07/16/22 03:55 PM EDT

CORRECTION: IS MPW MANAGEMENT GETTING DESPERATE? | 7.16.22 | (MPW)

Takeaway: With the wagons circling, we will respond to management's only outbound communication

Correction: Its even worse than the prior version of this note! We messed up the 1Q22 calculation for EBITDAR, because now that the lease is accounted for as a financing lease on MPW's balance sheet the rent (included in interest expense) is already being added back in calculating EBITDA. So in effect we were giving them 2x the credit, and coverage for 1Q22 is <1x. This is the only change vs. the prior version of this note. Kudos to a client for noticing!

Hedgeye Cartoon of the Day: Three Pigs

It is 7.16.22, and Active Short MPW is overvalued by approximately ~$15.77/share. We reviewed why on the Macro Show yesterday, its just math.

Ticker: MPW

Subsector: Healthcare / NNN Hospitals (MPW standing alone)

Headline: Anyone taking this stuff seriously needs to have their head examined

We normally would not do this, but given (1) Active Short Medical Properties Trust (MPW) has elected to only communicate on a one-off basis on its "home turf" in Birmingham with select analysts (vs. at NAREIT for example), (2) they have clearly taken a "Ministry of Truth" approach ("come to us if you want the facts, ignore those guys over there"), and (3) the arguments are becoming seemingly more ridiculous with each passing week, we are going to respond to several points following this past week's volley of commentary. We cannot sit idly by and let this go un-rebutted, as frankly reading it just insults the intelligence.

"Operator EBITDARM coverage that is better than we thought... coverage is 3.1-3.2x versus the reported 2.7x comparable to other NNN healthcare REITs":

Just run the numbers, this statement is completely absurd as we have demonstrated multiple times. We are including our calculation of Steward corporate coverage once again for the most recent financial data that is available, and again stress that under a crossed master lease structure with a parent guarantee, the corporate coverage including overhead and capex is what matters vs. property-level coverage. A general question would be, "how much property-level expense is being pushed up to the corporate line in making these calcs?" Just another reason why the corporate financials are so important. See Figure 1 below.
Coincidentally, CHIA just released 1Q22 financial data for Steward's 8 Massachusetts hospitals, the same hospitals that MAM just acquired a 50% interest for a ~5.6% cash cap rate (the only cash cap rate ever disclosed by MPW). These hospitals account for roughly ~33% of Steward's total revenue and, despite MPW's now 50% ownership in the assets, support the overall corporate rent coverage. There is no recent period given available data where EBITDARM coverage approaches the 2.5-3x routinely reported by MPW at the property level, saying nothing about corporate. See Figure 2 below, noting that final 4Q21 results have not yet been reported for the 8 Steward hospitals. This would mean the balance of Steward's hospitals, which are of worse quality in our view excluding Utah, would need to be generating coverage levels significantly ABOVE the reported MPW coverage figures to get to those blended numbers. Furthermore, as we highlight in the notes, 2020 incudes roughly ~$192 million of pandemic fund relief revenue, without which every coverage metric for the Massachusetts portfolio would be negative for the year. The statements above make no sense and are not supported by the math, as all the financial data we have seen point to a gross overstatement of Steward's coverage and financial health by MPW.
All the more reason to give us updated 2021 Steward financials, so that investors can see and analyze for themselves.

"Steward does have an upcoming credit facility maturity in September and the refinancing process is underway — we didn’t get the sense there would be an issue."

On what terms? Who is doing the refinancing? Is it MPW? What is the collateral, assets or cash flow? How much is currently drawn on the existing revolver? Will there be an up- or down-sizing?
Basically, "prove it." Its too important an issue not to. Until then, we are all left to make our own liquidity/solvency assumptions, and ours are not great! See Figure 3 below.

"But the most important clarification is reported EBITDARM coverage includes recurring capital expenditures paid by operators totaling 3-4% of revenues..."

Huh? Come again? Read the footnotes of the 1Q22 supplemental where MPW clearly states the presented coverages exclude capex. See Figure 4 below.
Again, the math does not work. Are they saying that regular-way expensed R&M is capex? What are they talking about here? Are the goalposts moving? Why isn't the sell-side asking these questions?
Based on available financial data, Steward corporate has been spending ~$200 million on capex per year which dovetails with the ~3-4% of revenue "standard" for hospital operators, but NONE of that was included in our corporate coverage calculation.
This is nonsensical. Nice try, guys.

"We don’t expect Steward’s full financials to be included with MPW’s 2Q22 earnings release/10-Q, but we do expect some incremental disclosure/update similar to that laid out on page 11 of the June 2021 investor presentation.":

Here is where things get interesting, and where MPW is obviously playing games with you. By MPW's own standards from a response to an SEC comment letter in November 2018, CFO Steven Hamner set the "material disclosure" bar at greater than 20% for leased asset concentration as a % of total assets, at which point MPW would file financial statements for Steward. See Figure 5 below.
Following the announcement of the now scuttled HCA/Steward Utah deal in September 2021, MPW began presenting "Pro Forma Total Gross Assets" and moved ~$1.2 billion in assets from Steward to the HCA bucket, including in the 2021 10-K filing, which showed total gross assets attributable to Steward dropping to ~18.5%. We estimate leased asset concentration dropped to ~16% excluding the MPW loan to Steward management to finance Cerberus' exit and MPW's direct 9.9% equity interest in Steward. This pro forma calculation was done BEFORE the transaction closed, and presumably used as justification to not disclose audited 2021 Steward financial statements as was done in 2020. It no longer applies or is relevant. See Figure 6 below.
In response, we went back and estimated this schedule to very simply adjust for the assets necessarily moving back out of the HCA bucket and back into the Steward bucket. Also see Figure 6 below. We estimate year-end Steward leased assets at just under ~22% of total gross assets, above the 20% level mentioned by CFO Steven Hamner directly to the SEC. We estimate just over ~21% for 1Q22.
The deal is not closing, the pro forma gross asset table is no longer relevant, and MPW should file Steward's 2021 financials statements so that investors can make informed judgments on its solvency, rather than relying on empty, non-math based "talking points" from management and parroted by the sell-side.
We believe the SEC should intervene if MPW continues to play games and resists doing so. We believe investors should want this to happen. We cannot judge the merits or lack thereof of management's commentary on Steward's solvency or progress in refinancing without this information. MPW's management has zero credibility and has not earned investors' trust, and updates similar to June 2021 with cherry-picked and rosy disclosure are no longer useful.

In summary, things are becoming more bizarre and we would expect this to continue if not accelerate. That's usually what happens when something is seriously wrong.

Figure 1: Estimated Steward Corporate 2020 EBITDAR Coverage