09/18/22 12:35 PM EDT

THE (DIS)TRUST SERIES | VOLUME III - I'M ON A BOAT! | 9.18.22 (MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: You just can't make it up...

Hedgeye Cartoon of the Day: Pinocchio is Back!

It is 9.18.22, and Active Short MPW is overvalued by approximately ~$13.80/share.

Tickers: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals (just MPW standing alone)

Headline: RDLT bought the AMARAL in May 2021, just four months after MPW financed the Steward MBO

So this is a fun one! We were doing some digging around Steward Health, which as a reminder is a ~30% tenant + lending relationship for MPW. As we have written about since April, Steward is very likely at or near the point of insolvency today, has generated significant operating losses over several years due to an uneconomic rent burden owed to MPW, is most likely not covering its rent with cash flow, and in our view is existential to MPW's equity. MPW is not only Steward's primary landlord, but also likely its largest unsecured creditor in addition to being a direct ~9.9% equity owner. In other words, there is a strong argument to be made that MPW effectively "owns" Steward once Steward enters the "zone of insolvency" (now?).
Apparently Steward CEO Ralph de la Torre (henceforth "RDLT") is the proud owner of the AMARAL, a 190-foot yacht that he acquired in May 2021 for an estimated ~$40 million (see Figure 1 below).
Why is this important? Recall that in January 2021 MPW used its corporate balance sheet to lend ~$335 million directly to a management group, led by RDLT, to finance the buyout of Cerberus Capital Management's ~90.1% equity interest in Steward. RDLT + Steward management also pledged their equity as security against the loan. So again, not only has MPW (1) lent to OpCos that are MPW tenants, (2) made equity investments in OpCos that are MPW tenants, (3) funded 100% of the purchase price of those OpCos in some cases and (4) invested exorbitant "capex" in properties post-acquisition as a triple-net landlord (which should never happen), but (5) lent funds to individual parties as the owners of those OpCos. MPW calls them "affiliates" of Steward in the filings, but to be clear they are the majority equity owners.
Apparently RDLT did not have the capital to fund his part of the Steward acquisition, but four months later had enough on the side to acquire a yacht. This also came amidst running a money-losing enterprise in serious need of funding and not paying its vendors or its employees - not exactly the typical or rational course of action for a CEO of a distressed company.
You can probably see where we are going with this, but we have questions for MPW:

"Does MPW management know and understand their counterparts at Steward?" And then by extension, "Should MPW shareholders be ok with this fact pattern?"
"What exactly is the relationship between MPW and RDLT?"
"Is MPW actually appropriately underwriting its tenants and debtors?"
"Did the yacht purchase impact MPW's collateral package or any personal guarantees under the ~$355 million loan? If so, how?"
"How can you justify these capital allocation decisions to your shareholders?" There is potentially a decent argument to be made that, at best, the loan helped to at least free up capital for "other" uses.
And then finally, "How often is the AMARAL in international waters?"