11/27/22 06:16 PM EST

SUNDAY NIGHT REIT READ | POSITION MONITOR + VAL HANDBOOK | 11.27.22 (DLR, EQIX, HR, DOC, SBAC, MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Adding Data Center REITs DLR + EQIX to Long Bench

Hedgeye Cartoon of the Day: Thanksgiving Loan

It is 11.27.22, and Active Short MPW is overvalued by... whatever the current share price is.

WEEKLY VALUATION HANDBOOK PDF LINK

Tickers: DLR, EQIX, HR, DOC, SBAC

Company Names: Various

Subsectors: Data Centers, Healthcare, Towers

Headline: Adding DLR & EQIX to Long Bench, moving other pieces around

Adding Data Center REITs Digital Realty (DLR) and Equinix (EQIX) to the Long Bench - (1) this will be controversial as there as several high-profile short calls of the DCs out there, (2) we agree with some of the points and disagree with others, (3) we have reason to believe that DC markets may be tightening, particularly in Europe, which would run counter to much of the negative pricing power seen in recent years, (4) return profiles for these companies are not as great as the companies would present them, but also not as poor as the bears present either, (5) base effects are getting easier and (6) DCs, along with the Towers, are great REIT picks in a traditional Quad 4 at least historically. This Quad 4 has not been traditional yet. We see the DCs being a source of funds in coming quarters.
Moving Healthcare Realty (HR) to the bottom of the pecking order on the Active Long list. We got this one wrong, and we are re-evaluating constantly for more information. More to come here, but we see a "cleaner" option in DOC among MOBs.
Moving SBA Communications (SBAC) to the bottom of the pecking order on the Active Short list. We see potential downside to the ~$275/share range under the next bout of volatility (as we said over the summer), but at that point the bear case (slowing growth, higher churn, higher leverage) will have been fully priced in and we will think about removing the short. We missed exiting the short on the first go around. The reality is that the Towers, similar to the DCs, will likely be beneficiaries of fund flows as the rates trade rolls over. Watching this one closely.

Tickers: Various

Company Names: Various

Subsector: Residential / Multifamily

Headline: DOJ opening investigation into RealPage

Late last week before Thanksgiving ProPublica reported that the DOJ's Antitrust Division was opening an investigation into whether RealPage helped apartment landlords coordinate rent increases.
ProPublica previously reported on the use of the YieldStar software in mid-October.
Members of Congress have since sent letters to the DOJ and FTC requesting an investigation into whether the pricing software could be (1) pushing rents above "competitive" levels and (2) allowing large landlords, including several publicly-traded apartment REITs, to coordinate on pricing in violation of federal antitrust laws. YieldStar algorithmically recommends pricing daily for each available apartment unit, based on a constant feed of leasing signing data from all of its property management customers market-by-market.
We think the most important takeaway here is the negative headline risk, political pressure and potential for adverse regulation across the resi space and particularly in the Sunbelt, following two years of above-trend rent growth that has stretched affordability. We continue to see more risk on the SFR side of resi, but clearly apartment landlords are not immune from scrutiny. We have been fading residential REITs since early-2022.

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals (just MPW standing alone)

Headline: Thoughts on the coming weeks + the notion that MPW is "cheap"

We have been receiving a lot of feedback from subs and investors on MPW over the last few weeks, which is obviously always welcome as we continue to challenge ourselves and look for blind spots.
To be clear, and we have said this numerous times, when we say "MPW's equity is worthless," we mean that (1) "market" rents struck with true arms' length operator tenants, or (2) true arms' length third-party buyers underwriting and acquiring MPW's assets when (3) combined with MPW's degree of financial leverage would very likely result in de minimis equity value. MPW re-striking Steward's cash lease payments due on the 12th of each month to long-term sustainable levels to facilitate Steward becoming cash flow positive again, which we estimate to be ~60-65% below current levels before the +5% reset in January, would immediately erase ~20-25% of MPW's cash EBITDA. Given ~9x cash leverage at MPW, and that we think MPW is "worth" no more than ~12-13x cash EBITDA given the economics generated by the business, the equity would not survive that reduction. And that is before any changes at Prospect, Pipeline, Springstone, Priory, Median, etc.
Now, that is obviously a different question than "what does the stock do?" And to be clear if MPW headed back towards the mid-single digits, which we expect to happen in the coming months, MPW would naturally and very rationally move down the pecking order on our Active Short list as the risk/reward changes. We are not on a kamikaze mission. We still see significant downside from here.
Regarding the notion that MPW is somehow "cheap" - look, if you want to (1) value the stock on GAAP FFO when at least ~20% of earnings is non-cash, and (2) ignore leverage, well then knock yourself out. Call it cheap. But if you want to consider leverage, operator loans, a significant cash overhead burden, capex endemic to MPW's model when there should be none for a triple-net, and cash generation of the underlying assets, then consider the following and the math in Figure 1 below.

MPW is trading at a ~6% net effective cap rate. Given that MPW sends at least ~$200 million annually in "capex" to its operators, despite being a triple-net REIT, we would argue this must be part of the calc.
Using the same methodology and their own economics, DOC is trading at a ~6.2%, CTRE is at ~7.4%, ADC is at ~5.4%, GTY is at ~6.1%, NNN is at ~6.2% (!!!), NTST is at ~5.8% and O is at ~5.6%.
We would argue that MPW should be valued today AT LEAST +200bps wide of where it is currently trading, so as to compensate investors for the very significant tenant credit risks throughout MPW's portfolio. Under such a scenario, MPW would be trading at ~$5.50/share, or ~60% below current levels.
Still think it's "cheap?" We for sure do not.

Lastly, despite market chatter we also think the ABL gets extended, if for nothing else than MPW cannot allow Steward to file. That scenario would end MPW, period stop. But again, the following questions need to be asked:

Did MPW guarantee, syndicate or refinance the debt?
Did MPW lend on a subordinated basis additional funds "below" the ABL?
How much is outstanding on the ABL post-extension? This is important to understand for a company which we think is still burning ~$200-300 million per year in cash.
What are the terms of the extension?
If Steward's 2021 audit is complete, will you disclose the financials, as we believe you are fully authorized to do under Section 39.6 of the master lease agreement.

Figure 1: MPW Current Implied Net Effective Cap Rate Math