09/28/22 07:00 AM EDT

THE (DIS)TRUST SERIES | VOLUME VI - A FAMILY AFFAIR (MPW)

Rob Simone, CFA

Takeaway: Nepotism? At least 4 immediate family members related to the top-3 NEOs work in managerial positions at MPW, signaling a broken culture

Hedgeye Cartoon of the Day: The Immortal Pinocchio

It is 9.28.22, and Active Short MPW is overvalued by approximately ~$11.93/share. Getting closer to our "fair value" estimate of $10-11/share under the status quo scenario which assumes no tenant issues, of which we know there are several. Significant and worsening issues at Steward, specifically, along with Prospect, Springstone/LifePoint, Priory and others very likely leaves MPW's equity value essentially worthless. We will have thoughts on the pending Steward credit facility refinancing in our daily note out shortly following this note.

Ticker: MPW

Company Name: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals (just MPW standing alone)

Headline: Tack nepotism onto the growing landfill of issues

Upon reading MPW's 2021 annual report as filed on the company's website, we noticed something interesting that led us to investigate C-Suite family member employment at MPW. MPW's brazen choices in its filings focused our attention on this issue, and we think it is important for investors to understand the incentives here so as to better evaluate MPW's at times inexplicable decisions. We are also very positive that most investors are not aware of what follows, so at the very least we think there is value in making it known. This is all blatantly and unapologetically there for all to see; all you have to do is look. It is especially important when viewed against other corporate governance failures and poorly constructed compensation arrangements.
As reported on page 18 of its 10-K filing, as of 2.18.22 the company had ~112 employees. Here is the call-out quote on page 18 of the AR that raised our interest:

“Acute care hospitals are the hub. You see the rise of telehealth and strip-center medical clinics, but none of those are possible without the crucial infrastructure of general acute care hospitals that serve the patients with greatest need and coordinate the delivery of care throughout the rest of the care network.” - Anderson Aldag, Manager of Acquisitions at MPT

What follows is a list of a few select employees currently employed by MPW in managerial positions. Again, there are only ~112 employees in total working across the entire company. Let's focus in on the observable facts.
Relatives of CEO Ed Aldag:

Obviously Anderson Aldag above, son of Ed Aldag, who is listed as a Manager of Acquisitions based in Birmingham. Why does a son of the CEO, who graduated undergrad in 2018, have a quote in the annual report of this publicly-traded REIT? Are there no other more senior executives, with significantly more experience and influence over decision-making at the company, to contribute input to the AR in a seeming leadership role? Valid questions, in our view. Anderson apparently also interned at Cerberus Capital Management in 2017. Why is this relevant? MPW acquired a ~9.9% interest in Steward Health in 2016/2017 from Cerberus, acquired ~$3 billion of hospital real estate in 2016/2017 from Steward (~$1.8 billion in 2017 alone) while Cerberus was Steward's majority owner, and then financed Cerberus' exit in early-2021 with a highly suspicious loan to individuals who clearly did not need the capital.
Claude Plaskett, son-in-law of Ed Aldag: Listed as Manager of Acquisitions in Birmingham since 2019. Claude, who graduated undergrad in 2014, was given a call-out quote on page 17 of the AR:

"Other real estate investors may try to invest in hospitals along with other property types, but they lack the special competency and dedication that investing in hospitals requires. By focusing just on hospitals, MPT is an expert. And when your primary resource for capital understands your business, it makes it a lot easier to work together." - Claude Plaskett, Manager of Acquisitions at MPT
How does Claude's boss feel about this? Perhaps more importantly, is there a boss?

Relatives of CFO Steve Hamner:

Stephanie Hamner, daughter of Steve Hamner: Listed as Manager of Int'l Acquisitions based in London and has worked at MPW since 2018.

Stephanie also has a quote on page 24 of the AR: "“If those facilities went away, mental health care would suffer,” she says, emphasizing Priory’s position as the preeminent behavioral health provider across the U.K. “We’ve seen all over the world an increase in demand for mental health services, and that’s a trend that will continue in the U.K. and elsewhere.”
As a quick aside, this is the same nonsensical narrative we often see peddled by the company and some bulls. The question is not whether facilities "go away," the question is what rent is paid such that they DON'T go away. The company repeatedly hides behind this false narrative, claiming that a second operator is always ready to "step in" and underwrite the existing rent as if that rent must be static or else the hospital will suddenly evaporate. The short thesis around this stock NEVER involved hospitals "going away." As a matter of fact, MPW's mere presence in the capital structure actually RAISES the probability of these facilities going dark. It's nonsense, don't buy it.
Stephanie, also a 2014 undergrad, is listed on the U.K.'s Companies House as a director appointee of 83 U.K.-based entities, presumably the individual partnerships through which Priory and Circle assets were acquired and are owned. Meanwhile, Priory at 4-4.5% of MPW's pro-rata revenues is very likely struggling and getting worse from a coverage standpoint.
Stephanie also previously worked at Ernest Health, which is a current MPW tenant and former equity investment.

Matthew Hamner, son of Steven Hamner: Listed as a Manager of Special Projects based in New York, and has been with the company since late-2020. This is an interesting one.

First, what does "special projects" refer to? What "special projects" should a triple-net REIT have? In the end all they should be doing is collecting rent checks. Why are these "special projects" in New York versus the company's home in Birmingham?
Second and related, MPW signed a 14ksf office lease at 425 Park Avenue last year. That likely represents ~$1.5-2 million in annual rent plus salaries for premium office space, in a market where MPW has no owned hospitals. Why do they need that space? Furthermore, and just thinking through that, if you applied ALL of MPW's 112 employees to that office, it would imply density of ~125sf/employee. For those familiar with the NYC office market (as we are, intimately), pre-COVID tenants were signing leases for ~150-200ksf per employee and sometimes lower depending on configuration. We also know that MPW is in the process of building a new corporate HQ in Birmingham. Again, why do you need that premium NYC office space, and so much at that?
Is it just hang out space when visiting bankers? Our guess is that they will eventually be hosting restructuring advisors there before the lease is ultimately discharged.

These are the family members in managerial roles that we have been able to identify with certainty, but have reason to believe that there may be more.
We understand the sensitivities around family members, but in this case we think the question here is highly relevant and needs to be asked: Which constituencies are benefitting the most from MPW as currently constituted? And is MPW just an insider/family enrichment scheme? MPW's tenants for sure are not the winners here, nor are the public shareholders given MPW's strategy and capital allocation decisions. The healthcare system and patients are very likely suffering worse outcomes given overly burdensome rent obligations to MPW that extract value from the ecosystem. And then there is an argument to be made that MPW's investment bankers did well (for a time). But one thing is clear, the insiders and their family members appear to be winning, with hardly any ramifications (yet) for a ~40-50% loss in shareholder value.
The core issue is this: Is MPW's management team honoring their fiduciary duty to act in the best interests of the company and its shareholders? Or, are they acting in their own best interests, to the detriment of MPW shareholders and virtually every other stakeholder involved with the company. We think the latter.
Just another thing to press management on in the luxury box while watching the Knicks game next week. Because, you know, that's what is really important right now.