10/10/22 07:28 AM EDT

THE (DIS)TRUST SERIES | VOLUME XIII | HEALTHSCOPE SALE WOULD LIKELY BE DILUTIVE | (MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Frontrunning any spin: We estimate ~$0.03-0.05/share of AFFO dilution, ~0.3x turn leverage reduction

Hedgeye Cartoon of the Day: Getting Hotter

It is 10.10.22, and Active Short MPW is overvalued by approximately ~$10.14/share.

Ticker: MPW

Company: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals

Headline: MPW apparently hired Goldman to sell Healthscope portfolio in Australia - we see likely dilution

Headline: We estimate ~$0.03-0.05/share of AFFO dilution and roughly ~0.3x turns of additional leverage reduction should the sale proceed. Any reasonable level of sale proceeds unlikely to be enough to fully repay the ~$828 million outstanding balance on AUD term loan at a ~2.45% interest rate and maturing in 2024. MPW took on essentially ~100% leverage for this transaction, given that the 11 Healthscope assets are the only located in Australia. We believe that rents struck upon acquisition in 2019 were likely ~25-30% above market, and that any buyer today will likely underwrite and pay a price around a "sustainable" or "market" rent, which will optically make the cash cap rate paid to MPW look higher on its in-place rents. MPW is highly unlikely to disclose a cash cap rate or any useful metrics, so we are attempting to front-run the math. If anything, our view is that this transaction demonstrates a sense of urgency or even desperation to delever, given how dilutive the deal would likely be in isolation. In total we estimate ~$0.08/share of total AFFO dilution for recent transactions, with the pro forma AFFO payout ratio of ~87% again approaching the ~90% level. With all this said, it is early innings and there is no guarantee this sale closes at all. We of course welcome any investor feedback/pushback on these assumptions.
As a reminder, MPW acquired Healthscope back in 2019 which remains its only Australian portfolio. MPW had been booking rent deferrals in 1Q22 and 2Q22 related to this portfolio, but claimed rents were made current again in 3Q22.
Current in-place rents, term and escalations imply going-in GAAP/Cash cap rates of ~6.4%/5.2%, respectively, with an estimated ~5.6% cash yield-on-cost although the recent cash rent deferrals likely leave that number too high.
We believe MPW likely underwrote the deal to a ~2.0-2.3x coverage ratio at the time, and that any buyer today could underwrite the sustainable rent closer to ~3x EBITDAR.
After FX translation into USD and assuming a ~4.5% cash cap rate paid on sustainable rent, this equates to ~$42 million of lost rent post-sale to MPW, gross proceeds of ~$700 million to be used for leverage reduction, and a ~$17 million reduction in annual interest expense. We present a range of outcomes given different cap rates underwritten by any buyer. All are obviously dilutive to earnings given the low interest rate on the debt and the ~100% financing of the assets.
As MPW continues to raise what we consider to be emergency liquidity amidst the devolving Steward, Prospect and now Pipeline Health situations, creating cash earnings dilution in the process, we believe serious consideration needs to be given to a pending dividend reduction. The market obviously agrees. The inevitable reduction in Steward's rent will obviously necessitate that.