Tuesday, May 08, 2018

Red Herring Soup

Yesterday's 8-K filing from Carter Validus Mission Critical REIT (CVMC) and today's DI Wire paraphrase of the filing omitted important information but added a nonsense red herring as a distraction.  Both the 8-K and article note that a major CVMC tenant, Bay Area Regional Medical Center, LLC, is filing for bankruptcy and is closing its facility on May 10, 2018, and the two state that CVMC is actively talking to the tenant and is pursuing all avenues to maximize shareholder value, including the sale of the property or its re-lease.  These are actions investors should expect from a sponsor.  Apart from Bay Area's bankruptcy and impending closure, Carter Validus's 8-K neglected to to discuss how the loss of Bay Area impacts the REIT.

According to CVMC's 2017 10-K released at the end of March, Bay Area's book value represented 20% of the REIT's year-end 2017 carried cost, and its lease revenue represented 21% of the REIT's contracted rental revenue.  Bay Area is the REIT's largest tenant by a wide margin, so its bankruptcy and immediate closure will have major financial repercussions for the REIT.  The next largest tenant, as measured by contracted rents, represented 12% of the REIT's contracted rental revenue, considerably less than Bay Area's 21%.  Because Bay Areas's departure rips a big hole in CVMC's revenue, what happens to CVMC's distribution, which was already lowered earlier this year?  How does Bay Area's bankruptcy effect not only the property's $86 million mortgage but the REIT's line of credit?  What happens to the REIT's NAV?  Dare I mention liquidity event timing?

CVMC's 8-K chose to avoid these questions and any disclosure beyond Bay Area's bankruptcy and plans to vacate its property, and opted for the irrelevant.  The 8-K touted Bay Area's market share and what other prominent medical groups it out performed.  DI Wire repeated this information and even added some news of its own, reporting on a Bay Area award and its trauma center's top certification.  None of this information is pertinent for a hospital that closes in two days.  As of Friday, Bay Area's market share will be a whopping 0%.  CVMC needs a trauma center, stat.

You can read the frivolity yourself; the entire two paragraphs of CVMC's 8-K is below:
On May 4, 2018, Bay Area Regional Medical Center, LLC ("Bay Area"), a tenant of Carter Validus Mission Critical REIT, Inc. (the "Company") through a wholly-owned subsidiary of the operating partnership of the Company, announced in a press release that it is closing its operations on May 10, 2018 and filing for bankruptcy in the near term. The Company is and has been actively communicating with Bay Area, and will seek all of its rights and remedies to enforce all obligations of the parties to the lease and any other agreements associated with the Company’s investment. The Company will seek to pursue all avenues to maximize stockholder value, which may include sale of the property or leasing of the building to a new tenant or tenants.
Based upon information provided recently by Bay Area, Bay Area Regional Medical Center’s Southeast Houston market share in the fourth quarter of 2017 was 12.61%, which ranked second to only one other single system, which was HCA’s Clear Lake Regional Hospital with a 36.59% market share.  According to Bay Area, Bay Area Regional Medical Center’s Southeast Houston market share outpaced Memorial Hermann Southeast Hospital, Houston Methodist’s St. John’s Hospital, and UT Medical Branch Hospital, all three of which are large systems in the Houston market.

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