Medical Properties Trust (MPW) remains one of Hedgeye REITs analyst Rob Simone's top short ideas. Rob recently hosted a special flash call/webcast where he addresses potential scenarios on where the stock goes from here.
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Simone: Ahead of the company's 2Q22 earnings report we review a set of potential scenarios for how this story will resolve itself, all of which are terrible. We recap a set of recent egregious accounting and corporate governance gimmicks, and present a list of key questions that we would ask management on the earnings call 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.
As we have written (and tweeted) frequently, we believe the simple math around MPW's lease economics dictates that the stock is grossly overvalued today, and is poised to imminently have its equity value completely eviscerated as it encounters significant tenant issues, most notably by its largest tenant Steward Health which comprises just under ~30% of MPW's revenue. There is essentially no flexibility to digest a rent cut with MPW itself levered nearly ~10x cash EBITDA.
We are highly confident that Steward, burdened by an above-market, uneconomic and completely unsustainable (crossed, parent guaranteed) master lease to MPW, 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. 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 when it inevitably defaults. 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 remains.
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.