07/06/22 08:07 AM EDT

REITS DAILY BRIEF | 7.6.22 | (STEWARD'S LIQUIDITY & MPW'S OPTIONS)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: MPW will likely try to pull another rabbit out of the hat, which would rely on raising external capital

Hedgeye Cartoon of the Day: Shape is Subjective

It is 7.6.22, and Active Short MPW is overvalued by approximately ~$15.69/share.

Tickers: MPW

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

Headline: Sorry but not sorry, Steward (and very likely by extension, MPW) is a dumpster fire

We have obviously been very vocal about Active Short Medical Properties Trust (MPW), up to and including saying it is a potential "goose egg," "donut," etc. Pick your phrase. At times we have heard a lot of pushback about that claim, and to be honest its very fair pushback - it is a big claim and these situations don't happen too often, so it makes sense to us that there would be a fair amount of scrutiny. But at the same time, when your house is on fire or someone is trying to kick in your back door, these are very appropriate times to pull the "fire alarm." We believe now is one of those times.

Following Steward Health's (25-30% of MPW's rent + interest) deal with CareMax (CMAX) and the scuttled sale of 5 Utah hospitals to HCA Healthcare Inc. (HCA), we took another run at Steward's estimated liquidity (see Figure 1 below). Again, in the absence of (1) actual Steward financials provided by MPW and (2) given the importance of this particular tenant relationship to the MPW story, it is absolutely critical to perform this exercise using reasonable estimates. There is literally no way to evaluate MPW's valuation, dividend, credit quality and merits as an investment without having an understanding of the Steward relationship and why now is different than the previous 5-10 years. Our conclusion: Steward is a timebomb sitting in the middle of MPW's structure that is very likely poised to blow it all up. And again, if MPW wanted to put these concerns to bed, they could voluntarily release Steward's audited 2021 financial statements (as they did for 2020) and provide quarterly updates. Why have they not done that? Why have they repeatedly resisted doing so in the past, up to and including making the argument to the SEC that a 20-30% operator relationship is not a material exposure? Why does MPW opt to release only property-level coverage figures in lieu of corporate figures, which are what really matter in a master lease structure? And those reported numbers without associated backup force investors to trust MPW's management team, a leap that we would not be willing to make.

We then move on to thinking about how MPW's management team will act to try to "kick the can down the road," as we do not think they are stupid and very likely both (1) aware of this situation and (2) currently thinking hard on how to proceed from here. Our other conclusion: there will likely be an attempt by MPW in the near-term to "creatively" funnel additional liquidity to Steward, and this will require either (1) asset sales (relatively unlikely post-HCA) or (2) a dilutive equity raise which we think shareholders should not entertain at all. Or, said another way, perhaps the only way to keep this scheme (deliberate word use) going is to raise new money from investors, channel those funds to money-losing tenants for operational support, only to have it returned to MPW in the form of rent + interest, which then supports MPW's dividend paid back to investors. Re-read that last sentence and let that arrangement sink in for a minute... we won't use "the word." At ~10x levered on a cash EBITDA basis with only ~$250 million of cash on the balance sheet as of 1Q22, MPW needs external funding to further support Steward. Any attempt to do so would be an immediate and enormous red flag.

Back to Steward's estimated liquidity:

Steward ended 2020 with ~$407 million of cash,
We assumed 2021 EBITDAR of ~$200 million, or flat to 2020 levels despite a very likely further deterioration (we are giving them the benefit of the doubt),
We include Steward's 2021 lease + debt obligations,
Make an assumption of ~3% of revenues for 2021 capex,
This results in estimated cash on the balance sheet of ~$25 million at 12.13.21,
We then assume a half year of similar burn rate for 1H22, again assumes no recovery / deterioration (despite higher labor costs and now lower-than-expected industry volumes),
~$100 million in cash to Steward's balance sheet from the CMAX deal, and
a ~$168 million revolver draw to maintain minimum cash of $100 million.
On these numbers we estimate that Steward likely has somewhere around ~3 months of cash burn runway given the current burn rate, a now almost fully drawn ~$530 million revolver maturing on 9.29.22, and no remaining sellable / financeable real estate left in the structure.
Heading into this maturity, we estimate that Steward is levered ~20x recurring EBITDAR including capitalized leases (EBITDA is negative).
We think the game is over and investors SHOULD NOT TOLERATE any effort by MPW to funnel additional liquidity to Steward. Given that MPW lost is "put" right to HCA on the 5 Utah hospitals, the next most likely option is an equity raise, which in our view would be next to criminal (figuratively). Rather, the Steward rent burden should be (and likely ultimately will be) restructured lower to make the arrangement more sustainable.
Given MPW's leverage and current dividend coverage, this will necessitate an MPW dividend cut and result in a significantly lower share price when valued on lower cash flow. MPW is not "cheap" and the current dividend yield should be viewed more as a "credit spread" at this point. MPW is still being valued at ~18x forward cash EBITDA without assuming any rent reduction.