07/14/22 07:41 AM EDT

REITS DAILY BRIEF | POSITION MONITOR UPDATE | 7.14.22 | (AVB, CTRE, IHS TCN)

Rob Simone, CFA

Takeaway: Adding CTRE to Active Long, TCN to Active Short

Hedgeye Cartoon of the Day: Eff'd in Quad 4

It is 7.14.22, and Active Short MPW is overvalued by approximately ~$15.68/share. Fun with math - if you effectively pay real estate multiples (~25-30x) for assets worth ~7-8x AT BEST (hospital systems), and then lever yourself up to ~10x, what is the resulting equity value? Its not positive... we wouldn't even consider owning the bonds here, but for another day!

Ticker: TCN

Subsector: Single-Family Rentals (SFR)

Headline: Going deeper on a short of the SFR subsector

More and more we are convinced that we are in the early-innings of a general RoC slowdown for consensus long and over-owned SFR, in addition to obvious headline and idiosyncratic legal challenges. We are adding Tricon Residential (TCN) to the Active Short list and see the potential for a mid-single-digit stock price as the cycle turns.
2023 numbers are likely too high across the subsector and need to come down. Now that we are in 2H22, that is really going to start to matter.
The name is massively over-levered at ~9.5x cash EBITDA, relative to both its immediate peers and broader resi. Declines in fundamentals will likely hit TCN's equity value in an outsized way.
We believe TCN likely overpaid for assets YTD, and given the change in asking rates on those assets is probably looking at sub-4% initial unlevered yields versus something likely underwritten internally in the 5-6% range given the pace of rental rate changes at the time. Aka, poor capital allocation at the peak of the cycle. Generally external growth will likely slow moving forward and we are already seeing signs of that now (FirstKey homes for example).
External management structure leaves TCN very capital inefficient, with a ~270bp yield drag in moving from nominal to effective (incl. overhead and capex) vs. ~50-60bps for both AMH and INVH.

Ticker: CTRE

Subsector: Healthcare

Headline: Great Quad 4 stock, solid credit, activist interest on the horizon?

Adding CareTrust REIT (CTRE) to the Active Long list, after the stock signaled positive and moved up into the top-14 list of signal strength longs. We had CTRE on the Passive Long list and were waiting for an interesting entry point. We expect it to outperform relative, and perhaps absolute on a catalyst, over the next 6-12 months.
Ensign is a solid credit and comprises ~33% of CTRE's rent, making CTRE "money good" in our view and a great place to hide out in Quad 4, which typically favors both healthcare and strong credit + duration.
Finally, we believe shareholders are NOT pleased with CTRE's corporate governance and many don't believe the company should exist as a standalone public entity anymore. We think the probability of activist involvement to force action is rising.

Figure 1: Updated Hedgeye REITs Position Monitor