02/12/23 03:34 PM EST

SUNDAY NIGHT REIT READ | NEW ACTIVE SHORT ST. JOE COMPANY | 2.12.23 | (JOE, IRT, DOC)

Rob Simone, CFA

Takeaway: Also adding DOC to Active Long list and IRT to Active Short list; enjoy the game, everyone!

Hedgeye Cartoon of the Day: Hike!

It is 2.12.23, and Active Short MPW is overvalued by whatever the share price is. As a reminder, here is what actually happened with Shasta, which was a case study in "success" resurfaced by management along with 2Q22 results.

Ticker: JOE

Company Name: New Active Short St. Joe Company

Subsector: Residential / Land

Headline: JOE's dirt = hurt

Adding St. Joe Company (JOE) to the Active Short list, as we see significant downside potential (~40-50%+) from current levels. JOE is essentially 100% exposed to slightly inland land positions along the Western coast of Florida surrounding Panama City. It is heavily levered to the Florida housing cycle and credit availability, and we think it is very materially over-valued relative to homebuilders and any reasonable NAV/monetization scenario for its assets.
Black book presentation laying out the short these planned for end-of-Feb./early-March following 4Q22 earnings season (tentatively 2.28 as of now). We wanted to get it "on the board now" given the significant recent outperformance vs. homebuilders (~1,700bps) and the XLRE (2,300bps) over the last three months.
We are refining our work, but think a "fair" value for JOE's assets is in the ~$20-25/share range versus a current share price just under ~$47/share. This implies roughly ~50% downside from current levels and before dividends and carry costs.
We estimate JOE is currently trading at ~4.3x/2.4x levered/unlevered BV compared to ~1.9x/1.3x, respectively, for publicly-traded homebuilders. We are of the view that JOE's landholdings (1) do not deserve such a premium in the market, and (2) the extremely long "tail" over which it will take it realize value, and requisite PV discounting, does not fit with the value being ascribed to JOE in the market.
Illiquid stock owing to concentrated positions held by Fairholme Funds (~42% ownership) and its Chairman, Bruce Berkowitz (another ~1%). Net of other index funds holding shares (~21%), there is relatively limited float and also a low short interest as a % of that float (~2.3%).
Riddled with potential conflicts, as Bruce Berkowitz serves as Chairman of both JOE and Fairholme, Fairholme manages JOE's captive investment portfolio, and JOE's Board has two other directors (of 5 total) who are or were Fairholme-affiliated.
Lack of transparency - the level of disclosure has been declining/inconsistent/of poor quality, the company does not hold quarterly earnings calls with analysts and does not attend conferences, and there is no other sell-side research coverage. We believe the actions taken over time convey an insular culture and attempt to obfuscate. These attributes are not consistent with good stewardship of shareholder capital or a premium in the market.
Note: the idea has been pitched publicly as a short candidate in the past by Greenlight Capital (2010) and Kerrisdale Capital (2018). We think the "here and now" offers the added benefits on the short side of tightening/persistently tight credit markets and a weakening housing market, both in level of degree that have likely not been seen since the GFC.

Ticker: IRT

Company Name: New Active Short Independence Realty Trust

Subsector: Apartments / Multifamily

Headline: One more Sunbelt MF REIT on the short side

We are adding Independence Realty Trust (IRT) to the Active Short list, joining CPT and NXRT among the multifamily REITs.
First, we have been looking for other MF REITs to add on the shot side amidst this "big bear bounce" as KM likes to call it, with all of the Residential REITs signaling bearish TRADE and TREND. We are more bearish the Sunbelt vs. Coastal Gateway.
We think the RoC profile remains unfavorable for at least 2-3 more quarters given the deceleration in underlying market rent growth and tough base effects. IRT is essentially ~70-80% exposed to the markets we think are decelerating the fastest right now from a market rent growth/leasing spread perspective, including Atlanta (~14.5% of NOI), Dallas (~12.3%), Raleigh-Durham (~5%), Nashville (~4.8%), Memphis (~4.1%) and Florida (~4.7%). ~70% of total company NOI is derived from the Sunbelt.
While admittedly the debt is termed out and leverage is relatively lower than 2021 levels, IRT still has one of the more highly-levered balance sheets among the Sunbelt REITs at ~7x Adj. net debt/EBITDA and nearly ~2x turns higher than the MF sector using a size-weighted average. Similar to NXRT (whose leverage has gotten a little better on the margin), IRT's absolute leverage levels will be a headwind as we move deeper into Quad 4. IRT and Steadfast Apartment REIT merged at essentially peak values in late-2021.
It makes no sense to us, despite the value-add potential embedded in the portfolio, that IRT should carry an in-line-to-premium valuation relative to MAA on an unlevered basis.

Ticker: DOC

Company Name: New Active Long Physicians Realty Trust

Subsector: Healthcare - MOBs

Headline: Another spot to hide-out in Quad 4; Adding to Active Long list

Again, fitting with our view that through April-May the best we can do is look for longs where we "lose less," we think lower-levered, high-tenant credit healthcare with term, little operating leverage and lower probability of earnings reductions/unfavorable RoC is a place to "hide out." DOC is essentially a "cleaner" HR in one of the least volatile corners of healthcare, and we are adding it the Active Long list.
DOC still has its unlevered cost of capital in the market, and therefore can still grow externally in an accretive fashion and not just lean on low-single-digit internal escalators. We like DOC's capital allocation discipline and properly-aligned incentives with shareholders as per the proxy. While HR has lost a good deal of credibility with investors post-HTA, we believe DOC remains "outside of the REIT box."
DOC's ~5.8x net debt leverage is a full turn lower than HR.

Figure 1: Updated Hedgeye REITs Position Monitor