MedEquities Realty Downgraded Amid Tenant Troubles

MedEquities Realty Trust Inc MRT — a real estate investment trust focused on health care properties and related real estate debt investments — reported second-quarter results Wednesday and said its top tenant hasn't paid rent since May.

The disclosure goes against prior assumptions and prompted KeyBanc Capital Markets to drop its bullish stance.

The Analyst

KeyBanc Capital Markets' Jordan Sadler downgraded MedEquities Realty Trust from Overweight to Sector Weight.

The Thesis

MedEquities said in conjunction with its Q2 print that its top tenant OnPointe Health has not paid rent it owed since May, and security deposits only covered May and June's payments, Sadler said in the downgrade note. (See the analyst's track record here.) 

In late June, MedEquities said OnPointe was up-to-date on rent, but Wednesday's earnings report and disclosure stand "in stark contrast" to the prior narrative, the analyst said. 

The company did say it's seeking new tenants for the facilities occupied by OnPointe, but MedEquities may need to accept a meaningful rent cut, Sadler said. The market rent coverage of 1.4 to 1.5 times EBITDAR suggests a rent reduction could be as steep as 30-50 percent, he said.

The process of finding a new tenant could take as long as six months, although Sadler said the company has known of its tenant's troubles for some time, so the company could have already identified potential replacements. 

Another MedEquities tenant that contributes 15 percent of total rent, Fundamental Healthcare, is seeing substantial declines in facility-level performance, Sadler said. While Fundamental is still in compliance under its guarantor agreement, the news comes at a bad time for MedEquities' investors and "incrementally hurts" management's credibility, according to KeyBanc. 

Price Action

MedEquities shares were trading down 2.75 percent to $9.90 at the time of publication Thursday. 

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