09/28/22 07:32 AM EDT

REITS DAILY BRIEF | WEN STEWARD CREDIT FACILITY? | 9.28.22 (MPW, APARTMENTS)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Matures on 9.29 w/o an announcement yet on a replacement ABL; our thoughts on outcomes below

Hedgeye Cartoon of the Day: Soft (Fiery) Landing

It is 9.28.22, and Active Short MPW is overvalued by approximately ~$11.93/share..

Tickers: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals (MPW standing alone)

Headline: Out of time, watch for the fine print on any new Steward ABL facility

As we have written about previously, Steward Health's (~25-30% of MPW's annual revenue) revolver comes due tomorrow, 9.29. This has been a clear catalyst / key date to this story for months, and in our view the fact that we sit here a day out without a resolution speaks to something being very wrong here. Usually credit agreements are re-cut months in advance of the maturity date, even for over-levered or struggling companies. Given the significance of Steward, as well as MPW management's propensity to issue highly promotional press releases to drive a nonsensical bullish narrative, we have no doubt that MPW will do so again upon the resolution of this very key part of the story. The fact that they have not yet done so speaks volumes, in our view.
In the interim, credit markets have obviously deteriorated and borrowing costs continue to spike.
To recap, our view has been that MPW would be forced to to take all or some portion of a new replacement facility given the following: (1) the apparent lack of a completed 2021 Steward audit, per commentary on MPW's earnings call, (2) Steward's worsening financial condition and likely ~$200 million of annual cash burn, (3) the lack of hard asset collateral after selling all the real estate into MPW, (4) Steward's current deal with CMAX to sell its highest quality Medicare A/R balances, which they would not voluntarily do save for pressing liquidity needs, (5) the scuttling of the HCA Utah transaction, which may have deprived Steward of ~$850 million in gross proceeds, and (6) the fact that MPW made a ~$150 million bridge loan commitment to Steward in April, an act that is entirely inconsistent with a large, healthy, solvent tenant relationship. They simply would not do that, save for significant distress.
MPW refinancing this maturity would essentially put MPW in the "fulcrum" position under a full default scenario, as MPW would not just be Steward's landlord but largest unsecured creditor as well.
As we sit here on 9.28, we look for any announcement coming out of MPW over the next two days addressing this issue. No announcement by Friday should be viewed as an obvious, incremental negative. Any announcement made needs to be carefully scrutinized.
WE CANNOT STRESS THIS ENOUGH: ANY PARTICIPATION BY MPW in this pending ABL refinancing, whether it be a participation in a syndicate, a backstop, a guarantee, etc., SHOULD BE VIEWED AS AN UNSUCCESSFUL OUTCOME FOR MPW. These would mean that there were no independent, third-party bank or non-bank lenders willing to underwrite Steward without MPW's support. It would also mean that MPW would be on the hook under a Steward default scenario, which we think is ultimately likely, and bring MPW closer to owning Steward's entire capital structure. Such an outcome would be devastating for MPW's equity, and likely force MPW into a negotiated rent reduction to avoid the possibility of full consolidation under a RIDEA structure.

Tickers: Various

Subsector: Apartments

Headline: Flashing red on RoC across the board

We remain Active Short select Sunbelt Apartment names NXRT & CPT. We think the "TINA" argument is not going to hold as we move into 4Q22/1Q23.
Market showing largest Q/Q RoC declines:

Tampa: -479bps, and likely to get much worse near-term
New York: -426bps
Phoenix: -424bps
Orlando: -402bps
Jacksonville / Charlotte: -391bps