Hedgeye Cartoon of the Day: Unfortunate
We hope you can join us Today, July 28th @ 10:00am ET for a Flash Call on Active Short Medical Properties Trust, Inc. (MPW), which remains our top short idea. Ahead of the company's 2Q22 earnings report on 8.3 we will be reviewing a set of potential scenarios for how this story will resolve itself, all of which are terrible. We will also recap a set of recent egregious accounting gimmicks, and present a list of key questions that we would ask management if allowed. We are optimists, but it is almost impossible to find any positives for this name ahead of what is sure to be a rosy picture painted by management next week (see CYH 2Q22 results for a read across).
In our view, if Steward Health, Prospect and other major tenants cannot stand independently without the balance sheet support of MPW, the arrangement is circular and MPW's equity is fundamentally worthless. The math clearly shows that at least Steward cannot stand on its own merits. The key question, therefore, is: "how long does it take to blow up?" We think sooner than the market is currently handicapping. There is essentially no flexibility for MPW to absorb a ~30% tenant issue, as MPW's own cap stack is grossly over-levered at nearly ~10x cash EBITDA.
We are highly confident that Steward, burdened by an above-market, uneconomic and completely unsustainable rent burden (crossed, parent guaranteed master lease), is effectively insolvent today. Steward has continued to operate in its current form only by selling its real estate to MPW and via direct liquidity/working capital support from MPW, funded by equity/debt issuance. MPW has taken massive and asymmetric risk to keep Steward afloat, to the detriment of shareholders. Steward is now out of real estate to monetize or finance. And with MPW comprising most, and perhaps soon to be all of Steward's cap stack, MPW is effectively the "new equity" of Steward as it grows increasingly distressed and enters the "zone of insolvency." While a little harder to handicap in terms of timing, our view is that the inevitable default and consolidation of Steward with and into MPW will destroy what little MPW equity value remains. And that is before any other operator issues, of which there are several.
Fortunately for MPW shorts, there are both immediate and intermediate steps prior to that terminal point providing for significant downside from here. We expect a desperate MPW management team to become increasingly volatile from here and to continue their efforts to conceal and misdirect. We are hoping to get out ahead of that for clients. The game theory dictates, in our view, that a Steward rent reduction is in the cards.
A live Q&A session will occur at the end of the call.
EVENT LINK: CLICK HERE (video, dial-in, materials links)
Please e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
