office space that has either already been abandoned or is in the process of being abandoned or if not abandoned, downscaled. The relative lack of situations like this that has happened so far seems like good news, but it doesn't mean that they're not going to happen and of course, there are always a few banks that are going under out of the thousands of banks that we have in this country. Most other countries don't have nearly as many independently operated banks as we do. They are going to be failures. If you can name the failures, that's probably a reasonably good sign because of the thousands that are left.

Deidre Woollard: This bank it's not in the too big to fail category, but it certainly is in the bigger than a lot of the other small failures that probably don't make headlines.

Bill Barker: It's of concern, the fact that they were able to raise a billion dollars relatively quickly from some high profile and individuals with track records in this area is a comfort for this one bank at this particular price to say that the equity may be worth two or three times what the private equity has gotten in on might be the case. I'm just picking those numbers out. But it doesn't mean that we're not going to see commercial real estate at the very least and also rent-controlled multifamily crop up in some other place. I think that you should expect some more reserves and some more write-downs of goodwill on regional bank balance sheets over the coming year.

Deidre Woollard: I'm going to take us in a totally different direction now because I want to talk a little bit about retail. I studied the earnings results. It's such a weird mixed bag for retail. We had Target reporting earlier this week. Dylan and Asit talked a bit about that yesterday. We had Nordstrom, results weren't great there. But one thing that surprised me is some of these mall staples is almost we forget that they're still there. Companies are doing well. Abercrombie & Fitch is doing incredibly well. They reported a really strong fourth quarter and year, comparable sales up 16%. The strength of the Abercrombie brand versus the Hollister brand, very strong. This stock has done incredibly. One of the things that I think surprises people is, oh my goodness, that is, it has outperformed in Nvidia in terms of stock run-up. What is happening here? If you're an investor, what might you be thinking?

Bill Barker: If you're an investor, I think you're thanking your lucky stars that, because take a look at the chart on this, it's just straight up, nearly vertical over the last 9-12 months. You look at the previous 25 years and it was going nowhere. It just would have a decent run with a hit the fashion sense with the right things at the right time for a little bit and then like everybody else, and it misses and it just goes back-and-forth up and down over the decades of just not treading water, it's like a heartbeat where if you're watching your favorite medical show on TV and you see the heart monitor and it goes beep, beep with regularity, nothing starts going too high up or down while things are stable. This has just taken off and I think there is relatively little expectation that it can maintain anything approaching the stock returns that it's achieved in the last 12 months because I don't know it's about 10% bigger in terms of sales than it was pre-pandemic.

Deidre Woollard: It's interesting and also you think about Abercrombie and you think about the old days, the Abercrombie where you could smell the male [laughs] cologne drip wafting out of the store. It's very different now, and WSJ had an interesting article about this, about company reaping the rewards of taking adult women seriously. It started me thinking about if maybe these brands that people loved as teenagers, they're coming back for the grownups, it's an odd time for these to have a resurgence.

Bill Barker: They've achieved some inroads online, but so is everybody else and I think of course they were priced very low after a number of misses going into a year ago. So it had very, very easy act to follow in terms of increasing sales and in terms of actually converting sales into real profits. So it has achieved both of those things of late, but to anticipate that a 300% stock move is going to be repeated. Even over the next decade, I would say, is to expect that this company does something that it hasn't done in the past and that its brethren have also not been able to do. It's not a compounding story in fashion retail for the most part, it's hits and misses, ups and downs, a little bit of dividend, but not a thing which you can bank on 20% type growth compounding year over year.

Deidre Woollard: Yeah, you'd have to sell a lot of comfortable jeans. We also had American Eagle reporting today. Good for them to record fourth-quarter revenue up 12%. A thing I've found interesting was that post pandemic, they made this investment in logistics and now they're writing it down for about 94 billion. This is almost seems to me like what happened with Shopify, where you had the company go in on logistics and then decide, wait this is more challenging than you think. So logistics seems to be a lot harder for anybody without the name Amazon.

Bill Barker: Well, Amazon, XPO has achieved a lot in it's spin off and logistics, GXO. There's a lot to achieve in that space when you get it right, but it takes a lot of technology, expertise, a lot of upfront spending, and then ongoing spending on tech. I understand entities that look at their costs for logistics and think, well, if we can just recapture that and then once we build a system that works for us, start stealing clients and expanding it.

They, they see the pot of gold that might be available if they get it right. But it's not easy and you've got reverse logistics where people are buying their things online, trying them on and saying, nope, don't want it and put it back in the box. What happens to the box after that goes back into some central reservoir of other boxes and then you've got to figure out how to redistribute them or what can be resold. There's much more that goes into all of that than American Eagle anticipated or others that have also tried it.

Deidre Woollard: Yeah. Yeah, definitely. Of course now they're going to focus on the brands which, which makes sense. Thinking about both Abercrombie and American Eagle. One of the things that it's not just capturing the nostalgia from younger people who are now growing up, but I think there's also something happening larger in retail, which is this idea of we went through the pandemic, we went through that Athleisure phase, we saw Lululemon and things like that. Now we seem to be in this other phase, which is, I would call it somewhere between the business suit and the sweatpants where you've got people that were out, we're past the pandemic. We're not just in our houses, but we're not fully into formal wear. It seems like that is an area that these retailers and maybe some others should be focusing on.

Bill Barker: Well, if you were to scour the universe for people whose opinions you should listen to on fashion, I would come in either dead last or pretty close. So let me just turn that back to you. What do you think is going on here that investors could take advantage of or the companies can get right today that they haven't gotten right before today?

Deidre Woollard: Well, I think with Abercrombie, they announced wedding clothes and wedding accessories, and some of that is weddings are such a big business now, bachelorette parties are such a big business, I think that they're doing the right thing in catering to trying to figure out what the new-generation wants and moving with some of those trends. I mean, it's great to see jeans coming back because for a while there it was all leggings all the time.

Bill Barker: There is a cover of The New York Times Magazine this week which has some enormous pair of pants on it that I guess some wide pants are back in style or maybe I misread it. Maybe they've completely died, as I say, I'm the last person to talk to about fashion in what might be happening or what might happen next. Things come and go. I'd be surprised to hear that blue jeans suffered any near death and are now back, I hadn't seen that. [laughs] It's news that I hadn't been following. I think all these entities will be in the right place at the right time for a short period of time and we'll have a hard time staying at the center of what is demanded of fashion for very long.

Deidre Woollard: That is true, it is a tough game to invest in. Thanks for talking to me today, Bill.

Bill Barker: Thank you.

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Deidre Woollard: Today in travel week, we move from air to see, Mary Long caught up with Fool contributor Matt Frankel to check in on cruise-line companies and see which, if any, are sure bets for investors.

Mary Long: I hear that you go on cruises regularly, maybe first, let's start there. Any highlights from a recent trip?

Matt Frankel: We actually just got back a couple of weeks ago. We did a six-night trip that went to Mexico, Grand Cayman, and Jamaica. We took my kids. It was a great time.

Mary Long: So if you're going on multiple cruise, are you loyal to a specific brand? Are you choosing a cruise for the destinations? What's going through your thought process as you're selecting a cruise for vacation?

Matt Frankel: Both. I don't want to say I'm loyal to one brand. We generally cruise on Carnival the most just because I have two little kids and they have a lot of stuff for kids to do on those shifts. They love the kids camps and things like that. I've also done Royal Caribbean. I've done Virgin Voyages, which was a really fun experience. My kids are begging me to do a Disney Cruise, so maybe at some point I'll do one of those.

Mary Long: You mentioned Carnival and Royal Caribbean. There are three big players that are publicly traded companies in this industry. One of which is Carnival, that's the largest cruise company in the world. It's got over 100 ships across its family of brands. Then there's Royal Caribbean, which has a bit of a reputation perhaps as being an industry innovator. Then there's also Norwegian, which we haven't mentioned. Out of the three, this is the smallest and it builds itself as offering "the most nimble and contemporary fleets in the industry". So talk about how you Matt as a person, maybe choose between different cruises. But if we put the investor hat on, how do you differentiate each of these three companies from each other?

Matt Frankel: When you look at them just from a fundamental standpoint, they're not that different. They're in the same ballpark when it comes to how much debt they have relative to their capitalization. They're all in the same ballpark when it comes to things like gross margin, revenue growth over the past year, they're all within 10 percentage points of each other. The trends we saw during COVID just showed how similar all of these businesses are. The products are very different, just having been on Carnival and Royal Caribbean, I can tell you the product is very different. But as far as just from a fundamental standpoint, there's not that much difference between them.

Mary Long: So it's unsurprising, but interesting to me that there's not much difference in the fundamentals of these companies. If you look at the stock charts for the three of these since 2019, there's not too much to brag about. It's not really a pretty picture here, but Royal Caribbean has handily outperformed Norwegian and Carnival. Royal Caribbean being up 3%, while its competitors are down 72% and 66% respectively. Again, there's not a lot to brag about here, but that gap between Royal Caribbean and Carnival and Norwegian is striking to me. Is there something happening at Royal Caribbean that's maybe worth paying attention to?

Matt Frankel: That's a whole topic for a whole another podcast. But let's just break down the key points here. Number 1, Royal Caribbean's debt situation is the best of the three. Just put in perspective how much debt these companies have. Royal Caribbean is a $31 billion market cap company with $21.5 billion worth of long-term debt. That's the best of the three by a significant margin when it comes to the debt ratio. All of these companies were losing money hand over fist during COVID, Royal Caribbean, again, the best of the three, 10 consecutive quarters of operating losses during COVID. So all of these companies, when you say Carnival and Norwegian are down, a lot of the reason is they had to dilute shareholders by raising some capital and things like that.

There wasn't all debt that they raised, so some of it was equity capital. But Royal Caribbean in particular, they do some things just better. I'll just give one example from their marketing standpoint. If you go on any of the other cruise lines like Carnival or Norwegian, and take a short cruise, which a lot of people who aren't sure if they're going to like it will do a three or four night cruise. If you go on Carnival, you're going to be on one of the older ships. That's what they use for their weekend cruises, things like that, Royal Caribbean has built some of their biggest newest ships and exclusively uses them for three and four night sailings. There's no way to experience everything on one of those ships in even a week, let alone a three or four nights sailing.

The idea is, wow, this is spectacular. Now I've tried it for three nights, I love cruising, I'm going to book a longer cruise, or I didn't get to try everything I wanted to on the ship and three nights, but it's easy for me to get away for a long weekend, so I'm going to book another one in a few months on the same ship and try everything else. It's just the genius marketing moves like that, they're better at monetizing their assets. If, let's say you book a room that doesn't have a window, you've an inside room to save money and you want an upgrade. Carnival's upgrade plot process is clunky at best. They'll randomly target you and say, do you want a balcony room? Pay this much.

But it's very random and very disjointed. Royal Caribbean has a much better system of that. They actively try to upsell you to different rooms. If you book a year in advance, you'll get emails inviting you to upgrade your room. They have their own private island that's the best in the business by far. They monetize the heck out of it. They have overwater cabanas there that looks like something out at Tahiti that they sell for $3,500 for the day and they sell out every cruise. So they're better at monetizing, only 70% of Royal Caribbean's revenue comes from their cruise fare, which is a cool stat. So they have 30% of their revenue, which is a big number from just spending while you're already on the ship.

Mary Long: You talked about the debt situation on each of these companies. COVID obviously completely changed and really hurt this industry. But was this massive amount of debt at each of these companies are holding now, was that also a reality before COVID, has this always been an industrywide issue or just something that you've got to factor in, or is this primarily a post-COVID problem?

Matt Frankel: Yeah, these are definitely capital-intensive businesses. We were talking before recording how the average cruise ship burns 80,000 gallons of fuel today, you have to pay for that before you sail. The cost of the cruise ship themselves, Royal Caribbean's brand new ship, the Icon Of the Seas, the biggest ship in the world, cost two billion dollars to build. They just ordered another identical ship for delivery next year. These are very expensive. At the end of the day, they're vehicles, they're not hotels, they're vehicles, they're very expensive ones. The debt situation has been a thing for a long time. Carnival's debt situation got the worst of the three during COVID. They added about $6.5 billion of new debt. But in 2019 they already had $22 billion in long-term debt. So it's not a new thing. Royal Caribbean's debt despite the misconception about debt pouring on during COVID, went up by less than 10% during COVID, went from $18 billion to 19.7 billion during the pandemic. That's 2019 to 2023. This is a reality of the business. When they were in better financial shape before the pandemic, they had access to better financing terms generally, and the interest rate environment was lower. In simple terms, $20 billion at 5% interest and $20 billion in debt at 10% interest are two totally different things on your balance sheet. So that plays into it as well. But yeah, the debt in this business is a thing and Carnival just refinanced to some more affordable debt. So that's really the name of the game is to make your debt as affordable as possible because if you can borrow money and generate returns on that borrowed money that are in excess of your interest rates, it's a good financial move. Yes, you can run a cruise line with no debt, but it would be like buying a house with no mortgage, you're robbing yourself for that opportunity cost.

Mary Long: Are you seeing any notable differences or particularly impressive strategies in how one particular company is paying off that debt post-COVID?

Matt Frankel: I'd say Carnival. They are being the most aggressive at getting their debt under control, and to be fair, they need to. In the first half of 2023, they got rid of $1.4 billion worth of debt. In the middle of 2023, they announced a bunch of refinancing transactions. They were paying up to 10.5% interest on a lot of their debt. Obviously, that's not ideal. That's a tough hurdle to overcome when it comes to returns on capital. They saved $120 million by refinancing just a little over a billion dollars of debt. They're not just trying to retire debt because obviously they need to invest money in the business. If they make two billion dollars of profit this year, they can't just put that toward debt reduction. They need to use some of it to keep their fleet modern, order new ships, keep their business competitive. So the strategy seems to be reduce the cost of your debt as opposed to just totally get rid of it.

Mary Long: You made the point earlier that cruise ships are vehicles, not hotels. I want to hone in on that because if I look at Carnival's balance sheet, total assets at the end of 2023, $49 billion. Of that, 40 billion, are property and equipment. A huge chunk of their assets are what I'm assuming they're cruise ships. I don't know anyone who owns a cruise ship, but from a personal finance perspective, I know that as a general rule, vehicles depreciate in value. Is there an asterisk next to this massive amount of assets that these cruise lines are carrying? How should we think about this as investors? Are these really as meaningful as real estate assets might be, or is there something else there?

Matt Frankel: Yes. They do depreciate over time. Cruise lines absolutely get a tax benefit from that depreciation. Generally speaking, just boats in general, if you go to buy a boat, it has a longer life span than a car. It's not unusual to buy a 20-year-old boat that's in perfectly good condition, for example. With cruise ships, the rule of thumb is they usually are given an useful life span of about 30 years, at which point they are estimated to be worth about 15% of their original value. The cruise-line writes off a proportional amount of that as depreciation every year. They're getting a nice benefit. It's just like how a Real Estate Investment Trust gets a lot of tax benefit from depreciation, so do cruise lines. So they do depreciate but it's not as fast as you might think and they can sell their cruise ship to like a lower-end cruise line or something like that or sell it for parts or things like that at the end and it's a tax benefit along the way.

Mary Long: We're recording this a couple of days after Norwegian reported its 2023 results, the company was profitable for the first time since 2019. Investors seemingly saw smooth sailing ahead. Shares for Norwegian were up as they were for Carnival and for Royal Caribbean as well. What say you, you're a cruiser yourself, but as an investor, are you riding the wave of Norwegian and these other cruise companies or are you just going to sit tight and stay a passenger for now?

Matt Frankel: I'm generally on the sidelines. When it comes to cruise lines, airlines, any of these, my general rule is that a great product is not always a great business, and that's especially the case here. The businesses are doing fantastic right now. Norwegian is getting three new ships this year. That's the most ever in a single year. Royal Caribbean just reported that they had their five-best booking weeks ever in their history during the fourth quarter of 2023. All five are the best weeks ever. If you believe that this demand is going to stay forever, these are great investments.

That's a big if, this is a very cyclical business and what's really impressing people is they're doing this at a time when it's a lot of uncertainty in the economy. So if you think that the demand is going to stay, these are great businesses, their valuations are not that high. Just to name a couple, Royal Caribbean trades for about 13 times forward earnings, which is not an expensive stock. But you're assuming that this record high level of demand is going to stay forever. So that's my caution right here.

Deidre Woollard: As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow. Thanks again.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bill Barker has positions in Norwegian Cruise Line, Royal Caribbean Cruises, and XPO. Deidre Woollard has positions in Amazon.com and Nvidia. Mary Long has positions in Shopify. Matt Frankel has positions in Amazon and Shopify. Ricky Mulvey has positions in Lululemon Athletica and Shopify. The Motley Fool has positions in and recommends Amazon, Lululemon Athletica, Nvidia, Shopify, and Target. The Motley Fool recommends American Eagle Outfitters, Carnival Corp., and XPO. The Motley Fool has a disclosure policy.

Breaking Down the New York Community Bancorp Situation was originally published by The Motley Fool