Hedgeye - SUNDAY NIGHT REIT READ | ADDING STAG TO ACTIVE LONG LIST

Hedgeye Cartoon of the Day: Hello Powell, My Old Friend...

It is 10.16.22, and Active Short MPW is overvalued by approximately ~$10.86/share.

WEEKLY VALUATION HANDBOOK PDF LINK

Ticker: STAG

Company: New Active Long STAG Industrial

Subsector: Logistics

Headline: Adding to Active Long list; improving internal growth / RoC + earnings upside + conservative leverage at a very manageable price

We are adding STAG Industrial to the Active Long list. We see a favorable RoC profile with SSNOI accelerating to +5.3% (or perhaps higher) next year from roughly +4.5% this year. Several quarters of nearly +15% cash leasing spreads and a changing portfolio mix toward more traditional logistics product may have permanently reset the long-term growth profile of this company higher, vs. the +1% to +3% SSNOI growth of its past as more of a triple-net. We think Street earnings estimates are too low by a mid-single-digit percentage (~4% based on our current FY23 Core FFO estimate of $2.34/share), and STAG historically is a fairly strong relative performer in Quad 4.
Valuation: Like most of industrial, STAG has lost nearly ~10x turns of AFFO multiple since early-2022 and now trades at ~13-14x forward AFFO. Very reasonable versus the rest of Logistics for a company with an improving internal growth profile converging towards the rest of the group.
Relatively modest lease rollover risk in FY23 with just ~9.5% of rent expiring next year and a likely 80%+ or higher retention ratio. No spec development risk.
Capital Allocation: At this point in the cycle we like the focus on capital recycling at favorable +100bps or higher cap rate spreads. We fully expect more moderate acquisition volume in FY23, down from a likely ~$900 million to ~$1 billion this year, yet still believe Street numbers are at least ~4% too low.
Conservative and manageable ~5x leverage with just ~$200 to $400 million of debt maturing per annum through 2025, consisting primarily of unsecured bank debt.

Figure 1: STAG GIP Quad Backtest

Source: Bloomberg, Hedgeye Macro Team

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals

Headline: Updating DCF for higher cost of capital - stock worth ~$5-6/share today

We see a stock worth no more than ~$5-6/share today assuming no incremental tenant issues, given its materially higher (and broken) cost of capital.
Recall that we first performed this analysis back in July under a very different set of capital markets assumptions, a mid-7% unlevered cost of capital and a ~$17/share stock price. At the time this produced a justified value in the ~10-11/share range, given MPW's blended ~5-6% unlevered cash yields.
MPW's cost of capital has moved several hundred basis points higher since then, with the stock now yielding ~10.6% and the longer-dated bonds trading at $0.60-0.75 on the dollar and yielding over ~10% in some cases.
At the same time, underlying tenant credit has materially worsened since then including an outright tenant default (Pipeline) and a technical default, in our view, of MPW's largest tenant Steward.

Figure 2: Updated MPW "Status Quo" DCF Analysis