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Medical Properties Trust owns some 444 hospitals and other health care facilities across four continents. That fact alone has kept the Birmingham, Alabama–based real estate investment trust (REIT) strangely buoyant in the face of years of scrutiny by the Maltese government, Iowa Republican Sen. Chuck Grassley, an international syndicate of short sellers, and this magazine, among others. While other REITs own dead malls and abandoned office buildings, “there is no scenario where a world exists without hospitals,” CEO Edward Aldag reasoned on the company’s second-quarter earnings call Tuesday, cheerily invoking a Centers for Medicare & Medicaid Services forecast that hospital spending would reach $1.5 trillion by 2023.
But the stock plunged anyway, ending the trading day down 14 percent at $8.68, or about half the company’s value this time last year. Perhaps that’s due to a couple of announcements that follow a well-worn MPT pattern.
MPT acquired most of its $20 billion portfolio of health care assets from transactions with private equity firms at very high valuations. While MPT says these deals were based on meticulous underwriting, in many cases, they left hospitals with rent obligations they couldn’t afford to pay. Several MPT hospitals have since been plagued by outdated equipment and substandard quality of care levels. Last week, about a dozen MPT hospitals in four states were temporarily shut down due to an apparent ransomware attack. As of Tuesday, some hospitals were still diverting ambulances and conducting all business by paper and phone, while administrators continued to grapple with the security breach.
MPT’s single biggest tenant, representing about a quarter of its assets, is Steward Health, a struggling community hospital chain into which the REIT has plowed more than $5.5 billion since 2016. Steward’s former owner Cerberus Capital Management had extracted at least $800 million from the hospital chain by the time it sold out in 2021 to Steward founder Ralph de la Torre. Along with some senior managers, de la Torre bought out the private equity firm’s interest by taking out a $335 million loan with MPT, and shortly thereafter extracted their own nine-figure dividend from Steward. (Shortly after that, de la Torre bought a super-yacht.)
As a result of all these leasebacks and loans, Steward Health owes more than $400 million in annual rent to MPT. Unlike some of MPT’s tenants, Steward pays its rent on time, largely because MPT has kept a constant stream of construction loans, promissory notes, joint venture investments, and other IOUs flowing to the company. But Steward has not kept up with other obligations. In a single Texas county, Steward has been sued by a linens provider, two staffing agencies, an HVAC contractor, a supplier of cadaver carriers, and a drug detoxification service for amounts totaling more than $13 million.
The financial strain has taken a toll on Steward hospitals. Carney Hospital in Dorchester, Massachusetts, where family physician and essayist Stephanie Arnold spent a hellish stint as a medical resident back in 2015 that she wrote about for our August issue, has been on the brink of closure for a year. This spring, Steward abruptly closed a direly needed San Antonio hospital after the CEO blamed Steward’s unmanageable “lease obligations” in an audio recording leaked to CBS News.
For months, investors have wondered if Citigroup, which administers the hospital chain’s revolving line of credit secured by its accounts receivable, might cut Steward off when its current credit agreement expires in December. On Tuesday, MPT announced it was taking the problem off Citigroup’s books, disclosing in a press release that it would be contributing $140 million to a new syndicate of lenders that had agreed to supply Steward with a bigger, longer-term asset-backed lending facility with a double-digit interest rate. While this arrangement was hardly surprising given MPT’s past instances of bailing out its largest tenant, it fundamentally relieved Steward of its last “independent” institutional lender, which doesn’t exactly inspire confidence.
As a result of leasebacks and loans, Steward Health owes more than $400 million in annual rent to MPT.
MPT also announced another transaction on Tuesday with its third-biggest tenant, Prospect Medical Systems. Like Steward, Prospect sold off its hospitals to MPT when it was owned by a private equity firm, Leonard Green & Partners, which likewise extracted hundreds of millions in dividends while leaving the hospitals with a nine-figure annual rent check it could not afford. Unlike Steward, Prospect stopped paying rent altogether last year, after the Pennsylvania Department of Health shut down two of its hospitals over repeated staffing shortages. In a restructuring agreement ironed out over the past few months, MPT agreed to accept an equity stake in a Prospect managed-care subsidiary called PHP Holdings LLC in lieu of unpaid rent.
But yesterday, MPT said its “adjusted funds from operations” of $248 million for the quarter had been buoyed by $68 million in additional “revenue” it had booked on the basis of the fractional value of its stake in PHP. During the subsequent earnings call, MPT chief financial officer Steve Hamner freely admitted that this $68 million in revenue was not going to be, well, revenue. “We’re not expecting any … any cash income related to that instrument,” he said, explaining that the figure was instead based on a fraction of the value of its stake in PHP, which “multiple independent third parties” had allegedly valued at “approximately $655 million,” but which the company did not expect to “monetize” until 2024 at the earliest.
“Looking forward to the reaction from the $MPW bondholders when Showtime Steve sends over a piece of PHP paper for the debt service,” quipped analyst Rob Simone, who writes about REITs for the subscription service Hedgeye and is perhaps MPT’s most dogged critic.
Whatever relief Prospect’s hospitals were experiencing from the temporary rent moratorium has likely been crushed by the alleged ransomware attack the hospital system suffered last week. While the specifics of the security breach are unclear, it seems to have originated in the company’s three Connecticut hospitals and disrupted emergency services in Rhode Island and Pennsylvania as well. The status of Prospect’s seven Southern California hospitals remains unclear.
Among both investors and employees, the ransomware attack has heightened worries that Yale New Haven Health, which agreed to purchase Prospect’s Connecticut hospitals last October, might walk away from the deal. In MPT’s first-quarter earnings call, Aldag had touted the fact that “Yale is willing to pay what it’s willing to pay”—he had initially pegged the price tag as $457 million, but later amended that figure to $355 million—as evidence of his good taste in hospital assets. But while he had previously boasted that the transaction “continues to move along positively,” in Tuesday’s opening remarks on the call, Aldag simply said that neither he nor Prospect were “aware of any opposition to this transaction.”
