09/15/22 04:59 PM EDT

THE (DIS)TRUST SERIES | VOLUME 2 - WHATS A WHISTLEBLOWER TO DO? | 9.15.22 (MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: A Section 16 officer is the designated intermediary between any concerned employee and the Board

Hedgeye Cartoon of the Day: Pinocchio is Back!

It is 9.15.22, and Active Short MPW is overvalued by approximately ~$13.69/share.

Tickers: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals

Headline: MPW has no whistleblower hotline, and you need to go through your boss to lob a complaint!

We have written before about MPW's poor comp practices, namely the practice of tying cash bonus comp to transaction volumes and essentially inventing "adjusted" FFO numbers for comp evaluation (numbers that by the way are almost always higher than those reported with quarterly earnings). Essentially MPW's management team is being compensated to aggregate assets, aka "go out and do any deal" versus those that actually make economic sense for shareholders. In our view there is very poor incentive alignment to the detriment of shareholders, and likely a "captured" Board unwilling to make necessary adjustments. The checks and balances appear totally misaligned, and the Board would do well with truly independent observers and representation. We previously wrote that this would be one of the steps that we would take immediately as part of any attempt to save this company. A few additional things came up as we explored MPW's corporate governance (or lack thereof):

MPW appears to have no listed external whistleblower hotline, for the purposes of offering anyone with concerns around accounting, auditing, controls or other matters to transmit those concerns to the Audit or NCG committees. Examples of REITs that have such hotlines or directions on how to submit complaints/concerns/questions:

Welltower (WELL),
Realty Income (O) on page 8,
AvalonBay Communities (AVB) on page 7,
Rob's former employer Paramount Group (PGRE) on page 7, to their credit,
Active Short Invitation Homes (INVH) on page 22, also to their credit,
Active Short SBA Communications (SBAC) on pages 1-2, also to their credit, and
Former (but no longer) Active Short Americold (COLD) on pages 3-4 to name a few.

MPW appears to offer no option for anonymous third-party governance and ethics reporting services, as several of the above examples do, which transmit complaints/concerns directly to the Audit and/or NCG committees.
And then finally, MPW's "Code of Ethics Contact Person" is EVP, COO & Secretary Emmett E. McLean (Figure 1 below), a Section 16 officer and co-founder along with CEO Ed Aldag and CFO Steve Hamner, all three of whom have been at the helm of this company since it was formed and went public. What? Are they kidding? A few sub-bullets on Emmett's responsibilities:

"Any transaction or relationship that reasonably could be expected to give rise to a conflict of interest or the appearance thereof should be discussed with the Code of Ethics Contact Person." Hedgeye Hypothetical: What if Emmett were ever conflicted? Would he self-report? What if the CEO or CFO were conflicted? Would he take any such report seriously? These are serious questions.
"Each director, officer or employee must report any conduct that he or she believes to be unethical or unlawful to the Code of Ethics Contact Person promptly." Hedgeye Hypothetical: What if an employee thought that Emmett was doing something unethical or unlawful? How would that work?
"A director, officer or employee who is unsure of whether a situation violates this Code should discuss the situation with the Code of Ethics Contact Person to prevent possible misunderstandings and embarrassment at a later date."
"The Ethics, Nominating and Corporate Governance Committee and the Code of Ethics Contact Person shall take all action they consider appropriate to investigate any violations reported to them." Hedgeye Hypothetical: But what if the Code of Ethics Contact Person never reports an issue to the NCG? How could they investigate if they never receive anything?
"If a violation has occurred, the Company will take such disciplinary or preventive action as it deems appropriate, after consultation with the Ethics, Nominating and Corporate Governance Committee, in the case of a director or executive officer, or the Code of Ethics Contact Person, in the case of any other employee."