10/09/22 06:05 PM EDT

SUNDAY NIGHT REIT READ | 10.9.22 (RE FUND FLOWS, MPW, VNO)

Rob Simone, CFA

Takeaway: Hope everyone enjoyed the weekend! Adding VNO to Short Bench as well

Hedgeye Cartoon of the Day: Send Help!

It is 10.9.22, and Active Short MPW is overvalued by approximately ~$10.14/share. Where do we go from here? Now that the stock is near ~$10/share, which is roughly where we thought it should trade assuming no tenant issues, in full disclosure and for the purpose of full transparency we are receiving a lot of pushback to "back off" the short and take a "victory lap." Admittedly, the risk/reward is a lot different at $10/share vs. $21/share, and we totally get the sentiment. But with that said, MPW DOES HAVE VERY SERIOUS TENANT ISSUES THAT ARE COMING TO A HEAD NOW, is for sure not "cheap," shareholders are not being compensated at an ~8.2% implied cash cap rate for the inherent risk, and the stock remains bearish TRADE and TREND. All of that, plus in our view the equity remains essentially worthless based on the MATH, so there is still 100% downside. Staying short.

WEEKLY VALUATION HANDBOOK PDF LINK

Ticker: CNS

Company Cohen & Steers (not covered, just monitoring relevant fund flows)

Headline: Largest REIT manager still seeing positive flows; reversal could be vicious

Despite the sell pressure in U.S. listed Real Estate, believe it or not the largest and most prominent REIT manager CNS has yet to report net outflows in this cycle with 3Q22 potentially being positive again.
With VIX >30 and REITs bearish TRADE and TREND, expect there to be additional sell pressure should CNS begin seeing outflows in September and 4Q22.
CNS reported net aggregate inflows (for all products) of +$327 million in July and +$197 million in August.

Figure 1: CNS Historical U.S. Real Estate Fund Flows

Source: Company Reports, Hedgeye

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals

Headline: Do the Steward Health numbers being thrown around by MPW make sense?

No. The end.
Just kidding! Let's go through it. By the way we visited Steward some assets last week, and oof...
From what we have been hearing from investors and clients following a competitor HC REIT conference, MPW management has been hinting at roughly ~$400 million outstanding on Steward's current ABL facility as of 9.30.22. The same facility that was not fully extended by Citi on the 9.29 maturity date, and that Steward did not have the cash to retire. Aka, what used to be called a "default."
Let's think through that for a second and whether or not that is logical. The interesting thing here is that much of Steward's cash uses are contractual (cash lease payments, MAP repayment, etc.), and there is a short list of sources of cash (cash EBITDAR, funding from MPW and draws on Steward's own revolver).
This analysis excludes delayed vendor payments, which we think is a significant amount.
We previously estimated roughly ~$160 million outstanding on the revolver as of 12.31.21. Using that as a starting point and bridging to ~$400 million outstanding, its possible to back-solve for YTD EBITDAR as a "plug" using the other sources & uses, and then testing whether the results are logical or not.
See Figure 2 below.
Based on our numbers, we estimate that a ~$400 million revolver balance implies something in the range of ~$590 million of YTD EBITDAR at Steward, or nearly ~$790 million annualized. To put that in perspective, that would imply roughly +50% EBITDAR growth y/y versus 2021. Recall that 2021 unaudited EBITDAR of ~$450 million included just one quarter of results from the 5 Florida hospitals acquired from Tenet, which were generating ~$100 million annually at the time. The 2021 pro forma annual run rate for comparability purposes is ~$525 million ($425 million + $25 million x 4). $790 million vs. $525 million = +50% growth.
The question then becomes: does that make any sense? We do not know of any other hospital systems that have grown EBITDAR/EBITDA by +50% y/y, and would therefore ascribe a VERY low probability that Steward would be the first and only to do so. So no, it does not make any sense.
If we were to be generous, perhaps Steward grew EBITDAR +15% y/y? Pick your number, we don't really know for sure (because we are not being given audited financials for a >20% triple-net tenant). But under that scenario and using our numbers, Steward would have ~$540 million of the ~$700 million drawn down, and would be levered ~7x Adj. Net Debt/EBITDAR and (EBITDAR - Capex)/(Rent + Int.) coverage would be <1.0x (as we have been saying since April). Steward would be effectively insolvent, and solvent, higher quality hospital systems are being valued in the public market at <7x EBITDA.
We believe MPW may be Steward's only option in refinancing that ABL facility, which would result in MPW owning 100% of Steward's cap stack in addition to being Steward's largest landlord. We will know by mid-December following the 75-day extension.
Separately, this evening it was reported that Goldman had been hired to sell MPW's 11-hospital Healthscope portfolio in Australia. We will check back in with more thoughts, but our initial take is that (1) the transaction is very likely dilutive (TBD), (2) will not de-lever MPW in any meaningful way, and (3) MPW appears to be scrambling to raise liquidity. Questions need to be asked about the sustainability of MPW's dividend, which was not covered by cash from operations as per the cash flow statement in 1Q22 or 2Q22, as MPW continues to shrink.