10/16/22 07:00 AM EDT

THE (DIS)TRUST SERIES | VOLUME XV | RESPONDING TO CEO INTERVIEW | (MPW)

Rob Simone, CFA

Takeaway: Are there Reg FD issues here? Even if there aren't, we think any shareholder should be concerned by the erratic and inconsistent statements

Hedgeye Cartoon of the Day: The Immortal Pinocchio

It is 10.16.22, and Active Short MPW is overvalued by approximately ~$10.86/share.

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals

Headline: Rebutting a truly absurd interview w/ MPW's CEO

We normally would not do this (rebut an interview of a CEO conducted by someone else), but in this case (1) it is one of the rare times that CEO Ed Aldag has gone on record over the last ~6-7 months, and (2) the content is so completely absurd that we believe any shareholder reading it should be concerned about their investment. The title of the interview is The Ground Up: Medical Properties Trust CEO, Edward Aldag published on 10.14.22.
The interview begins by posting the CEO's bio from MPW's website, but misses/ignores the key question raised in our prior notes. Why was ~15 years of work experience, the only prior work experience post-UAB undergrad, removed from the CEO's bio beginning with the 2020 proxy (see Figure 1 below)? As presented it now appears that there is a 15 year gap and no prior experience relevant to running a publicly traded triple-net REIT. We think shareholders should care about the prior experience of executives charged with being stewards of their capital, and removing prior work experience is an enormous red flag, in our view.
Aldag: "No fear of hospitals and I love everything outside the U.S. PA is our largest underperformer, but it’s primarily Prospect, due to Covid and the Labor shortage."

Hedgeye Response: Huh? You are about to sell Healthscope in Australia at a likely ~15-20% loss on an unlevered basis, and you levered the portfolio up ~100%. So that means its a total loss. Domestically, Pipeline Health just declared bankruptcy two weeks ago and has no assets in PA. Steward just essentially defaulted on its credit facility and has just 2 of ~40 hospitals in PA. So PA definitionally is not your worst performer. Do you even know your own portfolio? Finally, Prospect is struggling due to excessive leverage and an above-market, unsustainable lease burden not covered by the system's EBITDAR. We expect Prospect to ultimately require a restructuring of the rent.

Aldag: "Planes are truly a business tool. I actually don’t enjoy traveling. We used to use Net Jets when we started out, and before that we used Marque. The planes are not just used by executives, other people use them in the company. The planes pay for themselves with one transaction."

First, now that we know MPW is selling one of its planes, we can see from the tail number where this plane (1 of 3 owned by MPW) has been.
Hedgeye Response: Wow. As the WSJ reported, flight records show that over the last three years MPW planes made 141 trips between Birmingham and Fairhope, AL, where public records show that Aldag owns a waterfront home on Mobile Bay. Figure 2 below shows flight records of a trip by this plane on 7.10.22 between Birmingham and Fairhope, and Figure 3 shows a trip made on 4.7.22 between Birmingham and Augusta, GA. Were these trips for business, and did the transactions (if any) pay for the planes? We would bet that Augusta National did not reimburse the cost of the trip, or offer up any hospital transaction. Lovely place, by the way! Should be on your "bucket list."

Aldag: "All leases have CPI protection. 50% have no caps and the other 50% have collars. If rates keep rising, we don’t see rate risk."

Hedgeye Response: What? Inflation-linked escalators put additional pressure on rent coverage at the operator level via the denominator (higher rent). We believe a significant portion of MPW's operators / underlying credits are either distressed or currently insolvent. Higher rates both negatively impact MPW's costs of capital AND increase the probability of tenant default, so there is significant risk!

Aldag: "Steward’s ABL matured at the end of September and was then restated, amended and extended until September 30 of 2023 – Steward made clear however in its press release that it is required to complete certain documentation by December 15 to achieve that 9/30/23 maturity. Steward is highly confident that it will complete the documentation."

Hedgeye Response:

Are there Regulation FD issues here?
MPW did not file any 8-K related to the Steward ABL. Steward made no reference whatsoever in its press release to either a full extension date or a requirement to complete certain documentation.
Our understanding from speaking with bankers is that the "documentation" issue is very likely related to non-completion of Steward's 2021 audit, likely owing to a "going concern" opinion issue on the part of Steward's auditor, KPMG.
Was there selective disclosure here during an earnings quiet period? Also, these statements are not consistent with what has been said to certain MPW investors since the ABL maturity date on 9.29.22, including that "MPW did not know the terms of the interim extension with Citi." MPW also apparently told other investors that "they were happy with the outcome" despite not knowing the terms, which they obviously did know. MPW clearly is having trouble keeping the story straight, in our view.
We believe a full Steward default is on the table between now and 12.15.22, but that MPW will either (1) fund / guarantee the outstanding ABL amount to avoid a BK filing and / or (2) materially cut the Steward rent obligation. MPW cannot allow Steward to file. The rent is the "fulcrum" and will ultimately need to be reduced.

Aldag: "We recently announced 3 hospitals to be sold to Yale for around $457 million. We weren’t planning to sell these, but Yale wanted to own them."

Hedgeye Response: You sold the hospitals to your tenant, Prospect. Not to Yale. What are you talking about? Yale is buying the "WholeCo" from Prospect on the back-end, where we do not know the terms or any contingencies.

Aldag: "HCA approached Steward to buy for $850 million just for the operations."

Hedgeye Response: Has HCA confirmed or can it confirm this price? This has not been publicly disclosed, only selectively here and in closed-door meetings with certain investors as we understand it. Also that deal was struck over a year ago in September 2021, so there will for sure have been diminution in value particularly among other potential buyers. Finally, if Steward were to sell these assets, would it not just further impair the profitability of Steward on a pro forma basis? Given that they are the best assets in the system. We believe any net proceeds to Steward after taxes would be spoken for in relation to debt repayment, and would generate no net cash to Steward.

Aldag: "When HCA came, so did Tennat, so they (Steward) know the properties well. They had agreed to buy Tennat for $1.2 Billion and the real estate for $900 million. Stewart put in more than $200 million."

Hedgeye Response:

First off, its "Tenet," not "Tennat." Come on now...
As we have written and talked about repeatedly, Steward did not put in more than ~$200 million for the OpCos of these 5 Florida hospitals. This is NOT a true statement, in our view is a repeated and deliberate misrepresentation of the facts, and CANNOT be cited as a reason for any cash shortfall at Steward.
Subsequent to the initial closing of the acquisition MPW funded an additional ~$200 million in "capex" to Steward, effectively reimbursing Steward for it's share of the purchase price (see Figure 4 below). Again, triple-net REITs should have little or no capex which is an obligation of the tenant, and for sure should not have a capex obligation equal to ~20% of the purchase price. In our view these investments function as "loans" that are never intended to be paid back, but rather converted to part of the lease but with a decidedly negative NPV given the obscenely long lease term and high probability of default.
Again, WE REJECT THE NOTION THAT A NON-USE OF CASH BY STEWARD CAN BE CITED AS A REASON FOR A CASH SHORTFALL.

Aldag: "When SEC requires, we will disclose. We understand what needs to be done. Steward has always performed well at the hospital level. All of the bad is behind Stewart."

Hedgeye Response: Our reading of the terms of the master lease w/ Steward (section 39.6) obligates Steward to furnish MPW with audited financial statements, and Steward consents to MPW disclosing them in regular way communication with analysts including earnings/earnings calls. So that implies MPW is opting not to disclose financial data. Why are they refusing to do so? Steward has not always performed well at the hospital level. Or at the corporate level, which is what actually matters for a parent-guaranteed, cross-defaulted master lease. Demonstrably and clearly, period stop. We believe the worst is in front of Steward, and by extension MPW as well.

Aldag: "In regard to the $350 million loan to Steward, 100% went to Cerrabus at the beginning of the pandemic. Remember, we have a participation right with some of the upside."

Hedgeye Response:

First off, its "Cerberus," not "Cerrabus." Come on now, again! Who is writing / editing this?
Secondly, no! The ~$335 million loan was made to RDLT and other minority partners, who then used proceeds to buy out Cerberus who was the prior private equity sponsor/owner of Steward. In other words, MPW as a triple-net REIT made a loan to an individual, which is an egregious misuse of shareholder capital and should never happen, to finance Cerberus' exit. The loan is secured by the equity of non-MPW owners of Steward (the other 90.1%), which means that if Steward defaults MPW would very likely own 100% of the equity of its largest operator.
The disclosure around this loan and timing of an equity offering was egregious. We believe the facts were deliberately hidden from shareholders.
Within the next ~4 months, our understanding is that RDLT then paid himself a ~$100 million dividend from a distressed Steward AND bought a ~$40 million yacht.

Aldag: Re: open market purchases of MPW stock by executives, which never happens, "The SEC does not make it easy. We’re limited by the blackout period and Steve, and I get paid the vast majority in stock. We sell stock primarily to pay the taxes."

Hedgeye Response: Got it.

Aldag: Re: any plan for a dividend cut, "Absolutely Not and of course it’s a Board decision."

Hedgeye Response: With the stock yielding ~10.7%, MPW not covering its dividend payment with cash from operations over 1H22, severe current tenant issues, and the 7+ year unsecured bonds trading at ~$0.60-0.75 on the dollar and yielding ~9-11.5% depending on the issue, we would ascribe a near ~100% probability that MPW will have to cut its dividend.

In conclusion, we would encourage shareholders to find and read this barely intelligible interview filled with inconsistencies and, perhaps, disclosure issues. And then ask yourselves, "how can we possibly invest with this management team?" We think "the wheels are coming off the bus," so to speak.

Figure 1: The Curious Case of Disappearing Work Experience at MPW