01/13/23 11:58 AM EST

THE (DIS)TRUST SERIES | VOL. XXXIX | PIPELINE HEALTH IS SIMPLY INCREDIBLE | 1.13.23 (MPW)

Rob Simone, CFA

Takeaway: A transparent window into much of what we think is broken about this company

Hedgeye Cartoon of the Day: Dumpster Fire

It is 1.13.23, and Active Short MPW is overvalued by approximately... whatever the current share price is. Again, until the relationships with Steward & Prospect are restructured and more transparent, our view is that there is no price you should be willing to pay for the equity. That is the genesis of "the equity is worthless" and "it is overvalued by x" comments, which are obviously different than the question "what will the stock do?" As we see it, deteriorating credit conditions in deepening Quad 4 should, at the very least, theoretically impact MPW's share price in an outsized negative way given poor cash economics, a poor RoC profile, poor earnings quality and excessive leverage at MPW, irrespective of any tenant defaults or rent cuts. The cash economics of the business dictate a mid-single-digit stock price assuming MPW can continue spinning all of its plates at once without dropping any. At the same time, the stock is NOT "cheap" and remains bearish TRADE, TREND & TAIL. The next catalyst that we can see is 4Q22 earnings, along with any Prospect resolution on Crozer (exchange the RE for worthless equity stake? Sure!). We want to read the 10-K, as there are always things to uncover. By the way, now that Steward's 2021 audited financials are available and Steward RE is >20% assets by MPW's own disclosure, lets see 'em! Otherwise, its purely an exercise in trust. Would you trust MPW?

Publishing Note: We are moving the (Dis)Trust Series to once every Friday/Saturday, unless in our judgment there is something urgent or new that needs to be published. Couple of reasons: (1) it just makes things "tighter," (2) frees up time for other names (believe it or not, we want that too), (3) we have largely presented our case, and (4) to be candid, covering this company as closely as (we think) it needs to be is nothing short of exhausting. We think that is by design - get people to tap out, and maybe you can keep it going!

Running MPW "Cheat Sheet"

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals (just MPW standing alone)

Headline: Just read the BK docs, and come to your own conclusions about what we have here

Before we begin on Pipeline, we need to concede a point to those who are either (1) near- or intermediate-term bullish on the name (nice pop, by the way, congrats!), or (2) staying away completely long or short. MPW is really hard to analyze. It is opaque, the disclosure is nothing short of terrible, the plot lines are many and hard to follow, and MPW basically has no publicly-traded tenants of any importance (HCA is <0.5% of assets; filings are more readily available for Europe exposures). We think this is also by design - our view is that if investors had transparent, real-time views into a larger portion of MPW's rent, this whole thing would have fallen apart a long time ago. Look across the NNN and Healthcare spaces, including with EPR most recently, and you can generally get a good feeling for underlying tenant credit.
Now with that said, the Pipeline Health BK process is incredibly valuable, as it provides a transparent window into most, if not all, of what we think is broken about this company. Yesterday and this morning the debtors filed a supplement in support of an amended plan of reorganization (including a term sheet) plus a declaration from Jefferies who is serving as advisor to the debtors.
First, observations related to the advisor declaration:

The advisors ascribed an enterprise value of ~$101 million, inclusive of ~$30 million for the NPV of a promissory note related to the pending sale of the Illinois real estate, implying a ~$70 million valuation for the Pipeline OpCo at the midpoint. Remember that number.
In July 2021 MPW acquired the real estate for ~$215 million in a SLB (see Figure 1 below). MPW claimed the "model is calibrated to operate profitably." Yet per the bankruptcy filings, the SLB deal was struck at an ~$18 million annual cash rent burden versus trailing CA facility-level (pre-overhead) EBITDARM of <$3 million as of August 2022. This implies coverage of <0.2x at the facility level. How can that ever be profitable?
MPW reported with 3Q22 earnings that trailing EBITDARM coverage for Pipeline was 1.4x as of June 2022. 1.4x versus 0.2x, with just two months difference in the trailing. Again, think about that.
The stated use of those $215 million of proceeds to Pipeline was "to retire debt for the system" and "capital support for the organization."
According to the disclosure statement filed on 11.4.22, Pipeline entered bankruptcy protection just one year later, with a prepetition capital structure inclusive of nearly ~$360 million of term loan and ABL debt.
Again, think about these numbers. $215 million of SLB proceeds to fund debt repayment + capex at the OpCo, and a bankruptcy filing one year later for an OpCo valued at just ~$70 million with nearly ~$360 million of debt outstanding excluding the leases. And coverage ratios that make no sense / don't tie.
Serious questions: What was the capital actually used for? Did MPW fund into a hopelessly over-levered situation? If that capital was used to invest in the enterprise, how is the OpCo worth a fraction of the SLB amount? Why the large disparities between coverages per the bankruptcy filings and what MPW represented to investors via quarterly earnings filings? Is this just poor capital allocation, or something else? I.e., do they not understand what they are doing (bad), or do they understand and just do not care (worse)?
Our take: You as the investor probably shouldn't care, either way stuff like this should be considered "un-investable." This is what happens when (1) management is incentivized by the comp plan to be asset aggregators w/o true cash flow modifiers and to pay the highest price (Figure 2 below), and (2) you have employees on the underwriting team who arguably should not be there if you care about capital allocation and good governance.

Second, observations related to the Third Amended Plan Supplement filed on 1.13.23, specifically the "MPT Settlement Agreement:"

Debtors have not paid MPW $1.5 million of cash rent due for each of the months of October, November and December 2022.
MPW has asserted defaults under the lease.
The parties are entering into an amended master lease agreement once all settlement conditions are satisfied.
Following the effective date of the plan of reorganization, MPW will be funding an additional ~$23.65 million in capex to the debtors for the CA hospitals via the release of $9.4 million of security deposits, $6 million in capex identified in the original lease to be added to the lease base, up to an additional $5 million in capex to be identified in the lease amendment and added to the lease base, and up to $3.25 million in repairs and upgrades to be funded from the existing reserve.
Rent deferrals:

50% of the base rent for the first 6 months of calendar year 2023 + 25% of base rent due in months 7 through 9 of calendar year 2023. On our math this amounts to ~$5.6 million of deferrals beginning in 1Q23 and continuing through 3Q23. This equates to ~$0.01/share of lost AFFO for FY23.
Deferred amounts due by 12.31.24 and beginning 1.1.24. All repayments subject to minimum $20 million liquidity at Pipeline.
~$4.5 million of existing past due rent shall be paid on the effective date.

Our take: (1) More of the same theme that we have seen over and over again with Shasta, Adeptus, Watsonville, Prospect, Steward, etc. - MPW overpays for the real estate, the operator gets into financial trouble, MPW funds additional dollars to the operator in the form of negative NPV "capex" and/or operator loans that are really for working capital, rent is deferred and/or there is a default, and somehow MPW treats the end result as a "win" despite write-down of loan principal at the very least, and (2) DO NOT buy the "rent is unchanged" narrative, for while GAAP straight-line rent may remain flat, cash collections from Pipeline have and will for sure drop at least through the end of the deferral period.