09/15/22 06:47 AM EDT

THE (DIS)TRUST SERIES | VOLUME 1 - SEMC NLRB COMPLAINT | 9.15.22 (MPW)

Rob Simone, CFA

Takeaway: MNA charges St. Elizabeth's with unfair labor practices

Since we obviously write frequently about Active Short MPW, as we think it is the most interesting story in REITs right now period stop, we are rolling out a new MPW-dedicated line of notes: "The (Dis)trust Series." This is an homage to one of our favorite RTA's ever, which renamed MPW "Medical Properties Distrust." Client and Twitter feedback after reading that one was hilarious, so we are going to roll with it.

Hedgeye Cartoon of the Day: Give 'Em the Horns

It is 9.15.22, and Active Short MPW is overvalued by approximately ~$13.79/share.

Tickers: MPW

Company Name: Active Short Medical Properties (Dis)trust

Subsector: NNN Hospitals

Headline: MNA charges Steward's St. Elizabeth's Medical Center with unfair labor practices

On 9.13.22 the Massachusetts Nurses Association ("MNA") filed a 21-count charge of unfair labor practices against Steward Health's St. Elizabeth's Medical Center ("SEMC") in Brighton, MA with the National Labor Relations Board (NLRB). As a reminder MPW owns ~50% of SEMC after completing the MAM JV earlier this year, but more importantly for purposes here is that we estimate SEMC accounts for ~10% of Steward Health's total revenue, so is an outsized contributor towards Steward's corporate results.
The summary of the complaint from the MNA notes that the hospital's RNAs have had a union contract in place since 2018, but alleges that Steward has failed to perform under 21 different aspects of the contract. We obtained a copy of the full complaint filed with the NLRB and list a few key points here, as we believe they are highly relevant and speak in part to Steward's financial condition:

Allegation #3: "Annual wage increases for per diems are back owned for three years now, 2019-2020, 2020-2021 and this year 2021-2022... After making back payments as ordered by the arbitrator for 2018, the Employer (Steward) resumed their failure and refusal to provide the subsequent annual wage increases as required. Though this provision has been in the CBA for more than a decade, the Employer has told us on multiple occasions that it has no process for tracking the data that would be necessary for them to comply."
Allegations #4-6: Failure in "Paying the contractual degree differentials, certification differentials and the on-call rate."
Allegation #8: "Management failed to implement the wage increase due January 4, 2022, which had been in the contract since 2018. They partially implemented after repeated complaints from the Charging Party in mid-February 2022, and demonstrated that they had no method or process to record that the increase was coming due or a process to implement it in a timely or accurate manner..."
Allegation #9: "The Employer has been unwilling or incapable of correcting the many underpayments of the back pay for what was to have been the January 4, 2022 increases, after they claimed to us that they made back payments in February 2022. Some of the underpayments remain uncorrected as of this writing (8/29/22)."
Allegation #11: Pattern of failing to move members to their contractual next pay step on the pay scale on first day of the first full pay period following an individual's anniversary of hire date."
Allegation #17: "Pension: Our contract requires the Employer to make bi-weekly contributions to a Taft Hartley defined benefit pension plan. From January through the first half of July 2022 (with partial arrears payment made in June) the Employer failed and refused to make such payments."

We believe strongly that Steward's financial condition has continued to deteriorate throughout 2022, and that despite MPW's best efforts Steward is essentially insolvent. Such financial strain necessitated a ~$150 million loan facility by MPW to Steward in April 2022 (this very material transaction was not disclosed until August 2022, despite the 1Q22 earnings report and the 10-Q filing occurring during that time interval), which we believe is likely to be just the first tranche. Meanwhile management represented to investors that Steward was fine and was not experiencing serious financial issues. Once the Steward revolver matures on 9.29, it is possible that MPW may comprise all or an overwhelming majority of Steward's cap stack, in addition to being the primary landlord. If that were to occur and Steward enters the zone of insolvency (now), we would argue that Steward is both owned and controlled by MPW. This would be devastating to MPW's equity.
As an aside given the recent heavy trading volumes, we would not be surprised at all if MPW is tapping its ATM to (1) raise capital to fund additional loan support to Steward + Prospect and/or to (2) de-lever its own balance sheet. Any such sales would obviously be dilutive, and would run directly counter to management's prior statements made on the 1Q22 earnings call about not selling equity. Using proceeds to make additional operator loans to Steward would be nothing short of reckless and existential for MPW.
We continue to believe that MPW, as presently constituted, has only de minimis equity value.