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Editor's Note: Since this newsletter was published on February 18th, we have made the following changes...
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Short: INVH, HZO, MPW, PEB, TSLA, RVLV, WSM, TRIP, EPR, ONEW, CPT Long: EDU |
Below are updates on our twelve current high-conviction long and short ideas. We removed Knight-Swift Transportation (KNX), Pool Corporation (POOL) and Avis Budget Group (CAR) from the Investing Ideas Short List. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
INVH
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Short Thesis Overview:
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Invitation Homes (INVH) FY23 guide below Street and we think perhaps still aggressive; hard to gauge share price reaction here
FY23 Core FFO seen at $1.73 to $1.81/share, with Hedgeye capturing the low-end at $1.73/share coming into the quarter and the midpoint at $1.77/share coming in below FactSet at $1.79/share. We would guess that FY23 SSNOI growth seen at +4% to +5.5% is likely below the Street on higher SSExp growth up +7.5% to +9.5%, but above us at +2.5% SSNOI growth coming in.
As a reference point we were at +7.1% SSExp for FY23 coming into the print, and we think we were among the more aggressive out there on SSExp assumptions. We see downside to the top-line numbers on higher bad debt expense y/y and perhaps ~100bps y/y of occupancy loss, which would obviously drive higher turnover costs and additional maintenance capex. In general we think maintenance capex is understated.
Normally our bias would be to the downside on share price reaction to this print, but it'ss hard to handicap right now given the market reaction to earnings thus far. We can say for sure that we think numbers need to come down, and that the RoC profile remains negative and unattractive for SFR. Where the SFR stocks are priced relative to MF does not reflect that, in our view, nor what should be inferior cash economics given the model.
HZO | ONEW
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HZO Short Thesis Overview: This is definitely a play on ‘shorting the rich’. MarineMax (HZO) is a retailer of new and used boats as well as aftermarket parts, maintenance, storage, financing and some other small business pieces. Consensus straightlined peak 32% margin into perpetuity and is modeling that $7 in EPS power holds steady over a TAIL duration. This company has reversion risk all through the P&L from peak revenue growth to peak margins to peak earnings power. A consumer facing high macro level spending headwinds along with a normalization of the inventory position and a mix reset back to normal selling will likely see gross and operating margins fall back to historical levels and presents ~40% downside in the stock – entirely from a massive negative earnings revision. ONEW Short Thesis: We added OneWater Marine (ONEW) to the short side of Investing Ideas this week. We'll have more details in the coming weeks but the core thesis is this: This story is similar to our MarineMax (HZO) Best Idea Short – but potentially better. Much like HZO, ONEW is a roll-up of boat retailers in the US. The company went from 37 dealerships in 2017 to 96 today – almost entirely through acquisitions. During that time of free money, the company levered up to over 3x EBITDA while it also benefitted from the boom in outdoor sports, including boating. We value this stock over a tail duration at $10-$15 – or 60% below where the stock is trading today |
Next week OneWater Marine (ONEW) has its annual meeting, and although we won’t get any new guidance maybe we’ll get some general update on the quarter so far. There may be some insight in to demand trends and supply for the industry as a whole which could provide further clarity on MarineMax (HZO) as well. Both are Best Idea Shorts, with the increase in demand during the pandemic and now with the weakening macro environment we expect demand to low drastically.
We’ve already seen some indications of that with the lower YY boat registrations. Some cracks are starting to emerge in the boating cycle, it happens slowly and then all at once. These companies are overearning/overvalued and we’d stay short here.
MPW
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Short Thesis Overview: Medical Properties Trust (MPW) is not a traditional triple-net REIT, rather an investor in hospital systems ("WholeCos" using the company's own words). In the process MPW removes the arbitrage from a traditional PorpCo-OpCo arbitrage. These investments are structured as loans + equity investments to the operator tenants, which are in many cases distressed and owe significant rent payments back to MPW as landlord. The arrangement is circular and depends on MPW's ability to raise attractively-priced external capital. Assuming all goes perfectly for MPW and there are no tenant issues, and with an updated distressed cost of capital, we estimate the stock is worth no more than $5-$6/share today. |
Medical Properties Trust (MPW) ...
- Paid a price AGAIN in the form of a ~15% rent cut on its best assets to secure a liquidity injection into it's largest tenant Steward
- MPW remains over-exposed to a clearly distressed/insolvent Steward at ~20% of cash EBITDA
- All of the contemplated transactions, if and when closed and taken together, are significantly dilutive and do not de-lever MPW in any meaningful way
- MPW's return profile does not improve at all and actually gets a little worse on the margin, as it continues to earn 5.5-6% unlevered cash-on-cash yields for the foreseeable future
- Again, the dividend appears to us to be unsustainable and very much at-risk, and finally
- The swapping out of CommonSpirit for Steward at ~7% of MPW's pro forma cash EBITDA is credit positive on the margin.
We believe the rent reduction is the "price of admission" for MPW's management team to secure a clearly much-needed liquidity injection into Steward. We would not want to pay that price if we were a shareholder. Also an interesting thought experiment - if the best Steward assets required this degree of rent reduction, what does that mean for the balance of the rent MPW derives from a RemainCo portfolio of much lower quality?
PEB
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Short Thesis Overview: Pebblebrook Hotel Trust (PEB) has a highly leveraged balance sheet, challenging exposures (heavy urban mix), extremely difficult resort property comps, and rather full valuation as compared to peer set + history. We see regression towards the mean in the cards on valuation + estimate reductions, which makes for a challenging combination over the NTM. |
Fresh weekly data this week was soft again this week, and judging by the corporate bookings data, we’re not expecting much change. MAR and HLT put their dose of optimism on the backdrop for business travel and MAR’s commentary definitely had more of a group tilt, but overall the forward looking data isn’t supportive of a change in trend. Among other datasets, we remain focused on the trend of corporate airline ticket sales, and the trend continues to be soft in the YTD. As of the latest data, the trend in bookings are tracking down around ~30% vs ’19 levels on a 4-wk moving average and rolling over.
This forward-looking data should continue to impact closer-in business transient business. We remain confident that the corporate demand vector will disappoint in the coming months and as such are staying bearish on a variety of hotel stocks and see more downside, especially for the hotel REITs like Pebblebrook Hotel Trust (PEB). HST soft guidance and margin warning signs pose significant risk to industrywide earnings.
TSLA
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Short Thesis Overview: Tesla's (TSLA) numbers are messy with far too much inventory, improbable OpEx containment, and flat to lower margins. But Musk’s salesmanship has become increasingly goofy. Tesla is just a ‘pandemic liquidity’ driven bubble stock that is likely already in the midst of a downward revaluation. |
Tesla (TSLA) Brand Decay, Weak Governance, EV ‘Pure Play’ Unwind
EV Survey Results for TSLA Have Deteriorated, First Observation of Awareness
Our EV survey showed a notable deterioration in the perception of TSLA. The survey continues to show consumer interest in electric vehicle adoption and showed no variation in the attractiveness of EV tax credits. Tesla’s EV superiority has largely dissipated. The survey runs through the end of last week, so these respondents may have seen the rally back in Tesla’s share price. Greater EV competition and an aging product line-up are likely contributors, in addition to Musk’s politicization.
The One Chart a TSLA Investor Needs: TSLA was a destination for liquidity – day traders, ESG funds w inflows, savings rate reversing; TSLA has lagged the impact of liquidity withdrawal.
RVLV
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Short Thesis Overview: Revolve Group (RVLV) has a problem with rising returns and rapidly building inventories. The company notes it has high quality inventory, and that it will retain its value, but because of softening demand, and the desire to reduce that inventory, there will be some measured promotions. Maybe this is possible in a normal environment, but EVERY APPAREL COMPANY HAS TOO MUCH INVENTORY. Good luck moving inventory in a measured fashion when every company is trying to clear product at the same time. |
Retail sales this week had a headline beat, but it was mainly from non-discretionary goods. Overall discretionary retailers slowed, while some subcategories accelerated on 1-year basis but still slowed on a 2-year basis. As the savings rate continues to go down, the apparel retail space is under threat. Despite somewhat positive January numbers, things aren’t going to stay that way, and there is so reason what Revolve Group (RVLV) won’t be one of the companies that suffers. Sales this coming quarter could beat, but with that should come a margin miss and a guide down. Trading at 29x earnings right now and on too high earnings numbers, this stock has a good 40-50% downside from here.
WSM
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Short Thesis Overview: We’re of the view with all Home-related names that the fastest collapse in housing demand in history will mean an intense and compressed decline in comps and margins, as opposed to a 2-3 year slow-bleed downward comp cycle that we saw in the GFC. Restoration Hardware (RH) is telling you the former is happening, but no one else is, which is why we’re short Williams-Sonoma (WSM). So much room for earnings to decline – at peak margins. |
Williams-Sonoma (WSM) is running a similar level of promotions this year for President’s Day as it did last year, but something notable is that last year Williams Sonoma has 30% of a Nespresso machine (originally $219.95 for $149.95) but this year it upped the ante with 20% off a Breville Espresso Machine (originally $749.95 for $599.95).
As enticing as that sale may seem, that is very much a discretionary purchase, and a $150 spur of the moment discretionary purchase is plausible but $600 for an espresso machine is a tough one especially in this macro environment. The entire WSM universe is heavily discretionary spending, home spending will continue to come under pressure the next few quarters.
Retail sales on a 2yr trend are slowing at furniture and home furnishing stores and electronics and appliance stores. We’d continue being short here.
TRIP
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Short Thesis: We’ve viewed the core TripAdvisor (TRIP) business as a melting ice cube and alas, the company’s implied guidance and outlook in Q3 was ugly, anchoring even below our Street low estimate. The conference call was informative but didn’t provide enough insight or detail to assuage our concerns on the broader health of the core business and the trajectory of the total company looking into ’23. There are certainly problems in the core business, growth is lagging, and the guide reflects those issues in addition to other timing factors for its higher growth businesses. TRIP issued revenue guidance that was merely in-line with current Street expectations but given the implied color, we think the total revenue guidance of LSD growth is not even conservative. |
The roller coaster ride that is TripAdvisor (TRIP) continued this week with the stock up strong into the print, and prior to the conference call. But then reality set in. We’d note that only earnings-related surprise to us was that the stock was actually up that much. In fact, with implied lower EBITDA guidance, we thought the stock should’ve traded lower. Reality seemed to set in following the conference call, but we see more downside.
It’s not all negative – TRIP did beat Q4 estimates and Viator is performing extremely well on the top line. Remember though, Q4 Street estimates were significantly higher before management lowered guidance in November and the actual print fell far short of the original estimates. Q1 and ’23 and ’24 EBITDA and FCF estimates are drifting lower following this low-quality print, but from our perspective, there’s much more to go.
Our thesis remains unchanged. The Core business looks like a melting ice cube to us. Revenue growth is lagging others in the travel space and margins are disappointing. Viator is outperforming and its important, but the Core is called the Core for a reason. TRIP remains a Best Idea Short.
EPR
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Short Thesis: EPR Properties (EPR) highlights the current oversight of potential rent cuts at large operators that suggest -30-35% downside risk from current levels. EPR is a unique, ~$2.8Bn equity market cap "experiential" triple-net REIT with exposure to largest tenants include Topgolf, AMC Theaters, Regal Cinemas (whose parent just recently filed for Chapter 11 protection), Cinemark, Vail Resorts, Camelback Mountain and Six Flags. Theaters, eat/play, ski resorts and other out-of-home attractions that is highly levered to the U.S. consumer and levels of/changes in discretionary spending. Investors by this point should be very familiar with Hedgeye's Macro call for a deepening, consumer-led Quad4 recession heading into FY23, and it is difficult to find a REIT more specialized or directly exposed to the downside in such a Macro regime. |
EPR Properties (EPR): 100% levered to consumer discretionary via its tenant exposure (AMC, Regal, Six Flags, etc.), we see downside to the mid-$20/share range AT LEAST as credit continues to worsen in a deepening Quad 4.
CPT
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Short Thesis: For Camden Property Trust (CPT) the RoC of growth is peaking and very likely slowing heading into FY23. We see a combination of RoC slowdown on all the key metrics + numbers that are too high and need to come down. CPT has a relatively strong balance sheet to be clear, but paying a full price at the cycle top for stabilized assets with likely deferred capex is not a wise capital allocation decision in our view. Different subsector, but it reminds us of CUBE's fully stabilized deal in late-2021 which the market hated and does not typically work well heading into a Quad 4 and overall RoC slowdown. The pushback will no doubt be that the recent correction in Apartment REIT equities has more than compensated for this and the stock is "cheap" on a relative basis, but we would not want to own anything on the long side right now that is staring at a downward estimate revision cycle while currently at peak RoC. |
Highlighting one key point from the Camden Property Trust (CPT) 4Q23 call on Friday.
CEO Rick Campo described a holding pattern environment where the bid-ask spread between buyers and sellers of multifamily assets is as wide as he can recall. While sellers point to 10-15% declines in asset valuations, buyers point to a very different macro backdrop versus a year ago and argue that values should be even lower. CPT thinks that sellers will be the first to "blink." We agree.
What this really means, in our view, is that while cap rates may have adjusted higher to account for a higher cost of capital, forward growth expectations now need to be revised lower. This translates into lower MF values from here. Cap rates STILL may have room to adjust to the upside.
As a result CPT adjusted its required unlevered IRR hurdles up by at least ~100bps to the ~7% range. For distressed deals CPT is thinking in terms of "price per pound / unit" to achieve as low a basis as possible.
We were early but remain bearish Sunbelt MF, and continue to like CPT and NXRT as Active Short ideas here into 2Q23. The space remains over-owned and we think several long-only funds might be trapped in what was thought to be a "TINA" trade. There are alternatives...
EDU
New Oriental Education & Tech Group (EDU) remains very tied to its relatively new e-commerce livestreaming venture (Oriental Selection aka East Buy). More chatter of Chinese students returning back to school in classroom setting (some for the first time in >1year) should bring some normalcy for the education space this year.
