06/02/22 06:40 AM EDT

REITS DAILY BRIEF | 6.2.22 | (MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Thoughts on Steward Health's sale of value-based care business

Hedgeye Cartoon of the Day: They're Eff'd

Ticker: MPW

Subsector: NNN Hospitals (really just MPW standing alone)

Headline: A sign of desperation at Steward? We think so...

Yesterday CareMax, Inc. (CMAX) announced it would be acquiring the value-based care (VBC) business of Steward Health Care System, again the largest tenant / operator + lending + director ownership relationship for Best Idea Short Medical Properties Trust (MPW). Steward accounts for ~25-30% of MPW's pro forma rent and interest income and is a significant source of credit, dividend and valuation support for the very highly-levered (~9.5x on a cash basis) MPW entity.
Post-close CMAX will serve as the exclusive value-based MSO across Steward's Medicare network. Steward's VBC business covers 8 states and ~171k senior lives. See Figure 1 below from the transaction deck from CMAX, the full version of which is linked below.
Steward is receiving ~$25 million in cash + 23.5 million shares of CMAX Class A common (~$130 million today, 21% of total) for total upfront consideration of ~$155 million at today's market prices. CareMax will also finance 100% of the outstanding A/R which is estimated to be ~$72 million at close. Finally, there is also an earnout component which could bring Steward's future ownership interest up to ~41% of CMAX's equity. Expected close is late-3Q22 / early-4Q22.
Focusing in on immediate liquidity and the implications for MPW, the cash component (cash consideration + A/R financing) represents about ~4 months of rent owed by Steward to MPW. A sell-down of CMAX shares excl. any earnout at current market prices would represent an additional ~5 months of rent, although the terms of any lockup period are not clear and any Steward selling post-close would likely apply significant downward pressure to CMAX shares.
Based on the projections in the deck, we estimate Steward is losing about ~$10 million of run-rate EBITDA in the sale which would shave about ~0.04x turns of rent + interest coverage under our calculation in Figure 2 below. So effectively, in our view, Steward is trading some modest deterioration in coverage for about ~$100 million of upfront liquidity. This should be viewed alongside (1) Steward's inability to cover rent + interest with both EBITDAR and cash flow after required operator capex, (2) Steward's significant cash burn rate and deteriorating liquidity, and (3) the maturity of Steward's credit facility at the end of September 2022.
As an aside, the financial projections for the VBC are WILD (see Figure 3), with a 100%+ EBITDA CAGR over 3 years.
Stepping back, this transaction shares common threads with pretty much every other transaction we have seen involving Steward: (1) operating / physical assets stripped from the system, leaving EBITDA and cash flows weakened primarily from rent burdens but now in this case lower revenue streams, and (2) what we would call "creative" ways to inject much-needed liquidity into Steward, which then turns around and pays a significant annual rent burden to MPW. Is this a sign of desperation at Steward, another "Hail Mary" to keep the lights on? Why would they sell a ~30% EBITDA margin business with such an unbelievable growth trajectory? Which, by the way, if true would alleviate Steward's financial problems significantly via some portion of ~$100 million of projected EBITDA over time? Some things to think about...
Deal presentation HERE.