01/17/22 03:52 PM EST

MONDAY NIGHT HOLIDAY REIT READ | 1.17.22 (RADI, PLD)

Takeaway: Adding RADI as new Best Idea Long; taking some risk off in Quad 4

CHART OF THE WEEKEND: YTD REIT Subsector Performance

Source: FactSet, Hedgeye

Ticker: RADI

Subsector: Towers / Infrastructure

Headline: Adding RADI as new Best Idea Long

We will be discussing this ~$1.4 billion equity market cap Tower company (not a REIT) as a new Best Idea Long in our Black Book presentation on 1/28, where we see ~3x potential upside from current levels as it stands now, with the admission that we are continuing to refine our work. Tower REITs are down -13.1% YTD on average (-630bps vs. XLRE) with RADI down -10.2% YTD.
We originally came across this name when we started digging into the Data Center REITs, and a client mentioned it to us as a misunderstood company with exceptional economics and a very attractive RoC profile on several key financial metrics. Candidly, it has been awhile since we've come across a REIT or REIT-related business with contractual rental streams that is this interesting on the long side over a TAIL duration.
Essentially the way to think about RADI is as the "lessor" to the tower companies and other communication infrastructure /antenna owners. This is akin in many ways to (1) owning the ground under an office building in Manhattan, for example, where the land owner collects rent payments subject to contractual escalators over a long lease duration (50+ years), or (2) to being the provider of sale-leaseback financing to a single-tenant retail structure. Cell Tower REIT American Tower (AMT) is RADI's largest in-place tenant.
RADI aggregates rental streams underlying wireless sites by acquiring real property interests in the land or rooftop area under the tower or antenna, or contractual rights such as an assignment of rent. RADI underwrites the asset and pays a lump sum upfront or in installments (really seller financing) for the right to receive a stream of future rental payments generated pursuant to an existing ground lease or rooftop lease.
~85% of RADI's assets are triple-net arrangements, meaning the tenants or underlying property owners are responsible for all taxes, utilities, insurance and cap obligations, i.e. rental income is representative of NOI. RADI's assets have bond-like duration with CPI protection built in, which is attractive from a macro perspective in Quad 4.
What is most interesting to us is the opportunity to dramatically increase AFFO / cash flow per share, with a largely fixed corporate overhead layer in-place to drive flow-through of NOI from future rental stream acquisitions straight to the bottom line. Essentially right now RADI is materially "under-earning." Deals appear to be acquired in the ~6.5% yield range versus the Towers trading sub-4% and Safehold, Inc. (SAFE) trading at a sub-2% yield. We are thinking carefully how to value the terminal and think about the exit assumptions.
More to come on 1/28...

Ticker: PLD

Subsector: Industrial / Logistics

Headline: Adding to Best Idea Long list

Ahead of PLD's 4Q21 earnings to be released before the market open on Wednesday, 1/19, we are adding the company to the Best Idea Long list, in addition to re-ordering our longs and taking some risk off the table. Put simply, (1) PLD is a much larger portion of the XLRE versus prior periods, (2) backtests well both in Quad 4 and especially in a shallow Quad 4 (see Figure 1 below), and (3) should deliver upside both on the 4Q21 print as well as the FY22 outlook.
We are modeling 4Q21 Core FFO including promotes at $1.11/share on the quarter vs. $1.10/share FactSet and guidance at $1.08-$1.10, and think our number could be conservative.
Historically PLD tends to set a relatively low bar initially and then walk up its guidance as the year progresses. Sitting here today we think the company could potentially guide to the $4.70/share range or slightly above for the year on Core FFO (vs. FactSet of $4.66), but end the year above $4.80/share potentially inclusive of promote income.

Figure 1: PLD Quad Backtest