10/05/22 07:58 AM EDT

REITS DAILY BRIEF | FACEBOOK TERMINATING 225 PARK AVE LEASE | 10.5.22 (GATEWAY OFFICE, MAA)

Rob Simone, CFA

Takeaway: Move comes after fully occupying VNO's Moynihan; Adding MAA to Active Short list

Hedgeye Cartoon of the Day: What Could Go Wrong?

It is 10.5.22, and Active Short MPW is overvalued by approximately ~$12/share. How did the conference meetings go?

Tickers: BXP, ESRT, PGRE, SLG, VNO, NYC, HPP, KRC, DEI, JBGS

Subsector: NYC Gateway Office

Headline: Marginal "taker" of NYC office space over 2015-2019 (tech) now shedding excess?

Over the weekend news broke that Meta terminated about ~200ksf at 225 Park Avenue in Midtown South, owned by Orda Management, some of the earliest space taken by Facebook in NYC in 2016 as it began its aggressive expansion.
Meta famously leased more than ~2msf between Hudson Yards and VNO's Farley Post Office, so the Midtown South space was no longer required.
Depending on the initial terms of the 225 lease, Meta likely terminated with 4-5 years of remaining term.
Meta also recently backed out of a 300ksf expansion at VNO's 770 Broadway in NoHo, and then paused plans to complete the buildout of its Hudson Yards space. Amazon walked away from a planned expansion at Brookfield's 5 Manhattan West.
For years in the late-2010's, office landlords constantly pitched the "tech is coming" narrative as the main reason for the coming revitalization of an asset class with persistent, stagnating/declining net effective rents. COVID obviously blew a hole in that narrative.
Lets just state the obvious clearly: If Meta and other large-cap tech tenants retrench/cease leasing in NYC, the only potential bull case for Manhattan CBD office is no longer on the table.
We recently removed PGRE from the Active Long list, and are adding several Gateway Office REITs to the Short Bench (see Figure 1 below), notably SL Green Realty (SLG) where irresponsible leverage is a VERY significant concern and Hudson Pacific (HPP) with near-term roll/funding issues. We remember a time when "blue-chip" Boston Properties (BXP) was levered ~5x EBITDA, but is now nearly ~2.5x turns higher.
Office has been a significant underperformer YTD, but we would just remind investors that we just started the 2nd of 4 consecutive (and deepening) Quad 4s through 1H23. Office is an absolute disaster in a "typical" Quad 4, and this is anything but typical and obviously more acute given the now structural decline in office + high leverage + closing credit markets.

Ticker: MAA

Company Name: New Active Short Mid-America Apartment Communities

Subsector: Sunbelt Apartments

Headline: Adding to Active Short list alongside NXRT & CPT; prefer NXRT & MAA the most

Similar to other Residential REITs, we see in MAA (1) a material SSRev deceleration in FY23, perhaps more pronounced for MAA vs. CPT given how aggressively MAA "priced out" several of its tenants (and quasi-bragged about it), (2) property tax growth accelerating, which will keep SSExp growth likely above the RoC for the top line, and (3) Street numbers that are very likely too high by a mid-single-digit percentage. Watch out for personnel and insurance expenses as well.
If we had to pick one subsector setting up for the biggest disappointment on FY23 outlooks relative to expectations, it would be Residential (Apartments + SFR). Count MAA among those most at risk, in our view, along with INVH, TCN & CPT. We don't yet have as strong a view on Manufactured Housing.
FY23 Core FFO: ~$8.82/share est. vs. Consensus $9.11. We are modeling just under +5% SSRev growth against +5.7% SSExp growth (which might still be too low), for SSNOI growth of +4.4%. Recall that pricing on new leases effective in August 2022 was ~$1,728/month, or just a +2% positive spread to realized in 2Q22. We are modeling +5% realized rental rate growth in FY23, so the growth rate deceleration assumptions are not crazy by any stretch.
MAA is currently trading at a ~4.8% net effective cash cap rate incl. G&A + capex, vs. CPT at ~5% (less efficient platform) and UDR at a ~5.2%. So despite the recent performance, these stocks are not "cheap" by any stretch heading into a severe consumer slowdown and negative RoC setup.
We DO NOT buy the "TINA" argument, and think Residential will be a "source of funds" for select Triple-Nets (NNN, ADC, NTST) and Healthcare (still holding out on HR, CTRE, and perhaps DOC).