10/18/22 08:18 AM EDT

REITS DAILY BRIEF | ELS MISS + SFR CONSIDERATIONS AROUND QUARTERRA | 10.18.22 (ELS, AMH, INVH, TCN)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Really bad 3Q22 print out of ELS

Hedgeye Cartoon of the Day: Quad 4 F'D

It is 10.18.22, and Active Short MPW is overvalued by approximately ~$11.17/share.

Ticker: ELS

Company Names: Equity LifeStyle Properties, Inc.

Subsector: Manufactured Housing (MH)

Headline: We have no position (other than a suggested hurricane-related tactical short), but this quarter was bad in our view

Last night ELS reported 3Q22 results and withdrew FY22 SSRev + SSExp + SSNOI guidance as it continues to assess the impact of Hurricane Ian in Florida, which was clearly very severe. Core/Normalized FFO was also reduced ~$0.06/share at the midpoint to $2.64-$2.70/share from $2.68-$2.78. Although "one-time" in nature, this storm was clearly very disruptive and appears likely to result in both increased operating/repair costs as well as significant downtime at certain properties. Perhaps more importantly, a second consecutive quarterly "miss" combined with the withdrawal of FY22 same-store guidance this late in the year could result in a "penalty box" effect for a Quad 4 market looking to shoot first and ask questions later.
SSExp up +7.8% y/y accelerated +80bps q/q and blew through prior guidance for +3.7% to +4.3%. Utilities increased +12.1% and payroll as up +10.2% y/y, with average electric rates up +14%y/y in the quarter. As we have written about previously, and partially driving our non-consensus bearish view of residential earlier this year, we believe the Street is serially underestimating the impact of accelerating expense growth heading into FY23, at a time when the RoC for SSRevs was set to slow anyway but is now threatened by what our Macro Team believes will be a severe recession. While MH obviously has its idiosyncratic factors, this print may serve as an early warning sign of the types and degrees of growth we can expect to see for labor, utilities and ultimately property taxes which happens on a lag.
FY23 rate guidance both ( + )'s and ( - )'s:

MH (negative in our view): By end of October will be sending FY23 rate increases effective 2.1.23 and averaging +6.2% to +6.6% vs. Street expectations likely in the +6% +8% range by our estimation. MH is roughly ~60% of revenues so has the larger impact on the margin.
RVs (positive): FY23 rate increases in the +7.6% to +8% range vs. Street expectations for +6% based on models.

On a related note, we do not necessarily think MAA was negatively impacted in an outsized way given traditional MF, but we are surprised by the most conservative management team (in our view) not providing a post-hurricane update.

Tickers: AMH, INVH, TCN

Company Names: Active Shorts Invitation Homes + Tricon Residential, American Homes 4 Rent

Subsector: Single-Family Rentals

Headline: Quarterra process an overhang for existing SFR? Perhaps a "no-win" situation for existing REITs?

Lennar (LEN) plans to spin-off its Quarterra Group, which is primarily a multifamily developer but has also assembled a portfolio of ~2,200 build-to-rent single-family homes across 19 U.S. markets. The division has another ~5,500 locations in the development pipeline.
Put simply, we see a few potential negatives here for the SFRs:

First, there is potential that it may not be a REIT and therefore more capital efficient / able to retain capital.
The offering "discount" will be a negative mark for the space, should it proceed. Should the spin fail, it would likely mean either elevated market volatility or declining investor sentiment around housing and residential rental.
Quarterra is a "cleaner" option in the sense that almost definitionally Quarterra's build-to-rent product will be of a newer vintage and therefore have a lower underwritten maintenance capex burden. We continue to believe that the SFR REITs, especially Active Short INVH, have been under-investing in their existing operating portfolios and therefore building up an effective deferred capex liability. It makes no sense to us that SFR should be spending less capex than stabilized, more efficient traditional MF. We continue to think that underwritten capex burdens for SFR should be 15% or higher as a % of NOI.

Lastly as it relates to INVH, we wanted to call out Quarterra's pursuit of securitizations as a means of financing, and the fact that ~21 securitizations of SFR cash flows totaling just under ~$11 billion have priced YTD. While we understand RETs' general desire to be unsecured issuers, we called out earlier this year and continue to question the motives behind INVH's pursuit of retiring its lower-cost securitizations and eating any negative yield spreads as borrowing costs have risen. Clearly the asset-backed securitization market is open and offers a much lower-cost source of long-term capital, so why not consider pursuing that or at least halting the paydown of the existing tranches?