12/05/21 04:00 PM EST

SUNDAY NIGHT REIT READ | 12.5.21 | (PGRE, EGP, PLYM, MAA, CPT, O, EPR)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Making some position monitor adjustments

Tickers: PGRE, EGP, PLYM, EPR, MAA, CPT, O

Subsector: Various

Headline: Making a few passive-bucket position monitor adjustments

PGRE: Moving off the Short Bias list and to the DMZ; functioned as a great funding short (down -8.1%) since 9/30, but the (1) the risk/reward is no longer as attractive, (2) the style factors are shifting, and (3) following CXP it probably has the highest probability of event-driven outcomes which are hard to handicap. We like SLG and VNO on the long side with higher leverage and beta.
EGP / PLYM: Moving off the Long Bias list and to the DMZ; up +11.4% and +19.4%, respectively, since added but no longer as favorable from a style factor perspective. There are few catalysts to identify (outside of COLD) in the Industrial/Logistics subsector right now, so the stocks are essentially macro vehicles.
EPR: Adding the Long Bias list; high beta, high leverage, momentum, and market cap style factors, and screening very favorably from a sentiment perspective.
O: Adding to the Short Bias list; reciprocal of EPR.
MAA & CPT: Adding to the Short Bias list. Love the business models but thinking about (1) the coming and inevitable RoC deceleration in SSNOI and earnings (we favor the Coastals which are several quarters behind in the recovery and MUCH better base effects) and (2) the performance / valuation spread vs. the SFR REITs which play in the same markets. The catalyst will likely be the RoC inflection, so beginning to think about that although it may not be the time to pull the trigger just yet

Ticker: AMH

Subsector: Single-Family Rentals

Headline: AMH remains our favorite long idea over a TAIL duration

Last week we wrote HERE about the rationale behind and key leading indicators for having Best Idea Long AMH as our favorite long idea over a TAIL duration. In short, there is a clear and highly correlated (80%+) relationship between Home Price Appreciation (HPA) and the % change in rental rates on signed versus old leases (otherwise known in the industry as "leasing spreads") on a 4-quarter lag. This is similar to the effect of OER catching up to HPA as it relates to the CPI. HPA leads spreads by 3-4 quarters, which then take another 2-3 quarters to "blend in" to AMH's actual quarterly results as the portfolio of units "churns" due to the ~12 month average lease term. Look at the CHART OF THE DAY below and ask the question, "where are leasing spreads heading from here?" It is very conceivable that the RoC in rental rates realized accelerates for AMH into and through 2H22, there is zero probability the Street is modeling this, and estimates are likely AT LEAST 8-10% too low. On top of that the name is screening very well from a sentiment standpoint as shown by our Sentiment Monitor in Figure 3 below. Buy the dip!

CHART OF THE DAY: HPA Leads Leasing Spreads & Actual Results

Source: Company Reports, Hedgeye Estimates.

Ticker: PSA

Subsector: Self-Storage

Headline: Closes All Storage transaction, which is a great capital allocation decision

Perhaps the most important factor to consider in evaluating the investability of a REIT is capital allocation, as in the end they are just entities that are raising external capital and choosing which markets/asset types to deploy that capital and where to harvest and recycle it.

PSA announced last week that it had closed on its previously-announced $1.5 billion acquisition of All Storage which owns and operates 52 assets in the Dallas-Fort Worth MSA.

The acquisition was 100% funded with unsecured debt which, given the ~2% cost of debt, is an exceptional use of capital for a deal that could ultimately stabilize above a ~5-6% yield. The portfolio is only ~75% stabilized and is immediately accretive to earnings in FY22 as well as forward NAV growth, with only a marginal increase in leverage to ~4.5x net debt + pfd./EBITDA. We continue to like the way that PSA is flexing its low-levered balance sheet to increase scale and execute on accretive external growth.

The math tells us that FY22 is setting up to produce another double-digit SSNOI growth year, although there is a high probability that the RoC inflects downward after 2Q22.

Ticker: SLG

Subsector: CBD Office

Headline: Investor conference Monday, 12/6

SLG will be holding its annual investor conference on Monday, which is an important catalyst as it usually lays out the plan and financial targets for the coming year. We are bullish selected CBD office names from a macro perspective in #Quad 1, hence the place on the Long Bias list. However as it relates to this catalyst, historically it has worked well to fade the event and following 5-7 day period before taking any long position. We see upside to current FY22 consensus Core FFO of $6.75/share, and would note that SLG just hiked its dividend by +2.5% this past week for the first time since before the pandemic. Our bias is to the upside, but be patient and let the investor conference play out first. We will be live-tweeting from the event and writing afterwards, so stay tuned.

Figure 2: Updated Hedgeye REITs Position Monitor