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Short: MPW, PEB, REXR, CFG, KNX, HELE, PSEC Long: DKNG, MCK, GD |
This week we removed Kimco Realty Corp. (KIM) from the Short side of Investing Ideas and added Prospect Capital (PSEC).
Below are updates on our 10 current high-conviction Long and Short ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
MPW
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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. The equity is very possibly completely worthless, as we think the assets are worth no more than ~9 billion (updated) to true "arm's length" third-party buyers vs. pro forma net debt of ~10.5 billion at share. |
Medical Properties Trust (MPW) - The only thing propping the structure up had been extremely liquid debt markets and artificially low borrowing costs. The bonds are perhaps a more interesting story than the equity right now, and we think bondholders need to start thinking about recoveries here. Longer-dated maturities beyond 1Q25 look especially precarious. Obviously this is less exciting as a short at 4-5/share versus >20, but there is still ~100% downside from here. It is headed there over time unless management can pull a MASSIVE rabbit out of a hat. We remain Short MPW.
PEB
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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. |
Pebblebrook Hotel Trust (PEB) - The big missing ingredient for the hotel recovery has been the absence of the corporate transient customer making a full recovery on a volume basis. Yes, RevPAR from certain midweek factors is up and recovered relative to ’19, but the volume (OCC or room nights) is still down considerably and has not improved over the last 6 months or so. Our weekly scan of room rates, hotel bookings, and other factors suggests not much change is coming for the corporate segment, but data from the air industry is a bit more positive this week. Positive in the sense that bookings did accelerate some vs the prior week’s growth, but negative in the sense that the trend is still flattish.
Corporate air ticket bookings (volume only) are now up slightly due to easing comps, but that shouldn’t mean much for incremental RevPAR. We remain Short PEB.
REXR
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Short Thesis Overview: Rexford Industrial Realty (REXR) Potentially vicious reflexive share price move for a ~3.5% cap rate asset likely beginning a RoC slowdown right now. |
Rexford Industrial Realty (REXR) - Uniquely vulnerable in a decelerating and historically macro-sensitive subsector. Net effective rates signed with new leases have peaked/are peaking. 3Q23 results validated our concerns around a faster-than-average market rent growth RoC deceleration. REXR remains a Short.
CFG
Citizens Financial Group (CFG) - In their Oct 18th earnings, the bank's non-GAAP earnings per share fell short of expectations at 0.89, primarily due to reduced revenue from both net interest and non-interest sources, and higher operating expenses. There was a notable decline in net interest income, partly due to increased funding costs. Loan growth slowed, and deposits decreased slightly due to interest rate impacts. Although overall credit quality was stable, there was a minor uptick in non-accrual loans, especially in commercial real estate. These factors contribute to the current challenges in the regional banking sector, including increased deposit costs and regulatory changes affecting capital requirements. CFG remains a Short.
KNX
Knight-Swift Transportation (KNX) - What you've started to see in the last 3-6 months is a recoupling of KPI's to stock price movement for trucking. We found that weekly rail velocity correlates inversely with truck rates and truck utilization. What we are seeing is a re-accelerating weekly rail velocity.
Truck margins continue to remain under pressure, and we have seen an enormous reduction in expectations for KNX, blowing through their floor of 4 per share.
HELE
Helen of Troy (HELE) - Some HELE brands are seeing weak Google Interest YY lately. While Hydro Flask is a middle of the road product, Dry Bar is more top of the line in beauty. Prestige beauty is slowing lately and even though Dry Bar is a premium product, it had its hot moment and has since gone by the wayside for newer brands. With increased competition and a tougher consumer environment, HELE is facing a big risk to organic revenue growth. The stock will head lower with the inevitable expecations miss on this front.
PSEC
Prospect Capital (PSEC) - PSEC is a BDC that has elected RIC status. Similar to a REIT, it is a pass-through entity where the corporation pays no income taxes (so long as it meets certain requirements) and individuals are taxed at the individual level on their distributions. It owns 100% of the common stock of National Property REIT ("NPRC"). NPRC is hopelessly over-levered, approaching ~20x net debt-to-EBITDA. NPRC did not cover its interest payments to PSEC with internal cash flow over 2020-2022 (Hedgeye estimates the shortfall at ~365 million combined).
Below is a Real-Time Alert sent to subscribers this week from Keith McCullough on PSEC:
Here's a good example of me having a world-class (new) research-driven short in one hand (from Rob Simone), and patience in waiting for the TRR (top-end of Risk Range) on the other...
Coaching Notes:
1. Whoever thinks Dynamic Hedging and/or Short Selling is easy hasn't done it with real ammo
2. There are many components to the Timing Game, and we have many tools to augment our accuracy
3. That doesn't mean we nail every signal. That's an absurd and amateur expectation. It means that we execute with professional discipline and purpose
See Simone's REITs Pro research product for what I think is his best New Short since MPW.
KM
DKNG
DraftKings (DKNG) - Two years ago, DraftKings' (DKNG) stock was priced at around 72, and it's currently trading at about half of that value, despite showing significantly stronger fundamentals. As the dominant player in this market, DKNG's leading position, as reflected in recent market share data, offers substantial advantages. Although we anticipate some reduction in app downloads, given that many potential customers have already been reached, especially with competitors like ESPN Bet emerging, this decrease in downloads hasn't translated to a diminished user engagement.
The struggle to seamlessly transition users from Barstool to ESPN Bet indicates that high download numbers don't always correlate with actual monetary deposits in the apps. This distinction is crucial because downloads alone are not a reliable predictor of gross gaming revenue (GGR). DraftKings excels in more critical metrics such as user engagement time on the app and the patterns of user deposits and spending. Based on these factors, we maintain a positive, long-term outlook on DKNG.
MCK
Ocado Group (“Ocado”) has announced a deal for Ocado Intelligent Automation (“OIA”) to provide automated fulfilment technology at a distribution site for McKesson Canada (MCK). The deal will see Ocado sell its proven, unique warehouse fulfilment technology in a sector outside of grocery retail, and provide the AI-powered software applications necessary to operate that technology long term. McKesson Canada is a leading diversified healthcare provider in Canada and is the largest pharmaceutical distributor in the country. We remain Long MCK.
GD
General Dynamics (GD) - Is set to benefit from continued federal spending as the US deficit continues to climb. Global defense spending is on the rise, which is driving even more increases in defense spending. GD is in line for fiscal tailwinds due to this phenomenon, as the government's money cannon keeps firing. GD remains a Long.
