08/27/22 02:04 PM EDT

SATURDAY NIGHT REIT READ | IS MPW ACTUALLY A RURAL DVLPM'T BANK? | 8.27.22 (MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Beware the pre-follow on narrative shift! Traveling so writing a day early.

Hedgeye Cartoon of the Day: Pinocchio

It is 8.27.22, and Active Short MPW is (still) overvalued by approximately ~$14.97/share..

Ticker: MPW

Company: Active Short Medical Properties Trust

Subsector: NNN Hospitals (just MPW standing alone)

Headline: So we guess our thesis is correct? MPW is on both sides of the PropCo/OpCo arbitrage, aka there is no arbitrage

We normally would not do this, but we MUST respond to one of the most ridiculous competitor sell-side notes that we have ever seen, published earlier this week on 8/25 on Active Short Medical Properties Trust (MPW):

First, we have strong reason to believe that MPW management was in St. Louis early last week. Read into that what you will, but would suggest looking up I-Bank HQ locations.
We think, but don't know for sure, that an attempted follow-on offering is likely forthcoming for several reasons: (1) MPW lost its primary source of funds when the HCA/Steward Utah deal was scuttled, (2) as we have said repeatedly, MPW is excessively levered at around ~9x net debt/cash EBITDA, (3) MPW now has ~$920 million outstanding on the $1.8 billion revolver that needs to be termed out, (4) credit market conditions have obviously deteriorated and several series of MPW unsecured bonds are now yielding close to ~7% (+350bps since 12.31.21), (5) while the Prime option is there it is uncertain, and most importantly (6) MPW likely has additional loans to fund to Steward and Prospect, over and above the ~$250 million extended during 2Q22 (as we had expected). Prospect looks to be heading for a restructuring, and Steward may not have a completed 2021 audit ahead of its credit facility maturity on 9.29. Steward is involved in multiple lawsuits involving non-payment of vendors, and would not need loan support from its largest landlord if it was liquid and solvent. We would place less than a ~10% probability on Steward being the only healthy rural hospital system in the U.S. and generating ~$800 million of annualized EBITDA. We estimated something closer to a little more than half that number. Anything less than ~$700 million annually means that Steward is burning cash.
Ok with all of that said, let's look at the narrative shift/word salad here. We are making the (safe?) assumption that most of this is coming from management and being repeated:

Sell-Side Commentary: "MPW's primary business is funding operators that rehab underperforming hospitals."

MPW Management: "First and foremost, we invest primarily in real estate. We underwrite our real estate investments to attract successful operators, such that just like most REITs and other real estate investors, if any particular lessee is unable to continue paying our rent, we expect to find another lessee that can. In other words, it is the characteristics of our real assets that we believe attract successful operators and sustainable real estate returns, as opposed to relying on any particular operator lessee to bring value to our real assets." - CFO R. Steven Hamner on 2Q22 earnings call
Hedgeye: What? Which one is it? So are we correct in our thesis? Is MPW less a REIT and more a rural development bank now, using its balance sheet to extend liquidity support to struggling operators who then turn around and pay MPW rent? Rent that services MPW's debt, pays shareholder dividends, and GAAP rent that is used to compensate management? What we see here is a narrative shift ahead of attempting to sell equity to fund additional loans to likely insolvent operators, for the sole purpose of keeping this Ponzi-like arrangement going. It likely cannot continue without MPW raising external capital and/or cutting its dividend Don't fall for it, get your "VIG."

Sell-Side Commentary: "Management identified this area (funding operators that rehab underperforming hospitals) as underserved by other financing sources and stepped in with the creation of the REIT."

MPW Management: "I think that implies that hospitals in financial distress are more willing to do sale-leaseback transactions. And that may be, but that's never been our target." - CFO R. Steven Hamner on 2Q22 earnings call
Hedgeye: Again, what? Just flailing about at this point and running out of narratives, in our view.

Sell-Side Commentary: "The newer operators (like Steward) often have limited choices for capital, which is why they typically turn to MPW. This typically includes funds for acquiring new hospitals, but can also be for shorter-term needs, like cash management or bridge loans. We believe MPW provides this shorter-term capital to lessen the number of entities "at the table" should anything go wrong, in addition to achieving an attractive return."

Hedgeye: First of all, Steward is not a "new" operator. What are you talking about? And again, we suppose that we are correct in our thinking? Bridge loans, cash management, shorter-term capital - this is NOT what a triple-net landlord or even a mortgage REIT does. This is what a rural development or merchant bank does. We do not think that NNN REIT investors, or the IRS for that matter, want REITs to get into the short-term unsecured bridge lending business.

Sell-Side Commentary: "The key... is that MPW doesn't underwrite the specific operator when deciding whether to purchase a hospital (and, in effect, fund a specific operator's attempt to stabilize a hospital)."

Hedgeye: Got it. So MPW's primary business is funding operators, but they don't underwrite those specific operators that they fund, and just pray to whomever that they don't get stuck holding a bag of impaired operator loans and real estate. And let's be clear - Crozer is a real time example of what happens here, i.e. if a new operator refuses to assume an above-market, uneconomic lease, that rent will ultimately be reduced either voluntarily or via a forced restructuring.

Sell-Side Commentary: "In their August investor update, on page 5, they point out that of the 79 assets where operators had been replaced ($1.02 billion of gross real estate investment), the REIT recovered $1.07 billion."

Hedgeye: What about all the unsecured loan principal either written off or converted to equity over that time? Do these recovery figures include all the capital invested? We are very sure that they do not.

I mean let's be honest here, if we were asked to market a deal for MPW at this particular moment in time, we don't really know what we would say either. But this is just kind of sad. Perhaps MPW should just de-REIT now, take the keys to Steward and Prospect and fulfill its destiny as the U.S.'s premier rural hospital development lender. We will stay short as it goes through that process and the equity heads to zero. We think any follow-on equity offering, while boosting MPW's liquidity, will be massively dilutive to MPW's equity and share price. It would basically be a more than subtle admission that the short thesis is correct.

"Big Point," let's put a period on it: About ~40% of MPW's cash rent + interest income is currently at risk from two key hospital operator tenants, MPW is over-levered and its cost of capital is shot, cash flow is barely covering its dividend, and MPW just flexed its balance sheet to make unsecured and secured loans to those two tenants while telling the world everything is fine. Steward doesn't appear to have a 2021 audit and its revolver matures in a month. The Prospect secured loan took leverage on a single hospital up to ~$1mm per bed right before the Crozer sale collapsed. MPW management at best deceived about it on the 2Q22 earnings call, and in any case the disclosure was poor. And now they are likely lining up to sell you equity. Will you buy it?

Separately, post-SBAC presentation feedback coming Monday morning.

Figure 1: Hedgeye REITs Position Monitor