“Stop. I didn’t ask what you think, I don’t care what you think, don’t ever think. I don’t want your interpretation, I want facts.”
– Mark Yusko quoting Seth Klarman
I heard this quote on an investing podcast shortly after joining Hedgeye a month ago. At the time I was putting much thought (and still am!) on the evolution of my research process, and how it slots into the Hedgeye platform. It stopped me dead in my tracks, and reminded me to keep things simple and based on the math.
Before joining Hedgeye I spent three years in a corporate role at a REIT, and before that several years in Old Wall research roles supporting sector heads. Looking back at those research jobs, it’s remarkable how often the words “feel” and “think” crept in or even drove the work. Virtually every research note that I wrote started off with or contained at least one “We believe…”
Years of BS became a habit that then crossed over into the corporate role where, candidly, there is no room for BS. My CFO, who was tough but one of my greatest teachers, would stop me and demand the facts. “Give me the facts, lay out the facts, don’t wonder from the facts! If you give me facts, I probably can’t tell you you’re wrong!”
This has major implications for investing and how we methodically and mathematically approach the world. The facts allow us to shorten or compress the tail of negative outcomes and shift the odds more in our favor.
And that is why shorting EXR, as much as I may love and admire the company, or as much as it may trigger people, makes sense right now. That’s why looking at the rate of change of CPI, which proves out the accelerating inflation thesis, makes more sense than listening to Jay Powell on 60 Minutes. “Give me the facts,” as simple as it sounds, was one of my most important lessons, and what we all try to do here.
Back to the REITs Grind….
We are in the calm before the storm in REIT land ahead of Prologis (PLD) kicking off earnings season this coming Monday, 4/19. It always starts with a trickle (PLD, SLG & BDN) in the first week, and then things get weird and we are ripping through 3-4 reports per day for the next three weeks.
While I don’t have any office names in the position monitor (yet!), it will be very interesting to see how many companies roll out or update guidance. Take Boston Properties (BXP) for example – historically a bellwether for the sector, earlier this year they provided an outlook for 1Q21 only versus a full year historically.
By the time they report 1Q, essentially 50% of 2021 will be in the books, so no full year outlook would not be a good look for the sector.
The last two weeks have definitely been interesting for Best Idea Long PSA. Since we launched on 4/5, another activist (Land & Buildings) joined the fray along with Elliott Management, pressuring the company on a parallel front. Then yesterday the company announced a ~$1.8 billion portfolio acquisition, which adds 48 higher-quality, newer-vintage assets to its mid-Atlantic portfolio. A big portion of the thesis is capital deployment towards external growth at very attractive economics, and this deal definitely accomplishes that.
It’s not too often that you look at a sources & uses chart and see only one source of funds – unsecured debt. But that’s exactly the point – PSA’s under-levered balance sheet, scale and significant cash flow generation provides a unique opportunity to fund external growth accretively at an extremely low cost of funds.
In the process they took their leverage up a full turn to ~4x EBITDA (closer to their peers at 6x or higher), but lowered the overall cost of capital. With another $1.5 billion of higher-cost preferred stock coming callable through August 2021, there is an opportunity to bring down the overall cost of capital meaningfully.
As we laid out in our launch deck, a lower cost of capital equates to at least $20 per share of appreciation from here (+7%) without doing anything else. Sit back and enjoy!
If you would like to learn more about my in-depth investing research, please reach out to .
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.62-1.77% (bullish)
UST 2yr Yield 0.14-0.19% (bullish)
SPX 4070-4193 (bullish)
RUT 2 (bullish)
NASDAQ 13,208-14,152 (bullish)
Tech (XLK) 135.65-144.91 (bullish)
Energy (XLE) 47.31-51.25 (bullish)
Financials (XLF) 34.00-35.68 (bullish)
Utilities (XLU) 63.31-65.82 (bearish)
Shanghai Comp 3 (bearish)
Nikkei 290 (bullish)
VIX 15.08-19.43 (bearish)
USD 91.29-93.11 (bearish)
EUR/USD 1.171-1.121 (bullish)
USD/YEN 108.65-110.90 (bullish)
GBP/USD 1.366-1.391 (bullish)
Oil (WTI) 58.21-62.45 (bullish)
Nat Gas 2.43-2.68 (bearish)
Gold 1 (bearish)
Copper 3.95-4.17 (bullish)
Silver 24.06-25.80 (bearish)
One out, one inning, one game at a time!
Rob Simone, CFA
REIT Sector Head
