01/29/23 08:19 AM EST

SUNDAY NIGHT REIT READ | "RENTER BILL OF RIGHTS" + STEWARD WTF | 1.29.23 | (APARTMENTS, SFR, MPW)

Rob Simone, CFA

Takeaway: Key 4Q22 earnings reports on deck, WH releases a "blueprint," and what is going on with Steward's leadership team?

Hedgeye Cartoon of the Day: HIKE!

WEEKLY VALUATION HANDBOOK PDF LINK

Tickers: AVB, AIRC, AIV, BRT, CPT, CSR, EQR, ESS, IRT, MAA, NXRT, UDR, VRE, AMH, INVH, TCN

Company Names: Various

Subsector: Multifamily / Apartments & Single-Family Rentals (SFR)

Headline: WH released "Blueprint for Renters Bill of Rights"

Note: We are not taking a political stand on this, rather commenting on what we have viewed as a headwind for the industry since early-2022, namely increasing political pressure on landlords from both sides of the aisle amidst skyrocketing housing costs. This would obviously impact both the apartment and SFR landlords, including the publicly-traded REITs. We have no dog in any political fight, and really don't care about the politics outside of evaluating risks to the REITs.
Last week the White House published its "Blueprint for a Renters Bills of Rights." It was prepared by the Domestic Policy Council and National Economic Council.
Some key takeaways on the principles:

"Renters should have access to housing that is safe, decent and affordable and should pay no more than 30 percent of household income on housing costs." - how would you achieve this, outside of blanket direct or indirect (via taxes, fees, etc.) rent control? We think this line should scare landlords and landlord advocacy groups. Conceptually we agree on the 30%, but think that should be a personal choice (trade down?) rather than a top-down mandate. Concurrently, it would make sense to focus on financing and incentivizing new construction. Regardless of what we think, the central planners in both parties are coming for the landlords.
"As announced in November, the Federal Housing Finance Agency (FHFA), an independent agency, will increase affordability in the multifamily rental market by classifying multifamily loans with loan agreements that restrict rents at levels affordable to households with incomes between 80 and 120 percent of Area Median Income as "mission driven.'" - Just one observation, the Biden administration fired Mark Calabria after a SCOTUS ruling and replaced with their own nominated FHFA director. How is that agency "independent?" The GSEs are being used as a policy tool, and these measures could be reversed if and when there is a change in party control.
"Renters should have a clear and fair lease that has defined rental terms, rights, and responsibilities. Leases should not include mandatory arbitration clauses, unauthorized terms, hidden or illegal fees, false representations, or other unfair or deceptive practices." - perhaps the most direct shot at landlords in the document, and by the way a completely reasonable directive. Active Short Invitation Homes, based on our observations, is the one publicly-traded REIT that we think could be most at-risk here.
"Renters should be able to access resources that help them avoid eviction, ensure the legal process during an eviction proceeding is fair, and avoid future housing instability. To prevent evictions, renters should have access to just- or good-cause eviction protections that require a justified cause to evict a tenant, and tenants need to receive adequate notice if their lease is not being renewed."

What is, and has been, clear to us is that landlords are in the political crosshairs for the housing affordability crisis. Likely on both sides of the aisle by the way, which will result in a long-tailed experience across multiple administrations. They're not blaming money printing, lack of incentives to build, etc... but we digress.

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: Triple-Net Hospitals (Maybe? Possibly? We think?)

Headline: Steward Health no longer listing CFO on team page

Facts as we can observe them:

Using the Internet Archive Wayback Machine (an awesome sleuthing tool - looking at you, CREF!) we found that as of 1.10.23 Steward Health Care (MPW's largest tenant at 25-30% of cash rent / EBITDA) listed CFO Chris Dunleavy on the "Leadership Team" page on Steward's website. Also see Figure 1 below. Based on our conversations with healthcare industry participants, Dunleavy is known to be an experienced and highly credible executive within the industry possessing deep and successful hospital experience.
As of the time of this writing, 1.28.23 at 9am ET, the current page no longer lists Chris Dunleavy or any other CFO. Corporate leadership team page changes do not happen by accident, so unless the Steward team is completely incompetent (very possible) or trying to misdirect or trap investors (what would that say about Steward?), it would appear that Steward no longer has a full-time CFO.

As an aside, the page does list Armin Ernst, President of Steward Health Care International. Ernst is also listed on the Steward International website as CEO and President. Why do we mention this? Steward U.S. and Steward International are supposed to be legally separate entities. We have written before about the appearance of shared employees between these companies. Who works for which entity? And are they actually the same company?

A check of Dunleavy's publicly accessible Linkedin page, as of the same time as above, still shows Dunleavy as CFO of Steward.
As a reminder, Dunleavy gave comment in the press release on 9.30.22 for the "interim extension" of Steward's ABL credit facility.
When Steward announced the 1-year extension on 12.22.22, Chairman & CEO RDLT provided comment in that release and not Dunleavy.
On 1.27.23 we called Steward's corporate HQ in Dallas several times to hopefully receive comment on the status of the company's CFO. The phone kept ringing without pickup, transfer to an operator or any answering service / voicemail. We ultimately called Steward's media relations line and left a voicemail requesting to speak with Steward's CFO.
Also as a reminder, Steward just completed a highly unusual and, in our view, suspect extension process for its ABL facility, which included the obvious conclusion that Steward had not completed its 2021 audit as recently as the middle of December 2022.
To the best of our knowledge when RDLT participated in a round-table discussion last week, he did not mention any status changes of Steward's executive leadership team.
Question: Why?
Interestingly, Steward EVP and General Counsel Herb Holtz is also no longer listed on the Steward leadership team page. He was last listed as a key executive on 11.30.21. Holtz' Linkedin page also still lists his current role as General Counsel of Steward. Holtz was named General Counsel of Steward in late-2018.
Our view is that investors should naturally care and be concerned about this. Steward is literally existential to MPW. Our view remains that Steward is insolvent and continues to burn a ton of cash annually. IF the company is experiencing key executive departures, particularly the CFO within ~1 year of being hired and amidst an audit / ABL fiasco, we would view that as a very significant red flag.
Separately and as a reminder, we found more MPW nonsense around Shasta and published it HERE.
And then finally, last week independent third-party research firm Viceroy Research obviously made noise by publicly announcing their bearish view of MPW's stock. A link to their report can be found HERE. Full disclosure: Hedgeye had no contact with Viceroy or its principals in any form prior to Viceroy publishing its report.