12/15/22 07:28 AM EST

REITS DAILY BRIEF | FLORIDA REINSURANCE BILL + MPW/STEWARD WTF? | 12.15.22 (AMH, INVH, TCN, MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: You just cannot make it up...

Hedgeye Cartoon of the Day: Quad Four'd

It is 12.15.22, and Active Short MPW is overvalued by approximately... whatever the current share price is.

Tickers: AMH, INVH, TCN

Company Names: Active Shorts Invitation Homes & Tricon Residential, American Homes 4 Rent

Subsector: Single-Family Rentals (SFR)

Headline: Florida reinsurance bill passes House

Yesterday the Florida House voted 84-33 in favor of the SB 2-A Property Insurance bill, one day after it passed the state senate in a special session. The bill goes to Gov. DeSantis now for what is expected to be his signing.
The legislation is intended to help keep more private insurers in the state by setting up a ~$1 billion reinsurance fund, reducing litigation costs (eliminating one-way legal fees) and to force some customers away from the state-created insurance fund, Citizens Property Insurance Co. The general idea is to bring more carriers into the market to increase competition and drive down policy rates, with Florida residents struggling to replace prior policies and/or pay sky-rocketing premiums. Reinsurance accounts for ~49% or premiums that Florida homeowners pay each year.
The problems stem back to the early-90s when damages from Hurricane Andrew wiped out many private insurers and left many of the surviving companies unwilling to write new/affordable policies due to increasing weather risks, etc. Six insurers have gone insolvent and another is exiting Florida just this year.
Average annual insurance premiums in Florida have risen to ~$4,200/home, which is 3x the national average, and roughly ~12% of homeowners do not have property insurance vs. a ~5% national average. Earlier this year Hurricane Ian caused ~$40 to $70 billion of damage to Southwest through Central Florida.
A proposed amendment to the bill to freeze property insurance rates for one year failed a vote.
In addition the House voted in favor of a ~$750 million disaster relief program that includes property tax breaks for properties damaged by natural disasters.
Big picture: Insurance costs are likely going much higher in Florida, but overall insurance expenses account for ~3-5% of annual same-store operating expenses for AMH and INVH. Florida comprises ~30% of INVH's total NOI and we estimate ~12-15% for AMH.

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals (just MPW standing alone)

Headline: No Steward ABL news, but a crazy fact pattern while we wait...

While MPW/Steward hang out in the (figurative) witness protection program - unreachable, not commenting and leaving investors twisting in the wind over a literal existential issue in the form of the ABL - we wanted to discuss an interesting fact pattern that emerged yesterday around the "International JV."
Our understanding is that earlier this week MPW/Steward hosted an investor conference in their Miami market, hosting and touring (really just a "drive by" as we understand it?) investors through a 5-hospital market that was ~100% financed by MPW in late-2021.
Observable Facts:

Attending the tour were two gentlemen represented as employees of Steward Health Care, LLC (Steward U.S.). See Figure 1 below. Quick aside: we read other sell-side notes because the company has never interacted with us, despite our early efforts, so its one of the ways we have to better understand what management is saying.

Figure 1: Snip From Competitor Note Published Two Days Ago

Source: Jefferies Research note published 12.13.22, Hedgeye

However, these employees were listed as current employees of Steward International on 12.14.22, which is supposed to be a separate legal entity from Steward U.S. See Figure 2 below. We also tweeted about this yesterday HERE.

Figure 2: Snip from Steward International's Team Website as of 12.14.22

Source: stewardinternatioanl.org, Hedgeye

As of 6:50am ET on 12.15.22, Joshua Putter, President of Steward Health Care Colombia (check HERE for our quick background check links), is no longer listed as a management team member on Steward International's website. See Figure 3 below. This means that his profile was removed by Steward International one day after we highlighted this apparent sharing of employees between the two legal entities. HERE is the Steward International management team page.

Figure 3: Snip from Steward International's Team Website as of 12.15.22

Source: stewardinternatioanl.org, Hedgeye

Why does this matter, aside from being generally suspicious in our view? Recall that MPW and Steward setup the "International JV" in May 2011 as what was supposed to be an independent third-party entity, with MPW contributing ~100% of the capital in the form of a ~$205 million loan in exchange for a minority ~49% equity interest in the JV. The JV then purchased the international assets with a book value of ~$27 million out of Steward U.S. for ~$200 million, i.e. ~$200 million observably made its way from MPW to Steward via the International JV. The remaining ~51% of the venture is owned by Steward's management team, including we believe RDLT. See Figure 4 below. This loan is secured by the remaining equity interests in the venture and is guaranteed by the non-MPW equity owners. We strongly suspect the International JV is not able to service this loan with cash flow and that the loan balance is accruing.

Figure 4: Details on International JV

Source: Steward Health Care's 2020 Audited Financials, Hedgeye

Hedgeye Questions:

Why did Steward International remove Joshua Putter one day after we highlighted it on Twitter?
As it appears that Steward U.S., Steward International & CREF share employees (Michael Crowley is observably listed as an employee of all three entities), does this mean that they are really all the same company? Steward International claimed HERE that "Neither SHCI nor SHCM have any current commercial connection to MPT, nor any legal connection to Steward operations in the US."
Does that potentially mean that MPW owns more of Steward than its stated 9.9% direct equity interest?
Is MPW aware of these relationships? We would hope so, as they just hosted these employees on an MPW property tour.
In general, just "why?"

Figure 5: Hedgeye REITs Position Monitor