02/16/23 06:44 AM EST

THE (DIS)TRUST SERIES | VOL. XLIX | PUTTING ALL THE MOVING PARTS TOGETHER, AGAIN | 2.16.23 (MPW)

Rob Simone, CFA

Takeaway: Just going to keep hammering the math... someone has to do it!

Hedgeye Cartoon of the Day: "Plato's Cave" REIT

It is 2.16.23, and Active Short MPW is overvalued by approximately... whatever the current share price is. Believe us yet?

Running MPW "Cheat Sheet"

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals (We think? Maybe? Possibly?)

Headline: There are so many moving pieces here, we will keep track for subs

Our Conclusions: (1) Active Short MPW paid a price AGAIN in the form of a ~15% rent cut on its best assets to secure a liquidity injection into it's largest tenant Steward, (2) MPW remains over-exposed to a clearly distressed/insolvent Steward at ~20% of cash EBITDA, (3) all of the contemplated transactions, if and when closed and taken together, are significantly dilutive and do not de-lever MPW in any meaningful way, (4) MPW's return profile does not improve at all and actually gets a little worse on the margin, as it continues to earn 5.5-6% unlevered cash-on-cash yields for the foreseeable future, (5) again, the dividend appears to us to be unsustainable and very much at-risk, and finally (6) the swapping out of CommonSpirit for Steward at ~7% of MPW's pro forma cash EBITDA is credit positive on the margin.
With all of that said, similar to the HCA deal and Prospect CT/PA deals, it is possible that some or all of these contemplated transactions do not close and MPW is back to square one.
We believe the rent reduction is the "price of admission" for MPW's management team to secure a clearly much-needed liquidity injection into Steward. We would not want to pay that price if we were a shareholder. Also an interesting thought experiment - if the best Steward assets required this degree of rent reduction, what does that mean for the balance of the rent MPW derives from a RemainCo portfolio of much lower quality?
MPW and/or Steward told a sell-side analyst last night that "the enterprise value of the Centura transaction is similar to the previous HCA transaction..." which was pegged by MPW last year at an estimated ~$800-850 million. Well we found and published CommonSpirit's financials which disclosed a gross purchase price of ~$685 million, which was more in-line with our ~$600-700 million expectation and represents a ~15% haircut to the HCA price negotiated in mid-2021. We do not consider $685 million to be "similar" to ~$800 million, as it represents a significant re-trade and also results in less proceeds to Steward. So more playing "fast and loose with the facts" at best, in our view. We continue to think Steward has no excess cash proceeds after taxes and debt repayment to MPW and the ABL lenders. A PDF of the financial statements can be found HERE.
We lay out all the moving parts in Figure 1 below, with MPW currently trading at an implied ~14.5x cash EBITDA multiple. We have and continue to believe that number should be closer to ~10x, but pick your own number. What is the upside/downside here? Leverage ticks down by ~0.4x turns, but note that any (foolish, in our view) incremental share repurchase activity would drive that number back towards the starting point.
Also in Figure 1 below, notice the impact on pro forma dividend coverage. And again, we cannot stress this enough, these figures exclude MPW's recurring "capex" burden which averages to $200-300 million per year. If you believe these numbers as we do, MPW is burning cash.
Finally, and we thought about this deeply last night, we fail to see any positive catalysts on the horizon. The list was (1) Steward ABL extension, (2) Utah sale, (3) Pipeline resolution (that was actually a negative, and (4) Prospect resolution (that is a restructuring, and will also be a negative).