12/11/22 04:13 PM EST

SUNDAY NIGHT REIT READ | APARTMENT ITEMS + BREIT/SREIT + MPW MUSINGS | 12.11.22 (APARTMENTS, MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Kicking off the new week with a focus on resi, and grabbing some popcorn for whatever comes of Steward

Hedgeye Cartoon of the Day: Crash Dummy on the Shelf

It is 12.11.22, and Active Short MPW is overvalued by... whatever the current share price is.

WEEKLY VALUATION HANDBOOK PDF LINK

Tickers: AVB, AIRC, AIV, BRT, CPT, CSR, EQR, ESS, IRT, MAA, NXRT, UDR, VRE

Company Name: Various

Subsector: Multifamily Apartments

Headline: Rent growth continued to decelerate in November; 2nd derivative now falling fastest in Northeast + TX + FL

We are in the "eye of the storm" in terms of y/y base effects on rents, and do not imagine exploring residential long ideas again until at least the end of 1Q23.
Largest Sequential Decelerators M/M on RoC:

Jersey City: -422bps
New York: -280bps
Charleston: -244bps
Much of Texas & Florida in the red

Sequential Accelerators:

San Francisco: +109bps
Cambridge, MA: +42bps
And that's pretty much it...

Figure 1: Apartment Rent Growth Monitor

Source: Apartmentlist.com, zillow.com, Hedgeye

Tickers: BREIT / SREIT + Various

Company Names: Blackstone / Starwood (not covered by us) + various Apartment names

Subsector: Multifamily / Apartments

Headline: Highlights from Bisnow article on BREIT and its implications for Multifamily

We spoke with Bisnow last week and were quoted in their article re: BREIT/SREIT's gating of redemptions, with our focus resting on the forward implications for select public and private real estate markets and subsectors, such as Sunbelt multifamily.
This marked the first time in the history of BREIT that they are limiting redemptions; November redemptions will be ~$1.3 billion which would equate to ~43% of requested outflows. Concern had been percolating for months that withdrawal of market liquidity could result in redemptions > subscriptions in these vehicles and the ultimate gating of funds.
Aside from the obvious nonsense of reporting +11.9% and +13.2% positive performance through the first nine months for BREIT and SREIT, respectively, owning to a combination of private + lagged "marks," we think one of the most important factors to consider here is the removal of one of the largest marginal bidders (BREIT) in certain subsectors such as Sunbelt multifamily.
BREIT was often the only or the main bidder for larger portfolios / entities (such as APTS, BRG) which are used as read-across comps for the sector, and BREIT no longer being able to participate widens the bid-ask spread in an already illiquid market, all else the same. We pose the question: "What happens to Sunbelt resi stock prices if REITs are suddenly marked at ~6% cap rates instead of 5% or sub-5%?" It's not pretty.
Those performance metrics above were being reported despite ~20-30% declines in public market REIT prices in FY22.
As an aside, tomorrow we will be hosting a live Real Conversation at 12:30pm ET on the BREIT situation. We would encourage subs to tune in to hear more about both the near- and long-term implications of BREIT's recent moves. Our focus will be on: (1) what is happening in real-time vis-a-vis the private REIT holders, (2) for those who do not live in real estate day-to-day, what are the trade-offs between the public and private/non-traded REITs, and perhaps most importantly (3) what are the go-forward implications for public REIT valuations?

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals (just MPW standing alone)

Headline: Thinking through the incentives on each side of the MPW/Steward negotiating table

Note: Everything we are writing here, similar to early last week, consists of our own thoughts around the situation. The reality is that restructurings involve a lot of game theory and understanding of incentives. We view Steward as an evolving restructuring, with the company already having entered "the zone of insolvency." So for better or for worse, given that we do not have a direct seat at the table, we need to handicap different scenarios to come up with a logical outcome.
We view Steward / Ralph de la Torre (RDLT) as possessing virtually all of the leverage in the situation. Additionally, he very likely does not share MPW's incentives. Unfortunately, MPW knowingly or unknowingly put itself in an incredibly vulnerable position. Think about it:

RDLT has been CEO of Steward since it was non-profit Caritas Christi and through to the present day as its majority owner, including during Cerberus' ownership tenure from 2010 to 2020-2021. He has clearly done well for himself over that tenor and in his prior life as a surgeon.
He put up no capital in 1Q21, as far as we can see, when MPW 100% financed the change of control with Cerberus by loaning RDLT as majority owner + a doctor group ~$335 million and secured by their equity in Steward to buy out the Cerberus convert. We've obviously made our issues with that transaction abundantly clear, but perhaps a subtle and unspoken part of the story is that he wasn't "in" for any more of his own money outside of "sweat equity."
In the same quarter, with Cerberus fully out of the deal, Steward declared a ~$111 million dividend to its owners, which we can see based upon MPW's receipt of its ~9.9% share of ~$11 million. This implies ~$100 million paid to RDLT and the doctors, of which we think RDLT's share was likely ~$70-80 million although that is our estimate (based on CMAX filings) and not confirmed. We obviously discovered that within months of that distribution he acquired the AMARAL yacht for ~$40 million. Big point: He has extracted a fair amount of CASH out of the business and is clearly a wealthy guy.
At the same time, we do not know what his comp split has been since then, and this could be important for game theory purposes. If he was receiving primarily cash vs. non-cash comp and stock, he may not care if Steward defaults as there is less to lose in real time. Obviously the the reverse would be true, but if we are right and Steward is indeed insolvent (and he knows it?) he also may not care under that scenario as well. The only equity upside to him may be participation in "NewCo" Steward equity after the cap stack is repaired.
We imagine (again, we do not know, this requires some thought) that RDLT may understand this dynamic as well, and perhaps sees more value in resetting the deck. This would obviously involve reducing the rent to a sustainable level vis-a-vis Steward's actual EBITDAR.
Perhaps to sum it all up: A Steward "default" (1) may not bother RDLT that much given that he has already extracted the majority of his value from the structure, and (2) it actually may be in his best interest if he wants its value to increase again.

On the other side, MPW is truly "over a barrel." A Steward default or rent reduction is existential to MPW's equity value, which at least partially explains their willingness to go to such great lengths to keep Steward alive via direct and indirect loans. Valued at ~13-15x cash EBITDA and carrying ~8.5-9x cash leverage, at this point MPW's shareholders cannot afford a ~30% reduction in cash rent from a single tenant, which is our estimate of what needs to happen if Steward is to no longer be a "zombie" operator tenant. We think there is a situation here where on one side (Steward) the key decision maker feels he has little or nothing to lose, and on the other (MPW) the key decision makers collectively among them have A LOT to lose, including about ~$105 million of equity interest and all the associated perks (of which there are many at MPW).
Usually the side with the most leverage wins, but let's watch. Just some thoughts...