05/15/23 01:59 PM EDT

REITS PRO DAILY BRIEF | JUST HOW BAD IS THE CF SITUATION? | 5.15.23 (MPW)

Rob Simone, CFA

Takeaway: Circulating the cash flow forecasts we sent inst'l subs last week; HINT: It's bad; Also updated the subsector name...

And yes, we are assuming the MPW guys in the PRO subscription see this as well. We WANT you to see it. Because again, this is based on YOUR numbers. MATH > narratives. TICK TOCK....

Hedgeye Cartoon of the Day: Dumpster Fire

Investing Ideas: Most Recent Trend Ranges (as of 5.15.23):

Shorts:

ABR - $10.55 - $12.95

MPW - $6.81 - $8.85 <-- low-end of RR dropped as expected

CPT - removed today, 5.15

Quote of #Quad 4: "The fundamental problem here is that you have entire business models and capital structures that have been built up over the past decade that were just based off of zero percent or very low levels of interest rates and now with rates and spreads where they are, and continue to go, the math just doesn’t work.” - Andrew Freedman on “The Call,” 9.27.2022

What We Recommend REIT PRO Subs Do Right Now:

Long Side: SBAC, CTRE, DOC, ADC/NNN/O, STAG, OFC, IRM, NSA & EQC. We continue to like OFC on the long side as a relative trade - there will be no credit issues with >50% direct/indirect U.S. gov't exposure, and SSNOI is accelerating toward the mid-single-digit range vs. low-single-digits. CTRE is a great Quad 4 stock with solid underlying tenant credit (Ensign ~35-40% of rent, ~3.4x EBITDAR coverage). DOC is a "cleaner," lower-levered version of HR that focuses on the ultra-safe MOB space. ADC/NNN/O are quintessential Quad 4 stocks and stand out among the triple-net REITs with a cost of capital advantage and well-laddered debt maturities and so can grow. STAG is in the process of up-shifting to structurally higher growth rates, forward numbers are too low and a very reasonable relative valuation limits downside. IRM continues to see pricing/CuFt of volume accelerate, its balance sheet is in much better shape, and its dividend is better-covered vs. a year ago. SBAC is our favorite TAIL long idea over a <3 year duration. Note: EQIX, IRM & STAG are the strongest SIGNAL STRENGTH longs right now, but NONE of the REITs are in KM's top-25.

Short Side:

MPW: We still think shares are worth no more than ~$3/share AT BEST and assuming no further tenant issues, and there is a non-zero and rising probability that MPW's equity is worthless. Its MATH, not speculation - with assets generating ~5.5-6% unlevered cash-on-cash yields for the foreseeable future, leverage on cash EBITDA above ~9x, and a marginal cost of debt pushing 12%+ or higher, the model does not work. It's just a question of time.
INVH / AMH: The RoC is decelerating, we think a material amount of capex is deferred, and the tail risk of litigation is increasing. We think the property covenants in INVH's securitizations are potentially very problematic. Note - INVH was removed from II last week.
SLG: Horrible capital allocation, leverage that is suicidal, management credibility issues and an impaired underlying asset class. With the stock trading at a sub-6% implied cap rate inclusive of G&A and capex, also not at all "cheap" given a high marginal cost of capital. Each +50bp increase in the cap rate sends the stock ~25% lower given the REIT's leverage, so we think the risk/reward is still skewed to the downside. SLG cut its dividend about ~2 years too late, and we expect a continued negative re-rating of the stock. SLG sits near the top of our short priority list, as there could be existential risk here.
COLD: Earnings quality is poor and we think the company is "juicing" AFFO earnings by keeping maintenance capex artificially low. Leverage remains elevated and COLD still has development spend to fund.
UHAL: Sticking with this one a little longer to see if it breaks TREND, as fiscal 3Q23 results were really bad and the Quad 4 deceleration is happening faster than we anticipated. We see downside to ~$50/share from here.
ABR: A really incredible case, ABR originated essentially its entire balance sheet of short-term 2-3 year duration multifamily bridge loans over the past 2 years at 75%+ LTVs, peak values and trough interest rates. That bill is coming due as they need to be refinanced to permanent debt, and it looks UGLY to us. We see ~35% potential downside from current levels over the next several quarters. Lower rates might be the only thing that saves the model, and the company needs those lower rates NOW. This might be another potential "goose egg." MAYBE, but not clear yet.
Select Apartments - Still bearish on this corner of the Apartment/Residential sector, particularly the Sunbelt including Active Shorts CPT & IRT. We continue to think top-line expectations remain too high, with investors serially underestimating the potential drag from lower occupancy / higher-bad debt and related higher turnover costs. The RoC on all the key metrics remains negative for these names through at least 3Q23. We are now advocating shorting higher up in the "stack" (ABR), as well as the equity slices (CPT & IRT).