10/03/22 09:10 AM EDT

FLASH | THE (DIS)TRUST SERIES | VOLUME IX | MPW's ~#12 TENANT FILES IN BK COURT | (MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Pipeline Health System requesting emergency relief in BK court; calls other credits into question

Hedgeye Cartoon of the Day: Soft (Fiery) Landing

It is 10.3.22, and Active Short MPW is overvalued by approximately ~$11.86/share.

Ticker: MPW

Company: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals

Headline: More to follow as we review the docs, but Pipeline Health System just filed BK

Pipeline Health System just filed an emergency motion in So. District of Texas BK court requesting payment of certain taxes and fees + granting related relief. "Emergency relief has been requested."
Represents ~$218 million gross investment by MPW, or about ~1% of total gross assets. Pipeline is listed as MPW's 12th largest tenant reporting property-level coverage metrics (see Figure 1 below).
If the reported coverages are to be believed, and that's a big "if" when it comes to MPW, 1Q22 trailing EBITDARM and EBITDAR coverages were ~1.6x and ~0.7x, respectively, as reported with 2Q22 results. We are eager to compare any and all financial data available in the docs that can draw comparisons to these coverages, so as to further test their credibility. A further step would be estimating a "resized" rent emerging from BK to resize the rent owed to MPW.
MPW acquired the 4 community acute care hospitals and 2 MOBs from Pipeline in July 2021. Like so many other MPW deals, Pipeline was likely another case of adverse selection where a financially stressed hospital system took advantage of MPW's poor underwriting / eagerness to deploy capital, and monetized its real estate in essentially a "debt-for-lease" swap. The Pipeline CEO at the time highlighted existing debt repayment as a primary use of proceeds. Operating performance has obviously deteriorated meaningfully since that time.
Notably, Pipeline was attempting to sell two Chicago-area hospitals not owned by MPW, presumably to raise much-needed capital amidst rising financial distress. It will be interesting to see from the filings whether a failure of this sale had any role in the BK filing.
Pipeline operates 7 hospitals in total, of which the following 4 LA locations are owned by MPW:

Coast Plaza Hospital
Community Hospital of Huntington Park
East Los Angeles Doctors Hospital
Memorial Hospital of Gardena

We will follow up with more thoughts once we have reviewed the initial filings in detail, but in general we are of the view that opinions on the creditworthiness of MPW's tenant base should immediately be revised lower. This news follows what we consider to be a "soft default' by Steward Health this past Thursday/Friday. There are clearly more than a few "problem" credits in this portfolio. By our estimation, and as we have written before, at least ~35% of MPW's cash EBITDA could be "at risk."
"Who else is behind Pipeline on the way to filing?" Here are some candidates:

Obviously Steward Health, which needs no further introduction.
Prospect Medical will probably go next. Prospect represents ~9% of annual revenues and ~8% of assets. We have reason to believe the sale of the CT hospitals may also be hitting the skids.
Springstone/LifePoint at ~1x EBITDAR coverage post-combination and ~6% of assets.
Priory Group in the U.K. at 1.5x EBITDAR coverage and ~4% of assets / revenues.

Figure 1: MPW's Top Tenants Reporting Property-Level Coverages