05/01/22 05:45 PM EDT

SUNDAY NIGHT REIT READ | 5.1.22 | (AMH, MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Hope everyone enjoyed the weekend! Moving AMH to sidelines; MOAR MPW

Cartoon of the Weekend: Quad 4 Proctologist

Ticker: MPW

Subsector: Healthcare / NNN Hospitals (really just one company)

Headline: 2021 proxy shows more of the same

Obviously it was a very interesting week for us in relation to our Best Idea Short call on Medical Properties Trust (MPW). We held our presentation the prior week, and MPW elected to devote a significant amount of its earnings call on Thursday to our short report. Again, we would encourage subs to LISTEN to the call rather than read the transcript. We would also recommend re-reading our rebuttal to their non-rebuttal HERE immediately after listening, and then make a judgment. Based on the quality of the arguments, we do not believe this will end well for management. Candidly and quite frankly, the management team embarrassed itself on Thursday and left a trail of red flags, not the least of which was going down the "come to us if you want the truth, do not listen to lower-quality analysts and commentators out there" route. If we were in the "independent" cadre on the Board of that company, we would have resigned the next day.
It was clear to us that the management team was rattled and essentially went "all in" on a bluff. The incremental data provided was not altogether useful, namely (1) EBITDARM coverages were presented at the property-level before any allocated G&A or maintenance capex, and (2) the most important piece of data in the form of Steward Health financials was not disclosed. Again on the former, the Steward relationship is a cross-defaulted master lease which is a corporate obligation. It is HIGHLY LIKELY that Steward is not covering its rent obligation with corporate free cash flow, is essentially insolvent, and has no sellable or financeable assets left in the structure. If these are true, and we believe they are, Steward will need an external source of capital which in the past has been MPW. MPW will, therefore, need to pull another rabbit out of its hat to channel liquidity to Steward, or it will need to renegotiate the rent down to "kick the can down the road." If they do not do that, the situation then becomes potentially existential. All of the above are terrible outcomes for MPW's common shares.
Another interesting piece of data dropped on Thursday in the company's 2021 proxy filing. We wrote about this in our deck regarding past compensation, but MPW again reported a "Normalized" FFO number in the proxy that is completely different from quarterly earnings and does not include a reconciliation between the two. Once again the max payout threshold was hit for the 2021 cash bonus program, which drives "Non-Equity Incentive Plan Compensation" in Figure 2 below.
Based on management's own remarkable commentary from the earnings call (Figure 1 below), this number includes an annualized FFO benefit from any completed acquisitions during the year, but excludes any adjustment made for the impact from closed property sales. Read that again - management is effectively having its cake and eating it too, and in the process not walking investors through the calculation. This is terrible corporate governance, and shareholders should be questioning the Board about this.
Furthermore, given that all of FFO, Core FFO and "Normalized" FFO are non-cash earnings figures including the benefit of straight-line rent, you can see the potential for perverse incentives here by management as well as adverse selection. Acquire ANY hospital deal available regardless of the actual economics --> max out the lease term length and total dollars that subsequently gets straight-lined --> juice periodic FFO that bears no relation to the actual economics of the business --> max out cash payouts and sell stock as fast as it vests. And meanwhile, shareholders could be left holding the bag on a collection of hospital leases with relatively poor economics and very low probability of surviving through to term without a default and/or lease amendment. The actual reported return metrics, properly calculated and analyzed, show EXACTLY that. Said another way, public shareholders could effectively be supporting/fueling a legal but highly suspect compensation arrangement for this management team. How many times did management ask for the stock price to go up during the call?
Just as an aside and for what its worth, the coverage ratio highlighted in Figure 1 below would be ~3.1x if calculated on a cash basis.
Short the stock. We are also moving MPW ahead of INVH and COLD as our highest conviction short.