07/18/22 06:17 AM EDT

IS MPW RUNNING AFOUL OF SEC TOPIC 2, SECTION 2340? | 7.18.22 | (MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Someone should forward this note to both the SEC and MPW's auditors

Hedgeye Cartoon of the Day: Lie to Me

It is 7.17.22, and Active Short MPW is overvalued by approximately ~$15.77/share.

Ticker: MPW

Subsector: Healthcare / NNN Hospitals (MPW standing alone)

Headline: MPW appears to be running directly counter to SEC guidance for disclosure of significant tenant financials

We know that we have been writing about this a lot recently, but Active Short Medical Properties Trust (MPW) is a DEEP rabbit hole, and in our view may be one of the most important and interesting stories in the REIT space over the next year. We think this one is going to be a very binary outcome. Bear with us on this trail of logic, but it appears to us that MPW is basically telling the SEC to go pound sand on Steward disclosure, which in our view is the most critical part of the MPW story to understand right now:

November 2018: As we wrote about previously HERE, in 2018 MPW responded to the SEC saying that it expected its concentration of properties leased to Steward Health to exceed 20% of gross assets as of 12.31.18, and that MPW expected to file 2018/7 financial statements for Steward via form 10-K or 10-K/A. MPW subsequently filed audited 2018/7 financial statements for Steward in a 10-K/A on 8.6.19, and then obviously later filed Steward 2020/19 financials as part of a 10-K/A in June 2021. So there is precedent here.

Figure 1: MPW Response to SEC in November 2018

Source: sec.gov

September 2021: MPW announced HCA would be assuming part of the Steward master lease, after HCA agreed to acquire the operations of 5 Utah hospitals from Steward Healthcare. MPW's undepreciated book value of these assets at ~$1.2 billion represented ~5% of MPW's total gross assets. MPW also negotiated a put right to sell these hospitals to HCA at its option at fair market value. MPW estimated that its Steward exposure would drop to ~17% of gross assets upon closing in 1H22.
February 3, 2022: MPW reported 4Q21 results, inclusive of a calculation of "Total Pro Forma Gross Assets" by operator on page 12. In this table, which is included in Figure 2 below, MPW shifted the ~$1.2 billion of of undepreciated book value attributable to these 5 Utah hospitals from Steward to HCA. As a result, MPW presented its concentration to Steward at ~18.5% of pro forma gross assets as of 12.31.21, which is below the 20% threshold above. Importantly, MPW presented this calculation several months BEFORE the HCA / Steward deal received regulatory approval or closed. Presumably, this formed a significant part of the basis for not disclosing audited Steward financials going forward.

Figure 2: MPW 4Q21 Calculation of "Pro Forma Gross Assets"

Source: Company Reports

March 1, 2022: MPW filed its 2021 10-K report with the same calculation of "Total Pro Forma Gross Assets."
June 17, 2022: HCA / Steward scuttle their UTAH merger following a legal challenge by the FTC. Not only did MPW lose its put right on the 5 hospitals to HCA, which it had advertised as its best source of capital, but it also meant that the 5% of Total Pro Forma Gross Assets would not be moving from the Steward bucket to the HCA bucket. We calculated a "pro forma to MPW's pro forma," which very clearly and logically shows MPW's leased asset exposure to Steward remaining >20% when adjusting for loans and MPW's direct 9.9% equity interest. We calculate the leased asset exposure approaching ~22% for year-end 2021 and just over ~21% as of 3.31.22. I.e., MPW CANNOT claim sub-20% leased asset exposure as a reasonable basis for not disclosing Steward's audited 2021 financial statements. The company MUST update this chart along with 2Q22 results, otherwise they are lying to you.

Figure 3: Hedgeye's Pro Forma to MPW's Pro Forma

Source: sec.gov, Company Reports, Hedgeye

July 15, 2022: In a private 1-on-1 meeting in Birmingham, presumably during an earnings quiet period and following no June NAREIT presence, MPW's management apparently informed a sell-side analyst that it did NOT intend to file Steward's audited 2021 financials. The analyst wrote verbatim: "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."
Today, July 18, 2022: We looked up SEC Topic 2, Section 2340: Properties Subject to Triple Net Lease, It follows:

A triple net lease typically requires the lessee to pay costs normally associated with ownership of the property such as property taxes, insurance, utilities and maintenance costs. Based on these attributes, the leasing arrangement is similar to a financing arrangement for the lessee. When a registrant has triple net leased one or more real estate properties to a single lessee/tenant (including in the capacity as co-lessee or guarantor), and such properties represent a “significant” portion of the registrant’s assets, an investor may need to consider the lessee’s financial statements or other financial information in order to evaluate the risk to the registrant from this asset concentration. An asset concentration is generally considered “significant” if it exceeds 20% of the registrant’s assets as of its most recent balance sheet.
In circumstances where a registrant acquires a property resulting in a significant asset concentration, the registrant should generally provide full audited financial statements of the lessee or guarantor for the periods required by S-X 3-01 and 3-02 / S-X 8-02 and 8-03.

Article 3 provides general instructions applicable to all registrants. In particular, S-X 3-01 stipulates that the registrant and its subsidiaries should file a consolidated balance sheet as of the end of each of the two most recent fiscal years.
S-X 3-02 stipulates that the registrant and its subsidiaries should file audited statements of comprehensive income and cash flows for each of the three fiscal years preceding the date of the most recent audited balance sheet being filed,

Are you following along here?: (1) The SEC has clear guidance on significant tenant exposure, (2) MPW has repeatedly resisted that guidance as it relates to Steward, (3) MPW aggressively calculated pro forma gross asset exposure for Steward several months before the HCA deal closed, (4) the deal was scuttled leaving exposure >20%, and (5) MPW is apparently STILL telling analysts it has no intention to file audited 2021 Steward financials, thereby not only running counter to its own precedent but SEC guidance as well.

And we are supposed to take their word for it on the financial condition of Steward? No thanks, we will trust our own analysis given (1) how important this piece of the story is with Steward at ~25-30% of MPW's revenue, and (2) management's obvious efforts to obfuscate Steward's condition. And that analysis says Steward is on the verge of insolvency and the game is up.

Prior Notes:

7.17.22 - SUNDAY NIGHT REIT READ | 7.17.22 | (FINANCIAL STRAIN INDEX)

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

7.15.22 - REITS WEEKLY VALUATION HANDBOOK | 7.15.22

7.14.22 - REITS DAILY BRIEF | POSITION MONITOR UPDATE | 7.14.22 | (AVB, CTRE, IHS TCN)

7.13.22 - SELL INVITATION HOMES | 7.13.22 | (INVH)

7.10.22 - SUNDAY NIGHT REIT READ | 7.10.22 | (HR, HTA, INVH)

7.8.22 - REITS WEEKLY VALUATION HANDBOOK | 7.8.22

7.8.22 - REITS DAILY BRIEF | 7.8.22 | (INVH - TWO CITIES OPPOSE MOTION TO DISMISS, STILL MORE MPW)

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

7.3.22 - SUNDAY NIGHT REIT READ | 7.3.22 | (HR, HTA, WELL, MPW, NXRT)

7.1.22 - REITS WEEKLY VALUATION HANDBOOK | 7.1.22