08/29/24 07:48 PM EDT

REITS DAILY BRIEF | WILD DAY FOR PSEC + QUESTIONS REMAIN FOR MPW IN MA | 8.29.24 | (PSEC, MPW)

Rob Simone, CFA

@HedgeyeREITs

Kevin Hurley

Takeaway: Listen to this earnings call Q&A + the Steward MA saga continues

Hedgeye REITs Cartoon of the Day: Dumpster Fire

Recent Presentations:

Black Book: Active Short Prospect Capital Corp. (PSEC) - Replay LINK

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REIT Status Deck (MPW) - LINK

Prospect Restructuring Agreement Deck (MPW) - LINK

Actual Prospect Restructuring Agreement (MPW) - LINK

Hedgeye "Summary" Book (MPW) - LINK

Ticker: PSEC

Company Name: Active Short Prospect Capital

Subsector: BDCs w/ a Private REIT Inside

Headline: Just listen! A historic conference call blow-up! Red flags all over...

There is nothing really to say, just listen to the Q&A HERE. This has "Jeff Skilling vibes."
We are continuing to pick through the quarter and the 10-K, but does the conference call say it all?

Ticker: MPW

Company Name: Medical Properties (Dis)Trust

Subsector: Healthcare / NNN

Headline: Does ARI need to take more impairments, or does MPW owe Apollo money? Ask!

Again, we have no active recommendation on MPW and our views have not changed. We wanted to analyze/comment on the situation evolving with the MA Steward portfolio. We hope this remains helpful, as we doubt that the rest of the sell-side is even following this anymore + clients remain interested.
This evening THIS motion was filed in the docket designating successful bidders and sales hearings for St. Anne's Hospital, Mortion Hospital and the two Holy Family hospitals in Methuen and Haverhill. ~$28 million is the price for the Holy Family WholeCos, with a TBD allocation to the real estate net of WC adjustments. ~$175 million is being paid for the St. Anne's + Morton WholeCos, with ~$167 million going to the real estate/Apollo consisting of ~$67 million cash + a ~$100 million promissory note. Recall the original prices paid by MPW HERE.
Recall that ML2 has been rejected, Neshoba Valley and Carney Hospitals are closing, St. Elisabeth's Medical Center (SEMC) is currently being contemplated as purchased via eminent domain for just ~$4.5 million by MA (just a casual ~98% loss in value vs. MPW's original purchase, which no doubt "validates" their underwriting!), and we have no information yet on Good Samaritan. Norwood was excluded from ML2 and left within the still intact (for now) ML1.
Also recall that MPW has written down its equity in the MAM JV to zero, given that the WholeCo bids came in below the value of the real estate as implied by the lease base/ML2 was rejected. The outstanding financial issue at this point is Apollo's recovery as the senior mortgage lender.
Recall from HERE that Apollo took impairments to the mortgage loan with 2Q24 results (current UPB of ~$830 million, paid down from ~$920 million at origination) that imply roughly a ~26% loss and asset value/recovery to Apollo of ~$614 million. See Figure 1 below.
If we take what we know through this evening: SEMC at ~$4.5 million + St. Anne's and Mortion at ~$167 million (only ~$67 million cash at closing, ~$100 million note) + the two Holy Family hospitals at ~$28 million (assuming 100% of price goes to real estate, which is not clear at all) = ~$200 million of asset value today. So ~$200 million today versus ~$614 million implied by ARI. We seriously doubt that Good Sam + the two closed hospitals would make up the ~$400 million delta, given that St. Anne's and SEMC were the two most important hospitals and St. Anne's was likely the most marketable. The value diminution is incredible here off MPW's original ~$1.26 billion gross purchase price over 2016-2018, and the ~$1.7 billion gross value as implied by the MAM JV struck just~ 2.5 years ago. This to our minds calls into question ALL of MPW's values, as most of their balance sheet growth occurred after this initial Steward deal in 2016.
But the key question here to our minds is this: (1) Does Apollo need to take additional reserves given the likely lower recovery below the ~$614 million implied (at 100%), or (2) is Apollo assuming the shortfall is being made up somewhere else (MPW)?
Recall that we asked the question, repeatedly, leading up to 2Q24 results as to whether or not the loan was truly "non-recourse" to MPW. We believed (and continue to do so) that MPW very likely backstopped a portion of any shortfall to Apollo, via side letter or otherwise, and is responsible for "Recourse Obligations." MPW repeatedly said it was non-recourse, including in the MAM JV press release HERE and on the 2Q24 earnings call itself. THEN MPW filed its 2Q24 10-Q HERE, and magically THIS language appeared! Amazing! Contingent liabilities, out of nowhere! What do we know, right? I mean are we serious here? Again, how many times do you have to be lied to?
We believe that this ~$50 million, including for "other obligations," may represent only a portion of MPW's potential contingent liability here to Apollo and that, all else the same and absent any other agreement/settlement, the full laibility could be significantly larger. Like ~4-5x larger, perhaps? Why hasn't Apollo just foreclosed yet and taken the keys to the assets? Are MPW and Apollo potentially avoiding doing that so as to not trigger any guarantee or disclosure around it? Something does not make sense here, and we STRONGLY encourage interested investors to ask questions here. We also continue to question whether the unspecified "other" financing outflow in 2Q24 of ~$75 million, which is the largest amount in that line item that we have ever seen for MPW, is somehow related.
If undisclosed guarantees existed here, and the situation was materially misrepresented by MPW management to investors, in our view this would be ANOTHER potential instance of fraud. Just tack it onto the list.