10/18/22 08:54 AM EDT

THE (DIS)TRUST SERIES | VOLUME XVI | PROSPECT/YALE + HEALTHSCOPE UPDATES | (MPW)

Rob Simone, CFA

Takeaway: These transactions are both abject failures, period

Hedgeye Cartoon of the Day: The Heat is On!

It is 10.18.22, and Active Short MPW is overvalued by approximately ~$11.19/share.

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals

Headline: Updates on pending transactions; both dilutive + place additional pressure on the dividend

Potential Healthscope Portfolio Sale:

Recently the Australian reported that prospective buyers of MPW's 11-hospital portfolio in Australia leased to Healthscope are (1) worried about the earnings outlook for the operator, (2) see potential for insufficient coverage on in-place rents (which MPW struck) and (3) are looking for a potential guarantee of the rent in order to proceed.
Apparently Charter Hall, Dexus Property and Centuria have all taken a look at the portfolio.
Recall we wrote recently (and then updated) that we expect Healthscope to be a total loss on a levered basis, given (1) MPW paid too high a price and rents are probably +25-30% above market, (2) it levered the investment essentially ~100%, and (3) FX moved ~10-11% against MPW over the holding period. Its a combination that makes it essentially impossible to make money.
This fact pattern virtually guarantees that any transaction, closing in 2023 at the earliest, would be both dilutive and generate no excess proceeds given that it would likely not be enough to fully repay the AUD term loan. MPW will most likely have to tap existing cash to repay the balance, or otherwise be left with "orphaned" FX exposure and no corresponding Australian assets.

MPW/Prospect Medical Sale of CT Hospitals to Yale:

An article published yesterday by the Yale Daily News implies a ~$400 million purchase price paid by Yale to Prospect for the "WholeCo" on three money-losing CT hospitals.
Recall MPW is selling the three money-losing assets back to Prospect at "book" paid in August 2019 of ~$457 million, which as we wrote begged the question as to why someone would pay that price.
This implies that Prospect is being forced into taking a loss upfront of approximately ~$55-$60 million, money that it likely does not have. It also directly implies that MPW overpaid for the assets in 2019, given that the price for the PropCo + OpCo paid by Yale is now less than MPW's initial investment in just the real estate.
The question now becomes "how will MPW make Prospect whole" and funnel liquidity to the operator? Given the company's history with its tenants, we fully expect this to be done. An obvious candidate would be partial forgiveness of the now ~$150 million in mortgage debt from MPW and encumbering a single CA hospital, implying roughly ~$1 million per bed.
Finally, note that MPW's reported coverages (which we have no confidence in) for Prospect exclude the PA and CT hospitals which are the worst in the system. Even when excluding these assets, Prospect as the #2 largest tenant in the portfolio is among the worst performers.