PEAK - Medical Properties Trust Files Lawsuit Against Viceroy Research Looking To Reverse Market Sentiment

2023-04-03 09:00:00 ET

Summary

• Shares of MPW have declined by -61.12% over the past year and short interest has climbed to 20.73%.
• MPW has filed a lawsuit against short seller Viceroy Research and its individual members, indicating that their allegations are false.
• MPW has used PwC as its auditor since 2008 it is a big four accounting firm, and PwC has addressed the issue regarding the statements they have issued.
• If a court rules in favor of MPW and the allegations are proven false in a court of law a large short squeeze could be imminent.
• If a court finds that Viceroy Research's allegations are true, then all bets are off and it could get worse for MPW and its shareholders.

The situation for Medical Properties Trust ( MPW ) just got very interesting. I am going to cover the recent developments and provide my thoughts on the situation as it pertains to the stock price. Over the previous year, shares of MPW have declined by -61.12%, which has seriously impacted shareholders. In 2023, shares of MPW have declined -28.71% as they fell into single digits, a valuation that many didn't think would occur. Short sellers seem to be in control as short interest has increased to 20.73%. Things got very interesting as on 3/30/23, MPW filed a lawsuit against short seller Viceroy Research and its members while sending a letter to their shareholders . MPW is arguing that Viceroy published baseless allegations to drive down the share price of MPW while reassuring shareholders of the sustainable business and track record of value creation MPW has produced. I have read all the details, and while I am a shareholder in the red, I feel MPW is undervalued. I have dollar cost averaged several times, and my cost basis is $12.04 without accounting for dividends that have been paid.

MPW has filed a lawsuit against Viceroy Research and its members in the United States District Court For The Northern District Of Alabama Southern Division

The filing for case 2:23-cv-00408-NAD can be read by clicking here .

In the lawsuit that MPW has filed, they are naming Viceroy Research LLC and its members directly (John Perring, Gabriel Bernarde, and Aidan Lau) as the defendants. In the nature of the action, MPW claims that Viceroy Research and its members are in the business of targeting publicly traded companies for short and distort attacks. In paragraph 5, MPW acknowledges that short selling is not illegal in the United States and criticism of public companies is integral to capital markets. They also state that it is not illegal to combine short selling and criticism of the target company if the criticism does not deliberately or recklessly misrepresent facts in order to generate a profit. MPW claims that this is not the case with the defendants as Viceroy Research as a firm, its members as individuals, and their cohorts have spread malicious falsehoods about MPW for several months with the goal of driving down the share price. Near the end of January 2023, Viceroy announced that it held a short position against MPW and simultaneously published the first of 14 reports . Through these reports issued by Viceroy and through tweets on Twitter, Viceroy has made many negative claims against MPW. MPW states that the most blatant and inflammatory of these statements fall into four categories, including false accusations of revenue "round-tripping", false characterizations of executive compensation formula, false accusations of lying about dealings with operator-tenant Steward, and false accusations of fraud and criminal activity. I will go through the four categories and pull out what I consider to be the highlights.

Allegations of Revenue Round Tipping

• In its very first tweet about MPT on January 26, 2023, Viceroy claimed that MPT's "[r]ent is round-tripped via 'fake' purchases of massively inflated assets."
• In the opening sentence of its report released the same day, Viceroy wrote that MPT "has engaged in billions of dollars of uncommercial transactions with its tenants and their management teams in order to mask a pervasive revenue round-robin scheme and / or theft."
• Viceroy went on to claim that "MPW has engaged in billions of dollars of uncommercial sale-leaseback transactions," and "MPW appear to constantly overpay for fire sale assets, sometimes by as much as 10x, which in-turn allow debt-crippled tenants to meet their financial rent obligations as and when they fall due in the short term."
• Viceroy published " MPW Case Study – Neuropsychiatric Hospitals ," in which it claimed that MPT's commitment of $27.5 million to build a hospital near Houston, Texas was "completely unfathomable" because "the cost of development and market value of the land was combined [sic] total of $9.1m," meaning MPT had "overpaid for the [hospital] facility by 3x." Viceroy concluded its report by "reiterat[ing] our belief that MPW engages in pervasive revenue round-tripping schemes."

Allegations regarding executive compensation

• Viceroy also stated in its Twitter-published letter to PwC that MPT's executive compensation program "encourage[s] an aggressive, acquire-at-any-cost policy which ultimately aligns with a revenue round-tripping model."
• In its January 26, 2023 report, Viceroy claimed that because "acquisitions" are a factor in the calculation of MPT's incentive compensation for its executives, management "has consistently scraped the bottom of the barrel in its search for new properties and new tenants."
• "All these transactions will qualify executives for bonuses," Viceroy proclaimed. In Case 2:23-cv-00408-NAD Document 1 Filed 03/30/23 Page 22 of 46 -23- conjunction with this report, Viceroy tweeted that the incentive compensation formula was "aligned with fraud" and did not "disincentivize bad behavior":

Allegations of concealment concerning Steward

• In its January 26 report, Viceroy claimed that MPT "paid $205m for 3 hospitals worth $27m in Malta" that were purportedly "under investigation for corruption"
• Viceroy has repeated and embellished the Malta falsehood, with four reports dedicated to it: " MPW Case Study – Steward International ," published February 8, 2023; " MPW Case Study – Steward International Pt. 2 ," published February 13, 2023; "MPW Case Study – Steward International Pt. 3 ," published February 17, 2023; and " MPW & SHCI – A Den of Thieves ," published March 3, 2023.
• In the February 8 report and accompanying tweets , Viceroy even invented Case 2:23-cv-00408-NAD Document 1 Filed 03/30/23 Page 26 of 46 -27- an organizational chart that showed MPT as an owner of "Steward Malta" and made various accusations of fraud:
• On February 24, Viceroy tweeted : "BREAKING: The Malta Courts have annuled [sic] Steward Health Care International's Malta Hospital concession. Steward International is an subsidiary. Judge claims Steward International committed fraud."
• Perring retweeted Viceroy's post and added: "As $ MPW's crooked subsidiary tried to hide its links with @Steward (US) & #MPW, expect arrests. If the Bond Market thinks these assets are fully backed after the #RoundTripping & #Fraud, they've got another thing coming."
• On March 17, in its latest report , Viceroy continued to falsely associate MPT with Malta, writing: "MPW has not marked down its investment in its Maltese international joint venture with Steward despite multiple public issues around this concession. Recently a Maltese court has revoked the joint venture's concession and ordered the hospitals returned to the state and opined that Steward Health Care International fraudulently obtained the concession."

Accusations of Scamming and Fraud and encouragement of criminal investigations

• Perring, for example, has used Twitter to post a steady barrage of aggrandizing statements about purported wrongdoing by MPT to his tens of thousands of followers on the platform. For example
• January 26, 2023: "$ MPW is a fraud ."
• February 4, 2023: "# MPW is verging on the largest US #Healthcare #fraud ."
• February 13, 2023: " [T]his fraud is a massive #RoundTripping #Scam & rotten to the core ."
• February 15, 2023: " When will investors realise ? We have far from finished with . Remember these words, its [sic] a #ponzi scheme reliant on #RoundTripping, insane #AFFO, with @Steward & #MPW are Case 2:23-cv-00408-NAD Document 1 Filed 03/30/23 Page 29 of 46 -30- part of an international corruption investigation. #Fraud everywhere...to quote one great man, #ItsAScam."
• February 28, 2023: " These are bad actors , with fraudulent & deceitful operations."

Within the court filing MPW has defended these claims. MPW has requested a Jury demand where the plaintiff demands a trial by jury on all claims. The claims of relief include:

• Count one, Defamation
• Count two, Civil Conspiracy
• Count three, Tortious Interference with Contractual or business relations
• Count four, Private Nuisance
• Count five, Unjust Enrichment

MPW issues a shareholder letter

The letter to shareholders can be read here . MPW states that they have maintained a relentless focus on their objective of delivering results for shareholders. The results that MPW has delivered include more than $23 billion of investments in healthcare and more than $4.3 billion in dividends paid to shareholders. MPW encouraged each shareholder to read the lawsuit they just filed and disclosed that they could no longer sit by and watch the attacks as many shareholders have voiced their opinions for MPW to speak up and emphasize the facts. MPW shared several facts regarding the situation and MPW's business practices directly in the shareholder letter.

MPW discussed its portfolio in the shareholder letter, and emphasized that total revenues exceeded $1.5 billion, and per share NFFO and AFFO increased 4% in 2022. MPW specifically addressed that its financial statements are prepared in accordance with U.S. GAAP accounting rules and that PwC has served as its auditor since 2008. MPW provided a quote from PwC most recent audit opinion, which was issued after Viceroy Research published its allegations where they accused PwC of ignoring what Viceroy is claiming to be their evidence. PwC has stated the following:

the consolidated financial statements… present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America.

MPW states that its lawsuit against Viceroy's allegations clearly illustrates themalicious falsehoods grounded in a distorted picture of MPW's business. MPW specifically states that it is not possible to roundtrip funds sent directly to third parties as Viceroy states and provides three pieces of commentary:

• When MPT invested $27.5 million to build a hospital near Houston, Texas, virtually all of the funds were paid directly to the former owner/developer of the real estate (Medistar Gemini), along with contractors, architects, suppliers and other third parties rather than to the operator-tenant (NeuroPsychiatric Hospitals).

• When MPT acquired 11 hospitals as part of the IASIS/Steward merger, we paid $1.4 billion directly to an IASIS bank account – in other words, the purchase price was not even paid to Steward so the funds were not available for purported "round tripping."

• Similarly, when we acquired five Florida hospitals from Tenet Healthcare, MPT paid the real estate purchase price not to Steward, but directly to a Tenet-owned account.

My opinion on the situation

I have no knowledge to prove either side of the argument. I must make decisions based on the information that I have available. I will have to wait and see what a Judge and Jury say when the evidence is presented and reviewed. The real question is if I trust the numbers being presented to me.

When I look at MPW, this is a real company with real assets, and it continuously pays a dividend. MPW has stated it has paid more than $4.3 billion in dividends to shareholders. MPW is a U.S based company that files all the necessary documentation in accordance with the SEC to my knowledge. PwC is a big four accounting firm and has been MPW's auditor since 2008. I feel as confident as I can with the numbers presented since they are prepared and submitted by PWC.

At the moment, I will trust my due diligence in forming my investment thesis on MPW. I will trust the numbers being issued until there is a reason not to trust them. I will be eagerly awaiting the court's ruling in this matter, and at that point, I will either be forced to say I was wrong or be vindicated with the rest of the shareholder base.

Based on the numbers that PwC is signing off on, MPW looks undervalued compared to its peers

For the time being, I will treat MPW as any other company when I am looking at the valuation. I used Seeking Alpha's peer group as the base for this analysis. I am comparing MPW to:

• Healthpeak Properties ( PEAK )
• Healthcare Realty Trust ( HR )
• Physicians Realty Trust ( DOC )
• National Health Investors ( NHI )
• Sabra Health Care REIT ( SBRA )
• Omega Healthcare Investors ( OHI )
• Global Medical REIT ( GMRE )

I will use MPW's low end of the FFO projection of $1.50 for the forward FFO to be conservative.

When I compare REITs, I look at the price to FFO I am paying and how a REIT trades compared to its respective peers. MPW trades at a discounted valuation, as its price to FFO is 5.48x compared to its peer group average of 10.7x.

MPW has $10.27 billion in total debt. MPW's 7.38x total debt to EBITDA ratio is just under the peer group average of 7.82x. Compared to its peers, MPW looks to be in good shape, and I am not concerned about the balance sheet or MPW's debt.

I use tangible book value instead of book value because it strips away intangible assets such as goodwill. Tangible book value is a stricter valuation metric, and today MPW's tangible book value is $14.38. MPW is currently trading at a -42.84% discount to its tangible book value. The only other company that is trading at a discount is SBRA. The peer group average is a 36.12% premium on tangible book. It's rare that you find a company that trades at a discount to tangible book, as most companies are provided with a multiple on this metric. MPW looks very attractive from this valuation metric.

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