03/09/23 07:40 AM EST

THE (DIS)TRUST SERIES | VOL. LVI | "PROSPECT NEUTRAL" = "PROSPECT ZERO?" | 3.9.23 (MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Updating the moving parts again for what we think we know.; more selective disclosure?

Hedgeye Cartoon of the Day: Dumpster Fire

Hedgeye REITs Chart of the Day: You Are Paying a Low-6% Cap for (Dis)Trust... Don't Do That

Source: Company Reports, FactSet, Hedgeye Estimates

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: "B" Tranche Triple-Net Hospital "WholeCos"

Headline: More selective disclosure? Prospect CT terms appear worse than we first estimated

Earlier this week a sell-side note discussed how "..MPW disclosed it expects to be paid ~$300 million in cash with the balance (~$157 million) as a loan receivable..." We want to be 100% clear about this - these very critical details were NOT disclosed in the 10-K filing, in the 4Q22 earnings release or on the 4Q22 earnings call, and to the best of our knowledge were NOT discussed with investors at a recent competitor conference last week. No 8-K filing was made. We think the question needs to be asked, "Is this ANOTHER example of selective disclosure around a ~10%+ tenant that is actually or effectively insolvent?" A very reasonable question, in our view. We did not pick the moniker "(Dis)Trust" without a basis for doing so.
With that said, we wanted to dust off our Prospect restructuring assumptions as well as our assumptions for the potential sale of the Healthscope portfolio in Australia. See Figures 1 & 2 below.
On Prospect:

As we previously wrote HERE back when the sale of CT assets to Yale was announced in late-2022, our view was that (1) it did not make a ton of sense for MPW to be receiving its full ~$457 million purchase price back for three money-losing hospitals acquired pre-COVID, and (2) as always with (Dis)Trust there would likely be some contingencies that we would find out about later.
We later wrote HERE that Yale would be paying ~$400 million to Prospect for the WholeCos, implying a ~$50 to $60million loss to be absorbed in some form by Prospect as the intermediary in the transaction. Our belief was that MPW could get back a note as consideration for the difference in value between the $457 million and Yale's purchase price.
If the above is true, and we have no reason to believe it is not, the mix of consideration is WORSE than we first expected. Moreover, the transaction being facilitated here is effectively "depositing" ~$100 million of cash at the operator, i.e. MPW is effectively making ANOTHER sizeable working capital loan to Prospect and using its balance sheet to absorb the loss.
Again, again and again, MPW extends its tentacles past just the real estate and into the OpCos of its tenants, including in a very material way to the largest ones such as Steward and Prospect. If and when this deal closes, MPW will own a ~$151 million mortgage + ~$112 million term loan + ~$157 million seller note = ~$420 million of loans to its second largest tenant. If the Crozer PA asset-for-equity swap closes as contemplated (we believe also selectively disclosed in early-2023), MPW will also be left with a worthless OpCo equity stake.
Regarding Prospect's managed care business, which we believe is the "golden goose" yet has been on the market for ~3 years, (1) assuming it's able to be sold we believe it would impair RemainCo Prospect supporting the other 7 hospital investments by MPW (we estimate another ~$90 million of MPW's cash EBITDA), and (2) would there be any value left over after Prospect satisfies its existing third-party debts, payables, pension obligations and loans to MPW? Again, the master leases are all cross-defaulted and MPW's rent is effectively a corporate obligation.
Conclusion - If we assume the CT seller note would be PIK'ing/accruing (very reasonable assumption) and ascribe no value to it or any equity stake received in Prospect for Crozer PA, taking only the cash portion of the consideration of ~$300 million against ~$70 million of rent means that MPW would be effectively "selling" its rental stream at a ~4.3x multiple / ~23% cap rate = MASSIVELY DILUTIVE. And yes, you read that correctly, and the math in Figure 2 below supports it.

On Healthscope:

After Springstone/LifePoint (closed), Steward Utah (pending) and Prospect (pending), the remaining piece of the puzzle from what we (think) we know is Healthscope in Australia.
Now, and to be fair to the company, this is the one moving part that we actually think makes sense: (1) they never should have purchased it in the first place, (2) they need capital to de-lever, and are approaching the "urgently" territory, in our view, on that need, (3) it is the one transaction that we can see that when taken in isolation can possibly be executed on an "quasi-accretive" basis, and (4) they might not have anything else able to be sold right now on any reasonable terms.
With all of that said, the issues are: (1) it simply is not large enough to meaningfully "move the needle," (2) we do not think sufficient NET proceeds will be generated to fully repay the AUD term loan, implying "stranded" FX debt exposure that would need to be repaid out of pocket, and (3) taken together with everything else the company is doing and treated as one action, shareholders are still being diluted in a very significant way.
See Figures 1 & 2 below.
We assume: (1) a ~6.7% cap rate paid on MPW's in-place rents with the buyer underwriting to a targeted ~3x coverage, (2) conversion to USD at current FX rates, (3) G&A savings at ~75bps of gross value given that MPW will no longer own any Australian assets, (4) ~3% selling costs and (5) a ~15% tax rate applied to gross proceeds.
In isolation, we estimate the transaction being executed at a ~16x cash EBITDA multiple to MPW versus the current ~13.5x in the market.
However, with over ~$780 million of existing ~2.45% term loan debt at current FX rates, MPW will likely not generate enough to fully repay the debt, and the transaction is dilutive to AFFO given the spread between the cap rate and interest rate + >100% leverage. Again, MPW has no other assets in Australia to support this debt on an FX-matched basis.
Conclusion: We estimate ~$0.04/share of annual AFFO dilution. If accretive from a value perspective, all of that value would be accruing to the bondholders.

Overall Conclusion: The combined Steward Utah + Prospect + Healthscope actions imply an ~8.5x cash EBITDA multiple vs. MPW's 13.5x in the market = DILUTIVE. We have already supported our basis for a warranted ~10x cash EBITDA multiple / ~10% net effective cash cap rate. If all of this happens and we apply that multiple, MPW is a sub-$3/share stock before any additional issues with Steward or otherwise.