Investing Ideas Newsletter

Short: HZO, MPW, PEB, TSLA, RVLV, ONEW, CPT, STLD, ABR, DE Long: MLCO, LVS, NEM

Below are updates on our 13 current high-conviction long and short ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.

 

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 straight-lined 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 Overview: 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

We're stunned OneWater Marine (ONEW) did not miss the quarter. In line print, and in-line guide. With MarineMax (HZO) getting more promotional, this is unlikely to last. We’d short it here if you can go down the cap curve. Company is over-earning by 2-3x.

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.

REITs analyst Rob Simone posted a review of the 10-Q report for Medical Properties Trust (MPW) on May 11:

• Cash Flow Statement:
• Cash Paid for Acquisitions & Other Related Investments - MPW reported a net ~$72.9 million net outflow in the quarter. But in the 1Q23 earnings release, the company stated "The Company did not acquire any new hospital real estate during the first quarter..." Well then what is in that outflow? Does that include the ~$50 million advanced to Steward against expected "proceeds from Steward's insurance claims" on Norwood hospital? What else is in that line item? How can you reconcile spending nearly ~$73 million on acquisitions and investments in the quarter, and at the same time say you made no acquisitions in the quarter? Please help us understand this, because it like so much else here makes no sense. It is also critical to understand given the cash burn.
• Capital Additions & Other Investments - This number came in at a ~$68.6 million outflow in the quarter. What is the difference between this line item and the above? What specifically is aggregated here? Which tenants are being funded, and for what? How do you reconcile these figures with the ~$47.4 million in capital additions, developments and other funding to existing tenants listed on page 15 of the 1Q23 supplemental? Again, please help us, because the numbers make no sense and are adding up to a significant use of funds.  
• These are important questions, because MPW is now in significant cash burn mode. We estimate Excess Cash Flow ("ECF" = OCF - "Capex" - Dividends + a ~7% Return on "Capex"), or internally-generated cash flow, was -$108.3 million in the quarter and -$208.1 million on a rolling LTM basis. We suspect the true picture could likely be far worse, depending on how things are classified and what is truly "recurring." Again, ECF has not been positive in any year since at least 2011, and well before any recent issues at Prospect, Pipeline or Steward.
• MPW is over-distributing and needs to reduce its dividend. Otherwise dollar leverage is going to increase materially through year-end 2024 and MPW will likely have insufficient remaining liquidity ahead of the 1Q25 ~$1.4 billion maturity wall.
• Lifepoint Transaction - As expected MPW received its ~$205 million back in 1Q23 in satisfaction of its acquisition loan. It also converted a ~$23 million mortgage note to a fee simple interest in a Washington hospital and added to the existing master lease. 
• PHP Holdings (Prospect) Transaction - As discussed on the earnings call, MPW originated a ~$50 million convertible loan in 1Q23 to PHP Holdings which is included in "Investments in Unconsolidated Operating Entities" on the balance sheet. As we wrote about previously this claim + the "deficiency note" from the CT sale to Yale (we estimate ~$57 million, with ~$100 million in cash essentially deposited at the operator and securing the balance for now) + now the existing ~$112.9 million term loan + unpaid rent and interest will likely need to be satisfied from a sale of the PHP managed care/VBC business. That plus the first lien mortgage on the PA assets (book value of ~$417 million) will provide the recovery to MPW outside of the CA portfolio and the cash portion of the CT Yale transaction if/when closed. Assuming a gross valuation of ~$600-700 million for PHP and a ~50% LTV from the discussed "third-party financing," we estimate that would leave residual equity value of ~$300 million to satisfy claims.
• We do not think the PHP business is worth the stated ~$1 billion, and have seen no evidence in support of that valuation. Given past statements and inconsistencies from MPW's management, we do not see why investors should believe it either. 
• We believe MPW's recovery will likely be less than its total book value. The math does not work. We would need to know MPW's % stake in the business, but straight away it is easy to see that there will likely be a shortfall.
• This assumes that the ~$100 million loan from CT is paid back with available cash, and that cash is not "burned."
• This also assumes that the first mortgage on the Prospect PA assets would be less than a 100% LTV - a more than reasonable assumption. 
• Also makes the heroic assumption that PHP can be sold at all, which is not a sure thing given that we understand it has been on the market since 2021. Timing is also very uncertain given required approvals, diligence, etc. 
• Our understanding from the Rhode Island AG investigation is that Leonard Green closed on a sale of its share of the entire Prospect OpCo in 2021 for just ~$12 million.   
• Healthscope Portfolio Sale - Expected to close in a two-phase transaction, with the larger phase expected to close in 2Q23 and the full transaction completed by "the end of 2023." Proceeds will be used to repay the AUD term loan.
• Prospect Medical Restructuring Details:
• The master lease on the six California hospitals will be maintained with no change in the rental rates or escalators. Prospect will begin paying 50% of the contractual monthly rent beginning in September 2023. Given that the entire restructuring process will take at least ~12-18 months, per MPW's own disclosure, and the overall level of uncertainty, we have assumed this ~50% of existing contractual monthly rent paid through the end of 2024. The existing lease rate is ~8.5% against a ~$500 million value. We will of course adjust if and when more information becomes available, but for now we think that is a fair assumption. 
• MPW sending the keys back to Prospect on the 4 PA hospitals, in exchange for a first mortgage on the assets. 
• MPW providing a ~$75 million DIP loan secured by A/R and other assets. 
• MPW obtaining an equity interest in PHP equal to unpaid rent and interest + the existing ~$112.9 million term loan + other obligations. 
• And then of course, the ~$50 million convertible loan already funded to Prospect in 1Q23. 
• To be clear, we are of the view that there is NOT enough collateral to provide full recovery for the above obligations. This is contingent on the valuation range of PHP above, and there is no guarantee of close. 
• Regarding the Yale transaction, MPW noted that "...$457 million, of which we expect to receive the majority in cash and the remainder in equity securities of PHP Holdings. This transaction is expected to close in 2023 subject to certain regulatory approvals and the completion of Yale's acquisition of the hospital operations from Prospect. No assurances can be given that this transaction will be consummated as described or at all." Our understanding is that FTC approval sunsets on 6.13.23, meaning that if the deal does not close by then the parties would have to re-apply with the FTC. We give them credit for a 2Q23 close in our model, consisting of ~$300 million in cash. This piece may be the most important near-term part of the story right now - if this deal does not close MPW's liquidity situation would materially worsen, in our view. 
• Steward:
• We think the "Other Loans" entry on the balance sheet is essentially all to Steward. Notice that the balance went up 4Q/3Q22 by ~$28 million, which corresponds with the loan funding disclosed on the 1Q23 earnings call. The ~$228 million year-end balance also roughly corresponds with the ~$220 million promissory note disclosed in the 10-K, minus an ~$8 million delta. Finally, the balance of this line item increased by ~$50 million q/q in 1Q23, which corresponds with the advance disclosed on the call and page 50 of this 10-Q. Think about this - if we are correct, MPW essentially has a revolving credit facility line item on its balance sheet dedicated to its largest tenant. 
• MPW disclosed as a subsequent event that it only received $100 million of its $150 million loan originated in 2Q22 from the sale of the Utah OpCo, while stating that it expects to receive the balance. This was disclosed 10 days after the closing of the transaction. Recall that MPW stated on the 2Q22 call that the loan had "mandatory prepayments" from this sale and that Steward had a "positive cash flow outlook." Since then we know that MPW advanced Steward at least an incremental ~$78 million of funding in 4Q22 and 1Q23. This implies that MPW has only been repaid a net ~$22 million of the $150 million. Questions - How can this be possible? Does Steward not have the cash? What is the definition of "mandatory prepayments?" Again, this makes no sense, and is indicative of an insolvent Steward continuing to receive support from its landlord. Steward clearly does not have sufficient liquidity, in our view.
• Just to recap:
• Steward cash flow positive = not true
• Mandatory prepayment of $150 million loan = not true yet
• MPW didn't loan to Steward in 4Q22 = not true
• Utah purchase price to Commonspirit similar to ~$850 million from HCA = not true
• MAP repaid in September 2022 = not true
• Rent not the reason for hospitals closing = not true, per the recording obtained by CBS
• No problems or issues extending the ABL = not true
• We are sure we are missing some...
• Speaking of the Steward ABL, T-minus ~5-6 months before this becomes an issue again, but this time with lower RemainCo profitability and less valuable collateral remaining to sell. Recall Steward secured only a 1-year extension through 12.31.23. We again expect MPW to play a role, likely a larger one this time around.  

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 toward the mean in the cards on valuation + estimate reductions, which makes for a challenging combination over the NTM.

We’re sticking with our FS REIT shorts, with Pebblebrook Hotel Trust (PEB) ranked highest on that priority list. 

EBITDA expectations in some of our favorite REIT short ideas – PEB, PK and XHR – for ’23 and ’24 have come down more than 10% from the peaks last year (summer). That’s a big move, and although the companies mostly “beat” Q1 estimates, the balance of the year looks uneven and could set up for disappointments. We’re not buying any of the hype, and given the leverage both operating and financial, the risks remain high for these companies.  Among our core tenets, the following is what we keep coming back to with respect to FS REITs like PEB.

1. The trend in RevPAR growth remains rangebound across the U.S., and for corporate demand proxies, there’s been incremental softness over the last month (biz market weekday RevPAR, urban weekday, etc.)

2. The leisure channel has seen solid volumes, but travelers now have more options and domestic resorts face massive pricing comps in May-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 few months (Quad 4) which is a negative for sentiment and demand

6. Valuations on revised numbers and higher stock prices don’t suggest a favorable entry point in many of the FS REIT stocks – given catalysts we see a valuation haircut

Gaming, Lodging & Leisure analyst Todd Jordan discussed PEB on the May 11 edition of The Call @ Hedgeye, saying the "stock would get absolutely creamed if the economy softens." Click here to watch the 5-minute video. 

TSLA

Short Thesis Overview: 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.

Elon Musk, CEO of Twitter and Tesla (TSLA), responded to a tweet citing a single-factor statistic on race-based violence. On the May 10 edition of The Call @ Hedgeye, Industrials analyst Jay Van Sciver said, "At first, I was like, 'Wow, that's not a great thing to tweet,' and then I thought, 'Wait, this is one of our top short ideas, and the CEO tweeted this." Click here to view the 8-minute video.

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.

In our opinion, the stock did not sell off nearly as much as it should have on last week’s print. We’d press this one in the high teens. Revolve Group (RVLV) should be a $10 stock. The company failed yet again to add over 100K net new customers, and the rest of its KPIs looked underwhelming. Inventories are still out of whack, but showed sequential improvement – that’s the ONLY positive in the quarter. But our sense is that inventories are building again as new customers come on at a slower rate, place fewer orders, and spend less per order in the Revolve brand. Remember that student loan payments are back – to the tune of $350/month, which comes right out of the core Revolve consumer. We have this company earning $0.50-$0.70 over a TAIL duration, and if we’re generous with the multiple on the RIGHT earnings, we get to a stock 40-50% below current levels.

 

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 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. We are now advocating shorting higher up in the "stack" (ABR), as well as the equity slices (CPT & IRT).

STLD

Short Thesis: Base metals have been deeply cyclical for decades and, most likely, centuries. We think all of the bullish catalysts will fail, once again, in the face of "the cycle." Construction and consumption drive demand, with higher rates and tighter credit an inevitable dampener. Credit tightening, more expensive borrowing, and inflationary/supply pressures limit the upside in total construction spending. It is difficult to build a scenario where the infrastructure package and the war in Ukraine support steel markets. These factors have instead emboldened investors to pay absurd valuations for among the most deeply cyclical companies (albeit often well-run) in a largely no growth industry at all-time highs. We expect greater than 50% downside in the shares of Steel Dynamics (STLD).

ABR

Short Thesis: Given that ~20% of ABR's equity capital buffer is preferred stock, it has a HUGE impact on the residual value available to common when using a P/BV framework; assuming our initial estimate of ~$1.4 billion of potential impairments from bridge loan restructurings in present value terms, combined with a 1x P/BV multiple = an equity value of ~$5/share today, or more than ~50% downside from here before dividends and borrowing costs.

Arbor Realty Trust (ABR) is at the top end of its range; manufactured a beat in the quarter; lots of one-time items; sold more stock and didn’t talk about it with the Street; may have to take impairments on losses; multiple is going to take a hit.

REITs analyst Rob Simone discussed ABR in the May 9 edition of The Call @ Hedgeye. Click here to watch the 8-minute video. 

A few quotes and notes from what Simone called "a wild 1Q23 earnings call" from ABR:

• "Halfway Through the Debacle" - "We believe we're already halfway through this debacle. We believe it's been already at least 9 months to 11 months of real difficult times rising short-term interest rates extraordinarily high borrowing costs which is fueled by an inverted yield curve when sulfur goes up from 25 basis points to five and a quarter percent... We believe the real, the real work here is getting through the next 9 months, we've gotten through the first 9 months extraordinarily successfully you have 9 more months to go. And it's our thought process that after that period of time Short-term rates will come down."
• This is consistent with our view that ABR is about to hit the bulk of its most problematic roll, a significant portion of which likely has negative sponsor equity given the underwriting standards of the 1H21 vintage of loans. 
• “Variable Rate Loan With Negative Carry,” aka Cash Flow-Negative Borrower" - "But with this inverted yield curve. Every time we see a drop in the tenure. We see a tremendous number of our borrowers say okay. Let's like in every time the 10-year hedged 33-10 3.25 and it drops a little bit. People are just saying, okay, let's convert from a variable variable-rate loan with negative carry and let's put a little bit more equity into a capital call recap the transaction and convert into a fixed rate." 
• Later in the Q&A: "We look at all loans that have expiring rate caps have negative carry that are under stress and our originators are working with our portfolio refinance group in re-underwriting all of loans, getting them position, get them in front of the agencies and when the market drops these people are ready to go. I just want to let you know the agencies are very back. They're the only game in town."
• The question is how "negative," given DSCR/LTV requirements and fixed-rates that are STILL several hundred bps higher than ~LIBOR/SOFR+200 at the time of origination. 
• Putting up Mezz/Pref, aka New Good Money After Bad: "So what we're doing is saying listen, you may need to put another 5% or 10% into loan, both fixed rate. Let's get in a better position live to fight another day stabilize assets and that's where you can go out in the market and take advantage of good opportunities. You'll still get a good return. Conventional investors to yourself to put a little bit more and we do have some tools that other people don't. We're willing to put some preference or mezz with the right returns. We, one of the only approved agency lenders that allows for mezzanine over our own book and we've been doing that from time to time to help our borrowers get to where they need to go."
• Using ABR's balance sheet to originate mezz/pref is not a positive development for book value or the former premium multiple, in our view. 
• Cap Rate Moves Imply ~30% Loss in Value, All Else the Same: "Cap rates have gone up considerably high threes, low fours and 4 and 3 quarter to 5.5 range and that's been a significant movement and depending on interest rates will dictate whether there is movement but obviously even at these levels as you've been reading. There are very few sales right now. It's still hard to buy a 5 cap asset when you got to put 5.5% financing when it that's still negative leverage and can’t borrow short-term. So the cap rates are going to continue to move our interest rates are going to change, but clearly there is a little bit of a lock on sales right now and of course, you have the backdrop as we all know the banks have a lot of assets..."

DE

Short Thesis: Low rates helped fuel profits at Deere & Company (DE) and other agriculture equipment suppliers. Ethanol-blending mandates, falling/negative real rates and investor interest led to a NASDAQ-like bubble in farmland values. Farmers have been able to tap that value to borrow and supplement spending. Farming is as mature and sub-GDP growth as Industrials get. Consensus expects higher EPS for DE, which we believe is a very unlikely scenario in #Quad4 for a company already trading at peak. We see DE EPS missing substantially over the next several quarters.

MLCO | LVS

Melco Resorts & Entertainment (MLCO) and Las Vegas Sands (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.

Another month and more evidence that the Macau recovery continues to build as April GGR trends proved to be above expectations, likely aided by strong win per casino and hotel guest. Added visitor throughput in April likely helped as well, but the Macau market appears to be benefiting from a trend most other gaming markets across the world have in recent years – early recovery led by high end of the database and solid win per player trends. We’d expect this to continue.

Macau GGR accelerated from -51% run rate (vs ’19) in March to -38% run rate in April, and we know suspect May numbers will need to come up to reflect a bigger step change. We’re still a way off from ’19 levels, but for now, the rate of change is accelerating and the Macau stocks should continue to benefit from this positive momentum. In a note out April 30, we touched on Macau’s strong near-term backdrop within the context of its long-term (potential) structural hurdles involving access to the market. We see Las Vegas as potential net gainer as we look further into 2H and next year, but for now, Macau is primed to benefit from this explosive travel and gaming demand from the Mainland and HK.   

NEM

Long Thesis: In addition to GLD and Physical Gold, we remain bullish on Gold Miners (GDX) and Newmont Corporation (NEM), the world's largest gold mining company.   While the broader commodities complex is a notable underperformer amid Quad 4 environments, tend to be the exception. Gold’s flight-to-safety appeal is most pronounced in Quad 4, an environment that historically corresponds to declining real rates.

Industrials analyst Jay Van Sciver hosted a presentation on gold miners, including Newmont Corporation (NEM) on April 19. Click here to watch a 14-minute video.