08/21/22 03:00 PM EDT

SUNDAY NIGHT REIT READ | REAL-TIME LOOK AT TRIPLE-NET CREDIT RISK IMPACTS | 8.21.22 | (EPR, MPW)

Rob Simone, CFA

Takeaway: Hope everyone had a great weekend!

Hedgeye Cartoon of the Day: The REIT Stuff

It is 8.21.22, and Active Short MPW is overvalued by approximately ~$15.95/share. MPW still has a price, but unfortunately has no value. Prospect should probably be working the phones with restructuring advisors right now, and/or asking MPW for additional loan support. Just remember to get your "VIG" if MPW tries to sell equity.

Ticker: EPR

Company EPR Properties

Subsector: Triple-Net (NNN)

Headline: A real-time view window into how REITs react when large tenants have issues (think MPW...)

Last week provided a very interesting case study into the importance of large tenant credit for triple-net REITs, and a potential window into how shares of Active Short Medical Properties Trust (MPW) will likely react when both Steward and Prospect inevitably (in our view) begin exploring "options to bolster liquidity, restructure, etc...."
By way of background EPR acquires, develops and lends against (but does not lend to the tenant, just against the real estate!) triple-net leased experiential real estate properties such as movie theaters, ski resorts, water parks and other eat & play attractions such as Topgolf locations.
Last week Cineworld, which owns Regal Entertainment Group (a ~13.5% tenant exposure to EPR), announced that it was exploring strategic options to bolster liquidity amidst rising financial distress. On Friday the WSJ reported that Cineworld was approaching a potential bankruptcy filing and had hired Kirkland & Ellis LLP and AlixPartners to advise on the bankruptcy process.
This news sent shares of EPR down -12.4% on the week, despite the facts that (1) Cineworld was still current on rent to EPR and had been paying deferred amounts, (2) EPR's portfolio of Regal locations are likely among the best/most profitable of Regal's total portfolio, (3) a ~20% rent reduction from Regal would impact EPR's annual AFFO run rate by just a mid-single-digit percentage.
This is very informative for the MPW situation - the market will shoot first and ask questions later in these situations, immediately "marking down" the credit of not just the tenant in question but also for other tenants in the portfolio in the same sector that could also experience difficulty.
MPW has uniform tenant exposure to a single industry sector - hospitals. At least EPR has sector diversification from a credit perspective. Furthermore, MPW's two most obvious "problem tenants," Steward and Prospect, comprise nearly ~40% of annual revenues versus just ~13.5% for Cineworld. There are for sure additional distressed hospital operators behind Steward and Prospect. Further to that, tack on that MPW has lent or invested equity directly in to several key OpCo tenants. Finally, MPW is more highly levered at ~9x cash EBITDA versus ~6x for EPR.
If EPR can fall over -12% in a week on Cineworld, what can happen to MPW? We shall see, and likely by 1Q23 in our estimation.

Separately, this week will likely be a light publishing week for us as we wrap up our Black Book on new Active Short SBAC, barring any special developments. One thing that we have noticed thus far in the SBAC process is an interesting split - a telecom/tech investor community that thinks we are crazy, and a REIT community that, while perhaps owning SBAC and the other TowerCos because they have to on the long-only side, agrees that the numbers make no sense. Makes for an interesting debate, and our view is that these companies are "more real estate and less tech/comms." More and more we are of the view that growth is set to slow relative to both recent history and forward expectations. As we recently saw with PLD and Logistics, for example, it does not take much in terms of lowered expectations to reflexively send high multiple real estate stocks ~20-30% lower quickly. On our numbers SBAC trades at an implied ~3.5% cap rate/28-29x TCF multiple.

Figure 1: Hedgeye REITs Position Monitor