07/19/22 06:37 AM EDT

REITS DAILY BRIEF | POSITION MONITOR UPDATE | 7.19.22 | (INVH, PLD)

Rob Simone, CFA

Takeaway: INVH appears to concede on the PDB; Moving PLD off the Active Long list

Hedgeye Cartoon of the Day: UP

It is 7.19.22, and Active Short MPW is overvalued by approximately ~$15.81/share. Absolute best case scenario (recurring EBITDAR ~$400 million) Steward is levered ~10x including lease obligations, base case (recurring EBITDAR ~$200 million) its levered 20x. We think its closer to ~$200 million. Either way the OpCo is under water and worth 6-8x EBITDAR at best, with MPW essentially owning the entire cap stack (landlord, unsecured lender and 9.9% owner). What happens when the two entities become one, with MPW itself levered ~10x cash EBITDA? Oof...

Ticker: INVH

Subsector: Single-Family Rentals (SFR)

Headline: INVH files another MTD; concedes on PDB

Yesterday INVH filed another brief following Corona and Riverside opposing the original MTD, where it (1) essentially recycled prior arguments in the MTD and (2) requested that the court grant the MTD with prejudice. Namely, defendant is claiming plaintiff failed to plead a false claim with specificity and also to adequately allege scienter against both INVH and Starwood, to our knowledge with the intent of limiting the scope of the allegations and potential liability.
Interestingly, defendant essentially conceded on the PDB (see Figure 1).
Reading between the lines, there is this interesting "thread" being pulled on to essentially push blame/responsibility to Starwood (of Starwood Waypoint Homes), while at the same time arguing there is no evidence presented that the non-permitted work was performed during either's period of ownership. Irrespective of the legal merit of these claims (which we admit may be all that matters in the end), common sense tells us these arguments are silly. If there are no permits on file since the late-90s, the odds are OVERWHELMING (like ~99.9999999%) that removing a room of a house, filling in a pool, etc. some time between 2012 and now was performed by either entity without obtaining a permit to do so. Unless some random guy showed up and decided to do the work for sport and no one noticed. That's the 0.0000001% outcome.
We think it is likely that the judge skips oral arguments and decides "on paper" on whether the case is dismissed or proceeds. Following the move by Corona and Riverside, we think its better than a "coin flip" that the case proceeds, but we shall see in the next week or two.

Figure 1: INVH Concession on PDB?

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

Ticker: PLD

Subsector: Industrial / Logistics

Headline: Taking PLD off the Active Long list, moving to Passive Long

Following PLD's 2Q22 results, we are removing PLD from the Active Long list and relocating to Passive Long. Its time to take a less aggressive stance on this one on the long side after letting the dust settle post-DRE offer acceptance. While we expect the deal to be accretive from an AFFO perspective, we (1) don't like going public and insisting on pushing forward the all-stock offer at the peak of the cycle despite being offered an opportunity to pause the process by the market, and (2) we remain surprised PLD did not flex its Strategic Capital platform more to change the mix of cash/stock, at least explicitly at the outset. Its likely that select assets are contributed to Strategic Capital as a source of funds for development post-close, but we think PLD should have flexed its balance sheet upfront as it lost some of its equity cost of capital in 1H22 and did not collar the offer. From a fundamental perspective as a stand-alone, we are of the view that leasing demand is slowing on the margin. Even if its not, the market will likely take that position until the macro improves, so why stand in the way? Potential vacancy build in 2023 implies a negative RoC by default.
Updated FY22 guidance implies that cash SSNOI growth may have already peaked from a RoC perspective heading into a leasing slowdown and global recession.
E-commerce clearly slowing on the margin given % of new lease mix, at least for a time.
Even following the recent drawdown, we think that asset values moving in the wrong direction will be especially reflexive to PLD's share price given the implied nominal cap rate of ~4.2% and mid-3% on an effective basis inclusive of overhead and capex.
We are thinking through current Active Long Rexford (REXR) as well, but holding for now given different product/tenant mix.
For the quarter Core FFO of $1.11/share was in-line with Consensus and -$0.06/share vs. Hedgeye; deltas to our models were -$0.02/share from taxes and -$0.04/share from interest and other income with real estate / strategic capital / interest expense / G&A being a wash, so essentially an in-line quarter on the line items that matter.