10/03/22 06:25 AM EDT

SUNDAY NIGHT REIT READ (ON MONDAY MORNING) | 10.3.22 (SBAC, WY)

Rob Simone, CFA

Takeaway: Hope everyone enjoyed the weekend!

Hedgeye Cartoon of the Day: Canaries in the Quad 4 Coal Mine

It is 10.3.22, and Active Short MPW is overvalued by approximately ~$11.86/share. Publishing this note a day late - needed a break after Steward the last few days, so got the old "twilight nine" round in last night and watched some football. That was some AWFUL golf, the course record is safe. Steward effectively defaulted last week. Someone (other than us) please press MPW on it this week at the conference. We would like to know the length of the "interim extension," details around Citi's rights following the event, the new higher interest rate, the balance outstanding on the revolver (we would guess ~$400 million), whether talks broke down with third parties leading up to the maturity date, how MPW could possibly consider this to be "not material," and what form of collateral would need to be posted by Steward should they blow through the outside date.

WEEKLY VALUATION HANDBOOK PDF LINK

Ticker: SBAC

Company Name: Active Short SBA Communications

Subsector: Towers

Headline: Two news threads to watch related to our SBAC short

First: the seemingly destabilizing political situation in Brazil, where SBAC is in the process of levering up to increase its exposure in 4Q22.

Bolsonaro (43.2% of the vote) and Lula (48.4%) are headed to a runoff election after neither politician garnered enough support to secure a victory in the presidential election.
A Lula win would we a negative on the margin for two reasons, irrespective of political leanings: (1) it would increase the probability that Bolsonaro, who in the past has expressed nostalgia for Brazil's past military dictatorships, could launch a coup that would obviously destabilize the entire country, and (2) a turn to a very left-leaning administration would increase the probability that certain strategic assets, including digital communications infrastructure, could be nationalized.
As a reminder, SBAC is in the process of acquiring ~2,600 additional tower sites from GTS in Brazil for ~$725 million, or ~11x Year 1 TCF, which is expected to close this quarter. This will take SBAC's overall international exposure up to ~25% on a TCF basis with Brazil being its largest market by far. SBAC is increasing leverage to close this acquisition at a time when AMT is discussing a reduction in overall leverage levels.

Second: increased risk of mobile network blackouts in Europe amidst the growing energy crisis. Obviously more of a risk for AMT given its exposure to Europe, and CCI most insulated given domestic focus. SBAC, however, exposed in a different way to energy challenges via Tanzania and other African exposure where tower sites not as well-connected to the grid on average and depend on on-site generation.

Risk of mobile network blackouts this winter in Europe should there be power cuts or energy rationing.
Telecom executives fear a lack of backup systems and redundancy in several European countries, notably France, Sweden, Italy and Germany, where batteries at tower and antenna sites typically provide just ~30 minutes of backup power.

Ticker: WY

Company Name: Active Short Weyerhaeuser Company

Subsector: Timber

Headline: Operational update shows weakening 3Q22 Timber + Wood Products segment earnings

See Figure 1 below.
We don't mean to call into question ALL of the commentary, but we view this outlook reduction (especially on the volume side) as more a symptom of deepening Quad 4 for a very housing- and macro-sensitive sector and company.
Housing continues to collapse. WY likely has much more downside in a deepening Quad 4. Every back-tested Quad 4 has resulted in at least a -40% drawdown in WY peak-to-trough.
Keep it simple, remain short for now.

Figure 1: WY 3Q22 Operational Update