05/11/23 09:29 AM EDT

THE (DIS)TRUST SERIES | VOL. LXVII | 1Q23 10-Q REVIEW + FULL CASH FLOW MODEL | 5.11.23 (MPW)

Rob Simone, CFA

Takeaway: It's not good - we expect MPW's liquidity position to materially worsen through 4Q24; they need to cut the dividend

UPDATED MPW ISSUES "CHEAT SHEET"

OPEN LETTER LINK

CBS REPORT PARTS I & II

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

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

Headline: We see a combustible and unsustainable situation continuing to evolve...

First - 1Q23 10-Q Review:

This is what we see so far. This usually takes a few read-throughs, so we will update subs if and when we see more.
Cash Flow Statement:

Cash Paid for Acquisitions & Other Related Investments - MPW reported a net ~$72.9 million net outflow in the quarter. But in the 1Q23 earnings release, the company stated "The Company did not acquire any new hospital real estate during the first quarter..." Well then what is in that outflow? Does that include the ~$50 million advanced to Steward against expected "proceeds from Steward's insurance claims" on Norwood hospital? What else is in that line item? How can you reconcile spending nearly ~$73 million on acquisitions and investments in the quarter, and at the same time say you made no acquisitions in the quarter? Please help us understand this, because it like so much else here makes no sense. It is also critical to understand given the cash burn.

Update - based on Note 3 of the 10-Q, it appears this item includes the ~$50 million convert lent to PHP in the quarter. This implies the other $50 million investment in loans receivable on the cash flow statement must be the advance to Steward.

Capital Additions & Other Investments - This number came in at a ~$68.6 million outflow in the quarter. What is the difference between this line item and the above? What specifically is aggregated here? Which tenants are being funded, and for what? How do you reconcile these figures with the ~$47.4 million in capital additions, developments and other funding to existing tenants listed on page 15 of the 1Q23 supplemental? Again, please help us, because the numbers make no sense and are adding up to a significant use of funds.
These are important questions, because MPW is now in significant cash burn mode. We estimate Excess Cash Flow ("ECF" = OCF - "Capex" - Dividends + a ~7% Return on "Capex"), or internally-generated cash flow, was -$108.3 million in the quarter and -$208.1 million on a rolling LTM basis. We suspect the true picture could likely be far worse, depending on how things are classified and what is truly "recurring." Again, ECF has not been positive in any year since at least 2011, and well before any recent issues at Prospect, Pipeline or Steward.
MPW is over-distributing and needs to reduce its dividend. Otherwise dollar leverage is going to increase materially through year-end 2024 and MPW will likely have insufficient remaining liquidity ahead of the 1Q25 ~$1.4 billion maturity wall. As we show below in our model, giving the company credit for (1) growth from escalators, (2) no further tenant issues, (3) a resumption of Prospect's California rent, (4) closing of all anticipated transactions (with the exception of PHP given the uncertainty and timing) and (5) no change to the dividend, MPW will likely have a net funding deficit of ~$800 to 900 million through year-end 2024. This manifests itself via draws on the RCF, which we estimate will have less than ~$1 billion of capacity by the end of 2024.

Lifepoint Transaction - As expected MPW received its ~$205 million back in 1Q23 in satisfaction of its acquisition loan. It also converted a ~$23 million mortgage note to a fee simple interest in a Washington hospital and added to the existing master lease.
PHP Holdings (Prospect) Transaction - As discussed on the call and HERE by us, MPW originated a ~$50 million convertible loan in 1Q23 to PHP Holdings which is included in "Investments in Unconsolidated Operating Entities" on the balance sheet. As we wrote about previously this claim + the "deficiency note" from the CT sale to Yale (we estimate ~$57 million, with ~$100 million in cash essentially deposited at the operator and securing the balance for now) + now the existing ~$112.9 million term loan + unpaid rent and interest will likely need to be satisfied from a sale of the PHP managed care/VBC business. That plus the first lien mortgage on the PA assets (book value of ~$417 million) will provide the recovery to MPW outside of the CA portfolio and the cash portion of the CT Yale transaction if/when closed. Assuming a gross valuation of ~$600-700 million for PHP and a ~50% LTV from the discussed "third-party financing," we estimate that would leave residual equity value of ~$300 million to satisfy claims.

We do not think the PHP business is worth the stated ~$1 billion, and have seen no evidence in support of that valuation. Given past statements and inconsistencies from MPW's management, we do not see why investors should believe it either.
We believe MPW's recovery will likely be less than its total book value. The math does not work. We would need to know MPW's % stake in the business, but straight away it is easy to see that there will likely be a shortfall.
This assumes that the ~$100 million loan from CT is paid back with available cash, and that cash is not "burned."
This also assumes that the first mortgage on the Prospect PA assets would be less than a 100% LTV - a more than reasonable assumption.
Also makes the heroic assumption that PHP can be sold at all, which is not a sure thing given that we understand it has been on the market since 2021. Timing is also very uncertain given required approvals, diligence, etc.
Our understanding from the Rhode Island AG investigation is that Leonard Green closed on a sale of entire Prospect OpCo in 2021 for just ~$12 million.

Healthscope Portfolio Sale - Expected to close in a two-phase transaction, with the larger phase expected to close in 2Q23 and the full transaction completed by "the end of 2023." Proceeds will be used to repay the AUD term loan. We have reflected this, plus the planned Prime repurchase in 3Q23, in our cash flow model below.
Prospect Medical Restructuring Details:

The master lease on the six California hospitals will be maintained with no change in the rental rates or escalators. Prospect will begin paying 50% of the contractual monthly rent beginning in September 2023. Given that the entire restructuring process will take at least ~12-18 months, per MPW's own disclosure, and the overall level of uncertainty, we have assumed this ~50% of existing contractual monthly rent paid through the end of 2024. The existing lease rate is ~8.5% against a ~$500 million value. We will of course adjust if and when more information becomes available, but for now we think that is a fair assumption.
MPW sending the keys back to Prospect on the 4 PA hospitals, in exchange for a first mortgage on the assets.
MPW providing a ~$75 million DIP loan secured by A/R and other assets.
MPW obtaining an equity interest in PHP equal to unpaid rent and interest + the existing ~$112.9 million term loan + other obligations.
And then of course, the ~$50 million convertible loan already funded to Prospect in 1Q23.
To be clear, we are of the view that there is NOT enough collateral to provide full recovery for the above obligations. This is contingent on the valuation range of PHP above, and there is no guarantee of close.
Regarding the Yale transaction, MPW noted that "...$457 million, of which we expect to receive the majority in cash and the remainder in equity securities of PHP Holdings. This transaction is expected to close in 2023 subject to certain regulatory approvals and the completion of Yale's acquisition of the hospital operations from Prospect. No assurances can be given that this transaction will be consummated as described or at all." Our understanding is that FTC approval sunsets on 6.13.23, meaning that if the deal does not close by then the parties would have to re-apply with the FTC. We give them credit for a 2Q23 close in our model, consisting of ~$300 million in cash. This piece may be the most important near-term part of the story right now - if this deal does not close MPW's liquidity situation would materially worsen, in our view.

Steward:

We think the "Other Loans" entry on the balance sheet is essentially all to Steward. Notice that the balance went up 4Q/3Q22 by ~$28 million, which corresponds with the loan funding disclosed on the 1Q23 earnings call. The ~$228 million year-end balance also roughly corresponds with the ~$220 million promissory note disclosed in the 10-K, minus an ~$8 million delta. Finally, the balance of this line item increased by ~$50 million q/q in 1Q23, which corresponds with the advance disclosed on the call and page 50 of this 10-Q. Think about this - if we are correct, MPW essentially has a revolving credit facility line item on its balance sheet dedicated to its largest tenant.
MPW disclosed as a subsequent event that it only received $100 million of its $150 million loan originated in 2Q22 from the sale of the Utah OpCo, while stating that it expects to receive the balance. This was disclosed 10 days after the closing of the transaction. Recall that MPW stated on the 2Q22 call that the loan had "mandatory prepayments" from this sale and that Steward had a "positive cash flow outlook." Since then we know that MPW advanced Steward at least an incremental ~$78 million of funding in 4Q22 and 1Q23. This implies that MPW has only been repaid a net ~$22 million of the $150 million. Questions - How can this be possible? Does Steward not have the cash? What is the definition of "mandatory prepayments?" Again, this makes no sense, and is indicative of an insolvent Steward continuing to receive support from its landlord. Steward clearly does not have sufficient liquidity, in our view.
Just to recap:

Steward cash flow positive = not true
Mandatory prepayment of $150 million loan = not true yet
MPW didn't loan to Steward in 4Q22 = not true
Utah purchase price to Commonspirit similar to ~$850 million from HCA = not true
MAP repaid in September 2022 = not true
Rent not the reason for hospitals closing = not true, per the recording obtained by CBS
No problems or issues extending the ABL = not true
We are sure we are missing some...

Speaking of the Steward ABL, T-minus ~5-6 months before this becomes an issue again, but this time with lower RemainCo profitability and less valuable collateral remaining to sell. Recall Steward secured only a 1-year extension through 12.31.23. We again expect MPW to play a role, likely a larger one this time around.