02/20/23 08:16 AM EST

MONDAY NIGHT REIT READ | NXRT 4Q + STAG MODEL + MIKE PAPA WHISKEY | 2.20.23 | (NXRT, STAG, MPW)

Rob Simone, CFA

Takeaway: Incrementally less bearish NXRT + STAG model update + we decided on a subsector name! New subsector reveal! FUBAR...

Hedgeye Cartoon of the Day: Bring Back the Dove

It is 2.20.23, and Active Short MPW is overvalued by whatever the share price is. Believe us yet?

REIT VALUATION HANDBOOK

Ticker: STAG

Company Name: Active Long STAG Industrial

Subsector: Industrial / Logistics

Headline: Boring is good - updated model, FY23 guidance conservative and numbers too low

We finished updating our model on Active Long STAG following 4Q22 results, and continue to like it as a place to hide that still has upside potential as it re-rates higher.
We are modeling Core FFO of ~$2.32 for this year, or +3% above the Street and up +5% y/y. We have cash EBITDA growing +7.5% this year and a high-single-digit % y/y for FY24, respectively, so we are looking at possibly ~2 years of RoC acceleration.
At the same time, we think the company's FY23 outlook is low by ~3-4%, setting up for positive earnings revisions throughout the year.
We see upside to ~$40/share, or +12.5% from here before dividends, which represents ~17.5x forward Core FFO earnings or ~20x forward AFFO. Reminder: Hedgeye does not do official PTs.
Leverage is conservative at ~5x cash EBITDA, and STAG remains a prime candidate as a relative Quad 4 winner.

Ticker: NXRT

Company Name: Active Short NexPoint Residential Trust

Subsector: Multifamily / Apartments

Headline: Thoughts heading into 4Q22 earnings print tomorrow

FY23 guidance expectations:

SSRev: +7%
SSExp: +8.5%
SSNOI: +5.5%
Core FFO: ~$3.30/share, or a penny above FactSet consensus

We have been growing less bearish on the name relative to CPT and IRT, following its successful refinancing last year + additional announced assets sales + the very significant relative underperformance vs. the XLRE since we added on the short side.
We are going to re-evaluate post earnings after we get a better read on the forward outlook, but this one has obviously been migrating to the bottom of the Active Short list.

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: "B" Tranche Triple-Net Hospital "WholeCos," that's what we'll call it!

Headline: Reports 4Q22 results Thursday, 2.23 before the market opens

It should be a very interesting week with MPW reporting its 4Q22 results on Thursday before the open, after delaying the report / call by ~3 weeks vs. when it historically reports.
The situation has become so potentially combustible since the appearance of Viceroy Research, who is obviously pursuing a different path and tugging on different threads than we have, that we actually do not have a good sense on what to expect from the report. It can go in many different directions, so we would rather take things as they come and evaluate after the fact versus hazarding too many guesses ahead of time. The only thing we would say is that the earnings guidance provided on the call will probably be lower than consensus AFFO, as we think the company has clearly been calling around to "jawbone" numbers down. We have no idea why the company delayed earnings, it's really anyone's guess at this point (perhaps to capture Utah and a lower Steward % of gross assets?). Let's watch...
We will continue to focus on the same things we have since April 2022: (1) the actual cash economics of this business do not fit with management's narrative and do not warrant the current valuation in the market, (2) those economics will not improve for the foreseeable future, owing to MPW's long agreement terms, (3) MPW's cost of capital versus its cash returns leave the structure totally "upside down" and "broken," (4) MPW's underlying tenant credit is very poor and leaves investors vulnerable to rent cuts, as we just saw with largest tenant Steward Health's best assets and Prospect's likely upcoming restructuring, (5) earnings quality is extremely poor, (6) leverage is too high, (7) we believe the current dividend is unsustainable, (8) the compensation structure is asymmetric, perverse and creates poor incentives including "asset gathering," (9) corporate governance structures are poor and riddled with conflicts, (10) overall disclosure is very poor, and finally (11) several of MPW's transactions are unusual, entirely inappropriate for a publicly-traded REIT and likely result in channeling liquidity to some of its largest operator relationships, i.e. are circular in nature. We try but struggle to find any reason to own this stock outside of playing for a "bounce" or short squeeze. Investors just got that bounce on the order of ~30% since October, so everyone needs to figure out whether they want to hang around or not. We obviously would not for the above reasons, along with the fact that the positive catalysts cited by the bulls (Steward ABL extension + Utah sale) are now firmly in the rearview mirror.
As we wrote last week, the math dictates (not our belief) that MPW warrants a ~40-50% discount to "book" or a ~10x cash EBITDA multiple, which = $3-5/share before additional tenant issues.
A few topics we do want to discuss here:

Our visit to Birmingham: Some clients and subs were not clear on the purpose of our the trip to Birmingham last week. Put simply, we wanted to learn more about the planned MPW global HQ build and see how things are evolving on the ground, given that construction was supposed to start in late-2022. We heard from market participants that the project was "excessive" and likely entirely inconsistent with (1) the realities and costs of the Birmingham office market, (2) a company that is actually shrinking rather than growing, and (3) not a good use of shareholder capital. Given that the office market currently has ~20% availability, asking rents are in the mid-$20psf range and Class-A assets are trading for ~$100psf or lower, building at ~$500psf or higher is a very poor use of shareholder capital. This is just another example, in our view, of something that management should not be doing, as it does not reflect the best interests of shareholders.
Further comments on the Steward Utah sale to CommonSpirit: The ~$685 million sale swaps out ~8% of MPW's cash EBITDA with better credit ( + ) and facilitates a ~$150 million loan repayment to MPW ( + ), but further impairs the ~20-22% remaining cash EBITDA exposure to Steward ( - ). This sale does NOT validate the value embedded in the rest of the portfolio, the majority of which is of much lower quality. This is an example of the "adverse selection problem," where a distressed, over-levered operator in desperate need of capital sells the assets they can rather than the assets they want to ( - ). And in the process of doing so to pay down existing debt, the profitability of RemainCo is meaningfully impaired ( - ) and cash burn accelerates ( - ). Not to mention that MPW was forced to take a rent reduction (we estimate ~8-10% now on fully-escalated FY23 cash rent) on the BEST assets ( - ), just to facilitate a liquidity injection into its largest tenant ( + ) but with no or little excess cash proceeds ( - ). Using round numbers, we estimate ~$390 million in annual cash rent to all of Steward's RemainCo landlords against ~$100-200 million of recurring EBITDAR and still ~$200 million of maintenance capex behind that = annual cash burn of ~$300-400 million vs. ~$200-300 million pre-deal ( - ). Steward was also forced to take a ~15% haircut to the original negotiated sale price with HCA from 2021, resulting in less proceeds ( - ). We are doing our best to be fair here and show both the ( + ) 's and ( - ) 's, but notice all the ( - ) 's piling up?
Dilutive transactions & the dividend: We had a conversation with a subscriber late last week regarding the string of completed (Springstone/Lifepoint loan repayment) or contemplated (Steward Utah, Prospect, Healthscope) transactions. The thought was that the Healthscope sale would be viewed as a positive for the stock price. That may or may not happen re: the stock at least for a time, as it will surely be marketed as a positive, but the reality remains that these transactions taken together are very dilutive. Again, not our opinion, just the math:

Current MPW valuation, post-closing of Springstone / LifePoint and assuming the market multiple has adjusted: ~14.5x annualized Adj. Cash EBITDA.
Contemplated Sales (Steward Utah + Prospect CT sale + Prospect PA (Crozer) asset-for-equity swap + Healthscope sale): We estimate ~10.3x Cash EBITDA / ~10% cap rate, collectively, and ascribing no value to any Prospect OpCo equity stake.
= Dilutive! We estimate this will shave ~$85 to $100 million from annual cash from operations net of full AUD term loan + revolver repayment and related interest savings. ~$450 million of 2.55% senior notes need to be refinanced or repaid in December 2023, and if reset +300-400bps higher would represent an incremental ~$15 to 16 million hit to annual cash flow over and above the ~$85 to $100 million above.
To put that into perspective, cash from operations exceeded dividend payments by ~$168 million in 2021 BEFORE MPW sold 50% of of its Steward Utah portfolio and placed those assets into an unconsolidated JV, and YTD in 2022 through 3Q22 cash from operations exceeded dividend payments by just ~$33 million.
Note: this is before any "capex" investments below the cash from operations line, which has averaged ~$200 million per year for MPW since 2015-2016. Again, triple-net REITs should not have this level, if any, of capex, as operating and capital costs are assigned to the tenant. We view these as massively negative NPV loans that are really intended to channel liquidity to the tenant. See Steward's Tenet Miami deal. If you want to measure dividend coverage with MPW's definition of AFFO, well then knock yourself out, but unfortunately it will produce an incorrect result. In short, MPW's definition of AFFO (which changed three times over three consecutive quarters, btw), is useless in our view. It is possible, if not likely, to BOTH be "under" MPW's ~95% AFFO dividend covenant AND simultaneously be burning cash / having to borrow to fund the dividend.

Sidebar: We very intimately saw a similar situation when we worked at Fortress Investment Group on SNR (remember that little beauty?). Fortress financed part of the portfolio with amortizing Freddie debt that had an imminent rate reset, and also excluded principal amortization from the AFFO calculation. The result was that AFFO was very much overstated and not reflective at all of the cash flow available to cover the unsustainable dividend payout.

In other words and all else the same, absent a dividend cut we would expect MPW (which is barely covering its dividend payment today) to see its net debt balances increase so as to fund its dividend payments post-close of these transactions. I.e., borrowing to pay its dividend, and that would be before any additional tenant issues, dilutive sales or debt refinancing at higher rates.
Finally and from our time at PGRE, our read is that MPW likely raised its dividend payout in 2021 and 2022 in part due to the need to shield the 1Q22 gain from the MAM transaction, and with the expectation of rolling some of that tax basis into new acquisitions via 1031. Recall MPW started out with aggressive 2022 acquisition guidance, but ultimately lost its ability to execute on it after losing its cost of capital in the market as well as the HCA put option. Rather than buying, MPW is now forced to recycle the assets it can to raise capital and de-lever while simultaneously over-distributing. A significant portion of that net income is derived from non-cash revenue (30%+). Have fun with that mix!