11/16/22 09:43 AM EST

REITS DAILY BRIEF | NOTES FROM NAREIT DAY #1 | 11.16.22

Rob Simone, CFA

Takeaway: Calling out what we think are some of the more important data points / themes

Hedgeye Cartoon of the Day: Over-served!

It is 11.16.22, and Active Short MPW is overvalued by approximately... whatever the current share price is (so that I don't have to keep updating this number).

Ticker: MAA, CPT, ESS, INVH

Company Names: Various, but focus on Mid-America Apartment Communities

Subsector: Multifamily / SFR

Headline: If MAA is not budgeting for FY23 recession, does that not mean numbers are too high by default?

One of the points we heard coming out of meetings was that MAA management was telling analysts/investors that they are not budgeting for a recession in FY23 and that they expect to see both market and leasing spread growth decelerate to historical or "normal" levels.
Hedgeye's view is that we are already in a Quad 4, consumer-led recession that is deepening and will last through at least 2Q23. Does that not imply, almost by default, that rent growth, occupancy and bad debt assumptions are all too aggressive, both internally at the company and across the Street? This is not a criticism of MAA, more a callout of likely complacency and/or anchoring.
Renewal spreads in the +10-11% range imply a quickening deceleration from 3Q22, following +17.5%/+16.5%/+14% in 1Q/2Q/3Q, respectively.
New Lease growth at +5.3% in October has now clearly decelerated massively and inflected below renewals at +10.7% for the month. Overall leasing spreads trending from the mid-teens (+13.9% in 3Q22) down to +8.1% in October (see Figure 1 below).
The RoC profile looks bad and likely worsening, but to be fair to MAA its lower relative absolute dollar value of in-place rents at ~$1,700 to ~$1,800/mo. could leave it more defensible than CPT at >$2,100/mo. and INVH at >$2,200/mo. within SFR.
As an aside, one of the more interesting/controversial residential-related comments we heard came from ESS. They claimed that just ~30% of the 11k layoffs announced by Meta are in their markets, ~60% of Twitter's employees reside outside of ESS' markets, and finally that a majority of hiring since early-2020 occurred outside of ESS' target markets. Unspoken word/implication: An outsized proportion of impacted tech jobs, versus recent history, reside in the Sunbelt markets (Austin, Nashville, Miami, etc.) and from hiring on the East Coast (New York, Boston, D.C., etc.) versus prior cycles. This has negative implications for the Sunbelt names as well as AVB + EQR, in our view.
And then the next logical follow-on, does this mean a negative read-across for Sunbelt office like CUZ, HIW, etc.?

Figure 1: Effective Rent Growth Slide from MAA's NAREIT Deck

Source: Company Reports

Ticker: PSA

Company Name: Public Storage

Subsector: Self-Storage

Headline: Balance sheet to facilitate ongoing external growth?

Our understanding is that PSA was telling investors that it expects to continue to be able to deploy ~$3 billion+ of external capital per annum over the next two years, essentially ~100% debt financed without the need to raise any equity. It stands out as PSA is perhaps the only REIT with both the intention and capacity to do this level of external growth. To be clear, we think that they should if they can execute after years of trailing peers.
PSA's cash flow generation + it's sector-best balance sheet no doubt facilitate the ability to do that.
Our question would be "where does that amount of deal volume come from?"
We also think that PSA may have purposely set a low bar heading into FY23, following its first ever guidance year in FY22 where they probably came out of the gate too aggressively.
October occupancy ended at ~92.8% versus ~93.3% as of 3Q22, and double-digit positive move-in volume for the month came at negative LSD move-in rental rates.

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals

Headline: Again, we cannot stress enough that the following questions need to be asked

What is the basis for saying that Steward's ABL facility will for sure be extended? Especially after we just saw that CMAX principals had to literally create a related-party entity and fund it to be able to finance the Steward VBC A/R, owing to lack of audited financials? We also understand that the rate on that facility for 1-year paper was ~12% with a ~3% fee. We think management's commentary about a "technical hold-up" of the 2021 audit makes no sense whatsoever.
How much is drawn on the ABL and what is the new availability? This is a very important question for a tenant that we believe is still burning ~$200-300 million per year and is essentially insolvent.
If an extension were to happen: (1) How does a 1-year extension (as implied by CFO Hamner's 3Q22 call commentary) fix the situation? (it doesn't, only a rent cut will in our view), (2) what are the terms or contingencies, if any, and (3) most importantly, what was MPW's involvement in the extension? Did they have to guarantee it? Syndicate it? Effectively finance the whole thing and/or make another subordinated loan to get it done? Any of these answered in the affirmative would effectively transfer the liability to MPW, and we all know what that means.
What is the basis for saying that MPW will continue to collect the existing rent from Pipeline? Multiple parties, including the U.S. Government, are objecting in real-time to the approval of the debtors' disclosure statement, and the existing annual rent of ~$18 million for the CA assets is not even close to being covered by <$3 million of property-level EBITDAR before allocated overhead.
We believe the math and facts as we see them do no support these assertions. More detail is required, not just regurgitating management commentary. Given MPW management's documented history (by us and in our opinion) of incorrect statements and misdirection, why should we take them at their word?