02/07/23 08:12 AM EST

REITS DAILY BRIEF | STORAGE DEAL + UDR RESULTS + INVH CLASS ACTION | 2.7.23 (LSI, PSA, INVH, UDR)

Rob Simone, CFA

Takeaway: Invitation Homes is an absolute (litigation) unit

Hedgeye Cartoon of the Day: Cleanup Crew

It is 2.7.23, and Active Short MPW is overvalued by approximately... whatever the current share price is. Believe us yet?

Tickers: LSI, PSA, CUBE

Company Names: Life Storage, Inc., Public Storage, Active Short CubeSmart

Subsector: Self-Storage

Headline: Maybe a less typical "take" on the proposed merger, but we think bearish CUBE

On Sunday evening Public Storage (PSA) proposed to acquire Life Storage (LSI) (no active recommendations on either) in an all-stock transaction for 0.4192 shares of PSA. LSI responded in a lukewarm fashion with the typical "we are reviewing the deal, etc."
Based on the closing price of PSA, we estimate an approximate ~5.0% nominal cash cap rate based on our estimate of LSI's forward NOI, and perhaps ~30-35bps lower inclusive of recurring / maintenance capex and assuming essentially all of LSI's overhead goes away.
Perhaps a slightly different take here - we think this transaction, should it close, is actually bearish Active Short CUBE. The main response from the bulls on CUBE since our short recommendation has been that the company could put itself up for sale or be pursued in a takeover. With PSA as the most likely/logical acquirer of CUBE potentially flexing up its balance sheet and having to integrate another public REIT platform, this would greatly reduce the probability of that happening, all else the same.
Candidly the deal is probably also bearish PSA for a time, as the share issuance overhang tends to have an outsized impact in Quad 4 as we saw with PLD/DRE and HR/HTA. We need more details as the negotiations continue.

Ticker: INVH

Company Name: Active Short Invitation Homes

Subsector: Single-Family Rentals (SFR)

Headline: INVH is an absolute (lawsuit) unit

A competitor alerted the market yesterday that Active Short INVH is the subject of a new class action lawsuit (Case No. CIVSB2213022) in the Superior Court of CA for the County of San Bernardino. The Plaintiff brings the complaint on behalf of himself + all current and former hourly, non-exempt workers employed by INVH throughout CA at any time from years preceding the filing of the complaint to the resolution of the action.
We are thinking through the complaint and how to quantify it, but in general it fits with the general pattern we have observed of INVH being a magnet for litigation from former tenants, employees, whistleblowers, etc. It is also consistent with our view that INVH, and perhaps all of SFR, is firmly in the legal and political crosshairs, and that these risks need to be discounted.
The complaint alleges:

failure to pay minimum wages,
failure to pay overtime wages,
failure to provide compliant meal and rest periods, or premium payments in lieu of,
failure to reimburse necessary businesses expenses,
failure to pay timely wages owed upon termination or resignation, and
failure to provide accurate, itemized wage statements.

More specifically, the complaint includes but is not limited to the follow allegations:

The complaint alleges INVH routinely required class members to perform unrecorded and uncompensated work, including unrecorded travel time in company-issued vehicles and off-the-clock maintenance of company-issued vehicles.
INVH was aware and caused that class members were working off-the-clock, and class members were not provided with minimum wage compensation or overtime pay for this work.
INVH failed to provide required break/meal/rest times, or to compensate class members with premium wages in lieu of those breaks.
INVH systematically required class members to purchase their own tools necessary to perform their work, and did not reimburse for such expenses.
All of these items result in a failure to provide accurate itemized wage statements as required under CA law.

We do not yet want to rush to estimate a damages/settlement amount, but would note that the prayer for relief includes punitive damages, treble damages, etc.
As a reminder, the CA whistleblower case is ongoing and INVH hired a new VP of legal last year, whom we believe is basically an in-house litigator brought onboard ahead of anticipated legal challenges.

Ticker: UDR

Company Name: UDR, Inc.

Subsector: Apartments / Multifamily

Headline: No active recommendation on UDR, but interesting read-across for all of MF

We do not have an active recommendation on UDR, but we wanted to highlight that 4Q effective new and blended lease spreads for the Northeast region (+7.2% / +9.3%, respectively) are now outpacing those for both the Southwest and Southeast regions.
UDR is obviously one of the more diversified Apartment REITs, with overweight exposures to CA markets, Seattle, D.C., Baltimore, New York and Boston.
All else the same and on a relative basis this is a bullish print for EQR and AVB, but we would say less so for ESS given Seattle, etc.

Figure 1: Hedgeye REITs Position Monitor