01/30/22 04:00 PM EST

SUNDAY NIGHT REIT READ | 1.30.22 (AVB, EQR, WE)

Takeaway: Some thoughts on SoftBank COO Marcelo Claure's departure

CARTOON OF THE DAY: Forecast Uncertain

Tickers: AVB, EQR

Subsector: Apartments

Headline: We are buyers ahead of 4Q21 results this week

The math tells us that FY22 Street estimates remain too low for the Coastal Gateway Apartment names on the order of ~5% +/-, and expect 4Q21 beats and forward estimate raises for both Best Idea Longs AVB and EQR.
It is possible that the RoCs on all the key metrics (SSRev, SSNOI, Core FFO, etc.) continue to accelerate late into FY22, contrasting with self-storage which appears poised for the second derivative to turn between 2Q/3Q.
EQR reports results after the close on 1/1:

We are looking for FY22 Core FFO in the range of ~$3.50/share vs. consensus at $3.36/share, or +4.4%.
This comes on assumed SSNOI growth of +12%, inclusive of real estate tax expense up +4.5% and on-site payroll up +5% to account for higher property values and wage inflation at the property level. These opex items could be a potential source of upside to numbers, as we would expect management teams to potentially set a conservative bar initially and setup "cushion" to outperform for the year.

AVB reports the following day on 1/2 after the close:

Remains our favorite long among the Apartment names.
Similar to the above, we see +5.5% upside to FY22 consensus and are modeling Core FFO in the range of ~$9.90/share, inclusive of a conservative take on taxes and payroll.
The math tells us that AVB will probably deliver higher SSNOI growth and a superior RoC profile to EQR, inclusive of higher Core FFO growth (+20% vs. +18%), with the stocks essentially the same per pound of growth.

ESS, CPT, and MAA also report this week, but we are zoomed in on the two above. As we have mentioned previously, we have been tilting on the short side on MAA and CPT, at the very least as a potential funding short against AVB and EQR as the RoC profiles diverge intra-sector.

Ticker: WE

Subsector: CBD / Secondary Office

Headline: Surprise SoftBank COO exit poorly timed with trending volatility

Late last week news broke that SoftBank COO and Best Idea Long WeWork (WE) Chairman Marcelo Claure was preparing to exit Softbank, apparently over a compensation dispute in which Claure sought $2.2 billion for turning around ~$5.5 billion equity market cap WE (for perspective).
Discussions had apparently been ongoing for months. Claure's departure follows other top lieutenants Nikesha Arora (2016) and Alok Sama (2019) who also ran for the hills.
The most immediate impact on WE is likely the need for a new Chairman, assuming Claure leaves his current seat. SoftBank would have the right to nominate a new Director to fill that seat should that scenario play out.
If we may be so bold, if doable under the by-laws and backstop agreements Starwood Capital CEO Barry Sternlicht (who is a PIPE investor and already has Board observer rights) would not be a bad choice for several reasons, not the least of which are (1) additional credible real estate experience in the Chairmanship and (2) the perception of added stability. We are not sure how to handicap the "social" aspects of that, however, and whether the relationship between SoftBank and Starwood would even make that possible. Just a thought...
Our sense is that this turn of events was unexpected by WeWork's management team. We do wonder, however, if the market "sniffed" this out early in the week last week when WE's stock plummeted a mid-teens percentage on seemingly no news.
Longer-term, we actually do not think this turn of events raises the probability that SoftBank lowers its profile or involvement in the name. Quite the opposite - SoftBank is committed up and down the capital structure via equity ownership and debt commitments and, in a way, cannot really afford to disengage without creating additional volatility for itself.

Figure 1: Updated Position Monitor (Unchanged)