Alright $TSLA $TSLAQ, got some fresh FUD for you. This time on a single family rental operator called Invitation Homes, ticker $INVH. Why I think the company could potentially go BK this year or see its value fall further. Let’s begin. $INVHQ

1/ Invitation Homes owns ~80k SFRs (single family rental) homes. Their business plan is to acquire usually low cost homes or fixer uppers in nice little suburban areas. Their primary renter are middle to to middle low class blue collar and maybe some white collar workers. $INVH

2/ My short thesis is primarily focused on 3 things: 1. Pending debt, liquidity and cash flow, and valuation. Here is a geographic breakdown of their portfolio as of 12/31/19. ~20% are in CA, which is hit particularly hard by the Corona Virus.
$INVH

3/ In fact, I’d say many of their locales will see adverse economic conditions from Corona. It’s not unreasonable to think rental income could come down 10% this year. Here’s a snapshot of their financials. 10% decrease in the top line puts them in the red. But wait...

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4/ ... $50mm & $96mm of their net income was derived from Gain on Sale of Properties, or ~65% of their 2019 Net income. 2018 net loss of ~$5.0mm puts them at $(45)mm in the red w/o gain on sale in 2018.
$INVH

5/ Given the economic environment we’re in now, I’d suspect this to either disappear or get cut in half in 2020. That, coupled with a moderate 10% decrease in top line puts them well over a $100mm loss. With FY19 earnings of $145.5mm, they currently trade at ~100x earnings! $INVH

6/ Now the best part, INVH business model is to finance their SFRs by raising Capital via securitizations. Having worked on a debt desk, let me tell you, in this environment, mReits will have trouble refinancing. They have OVER $4.3 BILLION coming due in 2020 alone. So what now?

6/ The sectz deals have extension provisions - I need to do more work surrounding whether the issuer or bondholders holds this right, but I imagine it’ll be harder to extend given the state of markets now. What happens if they can’t refinance?
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7/ Theoretically if these securitizations cannot be “taken out” by a new deal, the bondholders can potentially take the collateral. This would DESTROY the shelf (i.e. the brand name mechanism INVH issued through) and their ability to lever up goes out the window.
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8/ Better yet, INVH must retain 5% of each sectz deal issued, this is called Risk Retention and acts as INVH’s equity ownership in each debt deal. These are the first pieces to take any losses usually. With $2bn coming due by June & July 2020, they could be in trouble with refi.

9/ Now to their liquidity. They have $92mm of cash as of 12/31/19, with their expense profile, doesn’t give them much runway. They *do*, as of 12/31/19, have access to a $1.0bn LOC and $743mm in an equity ATM. If these exist as is will be seen in their Q1 10Q, but I’d imagine...

10/.. any sales via the ATM would be at drastically lower prices, and their LOC may encounter drawing issues given how bad things are getting. Lastly, each of their securitizations have DSCR (debt service coverage ratio) covenants and probably other affirmative covs.
$INVH

11/ If rental income goes down, or property values go down, they can easily trip these covenants, which will require $INVH to either cure this breach with cash or pledging more collateral. Either way, real possibility and not good.
$INVHQ
Short via Equity and October Puts.