09/20/22 05:12 PM EDT

THE (DIS)TRUST SERIES | VOLUME IV - SO... ABOUT THAT ~$335 MILLION LOAN | 9.20.22 (MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Awkward!

Hedgeye Cartoon of the Day: Pinocchio, Hold My Beer...

It is 9.20.22, and Active Short MPW is overvalued by approximately ~$13.15/share.

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals (just MPW standing alone)

Headline: Not only was the loan totally inappropriate, but the disclosure was abysmal

As we have written about previously, Active Short MPW broke essentially every rule of triple-net REIT investing when it made a ~$335 million loan to RDLT and other individuals to finance Cerberus' exit in early-2021. RDLT went on to purchase a yacht for ~$40 million just four months later, so not at all clear to us why he needed the capital from MPW.

Triple-net REITs should only be investing shareholder capital in real property.
MPW should not be lending to large, distressed tenants who turn around and pay MPW rent. Smaller "incubator" loans to tenants who could potentially take additional space later are in-bounds, but that does not apply here.
MPW should NEVER be lending to individuals, period stop.
In our view MPW either (1) does not understand or appropriately underwrite who they are investing in (that's bad), or (2) does understand and invests anyway (that's worse). Those are really the only two options, and both are terrible if you are an MPW shareholder. Completely inappropriate capital allocation.
If that was not bad enough, the timing and disclosure around this loan was highly concerning.

2.4.21 - MPW reported 4Q20 results, but made no direct reference to the loan or any commitment in the earnings release, supplemental or the earnings call. The only indication that any loan commitment had been made required careful examination of the pro forma gross assets schedule on page 12 of the supplemental - MPW's gross investment as measured by Steward assets increased by ~$337 million (see Figure 1 below). This increase obviously represents the ~$335 million acquisition loan commitment.
3.1.21 - MPW filed its 2020 10-K report. The company made no additional reference to the loan in this filing.
4.29.21 - MPW reported 1Q21 results, and for the first time publicly disclosed the loan.

"Through today, MPT made additional investments of approximately $158 million and ~$335 million, respectively, in its tenants Swiss Medical Network and Steward Health Care System... Proceeds of the $335 million loan to Steward were used to redeem a similarly sized convertible loan from Steward’s former private equity sponsor."

5.10.21 - MPW filed its 10-Q report, and on page 15 disclosed that the loan was made back on 1.8.21, or well before the 4Q20 earnings report. So to recap, no direct disclosure of this loan or the commitment was made for ~4 months. Furthermore, the following language was used in the disclosure:

"On January 8, 2021, we made a $335 million loan to Steward Health Care System LLC (“Steward”), which was used to redeem a similarly sized convertible loan from Steward’s former private equity sponsor."
And just to stress that point, MPW here is implying it lent ~$335 million to the OpCo.
What else happened on or about 1.8.21? On 1.7.21 MPW announced the pricing of a 36.8 million share offering (incl. the green shoe), which raised net proceeds of approximately ~$711 million.
Here is the intended use of proceeds from the press release announcing the follow-on: "The Company intends to use the net proceeds from the offering to fund in part the previously announced transactions related to the acquisition of a portfolio of behavioral healthcare real estate assets located throughout the United Kingdom currently owned and operated by the Priory Group (“Priory”), a leading private provider of behavioral care in the United Kingdom, as well as the related costs and expenses of the transactions. The offering is not conditioned upon the successful completion of the Priory acquisition. The Company intends to use any remaining balance of the net proceeds from the offering (or if the Priory acquisition is not completed) for general corporate purposes, which may include repaying indebtedness (including amounts outstanding from time to time under its revolving credit facility and/or term loan facilities), working capital and capital expenditures, and potential future acquisitions."

8.9.21 - MPW filed its 2Q21 10-Q report, and updated the disclosure language on page 15 to the following:

"On January 8, 2021, we made a ~$335 million loan to affiliates of Steward Health Care System LLC (“Steward”), which was used to redeem a similarly sized convertible loan from Steward’s former private equity sponsor."
That is an important adjustment to the disclosure language. Obviously in retrospect this was an acquisition loan made to RDLT and others and secured by their equity.

Questions for MPW:

At the most basic level: Why as a triple-net REIT would you EVER make this loan to an individual or individuals? Please explain how this is prudent capital allocation.
Why was this loan not immediately disclosed when funded in January 2021?
Was this loan disclosed to buyers of the follow-on equity offering on 1.7.21?
Were any proceeds from the equity offering used to fund the loan?
Why was the loan essentially hidden in the 4Q20 earnings supplemental with no explicit reference?
When first disclosed, why was it mischaracterized as being made to Steward the entity?
In general, why is your disclosure so poor around every material item?
These questions should be asked of the auditors as well.