07/08/22 07:30 AM EDT

REITS DAILY BRIEF | 7.8.22 | (INVH - TWO CITIES OPPOSE MOTION TO DISMISS, STILL MORE MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Clearly the cities have not "opted not to participate," as was the narrative

Hedgeye Cartoon of the Day: Bear Snacks

It is 7.8.22, and Active Short MPW is overvalued by approximately ~$15.66/share.

Ticker: INVH

Subsector: Single-Family Rentals (SFR)

Headline: Corona & Riverside, CA oppose dismissal on basis of PDB

What Happened: Yesterday the plaintiff, Blackbird Special Project, LLC, in the qui tam case against Active Short Invitation Homes (INVH) filed a motion notifying the court that two cities, Corona and Riverside, CA, have opposed the dismissal of the case on the basis of the California False Claims Act's ("CFCA") public disclosure bar ("PDB"). Recall that INVH had filed a motion to dismiss and plaintiff filed its response at the end of June. As per the filing yesterday, the CFCA affords government entities the right to oppose and thereby block dismissal.

Of particular note in the filing:

The CFCA states: "The court shall dismiss an action or claim under this section, unless opposed by the Attorney General or prosecuting authority of a political subdivision..."
California state law affords political subdivisions "the right to block a defendant's attempt to have a meritorious case dismissed on public disclosure grounds." - U.S. vs. Select Med. Corp., No. 11-CV-8214, 2017 WL 468276, at *4 (S.D. Ind. Feb. 3, 2017).
"When the government asserts its opposition to dismissal... the court has no authority to dismiss a qui tam action on the basis of prior public disclosure." - Select Med. Corp., 2017 WL 468276, at *4; see also Prime Healthcare Services, Inc., 2014 WL 12480026, at *3.
Cities of Riverside and Corona certificates opposing the motion to dismiss (see Figures 1 & 2 below).

Hedgeye's Take:

From the beginning we expected the motion to dismiss to be denied, with the case very likely moving to discovery which we believe could be exceedingly damaging to INVH over lack of required permitting (including beyond California). This filing obviously increases our confidence that the case will not be dismissed.
The biggest implication here is the negative hit to INVH management's credibility. Although we were not present in the meetings, we are well aware that management repeatedly told investors, including some of the largest page-1 INVH shareholders, that "the cities had opted not to participate in the case" while attempting to discredit both the plaintiff and and the substance of the argument. Based on our work, our understanding was that the 18 cities were more or less in a "legal holding pattern" with the ability to essentially "opt in" at any time and piggy-back off of other DA's or the plaintiffs efforts. Management's take was either uninformed or a deliberate head-fake, in our view, and investors relied upon that take in their investment decision making. Clearly at least some of the cities are interested, and we would not be surprised to see additional cities voice opposition before oral arguments at the end of July.
And stepping back, lets use some common sense here, guys. Put the models down, don't worry about consensus or INVH's leasing spreads (which are very likely peaking, btw), and lets think a little strategically here. Why would the cities immediately opt not to participate in this suit? It makes absolutely zero legal or common sense and is completely devoid of any business acumen, and INVH should know that. The fact that they do not is concerning. The reason why qui tam laws were created is that city attorneys typically do not have litigation budgets, so the goal is to incentivize private practice to find, bring and fund credible cases on behalf of cities that cannot afford to do so on their own. I.e., when a qui tam case is filed, the cities are effectively being granted a "free option" to participate in any judgment without having to do the legwork. To make the argument that 18 cities in California would voluntarily say "no" upfront is the same as saying these cities would choose not to potentially participate in their share of free money. It makes no sense, and honestly its pretty embarrassing that INVH would peddle and lean on this argument as a reason not to be worried. Sorry, but not sorry.
The more interesting question is, "what do the other 16 cities do here?" We think it is likely that additional cities sign-off on opposition to the MTD over the next ~15 days, again because why pass on the chance for a share of any judgment? Also interesting is whether defendant argues the claims of other cities can be dismissed if those cities do not lodge opposition to dismissal. We think that list shrinks.
And then finally an honest question: are the "legal calls" on this matter being conducted by the sell-side (who basically all have "Buys" on the stock), including one earlier this week, still credible or useful? What value is there in hearing 15 different shops, all likely not doing any substantive work, all saying the same thing? Not taking a victory lap here by any means, just spiking the football after a fist quarter touchdown.
We think both the sell- and buy-sides are MASSIVELY offsides on this one. Sell the stock.

Figure 1: Riverside's Certificate Opposing MTD

Source: U.S. District Court, Southern District of California

Figure 2: Corona's Certificate Opposing MTD

Source: U.S. District Court, Southern District of California

Ticker: MPW

Subsector: Healthcare / NNN Hospitals (really just MPW standing alone)

Headline: MPW apparently paid ~$60 million for Steward to acquire vacant hospital in April; doesn't disclose as "subsequent event"

In April, obviously following the end of 1Q22 but before the 10-Q filing on 5.10.22, Active Short Medical Properties Trust (MPW) apparently funded ~$60 million for Steward's purchase of the vacant Nicklaus Children's hospital in Miami-Dade, with MPW as owner of the real estate. The hospital does not open until mid-2024.
MPW did not disclose this as a "subsequent event" in the 10-Q or any 8-K, despite it being VERY material given that Steward comprises 25-30% of MPW's revenue and is experiencing financial distress up to and including potentially being insolvent.
How is that possible or ok? Its not.

Prior Notes:

7.6.22 - REITS DAILY BRIEF | 7.6.22 | (STEWARD'S LIQUIDITY & MPW'S OPTIONS)

7.3.22 - SUNDAY NIGHT REIT READ | 7.3.22 | (HR, HTA, WELL, MPW, NXRT)

7.1.22 - REITS WEEKLY VALUATION HANDBOOK | 7.1.22

6.30.22 - REITS DAILY BRIEF | 6.30.22 | (APARTMENT RENTS, MPW)

6.28.22 - REITS DAILY BRIEF | 6.28.22 | (INVH) | PLAINTIFF FILES RESPONSE

6.26.22 - SUNDAY NIGHT REIT READ | 6.26.22 | (COLD)

6.24.22 - REITS WEEKLY VALUATION HANDBOOK | 6.24.22

6.23.22 - REITS DAILY BRIEF | 6.23.22 | (PGRE)

6.22.22 - REITS DAILY BRIEF | 6.22.22 | (PGRE)

6.20.22 - REITS DAILY BRIEF | 6.20.22 | (POSITION MONITOR UPDATE)

6.17.22 - REITS DAILY BRIEF | 6.17.22 | (MPW - MORE BAD NEWS)