07/31/22 02:32 PM EDT

SUNDAY NIGHT REIT READ | STEWARD TRYING TO "STIFF" ITS VENDORS? | 7.31.22 | (MPW)

Rob Simone, CFA

Takeaway: Steward looks like a healthy / solvent tenant to us! (sarcasm)

Hedgeye Cartoon of the Day: Still Effed

It is 8.1.22, and Active Short Medical Properties Trust (MPW) is overvalued by approximately ~$17.24/share. In this note we document a disturbing pattern of Steward Health not paying vendors, then challenging them in court for non-performance/termination and being counter-sued. These are not the actions of a healthy or solvent tenant pursuing best business practices. Quite the opposite, actually. We believe this fact pattern is consistent with our belief that Steward is currently insolvent, likely stretching payables and avoiding paying bills to bolster cash flow, has a reputation of doing so, and requires external support, in this case from MPW. Obviously, Steward's largest bill is the rent owed back to MPW as landlord.

Ticker: MPW

Company Name: Active Short Medical Properties Trust, Inc.

Subsector: Healthcare / NNN Hospitals (just MPW standing alone, for good reason)

Headline: Steward's legal liability piling up related to vendor non-payment

We are in the process of updating models for 2Q22 results, so wanted to take another opportunity to talk about our favorite stock, Active Short Medical Properties Trust (MPW). Steward Health, and by extension MPW, looks like a dumpster fire, and again, we would be highly skeptical of any claims on MPW's upcoming 2Q22 call that "everything is fine" with its ~30% operator relationship. This is not the behavior of a healthy tenant. If that is the case, then they should show us!

Speaking of which, it looks like Steward was just compelled on 7.26.22 in the Aya case below to provide financial data. Importantly, we did not account for any of the >$100 million in potential liabilities below, nor the repayment of ~$440 million of Medicare payables, in our liquidity analysis last week. I.e, the picture is very likely MUCH worse. Just some more things that would be interesting questions for the earnings call, instead of buying ~2.8x property-level coverage ratios that don't really tell you anything valuable. MPW's management team does meet frequently with all of its tenants, after all!

Steward Health Care System, LLC vs. Aya Healthcare, Inc.; Civil Action No. 2184-CV-00513-BLS2 in the Commonwealth of MA:

Source: Defendant & Counter-Plaintiff Aya Healthcare, Inc.'s Motion to Compel Production of Documents and Information, dated 4.1.21
Known / Alleged Unpaid Amount: at least ~$42 million as of 3.21.21
Under a Crisis Staffing Services Agreement entered into during COVID on 3.23.20, Steward / Aya agreed for Aya to provide temporary nursing staffing services based on mutually agreed upon, flexible but competitive rates.
Aya invoiced Steward based on the number of clinicians working + hours worked, sending "thousands of invoices to Steward for services provided under the agreement."
Steward missed its first payment on 6.20.20; its past due balance reached ~$1.35 million by 7.27.20, followed by >$7 million by 12.21.20 - Steward did not dispute the invoices and continued to promise to pay its overdue balances. Aya continued to perform the agreed upon services in light of the promises and the ongoing pandemic.
3.2.21: Steward admitted the overdue balance had grown to ~$42 million. Steward proposed a payment plan for ~$1 million / week, and increasing to $1.5 million / week after 10 weeks. Aya rejected the proposal, as it was providing services costing ~$2.5 million / week.
3.5.21: Steward's CFO sent a letter to Aya's CEO disputing 3,416 of the invoices, many of which had already been paid in full, on the grounds that they violated MA regulations. Only 224 of the 3,416 invoices were for services actually provided in MA, which is hilarious (our color).
3.8:21: Steward filed a complaint asserting claims for breach of contract based on higher rates and alleging excess rates charged in MA. Steward requested an order to compel Aya to continue providing services despite not paying.
3.18.21: Steward argued that it was entitled to a credit for ~45% of what it had already paid on older invoices, against currently unpaid amounts. However, Steward had agreed in advance on the rates charged, and any increases were based on increases paid to Aya's nurses. Aya's own margins declined during the pandemic.
4.6.21: Aya counter-sued, alleging Steward fraudulently / deceitfully never intended to fully pay overdue balances, rather intended to allow unpaid amounts to accrue to an inordinate size in a calculated scheme, and then to coerce Aya into acceding to non-payment. Aya noted that Steward has a reputation among hospitals and vendors of delaying payments and stopping them altogether, including instructing staff to delay payments to vendors in an effort to improve short-term cash flow.
7.26.21: Aya motion to compel allowed in part, including documents concerning Steward's financial condition during the relevant period. I.e., we are clearly not the only ones looking for this data!

Steward Health Care System, LLC vs. Conifer Revenue Cycle Solutions, LLC; Case No. DC-22-03472 in the District Court of Dallas County:

Source: Defendant Conifer's Response in Opposition to Petition for Restraining Order & Injunction, dated 5.11.22
Known / Alleged Unpaid Amount: ~$17.8 million
6.16.21: Tenet Healthcare and Steward entered into an Asset Purchase Agreement ("APA") for the sale of five Miami-based hospitals to Steward for ~$1.1 billion. As a reminder, MPW bought the real estate for ~$900 million and leased it back to Steward, and Steward funded the remaining ~$200 million. MPW subsequently funded / reimbursed an additional ~$200 million of capital to Steward, essentially funding 100% of the purchase price of the transaction.

Conifer (an affiliate of Tenet) is not a party to the APA, but the APA did contemplate that Steward and Conifer would enter into a Master Services Agreement ("MSA") prior to closing, and Conifer would continue to provide services for a period of time after closing.
The transaction closed on 8.1.21.

8.1.21: Conifer and Steward entered the MSA, where Conifer agreed to provide revenue cycle services to the five hospitals. Initial term was one year + 6 mos. extension upon written notice. Steward agreed to pay Conifer ~$3.1 million per month and never disputed an invoice.
Conifer issued a total of 24 invoices from August 2021 through April 2022 totaling $27.8 million. Steward has made three payments totaling just ~$6.5 million. These payments, together with an offset for ~$3.4 million allowed by the APA on 8.13.21, imply Steward remains past due on over ~$17.8 million in undisputed MSA fees and expenses owed to Conifer.
3.18.22 - Conifer notified Steward of its material breach and demanded payment within the 30-day cure period. Conifer also offered to forbear on its termination rights pending the resolution of a separate dispute between Steward and Tenet (see below), so long as Steward (1) immediately paid $5 million and then the remainder within 60 days, and (2) funded $33 million into an escrow account to secure payment for Conifer's services through the extension period. Steward responded by claiming it did not owe any money, as credits from the APA were actually $24.7 million and more than enough to offset disputed amounts due under the MSA. Steward's attempted use of offsets directly violates Section 8.2 of the MSA. And this comes after Steward never disputed an invoice.
Steward subsequently filed for temporary injunction to compel Conifer to continue providing services, despite non-payment and refusing to fund the escrow.
Not great!

Steward Health Care System, LLC vs. Tenet Business Services Corporation; Case No. 2022-0289-SG in the Chancery Court of the State of Delaware:

Source: Defendant's Reply Brief in Support of Cross-Motion for Summary Judgment, dated 6.30.22
Known / Alleged Unpaid Amount: At least $37.5 million as of 5.4.22, + $20 million NWC in a separate arbitration case
Steward has refused to pay tens of millions of dollars owed to Tenet directly covered by the APA and the Transition Services Agreement ("TSA") executed between Steward and Tenet. That amount has continued to grow as Tenet has provided additional services under the TSA, but also learned about additional amounts Steward owes under the APA related to the Florida Directed Payment Program.
Additionally, Tenet alleges that Steward owes Tenet over $20 million in net working capital delivered to Steward at closing, which Steward is apparently disputing in a separate arbitration proceeding.
7.1.22: Tenet also filed a motion to compel for targeted financial discovery, including making Steward CFO, Christopher Dunleavy, available for deposition and (presumed by us) to produce Steward's financials.