Steward: Americans sue short-sellers claiming false multi-million transactions

The American healthcare real estate company in business with the owners of Steward Health Care International have sued for defamation a group of short sellers who exposed its opaque structure of offshore companies.

Medical Properties Trust (MPT), which leases hospital property to medical groups in the United States, claims allegations by Viceroy Research against it were defamatory and intended to affect its share price, in a bid to benefit Viceroy’s ‘short’ on MPT.

Viceroy’s research concentrated on Steward Health Care International’s lease of three Maltese state hospitals, claiming that SHCI used offshore companies to distance American owners – namely Steward in the US, and MPT – from the fallout of the Maltese court’s decision that invalidated their controversial privatisation.

SHCI has since had its lease of the three hospitals terminated by the Maltese government.

The compromised privatisation concession was crafted during former prime minister Joseph Muscat’s administration.

In 2020 – soon after then Opposition leader Adrian Delia filed a court case challenging the Malta concession – MPT and top executives from Steward’s management, including Steward CEO Ralph de la Torre, formed a joint venture called Manolete Health LLC to develop international opportunities. MPT holds 49% of Manolete Health LLC, and Steward’s management holds the other 51% through another investment vehicle that also has “Manolete” in its name.

While MPT insists the joint venture is between it and individual Steward managers, Viceroy alleges the vehicle was created so that MPT overpays millions on the joint venture transaction, cash that was allegedly provided to Steward to be in a position to pay back the rent it owes to MPT – a ruse that arguably keeps MPT’s shareholders happy at the company’s returns.

That transaction, MPT says, was a $205 million loan to Manolete Health LLC, which cash was used to purchase “the rights and existing assets related to all present and future international opportunities previously owned by Steward.”

MPT says Manolete Health LLC then acquired four Colombian hospitals, and made an unsecured loan of €1.1 million to allow “an entity controlled by Steward’s management” – to facilitate this acquisition by SHCI.

“Although MPT and Manolete Health LLC have considered investing in Malta hospitals and other properties, they have not done so. Neither entity has an ownership interest in SHCI’s Malta hospital concessions,” MPT said in its court filings.

Viceroy’s research claims that MPT used the $205 million to Manolete, to take ownership of the privatisation concession of SHCI’s Malta hospitals, at the time valued at just $27 million. The rest of the money was “a $173m gain-on-sale to Steward”, which it described as an “entirely uncommercial” revenue round-tripping transaction.

MPT claims this is a false statement. “Steward did not get a ‘windfall’ of $205 million from MPT; it received payment, through Manolete Health LLC, for what had been its rights and existing assets related to international opportunities. This was fully disclosed contemporaneously. Nor did MPT get any hospitals in Malta.”

In late January 2023, Viceroy announced that it held a short position in MPT, and published the first of 14 reports on Medical Properties Trust, in which it accused it of illegal “round-trip” transactions: as in the Steward-Manolete allegation, round-trip transactions involve “overpaying” owners of hospital properties and then leasing those properties back to hospital operators who must return the “overpayments” to MPT in the form of high rents.

“These accusations are malicious fiction, concocted to manipulate the market and to drive profits from short selling,” MPT said in its court filings in Alabama, saying Viceroy’s allegations had driven down MPT stock price by 35%.

To sell a stock “short” is to bet its price will fall. Short sellers borrow stock from a broker and sell it, retaining the proceeds, with a plan to buy replacement shares back later at a lower price. If the stock price declines as expected, the short-seller profits on the difference between the price before the drop and what he had to pay later to buy the replacement shares for the broker. The risk is however unlimited given there is no limit to how high a stock price can rise.

While short-selling is legal, MPT accused Viceroy of a “short-and-distort” campaign of false accusations of revenue “round-tripping”, fraud and criminal activity.

MPT has since complained that S&P Global Ratings had downgraded its issuer credit rating from BB+ to BB, a change that increased MPT’s cost of borrowing money and may drive away investors.

Viceroy research

Viceroy has said that MPT has never disclosed the name of the joint venture entity with De La Torre.

“This is an enormous red flag. Off-balance sheet entities create the potential for theft, round-tripping, or even hiding losses, and should be heavily scrutinised,” Viceroy say.

The researchers analysed Maltese, UK and Spanish company statements, to find that the parent company of SHCI – which is no longer registered in Malta, but in Madrid – is the company Manolete Health Management LLC in Delaware.

This company was created in April 2020 along with a series of other ‘Manolete’ companies – one of them is an MPT subsidiary – MPT Manolete Opco in Delaware. Even De La Torre had his own ‘Manolete’ firm created in London, before immediately dissolving it.

Viceroy believes MPT Manolete Opco holds the 49% stake in the joint venture that controls SHCI in Spain; while the remaining 51% is held by a Delaware company, also called ‘Steward Health Care International Investors LLC’, whose registered office is the same as that of Steward Systems, the American company.

How Medical Properties Trust works

MPT’s primary business is to acquire and develop healthcare facilities like hospitals, by leasing them to operating companies – like Steward – under long-term net leases.

Net leases require tenants to bear most of the costs associated with the properties, including maintenance.

MPT often partners with hospital operators in acquiring facilities: MPT buys the real estate, and then leases the real estate to the operator. Most of MPT’s leased assets are wholly owned by MPT.

Some are owned through joint ventures with partners who share the company’s view that healthcare facilities are integral to community infrastructure.

On occasion, MPT funds capital spending required for significant improvements needed to operate successfully for the long term.

MPT also sometimes funds the development of new facilities with a plan to lease to an operator-tenant upon completion. In such cases, the funds that MPT contributes are added to the lease base and reflected in the rent the tenant pays over time, usually a 15-year term with rent set at a fixed percentage of the lease base, and an annual escalator pegged to inflation.

In the United States, MPT had acquired eight hospitals from Steward Health Care System LLC for $1.3 billion, leased the premises back to Steward as operator, which yielded $475 million in income for MPT from 2016 to 2022, and then sold off at a healthy profit.

Today MPT has investments in 444 facilities – 427 of which are leased to 55 tenants – and revenues exceeding $1.5 billion in 2022, making it one of the largest REITs in the healthcare sector.