01/20/23 07:30 AM EST

THE (DIS)TRUST SERIES | VOL. XXXX | PROSPECT CROZER MIGHT BE A TOTAL LOSS | 1.20.23 (MPW)

Rob Simone, CFA

Takeaway: Exchanging the four hospitals for worthless Prospect equity would be functionally equivalent to a rent cut / impairment

Hedgeye Cartoon of the Day: Dumpster Fire

It is 1.20.23, 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. The model cannot survive over the long-term without access to your capital, which will be diluted.

Running MPW "Cheat Sheet"

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals (just MPW standing alone)

Headline: Prospect Crozer should be treated as a total loss for MPW

Our understanding from speaking with investors and observing FactSet consensus estimates is that: (1) Street AFFO estimates for MPW are observably being revised lower and (2) MPW may be floating the possibility of an "asset for equity swap" for the four Crozer hospitals in PA operated by Prospect Medical and owned by MPW.
With that said, it is unclear how much of the recent AFFO reduction can be attributed to Prospect, as MPW will also be receiving less earnings following the exercise of the Prime option, the potential sale of Healthscope in Australia, etc. Regardless, numbers are coming down which tells us something.
Under this contemplated arrangement MPW would likely give the keys to the hospitals back to Prospect and extinguish the rent, receiving back an equity interest in the Prospect OpCo as "compensation."
Given that we view the Prospect equity as essentially worthless, functionally this should be viewed as a rent cut to MPW and a total loss on the four hospitals, should the transaction occur.
We estimate that the four Crozer assets pay MPW annual cash rent of ~$35 million, meaning that this transaction would be ~$0.06/share dilutive to annual AFFO.
As there would be no cash entering MPW and the deal would be purely dilutive to earnings, we estimate that the PA exchange would increase net debt-to-cash EBITDA leverage by ~0.2x turns to ~8.6x on a pro forma basis. Obviously AFFO / dividend coverage would deteriorate marginally as well.
Taken together with the pending sale of Prospect's CT assets to Yale (the CT assets also generate ~$35 million in cash rent), we estimate MPW's pro forma AFFO payout / coverage ratios would be ~88% / 1.14x, respectively. It is important to note that these metrics are calculated before any additional rent deferrals / cuts taken elsewhere in the portfolio. We estimate pro forma leverage for this Prospect restructuring at ~8.3x.
Again, our view is that any equity interest in Prospect would be worthless and therefore any asset exchange would be an impairment hiding under a friendlier name.
We have made the case previously that MPW's business should be worth no more than ~10x cash EBITDA, given the blended ~5.5-6% cash yields generated by its assets for the foreseeable future + MPW's 10%+ cost of capital. Such a multiple would imply $3-3.50/share for MPW's equity after incorporating this restructuring, running it through the pro forma capital structure and assuming no additional tenant issues. This would represent ~75% downside from current levels.
On the cost of capital, investors should note that Tenet Healthcare (THC) is in the process of selling its remaining ~51% interest in San Ramon Regional Medical Center (SRRMC) to John Muir Health for ~$142.5 million. This is a rare real-time comp for a regional hospital trade, and we believe the transaction was executed at a ~10x EBITDA multiple, or roughly ~10% nominal cap rate or 8-8.5% on a net effective basis after assumed maintenance capex. While the press releases were not 100% clear what exactly Muir is buying, THC in its 10-K filing lists SRRMC as a JV/Owned asset, and given the large check size we are assuming the transaction is solely/primarily for the PropCo. We estimate MPW currently trades at a ~6% net effective cap rate inclusive of MPW's recurring capex burden. An ~8.5% net effective cap rate would imply a ~$4.40/share value for MPW, or ~55-60% downside from current levels. We think much of MPW's real estate and underlying credit is of much lower quality, implying that ~8.5% could be too generous, but regardless we think it is both real-time and tells the story when extrapolated. See Figure 1 below.
Note: we ascribe no value here to the OpCo stakes. Book value of these investments is ~$2.40/share.