08/29/22 06:57 AM EDT

REITS DAILY BRIEF | POST-SBAC BLACK BOOK FEEDBACK | 8.29.22 (SBAC, MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Broad agreement on points, disagreement on what it means for the stock price

Hedgeye Cartoon of the Day: The REIT Stuff (for Artemis)

It is 8.29.22, and Active Short MPW is overvalued by approximately ~$14.97/share.

Ticker: SBAC

Company Name: New Active Short SBA Communications Corp.

Subsector: Towers

Headline: Feedback points from our Black Book presentation last week

There is general agreement that the stock is "expensive" here, but we would characterize the majority of the response as "What exactly does that mean? The stock has been expensive for a decade. Why should it matter now?" We just think that we are entering into an interesting period of (1) MNO capex already peaking, (2) a general SBAC and Tower RoC slowdown, especially with Sprint churn (AMT already took its medicine) forthcoming and Oi risk, (3) increasing credit stress on the margin for the sector, (4) tightening capital market conditions overall, (5) relatively high cash leverage at SBAC and (6) the highest multiple in the group.
We have heard "What else do we own here? So many stocks are at risk for the reasons you highlight" very often. And we get it, its a fair point. It just seems to us that the buyside, especially amongst the long-only group, is uniformly lined up on the long side for this particular name. PLD and ARE were also in the "bulletproof" REIT group that only goes up, until they weren't.
"The absolute level of MNO capex spending will remain elevated and higher than in past cycles." True, but growth rates for the towers are driven by the RoC of capex spending on the margin. And downshifting just a bit/delaying can have a significant on high-multiple stocks heading into a deeper Quad 4 macro, as we just saw with Logistics.
We fully concede the point that SBAC generates a ton of cash flow, way more than a typical REIT and can "self-fund" or do an accelerated buyback. That may not be true in the near-to-intermediate term, however, as it takes on incremental leverage to close GTS. We are already pushing the upper-limits of SBAC's leverage target.
There is also pushback that leverage levels are too high. To be clear, we do not think that leverage is existential, rather just that higher leverage will impact the equity in an outsized way, all else the same, when high multiple stocks see compression. This tends to happen almost always when growth slows into a Quad 4 with the Fed tightening.
We think that, in general, the buyside is completely buying management's guidance on Oi. That could be shifting a bit given recent sell-side commentary and more critical looks at the numbers. We just think there is some headline risk there, given what we have heard and read coming out of the Brazilian carriers and for the country in general.
We would say that its a 50/50 split that SBAC should not be driving up its international tower exposure. Some think its a relatively poor use of capital (tend to be REIT-dedicated), others think its a growth engine (TMT community). We are more inclined towards the former.

Ticker: MPW

Company Name: Active Short Medical Properties Trust

Subsector: NNN Hospitals (just MPW in this subsector)

Headline: Some highlights from hospital systems reporting 1H22 and 2Q22 results

Pittsburgh-based UPMC reported 1H22 operating income down -86% y/y on revenue up +2.5% y/y.

Expenses increased across all categories including supplies and salaries & benefits.
"Throughout 2022, the continued effect of COVID-19, along with conditions in the labor and supply markets have resulted in cost growth in employment, staffing and other operating expenses in excess of revenue growth," management wrote in the filing.

Salt Lake City-based Intermountain Healthcare reported 1H22 operating income down -38% y/y on revenues up +25% but a +31% y/y increase in operating expenses.
Advocate Aurora Health reported 1H22 operating income of $51.2 million down, from $264.6 million.

Salaries, benefits & wages increased +12.3% y/y "primarily due to an increase in nurse agency costs, higher merit and premium pay for clinical care due to inflationary environment and demand and an increase in full-time equivalent employees of 1.8% due to higher patient volumes period-over-period."

Detroit-based Henry Ford Health reported a +1.5% y/y increase in 1H22 revenues, but a $74.77 million operating loss that worsened from $19.29 million a year ago.

Operating expenses up +4.4% y/y.
Salaries, wages & benefits increased +4.9% y/y "due to continued reliance upon temporary agency staffing to compensate for staffing shortages, the impact of 2021 targeted programs to retain and recruit frontline clinical and support staff, and routine wage programs. While strategies to mitigate COVID-19 driven frontline staff shortages are beginning to show traction, this is expected to significantly impact Henry Ford Health operations for the balance of 2022."

Renton, WA-based non-profit Providence reported a +2% y/y increase in 1H22 revenue but a +8% y/y increase in operating expenses, resulting in an operating loss of nearly ~$934 million.

"The report showed the ongoing impact of inflation, the national health care labor shortage, global supply chain disruptions and financial market weakness. In stepping up to meet the significant need, Providence like other health systems across the country, continued to absorb the increased cost of caring for patients even as revenue and reimbursement did not keep pace."
"Meanwhile, patient care operations continued to be strained by the health care labor shortage and challenges in discharging patients, resulting in an increased reliance on costly agency staffing and other premium labor compared with the prior year."

Rochester, MN-based Mayo Clinic reported 2Q22 opex up +11% y/y and a -66% y/y decline in operating income.

Expenses increased across all categories, including salaries & benefits.

Oakland, CA-based Kaiser Permanente reported 2Q22 operating income of ~$89 million, down from $349 million a year earlier.

"Much like the entire health care industry, we continue to address deferred care while navigating COVID-19 surges and associated expenses."

Boston-based Mass General Brigham's 2Q22 revenue increased +4.4% y/y, but operating income came in at a ~$120 million loss vs. a positive ~$128 million for the year ago period on higher opex.

"The challenges we face are significant. The national labor shortage continues, leading to higher costs and contributing to ongoing severe capacity constraints."

We would highlight that a majority of Steward's operating profitability is generated in its Boston and Utah hospitals. What are the odds that Steward is generating ~$800 million of annual run-rate EBITDAR? We think its low.