02/15/23 07:24 PM EST

REITS DAILY BRIEF | INVH EARNINGS + MPW FOLLOW-UP | 2.15.23 (INVH, MPW)

Rob Simone, CFA

Takeaway: Worth the price of admission? INVH guide not great, and we see top-line downside

Hedgeye Cartoon of the Day: Most definitely "Plato's Cave"

It is 2.15.23, and Active Short MPW is overvalued by approximately... whatever the current share price is. Believe us yet?

Ticker: INVH

Company Name: Active Short Invitation Homes

Subsector: Single-Family Rentals (SFR)

Headline: FY23 guide below Street and we think perhaps still aggressive; hard to gauge share price reaction here

FY23 Core FFO seen at $1.73 to $1.81/share, with Hedgeye capturing the low-end at $1.73/share coming into the quarter and the midpoint at $1.77/share coming in below FactSet at $1.79/share. We would guess that FY23 SSNOI growth seen at +4% to +5.5% is likely below the Street on higher SSExp growth up +7.5% to +9.5%, but above us at +2.5% SSNOI growth coming in. As a reference point we were at +7.1% SSExp for FY23 coming into the print, and we think we were among the more aggressive out there on SSExp assumptions. We see downside to the top-line numbers on higher bad debt expense y/y and perhaps ~100bps y/y of occupancy loss, which would obviously drive higher turnover costs and additional maintenance capex. In general we think maintenance capex is understated.
Normally our bias would be to the downside on share price reaction to this print, but it's hard to handicap right now given the market reaction to earnings thus far. We can say for sure that we think numbers need to come down, and that the RoC profile remains negative and unattractive for SFR. Where the SFR stocks are priced relative to MF does not reflect that, in our view, nor what should be inferior cash economics given the model.
4Q22 Results: Core FFO of $0.43/share +$0.02/share vs. Hedgeye and +$0.01/share vs. FactSet

+$0.01/share from each of G&A and Interest Expense
As expected SSNOI growth at +3.7% y/y was crushed by a "catch up" accrual for property taxes in Florida and Georgia. We would keep an eye out for tax growth in North Carolina going forward, but think its a bigger issue for AMH. Revenue growth of +10.7% in Florida was enough to keep SSNOI for the market positive, while Atlanta SSNOI declined -9.1% y/y and Texas got hammered down -14.5% on SSExp up +35%.
A theme we highlighted throughout 2H22, bad debt was up +100bps y/y to over ~200bps of gross rental revenue driven by LA County. We are modeling bad debt expense at ~225bps currently for FY23, and continue to think both the buyside and sell-side may be too low there.
While blended spreads at +9.1% were a little bit higher than we expected, INVH also saw the same "crossover point" as MF, with new lease spreads dipping below renewals for the first time since 2Q20, which is usually very negative for the RoC.

Figure 1: INVH 4Q22 Variances

PDF LINK

Source: Company Reports, Hedgeye Estimates

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: Who even knows anymore?

Headline: You just can't make it up... we estimate a ~15% cash rent reduction on Utah assets to MPW

At 4pm this evening we concluded our note with the following question: "What were the concessions, loans, etc. extended by MPW as part of the transaction? As with pretty much every other MPW transaction we have looked at, we expect in the coming weeks and months for additional details to leak out, including potentially with 4Q22 earnings next week."
Well by 4:30pm this evening we found out, at least for a subset of the concessions (we think there could always be more that are not disclosed yet)! MPW put out its own press release HERE. In it the company discloses a ~7.8% initial cash yield against a ~$1.2 billion lease base over a 15 year initial term, escalated ~3% annually. This implies initial cash rent of ~$94 million.
This represents an approximate ~15% reduction to our estimate of in-place escalated cash rent of ~$110 million paid to MPW for FY23 from Steward. This reduction accounts for roughly ~1.3% of our estimate of MPW's annualized cash EBITDA, before the contemplated Prospect restructuring and potential Healthscope sale. This is not spin, this is fact - MPW just cut the rent on its best assets.
We believe this concession was taken by MPW as the "price of admission" to secure a liquidity injection into RemainCo Steward. As we have seen time and time and time again, MPW and its shareholders are taking pain so as to elongate the life of its still ~20% EBITDA tenant. Meanwhile we do not expect Steward to have any excess cash proceeds after debt repayment.
One final point - this is consistent with our thesis, that MPW has leased hospitals at above-market rents to insolvent/distressed tenants who cannot afford to pay that rent, and that true "arm's length" third-party buyers would not be willing to assume it. And that rent reductions (which this is, on the best assets) will erase MPW's equity given its high leverage.
Questions:

If this is what it took to sell the best assets in the Steward system and secure a liquidity injection into Steward, what would it take for the balance of the portfolio? Noodle on that one for a bit...
We literally had the CEO of Steward out in front of investors a month ago touting the best EBITDA the company would ever experience, and that the rent was well-covered. If that were true, why would Steward opt to sell its best assets, and why would MPW accept a rent cut and treat it as a win?
What other concessions, if any, did MPW grant to facilitate this deal?
One final catalyst calendar question: What positives remain in front of us?

Prior Notes:

2.15.23 - THE (DIS)TRUST SERIES | VOL. XLVI | NO-NONSENSE TAKE ON STEWARD UTAH | 2.15.23 (MPW)

2.13.23 - THE (DIS)TRUST SERIES | VOL. XLV | TOO MUCH V'CNCY IN BIRMINGHAM... SO BUILD A HQ | 2.13.23 (MPW)

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

2.10.23 - REITS DAILY BRIEF | UPDATED CPT NUMBERS + REGAL LEASE NEGOTIATIONS | 2.10.23 (CPT, EPR, O)

2.9.23 - THE (DIS)TRUST SERIES | VOL. XLIV | ALL OF YOUR MODELS ARE BROKEN... | 2.9.23 (MPW)

2.9.23 - UHAL 3Q23 RESULTS | U-MISS'ED THE QUARTER | 2.9.23 (UHAL)

2.8.23 - REITS DAILY BRIEF | ESS 4Q RESULTS + UHAL + POSITION MONITOR UPDATES | 2.8.23 (ESS, IRT, UHAL)

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

2.5.23 - SUNDAY NIGHT REIT READ | WHO BLINKS FIRST? WE THINK SELLERS AS WELL | 2.5.23 | (CPT, EPR, MPW)

2.3.23 - REITS WEEKLY VALUATION HANDBOOK | 2.3.23

2.3.23 - CPT 4Q22 RESULTS | OUTRIGHT MISS ON THE QUARTER AND FY23 GUIDE | 2.3.23 (CPT)