Healthcare Real Estate In ‘Uncharted Waters’ As Bankruptcies Draw Government Scrutiny

Steward Health Care’s bankruptcy process has not only sparked local outrage over hospital closures as hundreds of employees are set to lose their jobs and communities will lose access to healthcare.

It has also spurred a reckoning over the types of real estate deals that underpin its hospitals and led to congressional investigations and legislative proposals to reduce the influence of private equity and REITs on the hospital sector.

This heightened scrutiny has begun to ripple through the capital markets for healthcare real estate, experts tell Bisnow, and the types of sale-leaseback deals Steward and its landlord Medical Properties Trust engaged in are likely to become less common.

These types of deals often occur when a hospital is struggling financially and needs an injection of capital, so it sells the real estate it sits on to a REIT or private equity firm that then leases it back to the operator. But in Steward’s case, the rents it agreed to pay were unsustainable, and the deals only worsened its downward spiral.

“If you saddle the hospital business with too much debt or long-term financial obligations, like a long-term lease, it can devastate the hospital,” said Andrew Dick, an attorney with Hall Render who works on healthcare real estate deals.

Cushman & Wakefield Executive Managing Director Jarry Rasmussen, who leads a healthcare-focused team in the firm's Valuation & Advisory group, said that bankruptcy cases like Steward’s have made firms less likely to execute these sale-leaseback deals.

“At a minimum, it's put a pause on it,” he said. “There are numerous bankruptcies and situations and confrontations going on, legal issues, not just in New England.”

The healthcare sector saw 79 companies file for bankruptcy last year, a five-year peak and well above the 25 filed in 2021 and 46 filed in 2022, according to Gibbins Advisors. And last year’s figure doesn’t include the most high-profile case, Steward, which filed for Chapter 11 bankruptcy in May. 

More than 20% of the healthcare companies that filed bankruptcy last year were tied to private equity firms, Healthcare Dive reported. There are roughly 460 hospitals owned by private equity firms in the U.S., according to the Private Equity Stakeholder Project.

Clare Moylan, principal at Gibbins Advisors, in a statement described last year’s increase in healthcare bankruptcies as “dramatic.” She said it included a spike in hospital operators specifically, which appears to “primarily be a result [of] COVID-19 pandemic-related protections ending.”

Rasmussen also said that the drying up of Covid relief funds has put hospital systems in a difficult financial position.

“The dollars were coming in, and now that those have ended or are about to end, that has had a challenging impact on the operations of some of the facilities.”

The American Hospital Association estimates that in 2022 one-third of hospitals were operating in negative margins, according to Cushman & Wakefield's 2023 Vital Signs report.

Rasmussen said there has been a “level of uneasiness” in the healthcare real estate sector around the recent bankruptcies, and it has slowed deal flow for the time being. 

“We are in almost uncharted waters and seeing where this is going to play out,” Rasmussen said.

The financial issues of healthcare operators can be worsened when they take on debt from private equity firms or rental obligations from sale-leaseback deals with REITs like MPT. These deals give them a short-term capital cushion but can leave a hospital's operating margins paper thin.

Steward Health Care has faced especially tight margins, and its saga has shined a light on these issues. The operator was previously owned by private equity group Cerberus Capital Management, and in 2016 it struck an almost $1.3B deal with MPT to sell its hospital real estate and lease it back from the REIT.

In January, MPT revealed it recorded $350M of write-downs due to Steward's inability to pay rent, and the REIT’s stock dropped over 30% after the news broke.

Steward filed for bankruptcy in May and promptly put all of its 31 hospitals up for sale.

Last week, Steward’s bankruptcy judge approved the planned closures of the Carney Hospital in Dorchester and Nashoba Valley Medical Center in Ayer, Massachusetts, which failed to draw qualified bidders, leading to over 1,200 layoffs and worsening access to healthcare in those communities.

The bankruptcy judge also approved a motion to nullify landlords MPT and Macquarie Infrastructure Partners' master lease on the properties that had required Steward to pay more than $100M in rent on these hospitals through 2040. New buyers of the remaining hospitals will now have the chance to negotiate rents with the landlords or buy the properties from them, deals that could impact pricing in the healthcare real estate sector.

MPT has been on a selling spree this year as it works to shore up its finances.

In April, the healthcare REIT sold a 75% stake in five Utah hospitals to an undisclosed investment fund for $886M, while MPT retained the remaining 25%. Last month, it sold a hospital in Mesa, Arizona, and seven freestanding emergency department facilities to Dignity Health for $160M.

This Steward-MPT saga has drawn increased scrutiny from Congress and state legislatures on the healthcare sector.

On June 11, Sens. Elizabeth Warren and Ed Markey introduced the Corporate Crimes Against Health Care Act, which aims to hold private equity firms and executives accountable and ensure that hospitals can be maintained and operated.

“This looting is happening all across the country, from hospitals to nursing homes to provider practices, and the corporate executives scoop up the cash and avoid any responsibility,” Warren said at a press event for the bill, WGBH reported. “I’ll say it bluntly: turning private equity and corporate greed loose in our healthcare system kills people.”

Senators have launched two separate inquiries into the role private equity plays in the healthcare sector, Healthcare Dive reported, focusing on their involvement in the operation of hospitals and emergency departments.

The Massachusetts legislature also advanced a bill to ban hospitals from leasing their main campuses from REITs, though it failed to obtain final passage before the end of the session last week.

There have been other calls for action from states, including Rhode Island and Pennsylvania looking to limit corporate ownership of hospitals and hold private equity firms accountable for hospital closures.

The Pennsylvania bill, which passed its house last month, came after Crozer Health, owned by larger healthcare system Prospect Medical Holdings, shuttered two hospitals in the state. Prospect Medical had sold most of its hospital real estate to MPT and leased them back, leaving it with over $35M in annual rent payments, the Philadelphia Inquirer reported.

Dick, the Hall Render attorney, said that similar legislation has been proposed in states across the country and this is having an impact on the sector.

“I do think it will be harder long term for hospitals to sell their hospital buildings to real estate companies and lease them back in certain states, but I still think there's investor demand,” Dick said.

He said MPT is primarily the only REIT executing sale-leaseback deals for acute general hospitals, but other private equity firms have been doing these deals for smaller, specialty hospitals. Dick said that these specialty deals are not as important to legislators because they affect a small portion of the population compared to the larger hospitals.

The sale-leaseback deals seem to be unfavorable for prospective buyers, including in Massachusetts, where Steward is actively trying to sell its assets. Massachusetts Health and Human Services Secretary Kate Walsh said the financing structure on those deals “made their hospitals less attractive to potential acquirers,” WBUR reported.

Rasmussen said that although the waters are muddy, he doesn’t see private equity players leaving the sector.

“I do still believe, personally, that as the future moves forward, private equity will still remain in [healthcare],” Rasmussen said. “If there's anything to be said, we're probably more in that pause stage to just see how things get taken care of.”