10/04/22 07:18 AM EDT

REITS DAILY BRIEF | WHERE ARE INVH'S + SUI'S IAN UPDATES? | 10.4.22 (INVH, SUI, MPW)

Rob Simone, CFA

Takeaway: INVH + SUI, w/ no post-Ian updates, are standouts among Sunbelt Residential REITs

Hedgeye Cartoon of the Day: Quad 4 Therapy

It is 10.4.22, and Active Short MPW is overvalued by approximately ~$11.55/share. Investors should no longer have any faith in the "we underwrite the real estate" line from management. Evidence Pipeline Health's Chapter 11 filing as representative of what we see repeatedly throughout MPW's collection of tenants: (1) while claiming "strong profitability, margins and coverages" upon acquisition of the CA portfolio in July 2021, one year later Pipeline filed BK and the California portfolio was generating <$3 million in EBITDAR (before corporate overhead!) against an estimated ~$12-13 million of annual rent (~0.2x coverage before capex), and (2) see Figure 1 below for captures of the actual real estate underlying these leases. While no doubt being critically important for the local community, these assets should not be part of a publicly-traded REIT portfolio. This is how MPW is allocating YOUR capital. This is also what happens when you incentivize management on deal volume (pages 37 and 41 of the proxy) and staff the acquisitions team with immediate family members. CEO Ed Aldag, CFO Steve Hamner and COO Emmett McLean reported all-in 2021 compensation of ~$17 million, ~$8.7 million and ~$5.6 million, respectively. This company should be considered completely un-investable for REIT-dedicated, long-only investors, in our view.

Ticker: INVH, SUI

Company Name: Active Short Invitation Homes, Sun Communities

Subsector: Single-Family Rentals (SFR), Manufactured Homes (MH)

Headline: Standouts for not yet releasing a post-Hurricane Ian update

INVH + SUI are notable standouts thus far among Florida-exposed residential REITs focusing on "freestanding" assets, in not yet updating investors on the operational impacts of Hurricane Ian.
CPT, ELS, AMH and even HIW put out releases with operational and damage updates. As expected, ELS' update to us implied the most serious negative impact, noting it was "undertaking an initial assessment of the impact" and "in the process of estimating costs associated with cleanup and restoration efforts." In the past ELS has recorded one-time expenses related to property damage, repairs and restoration (sometimes called "casualty loss"), and then non-cash "revenue" in the form of an expected insurance recovery related to the loss that gets adjusted in later periods based on ultimate payments. We view the latter as relatively aggressive (would rather see expressed as a "negative reserve" offset to opex). This non-cash revenue MUST be backed out of AFFO for the purposes of estimating cash flow relative to dividend and debt service. There is an argument to be made to include the non-cash revenue for valuation purposes if there was any actual revenue disruption in the quarter, for the purposes of calculating normalized FFO/AFFO. This obviously must be weighed against any expected downtime period.
On Active Short Invitation Homes, which has significant and clustered exposure in Tampa and Orlando, there has been no update as of yet. The flooding impact around Orlando and Kissimmee looks severe, so it is hard to imagine there is no damage or disruption. Obviously the West Coast of Florida was absolutely rocked by wind damage and flooding. AMH, which has ~8% portfolio exposure to Tampa + Orlando combined, indicated "limited damage" but also appeared at least to us to be shielding itself somewhat behind "preliminary assessments" and "materiality" or "material change" language. We would guess there is more to come there. Getting back to INVH, the company gave its initial report 8 days after Hurricane Irma made landfall in 2017, so we should be hearing something soon.
INVH in the past reported casualty loss expenses similar to the above, and we would approach the analysis in the same manner. Watch for shifting around of capex numbers for AFFO and valuation purposes - there should logically be a break to typical seasonal capex patterns for repairs, remediation, etc.