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Editor's Note: For well over a year, Hedgeye’s outspoken REITs analyst Rob Simone has done everything in his power to draw attention to the red flags raised by Medical Property Trust (MPW) and to warn investors to get out of the way. Now, the masses (and the markets) are beginning to take note. MPW’s stock price plunged (precipitously—15% as of this writing) Friday following the publication of a Wall Street Journal article that shed additional light on the glaring issues within America’s largest hospital landlord. MPW may just be appearing on many investors’ radars for the first time this week, but Simone has been sounding the alarm since April 2022, when he first added the company to his “Best Idea” Short list. The stock is down nearly 70% since Rob’s initial Short call. Simone has been adamant in his criticism of the REIT’s shady business practices, appearing on CBS News earlier this year and sharing his research regularly with Hedgeye subscribers. On Sunday, July 16, Rob Simone wrote the institutional research note and accompanying 49-slide presentation below highlighting a number of lingering risks to investors in MPW. In light of the precipitous drop in MPW's share price (as a result of the company's actions to-date) and the numerous questions raised in the note and slides below, Simone concludes... "We believe strongly that fiduciaries, acting responsibly on behalf of their investors, MUST understand these unique risks and have these questions answered BEFORE investing in MPW’s equity and debt securities. Otherwise, MPW should be considered “un-investible.” Medical Properties Trust is on its way to becoming one of the biggest blowups in REITs history. MPW remains a "Best Idea" Short. |
PRESENTATION PDF LINK
In our view MPW does not follow the "spirit" of the REIT rules, with the "letter" being an open question
- For the last several weeks we have been analyzing the IRS REIT rules under the U.S. Code, for the purpose of understanding Active Short MPW's compliance (or potential lack thereof) with those rules. These issues are complicated and require deliberate study. They are also open to interpretation. However, certain rules are very clearly stated, in our view.
- We have attempted to lay out and simplify the issues for investors as best as possible in the presentation below, while also supplying the supporting backup.
- Investors will recall that, from the beginning of our research into this company, our view has been that the factual and anecdotal evidence pointed to MPW owning a significant portion, if not all, of the capital structure of largest tenant, Steward Health Care.
- Indeed MPW has factually invested nearly ~$1 billion, or roughly ~5% of the company's balance sheet, in the operations of Steward and its affiliates outside of the real estate.
- At the same time, MPW purports to "underwrite the real estate" and primarily to "lease facilities to healthcare operating companies under long-term net leases." Our view is that the facts and history around this company demonstrate a different pattern.
- We have analyzed several of these past transactions for context. Historically MPW invested essentially 100% of the capital and received an overwhelming majority of the OpCo economics of Ernest Health and Capella. MPW's management explicitly cited these transactions as examples similar to certain investments in Steward. We believe these transactions demonstrate an enormous willingness by management to take risk. It is also unclear how they are consistent with a key private letter ruling (PLR) from the IRS or the Code itself.
- In our view, the Code and the (PLR) clearly state the following:
- A REIT cannot own >10% of the securities of any issuer,
- A REIT cannot own 10% or more of any tenant,
- A TRS cannot own >35% of either an operator or a manager,
- A TRS cannot be an operator or manager of healthcare properties,
- Convertibility into equity disqualifies debt treatment as "straight debt,"
- The IRS determines stock ownership based on share of value, and perhaps most importantly
- Ownership by a trust and any if its TRS's of >1% of the aggregate outstanding securities of any issuer disqualifies all other held securities in that issuer for "straight debt" treatment.
- Taken together, we do not understand how MPW justifies its status as a REIT, given its current investments in Steward. We firmly believe that fiduciaries, acting on behalf of their investors, MUST understand these risks and questions before investing in the equity or debt securities of MPW. Moreover, we believe the company should address these topics transparently. Otherwise, Hedgeye's view is that MPW should be considered "un-investible." The risks are too significant.
- Finally, these questions have direct implications for the ongoing restructuring of MPW's second largest U.S. tenant, Prospect Medical Holdings, where MPW appears to be leaning significantly on OpCo economics to earn its recovery.
