06/03/22 06:58 AM EDT

REITS DAILY BRIEF | 6.3.22 | (ANOTHER ONE ON MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: FTC sues to block HCA's acquisition of ops for 5 Steward hospitals in Utah

Hedgeye Cartoon of the Day: Unfortunate

Ticker: MPW

Subsector: Healthcare / NNN Hospitals (really just MPW standing alone)

Headline: A big potential "Oof" for MPW; Uncle Sam doesn't like the HCA deal

Yesterday the FTC sued to block HCA's planned acquisition of the operations of five Steward Health Hospitals in Utah, all of which are owned by Best Idea Short MPW and covered under the Steward master lease. This is a very big development, as (1) the transaction, which was originally planned to close in the first half of 2022, would have reduced MPW's pro forma revenue exposure to Steward by about 10 percentage points, and (2) it would have also injected much needed capital (although not clear how much) directly into Steward, which would obviously serve as support for the remaining Steward lease payments owed to MPW. As we have written about frequently, including yesterday, we believe Steward (MPW's largest operator relationship, 25-30% of rent + interest income) is financially stressed and probably insolvent.
This development was always viewed as a potential risk to the transaction being consummated, a risk that MPW's management essentially ignored as recently as a month ago (see below). It seriously damages MPW's chances to reduce exposure to Steward in the near term, which is essentially a "nuke" sitting inside of MPW's structure that threatens to blow the entire thing up. To be clear, several of MPW's operator relationships are likely problematic, but Steward stands out to us as potentially existential.
Secondarily, if blocked it takes away MPW's ability to put the hospitals to HCA which removes a significant source of capital to the company. This was marketed by management as a preferable and available source of capital vs. common share issuance. Oof.
From the FTC release:

The Federal Trade Commission has authorized an administrative complaint and a lawsuit in federal court to block the proposed merger between Utah healthcare competitors HCA Healthcare and Steward Health Care System. The agency alleges that the deal would eliminate the second and fourth largest healthcare systems in the Wasatch Front region, where approximately 80 percent of Utah’s residents live. The companies offer a broad range of essential medical and surgical diagnostic and treatment services that require an overnight hospital stay, known as inpatient general acute care services.
"As the second and fourth largest healthcare systems in the Wasatch Front region of Utah, which surrounds Salt Lake City, HCA Healthcare and Steward Health Care System help to keep costs down for consumers by competing vigorously with each other... If these companies merge, this competition will be lost, and Steward will no longer be available to patients as a low-cost provider in this region."

Recent MPW management comments on HCA Utah:

Edward Aldag, CEO: "And just as a reminder, the HCA Utah transaction is projected to close by the end of the second quarter of this year. Notwithstanding the value we have generated from Steward being one of our tenants, Steward accounts for an increasingly smaller portion of our portfolio as we continue to invest domestically and internationally in non-Steward hospitals." - 1Q22 Earnings Call
R. Steven Hamner, CFO: "I'll also remind the group that HCA's pending acquisition of Steward's Utah operations includes the assumption by HCA of the economics of our current master lease with Steward with respect to those Utah hospitals. And I'll point out two very important considerations. First, this implies a fair value of these facilities significantly higher than our investment in them. This, of course, is testimony to MPT's underwriting and to Steward's strategic and operational expertise. And second, recall that MPT has a put option that, subject to FTC approval and closing of the transaction with Steward, allows us to sell these assets to HCA at fair value. It is currently not our expectation or our plan to exercise that option in the foreseeable future. But when compared with an alternative that would contemplate funding our growth with common stock sales at recent prices, it should make clear to anyone that it is highly unlikely that there will be any such common issuance." - 1Q22 Earnings Call
Edward Aldag, CEO: "With respect to the HCA question, it's not that whether they would want to, we have a put option. If we want to sell to HCA once that transaction closed, we have the right to put the assets to them at fair value with, with the floor. We haven't described the floor, but fair value will greatly exceed the floor in any case. So we have that opportunity, yes, and it's available to us. As I mentioned, it is not our plan to do that in the near in the near term, in the foreseeable future, but it is available to us." - 1Q22 Earnings Call
R. Steven Hamner, CFO: "So for example, let's just take Utah because Steward has already agreed to sell Utah. What if something bad happened at the Steward parent level 12 months ago and we had to start taking back our facilities where we would capture those Utah assets and any others we wanted. Presumably, they would be generating strong profitability based on the local coverage that we've just reported. And we would be able to call HCA or Intermountain or some other large operator who wants to get them to Utah and tell them we're the landlord, we have these businesses. It's not just empty shell buildings. We have these businesses that are generating substantial profitability, recurring profitability. We'd like to give them to you. You don't have to do any – you don't have to pay to get into a market. You don't have to ramp up. You don't have to put in a whole lot of capital. All you have to do is take over these lease payments. Now, frankly, what would happen in that case is, is we wouldn't just give it to them. We would extract value from whoever that replacement operator is. But that's the whole concept behind us focusing on facility level, local level coverages." - 1Q22 Earnings Call

We would love to hear management respond to this development, specifically any contingency plans for the Steward exposure and alternative funding options. After all, without access to equity capital the structure likely dies on the vine as (1) MPW is already maxed out on leverage and (2) several tenant / operators likely won't make it without direct support from MPW. We will be hanging out at the lobby bar at NAREIT on Wednesday afternoon, so you guys should stop by and lets finally get to know each other and have a chat! Drinks on us! That is an honest and open invitation, but in all seriousness we ask how any investor could view MPW's management team as credible? Things are getting interesting.
FTC announcement HERE. Original MPW press release HERE.