01/26/23 07:00 AM EST

REITS DAILY BRIEF | RADI SALE PROCESS CONCLUDING NEXT MONTH? | 1.26.23 (EPR/AMC, RADI, SLG)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: RADI sale process + AMC covenant suspension extension + SLG 4Q22 results

Hedgeye Cartoon of the Day: Lost My Shell

It is 1.26.23, and Active Short MPW is overvalued by approximately... whatever the current share price is.

Tickers: EPR / AMC

Company Names: Active Short EPR Properties & Top-3 tenant AMC Entertainment Holdings

Subsectors: Triple-Nets

Headline: AMC's RCF covenant suspension period extended by another year; debt matures April 2024

Last night AMC announced in an 8-K filing that it had entered into a 12th amendment to its credit agreement, which extended the date for the termination of the covenant suspension period by an additional year to 3.31.24.
AMC previously agreed that during the suspension period it would adhere to (1) a minimum liquidity test, (2) an anti-cash hoarding test that functions as a revolver sweep on any outstanding balances, and (3) additional reporting obligations.
The credit facility matures in April 2024, and as we mentioned in our black book presentation any borrowings made and outstanding as of the end of 1Q23 could potentially be treated by the auditors as a current liability.
AMC is obviously one of Active Short EPR's largest tenants at ~15-16% of cash EBITDA. A bull-bear debate is raging under the surface on (1) the severity, likelihood and timing of any AMC BK filing, and (2) what the degree of potential rent reductions could be. If we had to handicap it, "consensus" is currently for a ~10% rent reduction at Regal and perhaps ~15-20% or so at AMC should they need to file. We actually think that is "step 2" in the process. If you begin with our "step 1" we think investors may come to the realizations that (1) the stock's fair value is materially below the current share price, and (2) worsening credit (spreads have not meaningfully widened, believe it or not) can serve as the catalyst towards that FV BEFORE any rent reductions or OpCo conversions.

Ticker: RADI

Company Name: Active Long Radius Global Infrastructure

Subsectors: Tower Ground Leases / Property Rights

Headline: Two PE firms pursuing RADI; appears process concluding end of next month

Yesterday afternoon another report arose that Active Long RADI is continuing its takeover talks with two potential suitors - EQT Infrastructure and PSP Investments.
The report mentioned that RADI would likely wrap up sale discussions by the end of February, and that several bidders including one pension fund had already dropped out of the process. Valuation of the YieldCo + the platform seems to be a sticking point in the negotiations.
Recall last year two Bloomberg reports emerged that RADI was pursuing a sale, which we think makes sense given a structure with a broken cost of capital that is being penalized instead of rewarded by the public markets.
We think $16-17/share is "fair" value here under a new cost of capital regime, underpinned by an underwritten ~7% unlevered IRR for the YieldCo.

Ticker: SLG

Company Name: Active Short SL Green Realty

Subsectors: Gateway Office

Headline: 4Q22 is and should be "boring;" net effective rent trends continue to look terrible

4Q22 should be / always is the least exciting quarter for Active Short SLG following the company's annual IC conference in December, where it already presented the FY23 outlook / buildings blocks and reduced the dividend payout.
4Q22 results roughly in-line (reported FFO $1.46 vs. $1.48 per FactSet), with no change to the FY23 outlook for FFO in the range of $5.30-$5.60/share and AFFO around ~$3.25/share. In our experience, SLG is VERY accurate in its forward year earnings outlooks and almost always finds a way to wind up in the range, save for an unexpected asset sale or some exogenous event like COVID.
Looking at the results, the key points to us remain leverage that is just too high heading into a "true" deepening Quad 4, declining occupancy rates and perhaps most importantly the net effective rent "hamster wheel."
Depending on how you calculate net effective rents (we estimate ~$55psf for FY22 executed leases inclusive of free rent and TIs), they are probably still trending down ~8-10% y/y and, as expected, are just being crushed by rising concessions (TI allowances +40% y/y roughly on a psf basis). With job losses accelerating, corporates shedding / consolidating space, and much of the office product in Manhattan best defined as "commodity" and "ultra competitive," there is no reason yet to expect an inflection point or "less bad" condition in the RoC on net effective rents.
Net effective rents, in our view, are the most important forward drivers of value, so until that RoC improves any discount to "NAV" observed in the public markets is really just a value trap.
Avoid value traps in Quad 4, office is a terrible Quad 4 performer in general, and SLG has some of the worst style factors in the group.