Investing Ideas Newsletter

Short: INVH, HZO, MPW, PEB, TSLA, RVLV, EPR, ONEW, CPT Long: EDU, MLCO, LVS, CARR

Below are updates on our thirteen current high-conviction long and short ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.

INVH

Short Thesis Overview:  We added Invitation Homes (INVH) to the REITs Best Idea Short list, as we thought the whistleblower case in San Diego was a much bigger deal potentially than the market is currently discounting. This was a controversial one for sure as INVH is a consensus long trade, but we thought (1) all the more reason to short it here given both the headline and real financial overhang mixed with a Quad 4 macro setup, and (2) clients need to be thinking about this issue critically

Invitation Homes (INVH) | Thoughts on COO promotion to President from EVP

Is this setting up the line of succession for Charles to the CEO role?

We thought that it was kind of strange to explicitly state "Dallas Tanner will continue in the role of Chief Executive Officer (CEO)." Was there any uncertainty as to this being so?

As a reminder, Tanner missed a few conferences and investor meetings last year that would typically be attended by the CEO, concurrent with increased regulatory pressure and hearings in D.C. We do not have a view if those were related, but we can say for sure that investors were trying to understand the dynamic there.

This move obviously follows the announced retirement of INVH's CFO, which we thought was oddly timed in the middle of an extremely busy lead-up period to 4Q22 earnings. 

HZO | ONEW

HZO Short Thesis Overview: This is definitely a play on ‘shorting the rich’. MarineMax (HZO) is a retailer of new and used boats as well as aftermarket parts, maintenance, storage, financing and some other small business pieces. Consensus straightlined peak 32% margin into perpetuity and is modeling that $7 in EPS power holds steady over a TAIL duration. This company has reversion risk all through the P&L from peak revenue growth to peak margins to peak earnings power. A consumer facing high macro level spending headwinds along with a normalization of the inventory position and a mix reset back to normal selling will likely see gross and operating margins fall back to historical levels and presents ~40% downside in the stock – entirely from a massive negative earnings revision. ONEW Short Thesis: OneWater Marine (ONEW) is similar to our MarineMax (HZO) Best Idea Short – but potentially better. Much like HZO, ONEW is a roll-up of boat retailers in the US. The company went from 37 dealerships in 2017 to 96 today – almost entirely through acquisitions. During that time of free money, the company levered up to over 3x EBITDA while it also benefitted from the boom in outdoor sports, including boating. We value this stock over a tail duration at $10-$15 – or 60% below where the stock is trading today

An insider sale from the Chief Revenue officer at HZO of 10k shares or ~$350k.  We think HZO growth and earnings are about to revert hard and fast as this is definitely a play on ‘shorting the rich’. MarineMax (HZO) is a retailer of new and used boats as well as aftermarket parts, maintenance, storage, financing and some other small business pieces. This company has reversion risk all through the P&L with consumer facing high macro level spending headwinds along with a normalization of the inventory position and a mix reset back to normal selling.

OneWater Marine (ONEW) is a roll-up of boat retailers in the US. The company went from 37 dealerships in 2017 to 96 today – almost entirely through acquisitions. During that time of free money, the company levered up to over 3x EBITDA while it also benefitted from the boom in outdoor sports, including boating. We value this stock over a tail duration at $10-$15 – or 60% below where the stock is trading today.

MPW

Short Thesis Overview: Medical Properties Trust (MPW) is not a traditional triple-net REIT, rather an investor in hospital systems ("WholeCos" using the company's own words). In the process MPW removes the arbitrage from a traditional PorpCo-OpCo arbitrage. These investments are structured as loans + equity investments to the operator tenants, which are in many cases distressed and owe significant rent payments back to MPW as landlord. The arrangement is circular and depends on MPW's ability to raise attractively-priced external capital. Assuming all goes perfectly for MPW and there are no tenant issues, and with an updated distressed cost of capital, we estimate the stock is worth no more than $5-$6/share today.

Ed Aldag said on the call that RemainCo Steward would be more profitable post-Utah sale.

Active Short Medical Properties Trust (MPW) is overvalued by approximately... whatever the current share price is. We are NOT at all kidding about that statement from the CEO above. Think about what is REALLY being said there, after everything that happened over the last 3-6 months. There is no price anyone should be willing to pay for this stock. We think the wheels are coming off the bus. 

• First, MPW's equity is worthless. We define "worthless" for a REIT as having de-minimis equity value. We are of the view that MPW is worth no more than ~$3/share today, assuming no additional tenant issues. Prospect, Steward & Pipeline clearly remain problem tenants. The stock STILL trades at an implied ~6.3% net effective cash cap rate. This calculation includes the impact of cash G&A and "capex," but is also generous in that it gives MPW credit for a ~7% return on that incremental capital investment. We believe MPW should reasonably trade several hundred basis points outside of that number, reflecting the inherent risk of its underlying tenant credit. MPW's cap rate "spread" to the BBB yield has actually narrowed in recent quarters. This clearly makes no sense.  
• Second, we care less about the wreck that was 4Q22 results and more about the pending 10-K filing. There are nearly always more meaningful and at times undisclosed data points in the quarterly and annual filings that help us piece together what is REALLY happening with this company.

Next, on the dividend. We continue to view the dividend payout as very much at risk. The current $1.16/share annual payout is completely unsustainable and should be reduced immediately to preserve cash flow and de-lever the entity. MPW's cheapest source of capital right now is internally generated funds.

PEB

Short Thesis Overview: Pebblebrook Hotel Trust (PEB) has a highly leveraged balance sheet, challenging exposures (heavy urban mix), extremely difficult resort property comps, and rather full valuation as compared to peer set + history.  We see regression towards the mean in the cards on valuation + estimate reductions, which makes for a challenging combination over the NTM.

EBITDA expectations in some of our favorite REIT short ideas – Pebblebrook Hotel Trust (PEB), PK, and XHR – for ’23 and ’24 have come down anywhere from 7-14% from the peaks last year (summertime).  That’s a big move but we see even more downside in estimates and currently have #’s 3-6% lower vs consensus, mostly on the back of weaker flow through assumptions.  Quad 4 and potentially recessionary headwinds would provide even more downside to numbers and with still high leverage ratios, the risks remain high.  Yes, perhaps the meat of the negative earnings revision cycle has played out, but there are other components to the short thesis, including:  

1. The trend in RevPAR growth remains suspect across the US especially corporate related RevPAR
2. The leisure channel faces massive pricing comps in April – July that does not seem reflected in earnings estimates
3. Continued margin pressure as amenities and staffing ramps back up with the return of corporate customers
4. Deferred maintenance CapEx & REIT RevPAR underperformance remain a key issue and will take time resolve – negative for NTM RevPAR growth, cash flow, dividend growth
5. Macro headwinds to remain firm through at least the next 3-4 months (Quad 4) which is a negative for sentiment & demand
6. Valuations on revised numbers don’t suggest a favorable entry point in many of the FS REIT stocks – given catalysts we see a valuation haircut

We’re sticking with our REIT shorts with PEB ranked highest on that priority list.

TSLA

Short Thesis Overview: Tesla's (TSLA) numbers are messy with far too much inventory, improbable OpEx containment, and flat to lower margins. But Musk’s salesmanship has become increasingly goofy.  Tesla is just a ‘pandemic liquidity’ driven bubble stock that is likely already in the midst of a downward revaluation.

You're going to want to listen to this discussion of Tesla (TSLA) from Industrials analyst Jay Van Sciver, post Elon's big investor day this week. Some quick takeaways:

Hosted their investor day yesterday; big plan was “sustainable energy on Earth with no sacrifices”; no discussion of terms like climate change or CO2 emissions; no cool car or anything; just had to cut prices because inventories are in a vertical climb; 

TSLA remains a short. Entire 11-minute video here.

RVLV

Short Thesis Overview: Revolve Group (RVLV) has a problem with rising returns and rapidly building inventories.  The company notes it has high quality inventory, and that it will retain its value, but because of softening demand, and the desire to reduce that inventory, there will be some measured promotions.  Maybe this is possible in a normal environment, but EVERY APPAREL COMPANY HAS TOO MUCH INVENTORY.  Good luck moving inventory in a measured fashion when every company is trying to clear product at the same time.

Revolve Group (RVLV) Bad Quarter, But Pseudo Squeezy: There was little to applaud in this RVLV quarter. Yes, sales came in better than the guide -- +8% vs ‘moderating from 3%’ guidance – but that was well telegraphed over the past two months in the credit card data. What we care about is rate of change, and the rate of change is slowing. That 8% top line compares to 10% in 3Q, and we think sales will go squarely negative in 1Q23. We get to $0.50-$0.60 in EPS in perpetuity for RVLV, which is worth at best about $10 per share. 

EPR

Short Thesis: EPR Properties (EPR) highlights the current oversight of potential rent cuts at large operators that suggest -30-35% downside risk from current levels. EPR is a unique, ~$2.8Bn equity market cap "experiential" triple-net REIT with exposure to largest tenants include Topgolf, AMC Theaters, Regal Cinemas (whose parent just recently filed for Chapter 11 protection), Cinemark, Vail Resorts, Camelback Mountain and Six Flags. Theaters, eat/play, ski resorts and other out-of-home attractions that is highly levered to the U.S. consumer and levels of/changes in discretionary spending. Investors by this point should be very familiar with Hedgeye's Macro call for a deepening, consumer-led Quad4 recession heading into FY23, and it is difficult to find a REIT more specialized or directly exposed to the downside in such a Macro regime.

EPR Properties (EPR), AMC (not covered by REITs) | Critical shareholder vote scheduled for 3.14.23

• AMC Entertainment Holdings (AMC), which is a ~15% tenant to Active Short EPR, reported 4Q22 results last night and clearly disappointed the Street with shares down ~7-8% currently in the pre-market. We want to focus in here on the ongoing recap dynamics:
• By way of background, in 2021 AMC withdrew its proposal to amend the corporate charter so as to authorize the issuance of more common shares. AMC effectively "ran out" of its capacity to issue more shares once it hit the 524 million share limit as per the corporate charter.
• In late-2022 AMC authorized and began to issue blank-check preferred stock in the form of "AMC Preferred Equity Units" or "APEs." So a meme within a meme... why not? The APEs have the same economic and voting rights as AMC common, and AMC holders were issued one APE unit for every share of AMC held. Afterwards AMC began selling additional APEs to raise more cash and gradually recapitalize its balance sheet.

Our take: AMC MUST win this vote if it has any hope of recapitalizing / de-levering without taking more drastic actions, and EPR shareholders should be closely watching the outcome as well. We think if the vote fails, (1) not only will AMC not have the ability to issue additional common AMC shares, but (2) with the APE units now essentially "unmarketable," AMC will have effectively lost its ability to raise equity capital through public issuance. Regardless of the outcome, our view has been that EPR's credit spreads should widen sufficiently to account for this very real credit risk. IF AMC were to have to file BK before Regal exits, ~30% of EPR's cash EBITDA will be in Chapter 11. 

CPT

Short Thesis: For Camden Property Trust (CPT) the RoC of growth is peaking and very likely slowing heading into FY23. We see a combination of RoC slowdown on all the key metrics + numbers that are too high and need to come down.  CPT has a relatively strong balance sheet to be clear, but paying a full price at the cycle top for stabilized assets with likely deferred capex is not a wise capital allocation decision in our view. Different subsector, but it reminds us of CUBE's fully stabilized deal in late-2021 which the market hated and does not typically work well heading into a Quad 4 and overall RoC slowdown.  The pushback will no doubt be that the recent correction in Apartment REIT equities has more than compensated for this and the stock is "cheap" on a relative basis, but we would not want to own anything on the long side right now that is staring at a downward estimate revision cycle while currently at peak RoC.

Still bearish on this corner of the Apartment/Residential sector, particularly the Sunbelt including Active Shorts Camden Property Trust (CPT). We continue to think top-line expectations remain too high, with investors serially underestimating the potential drag from lower occupancy / higher-bad debt and related higher turnover costs. The RoC on all the key metrics remains negative for these names through at least 3Q23.

EDU

Long Thesis: New Oriental Education & Tech Group (EDU)... EDU's new non-academic offerings also offer some long-term promise.  The overseas segment has delivered very robust results.  Good expense control, as marketing and G&A expenses have come in less than expected.   Pace of share repurchases in million of shares similar to last quarter.  In the most recent quarter, gross margins were lighter than China Felix Wang modeled (worth paying attention to going forward) BOTTOM LINE: At FY 2024 1.5x EV/Sales and 13x 2024 P/E, EDU looks cheap but it needs to continue to show improving growth.

As most investors know, our Macro team has been looking for China exposures to express the country's ongoing #Quad1 economic acceleration. New Oriental Education & Tech Group (EDU) fits the bill.

On the broader Macro view, this week we saw an acceleration across the board in China’s February PMIs this morning as the “re-opening” gains steams:

• China Services PMI +56.3 Y/Y, versus +54.4 in January
• China Manufacturing PMI +52.6 Y/Y, versus +50.1 in January
• China Caixin Manufacturing PMI +51.6, versus +49.2 in January

We continue to like China exposures like EDU, MLCO and LVS at the top-down Macro level (and our analysts like them from the bottom up fundamental level... a winning recipe).

Side note: EDU continued to buy back its bonds.  It has bought back $285.1 million worth of its 2.125% bonds, representing 95% of its principal 

MLCO | LVS

Long Thesis: Our Macro team sees China accelerating as the lone #Quad1 economy in a sea of #Quad4 red. Meanwhile, our Gaming, Lodging & Leisure team has been eyeing accelerating growth in Macau. "We expect positive momentum and generally positive catalysts for the Macau market and the Macau stocks for the coming months as visitation and GGR trends continue to recover," the GLL team wrote recently. And there's the long thesis on Melco Resorts & Entertainment (MLCO) and Las Vegas Sands (LVS).

Below are some notes from Melco Resorts & Entertainment's (MLCO) conference call. Commentary on Macau's recovery also provides insight as it relates to Las Vegas Sands (LVS) .

Quick takeaway: Momentum in Macau's favor. MLCO performing well - positive forward commentary in Macau and elsewhere for the company.

KEY POINTS FROM LVS PREPARED REMARKS + q&a

• Q4’22 Investor Deck: CLICK HERE
• Macau Recovery: Performance in '23 has been encouraging; during CNY, EBITDA reached $6MM per day, exceeding what was recorded during CNY in '19.  Post CNY volumes have held up well; daily average mass volume in February has been in line with January
• Studio City Phase II: First stage is targeted for the second quarter, which will include one of the hotel towers, along with the indoor water park; the remainder of Phase II is currently expected to open in Q3
• Philippines: Gaming volumes are very close to pre-pandemic levels; expecting continued growth with more international travel with increased junket activity
• Cyprus: Has exceeded pre-pandemic volumes; opening of City of Dreams Mediterranean is slated to open in Q3
• 2023 Guidance:
  • D&A: $125MM
  • Corporate expense: $20MM
  • Net interest expense: $100-$105MM
• 2023 Capex Guidance:
  • Cyprus: Spend will be $60-$65MM
  • Studio City: $75-$80MM
  • Maintenance: $150-$160MM
• Staffing: Will bring on ~1,000 additional staff for Studio City Phase II opening this year; are going to have 10% less FTE's at the end of '23 vs historical levels.  $1.7MM OpEx per day is the targeted number until greater volumes come back
• Covid: Has fundamentally changed the mindset of the business; focused on eliminating excess costs and being more conscious and getting operating leverage into a better place
• VIP to Premium Direct: Have always led the industry with the most Direct VIP / Premium direct business.  Believe they are still leading the industry with this segment based on trends in January & February
• Equity deal: Aren't expecting an equity offering, but will keep all options open

CARR

Long Thesis: Supply chain challenges and rising costs likely restrained volume growth for Carrier Global Corp (CARR), with little to suggest cyclically inflated demand. The group tends to be a strong Quad 4 performer. The factors above, particularly the IRA, portend a potential acceleration to double-digit organic growth once new residential construction normalizes. Concerns on digitization are likely misplaced on the asset heavy HVAC equipment/OEMs side. We expect a structural reappraisal of the growth and margin prospects for the HVAC names. We’re adding CARR & LII as a Best Ideas Longs, looking for 40% relative outperformance as these subsidized, broadly thematic names become an ‘industry to own’ into 2024.

For Carrier Global Corp (CARR), we think growth expectations will be reset higher.

• Supply chain challenges and rising costs likely restrained volume growth for CARR, with little to suggest cyclically inflated demand.
• The group tends to be a strong Quad 4 performer.
• The factors above, particularly the IRA, portend a potential acceleration to double-digit organic growth once new residential construction normalizes.
• Concerns on digitization are likely misplaced on the asset heavy HVAC equipment/OEMs side.
• We expect a structural reappraisal of the growth and margin prospects for the HVAC names.

We’re looking for 40% relative outperformance as the subsidized, broadly thematic names, such as CARR, become an ‘industry to own’ into 2024.