Key Points: Ahead of our Industrial REIT Black Book on Monday 7/12 at 12:30pm ET, we are updating our Position Monitor (Figure 2 below) to reflect our initial biases (more to come on Best Ideas later), as well for a few adjustments to the Self-Storage and Residential sectors. Some highlights:
- We are leaving AMH as a Best Idea Long and think the stock continues to work to the upside, despite the recent run from $36/sh where we added. As expected the majority of the pushback we continue to receive on the call is on valuation, specifically sector-high FFO multiples and trading premiums to peer INVH. We offer three challenges to this: (1) valuation is not a catalyst and SSRev/SSNOI growth continue to accelerate, so there is a good chance that even we are too conservative, (2) as we wrote HERE, because AMH has inventoried land on its balance sheet that is non-income producing, the multiples need to be adjusted for like-for-like comparisons to INVH, and (3) as shown in Figure 1 below AMH is actually still priced the "cheapest" in the residential space relative to forward growth. We view a singular focus on valuation as missing the bigger picture in general, but looking up and taking multiples at face value without necessary adjustments could be a fatal error.
- As we discussed yesterday on the Macro Show, growth is accelerating for the Coastal Gateway Apartment REITs, so we continue to think AVB and EQR work on the Long side here. We are also adding UDR to the Long Bias list. The Apartments are more of a cyclical recovery trade ahead of the Labor Day target for full return to office, whereas SFR remains a secular growth story.
- Adding MAA & NSA to Short Bias: While we love MAA's portfolio positioning and quality of management, the ongoing growth deceleration post-COVID is an interesting way to pair/fund Coastal Gateway longs while picking up some positive dividend carry. NSA has the highest leverage in the Self-Storage sector by far at ~7.5-8.0x, which will be a factor exposure headwind whenever the macro shifts to Quad 4. NSA's structuring and operating leverage downside protection support higher leverage for sure, but leverage will matter at some point.
- Overall, we are positioned roughly 2:1 on our longs/shorts.
Figure 1: Resi REIT PEG Ratios
Figure 2: Hedgeye REITs Position Monitor
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
Cell:
