09/29/22 06:26 AM EDT

REITS DAILY BRIEF | DIVVY HOMES LAYOFFS / GENERAL EXTERNAL GROWTH SLOWDOW | 9.29.22 (AMH, INVH, TCN)

Rob Simone, CFA

Takeaway: Predictably, contracting credit + higher rates hitting the riskiest end of SFR

Hedgeye Cartoon of the Day: Soft (Fiery) Landing

It is 9.29.22, and Active Short MPW is overvalued by approximately ~$12/share. Just a reminder: any participation by MPW in the refinancing of Steward's replacement ABL facility, whether it be a syndication, corporate guarantee or other backstop, should be viewed as an unsuccessful execution. It would mean that no bank or non-bank lender would underwrite Steward without the backing of MPW, and put MPW in the "second loss" position behind Steward but ahead of the lender, i.e. MPW would effectively own more of Steward's capital structure under a BK scenario. Steward's existing facility matures today, 9.29, and it is highly concerning that there has been no announcement of resolution as these are usually re-cut months ahead of time. MPW has already extended a ~$150 million loan facility directly to Steward in 2Q, a ~$200 million loan to the "int'l JV" w/ Steward which was highly suspicious, and another ~$335 million loan to RDLT + others to acquire Steward from Cerberus and secured by the equity in Steward not already owned by MPW (even more suspicious). Watch the wires this morning and tomorrow morning, and then for the classic "Friday 4:15pm ET and hopefully nobody sees it" move. No announcement at all is obviously a negative, creating "white space" and uncertainty ahead of MPW's 3Q22 earnings report. After all, on the 2Q call MPW management made it sound like the ABL was a done deal. That was two months ago, so clearly it was not.

Tickers: AMH, INVH, TCN

Subsector: Single-Family Rentals (SFR)

Headline: Upstart SFR to "subprime," backed by a16z, laying off staff as SFR acquisitions slow

a16z-backed Divvy Homes is laying off about ~12% of its staff, or 40 people, as the home buying market continues to collapse amidst significantly higher borrowing costs and deteriorating consumer credit.
Divvy acquires homes and then rents them to tenants w/o a credit history, or credit too weak to qualify for traditional 30-year fixed or floating-rate mortgages to buy a home. It is totally unsurprising that this non-cycle tested "subprime equivalent" in the SFR market should be suffering given the macro backdrop.
The key question to us is whether these credit issues move up in the quality spectrum to the larger, institutional SFR landlords and REITs. We think they do, and have modeled bad debt as a % of revenue returning to pandemic levels of distress (2-2.5%+ of gross revenues) by 1H23. We do not think Street models are making this assumption, and it is easy to see how this + perhaps ~100-150bps of occupancy loss + slowing realized rent growth against MUCH tougher comps sends SSRev growth towards the +4-4.5% level for the sector.
Combine this with what will very likely be materially lower acquisition volume / external growth in 2H22 and FY23 vs. 2021 and 1H22. KKR's My Community and AMH have already slowed acquisition volume amidst higher borrowing costs and a weakening underlying housing market. We think that several vintages of homes purchased by TCN, which have been on the market for rent much longer than the recent <30 days, are very likely going to miss initial underwriting on unlevered yields. Landlords are slowing capital deployment and tightening underwriting standards.
At the same time, with SSExp potentially hitting +6% or higher in FY23 amidst +6.5% to +7.5% property tax expense growth and higher turnover costs, the math dictates low-to-mid-single digit SSNOI growth next year.
Based on what we have seen, the sell-side generally is not there while the buyside may be gradually dialing down expectations. SSRev expectations are too high and SSExp expectations are FAR too low. I.e., gird for downward estimate revisions and potential disappointments when the SFR REITs initiate FY23 outlooks. INVH already appears to be talking down numbers.