09/07/22 03:16 PM EDT

REITS DAILY BRIEF PART II | WHAT REALLY HAPPENED W/ WATSONVILLE? | 9.7.22 (MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Simple - MPW lost a lot of money

Hedgeye Cartoon of the Day: Pinocchio Returns

It is 9.7.22, and Active Short MPW is overvalued by approximately ~$14.40/share.

Ticker: MPW

Company Name: Active Short Medical Properties Trust

Subsector: NNN Hospitals (MPW standing alone)

Headline: Redefining "successful"

This morning MPW issued a press release claiming "successful operator transition" at Watsonville Community Hospital in Watsonville, CA. To be clear, Watsonville has been a complete disaster of an investment which we will detail here, and very representative of the "typical" MPW hospital/operator relationship. Some very valuable background info can also be found here. But here is the situation as we understand it, and again the disclosure is bad.

In 2019 MPW paid ~$40 million for the real estate to Quorum (seller) and issued a ~$15 million loan to Halsen who purchased the OpCo for $5-6 million but had no capital. Read that again - Halsen was a "shell." And MPW put up all the capital.
The deal went south almost immediately and MPW funded an additional estimated ~$20 million in loans to Halsen to offset operating losses.
Within six months Halsen was in default for failing to pay rent. MPW had lent out an estimated ~$35 million prior to bankruptcy.
MPW extended DIP financing that was able to be flexed to ~$30-35 million, which was just repaid as per the announcement today.
MPW recorded a ~$40 million credit loss reserve in 4Q21, which roughly approximates the loan support extended pre-BK.
At the same time, the rent was reduced by ~25% in the restructuring yet MPW did not take an asset impairment on the property.
So just to recap: ~$105-110 million of total capital extended among the real estate + operator loans + DIP, ~$30 million just returned, and the go forward rent cut ~25% post-restructuring. We estimate MPW has incurred at least a ~$35-40 million loss BEFORE any diminution in value for the hospital real estate. The hospital is for sure worth less than MPW originally paid for it, given the reduction in rent.
MPW said in the release this morning: "The outcome of this transaction again validates MPT’s ability to underwrite hospitals with infrastructure characteristics that are appealing to multiple competent operators."
Hedgeye View: The outcome of this transaction validates nothing, except for MPW's ability to destroy shareholder capital and propensity to leave out key details. Our understanding is that there were no other bidders besides Pajaro, and no private interested parties.

MPW also disclosed the exercise of the Prime option for proceeds of ~$360 million. Our understanding is that this was executed at a ~13% cash cap rate and was decidedly dilutive. It was also not a "sale," and when combined with the proceeds from the Springstone/Lifepoint transaction does not de-lever MPW in any meaningful way on a cash basis. Recall the loan repaid was PIK'ing and contributing nothing to cash EBITDA. See Figure 1 below.
In the end, nothing in this press release was new, we are just attempting to set the record straight. We believe MPW is doing whatever it can to get the stock price up, as the model cannot function with the ability to raise external capital.