09/14/22 11:47 AM EDT

REITS DAILY BRIEF | 9.14.22 (CPT, MAA, NXRT)

Rob Simone, CFA

Takeaway: Cost of living pressures on MF increasing

Hedgeye Cartoon of the Day: Give 'Em the Horns

It is 9.14.22, and Active Short MPW is overvalued by approximately ~$13.78/share. Our understanding is that there was a large buyer of the Nov 8-13 put spread yesterday, which indicates that someone in the market may be placing a targeted/timed bet on downside tail risk. As a reminder Steward's credit facility matures on 9.29, and our view has been that MPW may not be just the lender of last resort, but perhaps the lender of only resort to Steward. We think the $150 million loan facility may be just the first step in additional liquidity support to the ~30% tenant/debtor, which would further MPW along the path to owning Steward's entire capital stack. Given MPW's history of atrocious disclosure, we would not expect management to disclose such additional loans on a timely basis, rather with 3Q22 result in late-October/early-November. Our view is that the only way to possibly make the Steward relationship sustainable in the long-term is to restructure the rent lower, which would likely destroy MPW's equity value.

Tickers: MAA

Company Name: Mid-America Apartment Communities, Inc.

Subsector: Apartments

Headline: Highly-concerning color on cost of living pressures emerges from industry conference

Our understanding is that in a meeting with investors at a competitor conference, Mid-America Apartment Communities (MAA) highlighted very concerning exit survey data for tenants vacating units "in the last print" as they describe it (August? 3QTD?, 2Q22?).
Similar to most landlords, MAA surveys tenants vacating as to the reasons why they are opting not to renew. Options include moving out of state, buying a home, new rent too expensive, etc.
Apparently ~20% of vacating tenants cited "rent being too expensive" as the primary reason for leaving. Historically this figure as averaged in the ~5-6% range through the cycle, and MAA cited the ~16-17% range as the historical "peak range" before landlords needed to slow/reduce rent which obviously leads to rent growth degradation.
Our view is that, while we are not at the point in the cycle where rent concessions increase, the recent mid-teens leasing spread figures are a thing of the past, especially in the Sunbelt. As a matter of fact in MAA's case there is potential for outright rent cuts given its recent history of aggressively pricing certain tenants out of units. MAA will likely need to respond by either accepting higher vacancy (never the first choice) or cutting rents heading into a slowdown.
This will obviously lead to further slowing in the second derivative on the top-line, NOI and earnings from all-time highs, which was the basis for our short calls on CPT and NXRT. We are also re-adding MAA to the Passive Short list on our position monitor as we think through what to do here.