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

An update on Invitation Homes (INVH):

• First, we wanted to highlight a line from the recent 10-K filing on page 55 under "Other Matters:"
• "In January 2023, we received an inquiry from the staff of the SEC requesting information relating to our compliance with building codes and permitting requirements, related policies and procedures, and other matters. We are in the process of responding to and cooperating with this request. We cannot currently predict the timing, outcome, or scope of the ongoing inquiries."
• Our first thought was that it was surprising to see this request come from the SEC versus the FTC, for example, as it appears somewhat outside of the SEC's jurisdiction. This is pure speculation on our part, but we think the inquiry must be related to degree, timing and accuracy of disclosure around the permitting issue and related qui tam case.
• Second, and getting back to the securitizations, which we first wrote about last year HERE, irrespective of the third-party suit filed by INVH against four GCs, we think it is reasonable to ask whether INVH has a rep and warranty issue. Again, this would partially explain the divergence between AMH and INVH in how they are handling their capital structures (INVH hurrying to retire as much securitization principal as possible and AMH not touching theirs). From Annex D: Property Covenants of the Borrower:
•  # 6 of the 2018-SFR4 securitization document: "Except if the Property has suffered a Casualty and is in the process of being restored in accordance with the Loan Agreement, Borrower shall keep and maintain in all material respects the Property in a good, safe and habitable condition and repair and free of and clear of any damage or waste, and from time to time make, or cause to be made, in all material respects, all reasonably necessary repairs, renewals, replacements, betterments and improvements thereto that are necessary to comply with the Renovation Standards and applicable legal requirements in all material respects."
• # 7: "The Property (including the leasing and intended use thereof) shall comply in all material respects with all applicable legal requirements, including, without limitation, building and zoning ordinances and codes and all certifications, permits, licenses and approvals, including without limitation, certificates of completion and occupancy permits, required for the legal leasing, use, occupancy, habitability and operation of the Property, all such certifications, permits, licenses and approvals shall be maintained in full force and effect, except as would not reasonably be expected to have an Individual Material Adverse Effect on the Property."
• Page 30 of PDF: "If any Property fails to comply with each of the property covenants set forth in Annex D of this offering circular (the “Property Covenants”) and the property representations (the “Property Representations”) set forth in Section B of Annex E to this offering circular (any such Property, a “Disqualified Property”), following the lapse of the applicable cure period, if any, set forth in the Loan Documents, the Borrower will be required to prepay the Loan by 100% of the Allocated Loan Amount for such Property..."

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

Both MarineMax (HZO) and OneWater Marine (ONEW) are trading to new post-pandemic lows this week. It makes sense with all the uncertainty from Silicon Valley Bank (SIVB), although we were strong in our short conviction regardless. These companies say that inventories are up Y/Y because they were historically low levels last year and companies were unable to fulfill demand, so there is plenty of backlog to fill. We think most people got their boats during the pandemic and now have satisfied demand, coupled with macro environment not being suitable for consumers to continue such high-priced discretionary spend. We expect demand comps to be negative Y/Y. There is still downside on these stocks despite trading down all week.

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.

An update on Medical Properties Trust (MPW):

• First, congrats to the senior leadership promotions announced Wednesday by MPW.
• With that said, can someone please explain why there is now a former FTI Consulting Senior Managing Director who specialized in executive compensation serving as an SVP and Senior Advisor to the CEO? Larry Portal (no knock on him, by the way), was included in the press release as a promotion to SVP alongside Rosa Hooper (MD of Asset Management and Underwriting, now SVP of Operations) and Kevin Hanna (current Controller, now Chief Accounting Officer as well). 
• According to Portal's LinkedIn page, he has been a Senior Advisor at MPW since December 2019 without any listed description of his day-to-day responsibilities. There is also no description in the promotion press release on his updated responsibilities. We were not previously aware that he is employed by the company. 
• A simple internet search on Portal reveals that he "... is widely considered a leading expert in the field of REIT and real estate executive compensation and has consulted with many leading public and private real estate companies in the design and implementation of their compensation programs." Portal was responsible for advising the compensation committees of Boards, including ensuring "... this process is effectively communicated to investors" and proxy advisors. 
• In other words, Mr. Portal became a trusted and leading expert in advising the "company side" in what should be an adversarial relationship between investors and corporates on the topic of executive compensation.
• We have seen from the inside (and this should not surprise investors) but in our view Board comp committees hire executive compensation advisors to maximize and "bullet proof" payout plans and structures from the perspective of what should be an "independent third-party advisor." They serve as a type of "CYA" for the board and the comp committee, in that when questioned on comp the management team can say "we rely on an independent third-party advisor to align our plan with our peers and stakeholder objectives, etc...." There is now a former employee of one of these firms, who is intimately familiar with the process and inner workings, serving as SVP and Senior Advisor to CEO, Ed Aldag.
• Moreover, given that he has been at MPW since December 2019, he was presumably involved and semi-responsible for at least the last two comp plans as discussed in the proxy statements. 
• Investors will recall that from the beginning (1) we found MPW's comp plan to be egregious and riddled with conflicts and perverse incentives, (2) the management team has pulled tremendous value out of MPW and sold vested units at an accelerated pace, (3) in general the entire entity appeared to be structured to maximize management comp, (4) a former MPW officer (Michael Stewart) and partner of Ed Aldag and Steve Hamner serves as the "Lead Independent Director" and is on the comp committee, and (5) until recently the management team appeared to be the only MPW constituency, other than the bankers, who were "winning" via their comp. 
• Now, with MPW's equity cratering, management credibility totally shot in our view, several large tenants experiencing difficulty up to and including being insolvent, the dividend unsustainable, leverage too high, the cost of capital totally broken, and the third-party allegations of fraud that we have all seen... they promote a compensation consultant to be Senior Advisor to the CEO. That is the priority right now?
• We would also remind investors that MPW does not, or should not, have any operating business, but as a triple-net REIT should serve as a "passive owner / investor" in the real estate and literally clear checks each month.
• So basically you are saying that we were correct in our view about what MPW actually is? A management compensation vehicle ... nothing more. 

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.

US RevPAR grew 13%, 20%, 8%, and 8% over the past four weeks vs. the ’19 base. Volatility reins in the hotel data complex during the seasonally slow period but 8% growth weeks are the only comparable and truly clean weeks as they did not include any calendar headwinds or tailwinds unlike the weeks before. So, we ask the question now two weeks in a row. Is this +8% the true run rate for growth? Looking at the internals across the past two weeks and the performance earlier in the year (pre-calendar noise) and we would think yes, but we’ll see as more data rolls in each week. As spring leisure travel kicks into gear and the industry starts to comp against elevated weekday demand comps, we’ll see if there are any notable changes across the industry. So far, no dice. While leisure continues to carry industry RevPAR, urban/business markets continue to light up red on our screens and lag the broader industry. Pebblebrook Hotel Trust (PEB) is our preferred way to play this trend and remains a Best Idea Short at Hedgeye.

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.

Tesla longs wanted a new car.  There was no cool product introduction.  The company talked about energy sustainability without referencing CO2 or climate change, quite a shift for Musk who in 2020 said “So obviously, the issues we're facing are very serious with the climate change, and we're experiencing these issues on a day-to-day basis. It's incredibly important we accelerate the advent of sustainable energy. Time really matters.” (Musk 9/22/20 before he became a politicized figure). 

What wasn’t addressed was why inventory accumulated at the end of 2022 or how Tesla plans to salvage its sagging brand.

While the long series of presentations looked designed to show management depth, few of those people were likely happy about the CEO entering the Dilbert cartoonist debate.  A supply chain dashboard is a standard feature of a large manufacturer.  Producing in Mexico appears to have been the big announcement. Insofar as this was a sell-the-news event following a sharp year-to-date rally, we see support for our ongoing bearish take. We expect consensus estimates for 1Q23 to trend toward zero (small profit), with estimates already down by a rough 25% YTD. 

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.

Retail sales numbers came out this week with a headline miss of MoM change of -0.4% vs. the expected -0.1% with clothing stores slowing 450bps. We continue to get datapoints that strengthen our conviction in being beared up. Clothing businesses aren’t doing well and will continue to worsen. Companies need to be guiding down quite a bit, and most aren’t, including Revolve Group (RVLV). Inventories are still elevated while sales have been slowing and GM is weakening. This company is still trading at too high of a multiple (28x earnings) on too high Street estimates. This short should play out over the next few quarters.

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.

Active Short EPR "beat" on 4Q22 results, but declined to provide initial FY23 earnings guidance due to uncertainty around Regal's BK proceedings. On the one hand we think it makes a ton of sense to hold off, as setting a range only to be wrong and having to dial back expectations would be an obvious negative for management credibility. If it were us, we would do exactly what EPR is doing.

On the other hand, the reality is neglecting to provide an earnings outlook sets EPR apart from other companies who typically provide a range with 4Q results, and also increases the amount of uncertainty all else the same. We take it as an incremental negative from a fundamental perspective. 

Below is REIT analyst Rob Simone's thesis overview on EPR.

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.

The RoC of growth is peaking and very likely slowing heading into 2H22 and FY23. We see a combination of RoC slowdown on all the key metrics + numbers that are too high and need to come down. 

The pushback has 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. 

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.

TAL Education Group (TAL)’s potential mistake with its Xueersi brand rattled all the education stocks this week. New Oriental Education & Tech Group (EDU) is best-in-class reputation-wise and generally stays away from misleading/sketchy types of marketing material. 

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).

Positive momentum continues to build in the SAR as confirmed by the latest (finalized) visitation figures for the month of February. Yes, this data is backward looking but the confirmation that visitation improved outside the Chinese New Year period is important. The Macau government is now projecting that 60K daily visitors to Macau would be the next step function higher, which would still fall ~45-50% vs. pre-Covid levels, but an acceleration from current levels. Layer on the elevated win per visitor trends which remain up LDD, and the GGR path should continue to climb from current levels. The market has a LONG way left to go but continues to trend in the right direction. Higher quality visitation + overall visitation growth will continue to drive results for Macau. Melco Resorts & Entertainment (MLCO) and Las Vegas Sands (LVS) remain on our Long Bias list. 

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.

HVAC names are typically good Quad 4 performers (2&3 less good).

The GFC, housing dominated downturn skews the history in the Quad performance history, along with some M&A/corporate actions. Not so many long- term trading histories for pure HVAC names.