06/30/22 08:05 AM EDT

REITS DAILY BRIEF | 6.30.22 | (APARTMENT RENTS, MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Apartment rent RoC decelerates in June; more data points to MPW operator challenges

Hedgeye Cartoon of the Day: Pour Me Another

It is 6.30.22, and Active Short MPW is overvalued by approximately ~$15.94/share.

Tickers: AVB, AIRC, AIV, BRT, CPT, CSR, EQR, ESS, IRT, MAA, NXRT, UDR, VRE

Subsector: Apartments

Headline: RoC deceleration picks up in month 3 of 7 really tough comps

RoC flashing red across the board - the blended y/y RoC decelerated -116bps sequentially in June vs. -39bps, -49bps & -77bps in the prior three months consecutively.
As we have been speaking to recently, we recently grew increasingly bearish near-term on residential broadly, but particularly on the Sunbelt names which were obviously huge COVID beneficiaries. There is nothing fundamentally wrong with the businesses, but the RoC slowdown on an over-owned, consensus long subsector could be particularly nasty for the stocks.
Our favorite Apartment shorts are Active Short CPT and Passive Short NXRT. Watch out for the outsized impact to NXRT's equity from an over-levered balance sheet.

Figure 1: Apartment Rental Rate Tracker Through June

PDF LINK

Tickers: MPW

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

Headline: 1H22 hospital operating trends + MPW's bonds

Kaufman Hall released a useful report on U.S. 1H22 hospital operating performance. In summary:

Margins are trending lower y/y across ~900 reporting hospitals due to higher labor costs, fewer hours worked and higher employee turnover. This comes despite an increase in patient visits from elective procedures during the warmer spring season + pent-up elective procedure demand from COVID.
Kaufman's measure of median operating / EBITDA margin (the "Kaufman Hall YTD Operating Margin Index) improved +13.5% m/m but was still down -36.1% y/y.
Again, we think investors need to consider adverse selection and what it means for MPW's tenants. If the "median" hospital is performing in this fashion, what does that mean for MPW's lower-quality operators? In particular, what does it mean for Steward Health (which is likely at or near the point of insolvency) which accounts for ~25-30% of MPW's rent + loan interest? Recall that MPW's management team claimed that ALL of its operators are performing well with no issues and no concerns.
Steward is out of saleable / financeable hard assets and appears to be scrambling to (1) raise liquidity in general but also (2) replace the "lost" proceeds from the failed HCA / Steward Utah merger, as evidenced by the recent deal with CareMax (CMAX) which injected about ~$100 million of immediate liquidity into Steward. The business sold to CMAX had previously been considered a major growth area for Steward. Steward's partially drawn credit facility matures at the end of September, and we think the firm is burning ~$150-200 million annually.
We believe it is highly unlikely that Steward's financial performance has recovered to 2019 pre-COVID levels of ~$400 million in recurring EBITDAR, which would still leave the company unable to cover its rent + interest, and out of cash by the end of this year on our math.
If Steward "soft defaults" and has to recut the lease with MPW (given that MPW is effectively on both sides of the deal), to be absolutely clear MPW will need to cut its dividend and will be revalued significantly lower from current levels.

While we're here, lets take a look at what MPW's bonds have been doing during this recent rally off the lows. One thing we have gained an enhanced appreciation for while at Hedgeye is to pay attention to when the equity and bonds are telling opposing stories, especially in Quad 4.