04/29/22 05:21 AM EDT

MPW HEARING FOOTSTEPS? | 4.29.22 | (MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Thoughts post-1Q22 earnings call

Hedgeye Cartoon of the Day: (Un)fortunate Teller

Ticker: MPW

Subsector: Healthcare / NNN Hospitals

Headline: Footsteps, + a little "Real Estate 101" and sprinkle in some "REIT 101" as well

Following one of the more "interesting" earnings calls that we have heard over more than a decade of covering REITs, we wanted to examine point-by-point the things that we think are VERY important for investors to understand. We would also encourage investors to listen to, not read, a replay of the call for added context towards determining whether MPW is investible or not.

MPW Quote: "We welcome each of you to speak directly with me, Steve, Drew or Tim, as we are eager to address any questions or concerns you may have." - Edward Aldag, Jr., Chairman & CEO

Hedgeye Response: We reached out to the company three times, including twice before we published our work/added MPW to the short side, where we introduced ourselves and Hedgeye and said we had questions, with no response from the company.

MPW Quote: "Cash cannot be engineered or manipulated." - R. Steven Hamner, EVP & CFO

Hedgeye Response: We couldn't agree more! As a matter of fact, that was probably the main thread in our deck. The cash economics for the combined company (leases + loans + equity investments) are deteriorating, and leverage on a cash basis is high and increasing secularly not cyclically. Curiously, cash loses its importance inside the Comp Committee, as management is paid based upon GAAP/straight-line metrics - "Normalized" FFO, EBITDA, G&A as % of "Adjusted" Revenue. Why not tie compensation to cash, since it cannot be engineered? Straight-line rent adjustments do matter, and the % of straight-line rent contributing to both revenue and FFO in each period has consistently moved up and to the right over a decade, leading to a secular decline in earnings quality. The data is there for all to see. Investors should ask themselves why and how long (and if ever) it will take for straight-lining to convert to the cash-paying bucket?

MPW Quote: "Given our view that our stock is significantly undervalued and does not appropriately reflect what we believe the value of MPT to be..." - Edward Aldag, Jr.

Hedgeye Response: MPW is the only "pure play" NNN Hospital REIT and has no true peers. After backing out straight-line rent adjustments, MPW is VERY expensive vs. skilled nursing REITs. MPW is generating unlevered cash yields of ~6% today and, given the long duration of the lease and loan commitments, will likely produce these economics for the foreseeable future over any investible duration for a publicly-traded REIT (assuming tenants pay through to term). We would argue those cash economics on hospital assets deserve a discounted multiple to "book" on an absolute basis versus ~1.05x today. We presented that math in our deck.

MPW Quotes: "We have a strong balance sheet." "As first quarter results continue to demonstrate, MPT and its portfolio are in the strongest positions in our history." - Edward Aldag, Jr.

Hedgeye Response: Really? On what metric? At the end of 1Q22 Adj. Net Debt/Cash EBITDA was ~9.3x, and Net Debt/Ent. Value was ~50% on an overvalued stock price. Don't forget to add in MPW's share of UJV debt (since they include the EBITDA contribution), and then subtract out straight-line rent from GAAP EBITDA! You know... to reflect the cash economics MPW is actually earning for the foreseeable future available to service that debt. Ah, left that part out, better hit the books again! We can loan management some old 2007-2009 CFA books or 2011 REIT School manuals if they would like, we don't really need references on the "101" basics anymore. We're big fans of assists over here at Hedgeye, happy to help! Investors should ignore the narratives and just run the math.

MPW Quotes: "First, let me point out, as I have numerous times, EBITDARM in these calculations comes straight from property-level GAAP basis financial reports we receive from our tenants..." "... we have provided individual tenant coverages for our portfolio." - Edward Aldag, Jr.

Hedgeye Response: The disclosed LTM property-level EBITDARM coverage ratios reflect the benefit of ~0.4x turns from HHS grants, which is a lot and will roll off in the coming quarters. Importantly, MPW failed to disclose corporate- or entity-level profitability or coverage metrics, which are really what matter most in the case of a master lease structure as with Steward. Will they disclose that? They have resisted doing so in the past, but finally did so last year for Steward HERE (slide 11). As we laid out in our deck last week, the reported Steward 2.4x coverage included "one-time" add-backs including COVID expenses but did not back out the HHS grants, thereby creating an apples-to-oranges comparison. A ~0.4x turn reduction in coverage at the property-level will have a much larger impact at the corporate-level, factoring in operating de-leverage from corporate overhead. Also, what about coverage metrics including the impact of recurring maintenance capex? Negative cash flow is not sustainable, and would necessitate an external source of capital (MPW has been a source historically) to continue as a going concern.

MPW Quotes: "Over the very long-term history of CMS and in other hospital reimbursement... staying at least even and frankly over time ahead of inflationary pressures." "So we expect... the revenue will keep up with increases." - Edward Aldag, Jr.

Hedgeye Response: CMS adjustments just came out at +3.2% and will be partially offset by sequestration. Does that sound like it is keeping pace with current inflation?

MPW Quote: Regarding labor pressures, "I've met with most of our operators over the last five weeks... None of them are overly concerned." - R. Steven Hamner

Hedgeye Response: Really? Is that what other public hospital operators just reported? The best-in-class operator highlighted rising labor costs and sent MPW's stock down nearly ~8% on that day. Is there any evidence anywhere in the healthcare industry to support this statement?

MPW Quote: "But the report then implies that there is something surprising that on a consolidated balance sheet basis MPT's gross yield is declining. I'm not going to walk this group through the evident arithmetic because it is apparent and frankly, we received not a single question about this. But in today's world, we thought we should document why gross yields come down in a compressing rate environment while investment spreads remain healthy." - R. Steven Hamner

Hedgeye Response: MPW's entire portfolio of assets is demonstrably yielding ~6% on cost. Its just arithmetic, and we agree it is definitely evident. How low were the yields on the new/marginal deals to drag down the company average? How long were the terms on those deals to extend the average investment term out so long? The cash yields (again, just evident arithmetic) should be benefitting from the historical deals escalating and compounding. Regarding "spreads remaining healthy," we also calculated levered spreads (Cash EBITDA-Cash Interest Exp.)/(BV of Equity+Accumulated D&A). See Figure 1 below. Levered cash-on-cash yields are down and to the right secularly since mid-2012, so the spread still trends lower over time. At the same time average borrowing costs have trended linearly lower over the same duration. Looks healthy to us! In all seriousness, investors should be asking themselves whether it makes sense to support these economics? All of the data supports our view that this management team is NOT a good steward of shareholder capital.

MPW Quote Responding to Comp Question: "But historically, the main adjustments that we make are for dilution from Board of Director approved disposition strategies." - R. Steven Hamner

Hedgeye Response: After initially trying to dance around the question a bit, the provided answer was nothing short of incredible. The Comp Committee gives credit for the annualized FFO benefit from acquisitions less cost of capital, but also does not eliminate the dilution resulting from dispositions. What? Why should shareholders be ok with this? Go back and listen to the transcript.

Final MPW Quote: "MPT is regularly the focus of third party reports that may express opinions about the company, which may be favorable or not. However, we encourage our investors to recognize that not all market commentators or reporters are equal or write objectively without agendas." - Edward Aldag, Jr.

Hedgeye Response: It's interesting to us that any management team of a publicly-traded company would find the need to make such a statement at all, but what is more interesting is that at the same time they attempted to augment disclosure around other loans and investments after years of inaction and seeming disinterest, and also presented empty arguments in response to each of our critical points. Maybe we are on to something? There is an expression in football where an untouched wide receiver coming across the middle drops a ball put right on the hands, expecting to get blown up at any second by a hard-hitting safety - "he heard the footsteps." Pitter patter...

Figure 1: MPW Historical Realized Levered Yields