05/25/22 09:08 AM EDT

REITS DAILY BRIEF | 5.25.22 | (MPW MUST LIVE ON ANOTHER PLANET)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Who are you going to believe?

Hedgeye Cartoon of the Day: Ball & Chain

Closed Real-Time Alert (RTA) Positions:

5.20.22 - Buy Signal - Covering MPW $18.07 (LINK)

* Not a Position Monitor change, this is part of Hedgeye's risk management process.

Ticker: MPW

Subsector: NNN / Healthcare (MPW dedicated NNN hospital REIT)

Headline: Round-up of recent operator commentary on labor costs

Investors will recall that key parts of our Short thesis on Medical Properties Trust (MPW) are that (1) there has been significant adverse selection on the operator side for MPW given that well-performing hospital systems typically opt NOT to sell their real estate, (2) as a result MPW's operators are very likely struggling much more than the "best of breed" or even average operator, (3) labor costs have crimped already thin single-digit pre-rent operating margins for hospitals broadly and MPW operating partners especially, and (4) several of MPW's operators are either at or near the point of financial difficulty or even insolvency, most notably Steward and Prospect Medical together comprising ~35-40% of MPW's pro forma annual revenue (rent + interest income). There has been recent commentary from the operator side that directly contradicts MPW management's rosy "everything is great and NONE of our operators are seeing any issues right now" from the 1Q22 "bluff" earnings call. Again investors should keep in mind that labor expenses typically represent ~40%+ of hospital operator opex, and even if the second derivative on the RoC of labor expenses improves operating margins will still compress if that growth outpaces the top line. Operator commentary indicates that expense growth is an ongoing issue that may extend into late-2022 or early-2023, and it leaves one to wonder if MPW is being forthright or just lives on another planet with a completely separate (and always positive) operating environment.

HCA Healthcare, Inc. (HCA):

1Q22 earnings call (4.22.22):

"We do, however, have numerous initiatives underway around retention, recruitment, capacity management, and new care models that we believe will help offset some of these labor pressures. However, we now believe improvement in our labor cost will be slower than originally anticipated. This factor primarily influenced our revised outlook for 2022."
"And first, as I mentioned, the pressure on the labor cost. And what we're seeing is it's higher than we originally planned. It's primarily related to the use of contract labor. But we're also adjusting our base wages to be responsive to the market as well."
"I think we talked about in our fourth quarter call, our contract labor as a percent of nursing hours was around 11%. In first quarter, it's about that level, too. We were 11.4% specifically in the fourth quarter, about 11.6% in the second quarter. We are experiencing elevated cost per hour of that contract labor, principally, we believe, related to the COVID surges."

BAML conference (5.11.22):

"Well, in the short run, as I mentioned on our earnings call, we are fully contracted for the most part in 2022. The government, we knocked on Washington's door. They don't really want to pay us anymore at this point, but we'll have to see how that plays out."

Mayo Clinic (Private):

Source Article
Mayo Clinic posted a ~$230 million loss for 1Q22 driven partially by a surge in labor expenses. Operating margin was 3.6% on net revenue of ~$3.9 billion.
"Several systems have posted losses in the first quarter due to heightened labor expenses as well as other cost pressures such as inflation."
“Workforce shortages and corresponding labor cost inflation, persistent supply chain disruptions and shortages, a higher interest rate environment and capital market volatility have all taken center stage for management attention,” the earnings report said.
Expenses increased +10% y/y, and "driving those costs were $2.3 billion in salaries and benefits, which increased 7.4% over the prior period and made up nearly 60% of all total expenses."

Providence Health:

Providence reported a ~$560 million net loss in 1Q22.
"..operating expenses were fueled in part need for staffing. Salaries and benefit costs increased 13% for the quarter compared to 2021 “due to increased agency spend, overtime and wages, including actions taken by the system to improve retention."

Kaiser Permanente:

Reported an operating loss of ~$72 million and a net loss of nearly ~$1 billion in 1Q22.
Operating expenses increased +9.5% y/y, and "Kaiser "... also acknowledged the significant increases in labor costs health systems across the country have experienced during 2022’s opening frame."

Let's contrast that with what MPW said on its call:

Edward Aldag: "Labor costs for Steward. Steward is very active in their daily management of overall labor costs. Contract labor is down year-over-year, though it has been increased slightly in the last two months. Overall, salary, wages and benefit and contract labor are well below budget. They have been able to cancel and rehire contract labor as rates improve."
Edward Aldag: "Circle is seeing some labor shortages, primarily with nurse staffing, as a result of the spike in Omicron that caused an unusually high number of nurses to be out sick or in quarantine. They are seeing some inflationary pricing pressures across suppliers, utilities, food costs, et cetera, but are navigating through these and do not see it having any material impact on their budget. They expect Q1 to be in alignment with their budget."
Edward Aldag: "Regarding Prospect's labor cost, they are starting to see those level off over the last month or two. They peaked around the end of January, beginning of February and declining each week since. They are also seeing contract labor costs coming down $15 to $20 per hour. Utility, food and other expenses have been up over the last year or so, and – but are still somewhat in line with inflation. They have not experienced any shortages or supply chain issues and do not see any concerns with cost at this point."
Edward Aldag: "Priory saw a slight decline in their coverage, but still in acceptable ranges near two times. Occupancy exceeded last year and was only held back by the same labor shortages that other behavioral health facilities have experienced. Q1 2022 is expected to be in line with expectations despite these COVID-related self-isolation staffing issues. Staffing pressures have been identified as a concern with personnel costs through February being up 4%, but year-over-year only 1% over budget."
Edward Aldag: "Prime continues its stellar performance... Labor cost. They peaked around the end of February and early March. They've seen a small but steady decline ever since. As far as utility, food and other expenses, they've seen increases over the last year so far but not any new pressures here. Fairly stable over the last couple of quarters and in line with their budgets."
R. Steven Hamner: "... I've met with most of our operators over the last five weeks. Obviously, this was on the list of agenda in my discussions with them. None of them are overly concerned. Obviously all have been dealing with this for longer than just the most recent inflation increases because the shortage in labor that we had over the last 10 years. And they've done a great job of managing it. I tried to give a little color on the largest tenants and where they are. Most of them are seeing the labor cost increases subside here in the last couple of months. But it obviously is something that we pay attention to and talk to our operators on a regular basis."

So the questions we have are: (1) how do investors square these comments with the MPW management team commentary circle, and (2) why should we believe that MPW's inferior and very likely financially stressed operators should ALL be faring better? Who should we believe here? One thing is for sure, these statements are not consistent with each other and MPW appears to stand alone.

Prior Notes:

5.24.22 - REITS DAILY BRIEF | 5.24.22 | (REMOVING COLD FROM BEST IDEA SHORT)

5.22.22 - SUNDAY NIGHT REIT READ | 5.22.22 | (OFC, STYLE FACTORS)

5.20.22 - REITS DAILY BRIEF | 5.20.22 | (MPW)

5.18.22 - REITS DAILY BRIEF | 5.18.22 | (POSITION MONITOR UPDATE)

5.17.22 - REITS DAILY BRIEF | 5.17.22 | (MPW)

5.16.22 - SUNDAY NIGHT REIT READ, A LITTLE LATE | 5.16.22 | (CUBE, PSA, EXR, LSI, UHAL)

5.12.22 - REITS DAILY BRIEF | 5.12.22 | (APARTMENT RENT TRACKER)

5.10.22 - RADI 1Q22 RESULTS | TIMING IMPACT DRAG; POTENTIAL DEAL ALL THAT MATTERS | 5.10.22 | (RADI)

5.8.22 - SUNDAY NIGHT REIT READ | 5.8.22 | (RADI)

5.6.22 - COLD 1Q22 RESULTS | SETTING UP ANOTHER GUIDANCE CUT? | 5.6.22 | (COLD)

5.5.22 - REITS DAILY BRIEF | 5.5.22 | (HR/HTA/WELL, LSI, NSA)