07/21/22 08:00 AM EDT

REITS DAILY BRIEF | (MPW, REXR 2Q22 RESULTS)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Fun Facts on MPW + in-line REXR results

Hedgeye Cartoon of the Day: Crash

It is 7.21.22, and Active Short Medical Properties Trust (MPW) is overvalued by approximately ~$16.12/share.

Ticker: MPW

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

Headline: Fun Facts of the Day!

MPW's predecessor, Medical Properties Trust, LLC, was founded in December 2002 by Edward K. Aldag (current CEO), William G. McKenzie, Emmett F. McLean (current COO & Secretary), R. Steven Hamner (current CFO) & James P. Bennett.
James P. Bennett was a former officer, director and consultant to the company. Under the consulting agreement, Bennet was paid a monthly consulting fee and certain fringe benefits + a fee based on the completion of certain acquisitions. Bennett left MPW in August 2003. At the time MPW owed Bennett accrued unpaid consulting fees in the amount of ~$411k, an amount he believed was too low and disputed legally. So not a great ending.
Bennett worked at HealthSouth from 1991 to July 2000, and was President & COO from 1995 until he left the company. News broke in August 2003 that Bennett was under investigation for his potential role in the now very infamous and massive ~$2.7 billion accounting fraud, roughly concurrent with his departure from MPW.
In early-February 2005, Bennett was indicted for fraud, conspiracy, insider trading, money laundering and lying to the FBI about his role in the fraud from 1996 to 2002, becoming the 18th former executive to be charged in the case. This happened after testimony from other executives in the trial of former CEO, Richard Scrushy, indicated that Bennett was aware of the fraud and sold ~$17.4 million of stock. Bennett was the only former executive to be charged with insider trading. Prosecutors later dropped the charges in July 2005.
Tugging on similar threads, the facts show:

MPW has paid its executives based on the gross volume of acquisitions completed. This is obviously a perverse incentive, as we have seen with Commonwealth REIT and others over the years. Incentivizing management to go out and do any deal is rarely a recipe for success for shareholders. Only management wins.
MPW's quality of reported earnings is VERY poor, given the high percentage of non-cash revenue generated from long-term leases. Reported FFO and related multiples, GAAP-based leverage and coverage metrics, and GAAP yields bare little semblance to MPW's actual economics. Management not only has deceptively talked about these economics, quoting 7-8% yields which are really straight-line figures, but has actively resisted SEC efforts to compel the company to disclose them to investors.
MPW uses very aggressive accounting, such as booking the straight-line rent under extension options beyond initial lease term. This boosts GAAP results and, by extension, management payouts.
Consistent with aggressive accounting, as we wrote earlier this week MPW both (1) pro forma'd its gross assets as of year-end 2021 several months before the Steward / HCA deal did not close (so as to reduce Steward leased exposure <20%), and (2) to our understanding met with four covering sell-side analysts last week in Birmingham during an earnings quiet period in between quarter-end and the 2Q22 earnings report date.
Management owns just ~1% of total shares outstanding and have been aggressively selling a large % of vested stock awards. Aldag, specifically, seems to be having a hole burnt in his pocket, selling nearly ~96% of his vested awards over the last 5 years.

Ticker: REXR

Subsector: Industrial / Logistics

Headline: In-line quarter for Active Long REXR; cash SSNOI slowed less than we expected and spreads off the charts

Last night Active Long REXR reported essentially an in-line quarter, but took up all the key ranges on FY22 guidance and reported what continue to be eye-popping leasing spreads (+61.5% on a cash basis, albeit inclusive of redevelopment). We would characterize, at least optically, as a good quarter amidst a broader earnings slowdown for a very unique name in the logistics space.
While cash SSNOI decelerated less than we expected, there is still a very clear RoC deceleration forthcoming beginning in 2H22, at least for the same-store pool. We need to think about this one and balance it against an overall favorable earnings trajectory driven by external growth and a very heavy contribution from in-fill redevelopment.
Core FFO of $0.49/share was +$0.01/share vs. FactSet and -$0.01/share vs. Hedgeye. Deltas to our model were really just rounding errors, with better top-line (+$0.02/share) offset by higher opex (-$0.01/share) and G&A (-$0.01/share).

Figure 1: REXR 2Q22 Earnings Variances