Shares of Medical Properties Trust (MPW -4.04%) have cratered more than 60% over the past year. One of the many factors weighing on the REIT's stock price is the impact of negative reports published by those shorting its stock, including Viceroy Research.
Medical Properties Trust has finally had enough. It filed a lawsuit against Viceroy Research. The healthcare REIT also penned a letter to shareholders addressing the claims made by Viceroy. That letter aims to clarify any confusion regarding its operating model and finances.
Laying out the facts
Medical Properties Trust's letter to shareholders provided facts to counteract five claims Viceroy Research made against the company. These included:
- A proven underwriting track record: The company noted that it focuses on acquiring hospital real estate that is essential infrastructure for its local community. Those infrastructure-like qualities drive the value of its investments. It's one of the many reasons the company has always been able to sell a hospital property for at least as much as it initially paid for the facility.
- A well-diversified portfolio that continues to perform well: Medical Properties Trust has worked to diversify its portfolio over the years. For example, Steward Healthcare went from 40% of its assets four years ago to 19%. Meanwhile, behavioral health facilities now represent 14% of its revenue, up from 11% at the end of 2021. Further, its average tenant can cover their rent with earnings by more than 2.1 times.
- Lease structures reduce tenant bankruptcy risk: Medical Properties Trust structures its leases to mitigate the impact of tenant bankruptcy. For example, Pipeline Health recently reemerged. It repaid 100% of the rent owed during bankruptcy while the court affirmed the leases.
- It follows U.S. GAAP accounting rules: PwC has been the company's auditor since 2008. PwC recently confirmed that the REIT's financial statement conforms with GAAP accounting principles.
- It's impossible to send round-trip revenue to third parties: Viceroy's major claim is that Medical Property Trust "engages in pervasive revenue round-tripping." In other words, it bought assets from its tenants that paid rent out of those funds. However, that wasn't possible in many instances since it paid third parties, like contractors or unrelated sellers, to build or acquire the properties. Further, sale-leaseback transactions are a common practice in commercial real estate.
Holding their value despite the headwinds
In essence, Viceroy has claimed that Medical Properties Trust has been buying assets at inflated prices from tenants, which use that money to pay rent. However, the evidence doesn't back this assessment. That's abundantly clear from the REIT's recent transactions that highlight the underlying value of its hospital properties, which have held up reasonably despite significant changes in market conditions.
For example, in October, Medical Properties Trust agreed to sell three Connecticut hospitals operated by troubled tenant Prospect Medical Holdings. It's selling the properties for $457 million, about what it originally paid for the facilities in 2019. That's despite the pandemic's impact on the hospitals' operations and a significant increase in interest rates, which has weighed on real estate values. In addition to recouping its entire investment, Medical Properties collected about $104 million in rent.
Meanwhile, the company recently agreed to sell its 11 properties in Australia for 1.2 billion Australian dollars ($800 million). That's about what it paid for the properties in 2019. It recouped that entire investment despite a significant increase in interest rates (the rate on the loan secured by those properties is fixed at 2.45% and matures next year). However, it's not as if this is a break-even transaction. Medical Properties Trust collects about $54 million of annual rent from the portfolio at current exchange rates.
Facing headwinds, but not a fraud
There's no doubt that Medical Properties Trust is facing some challenges from higher interest rates and financially challenged tenants. However, its problems aren't due to any fraudulent activity. Further, it's doing its best to navigate the current challenges by selling properties to shore up its balance sheet and working with tenants while they improve their financial situations. The company's deep relationships with tenants drive repeat business and referrals.
That's why I continue to own the stock. I've held shares for over 15 years and steadily added to my position. I've grown to trust management over the years. While they've made some investments that didn't pay off as well as hoped (and who hasn't), they've responsibly grown the company. I plan to continue holding because their strategy of investing in mission-critical hospital infrastructure should grow shareholder value over the long term.