Steward Saga Shines Light On Pattern Of Financial Troubles For Largest U.S. Hospital Landlord

The threat of closing hospitals has caused a public health scare in Massachusetts over the last two weeks, and it has put the financials and operating practices of Steward Health Care under a microscope.

But the operator is just one of several that have faced similar issues while renting hospital space from Medical Properties Trust, a landlord under financial pressure of its own.

A publicly traded real estate investment trust based in Birmingham, Alabama, MPT says Steward owes it $50M in unpaid rent, and it has loaned the operator tens of millions of dollars to keep it afloat. As it navigates this crisis, the REIT has come under fire from U.S. senators and short sellers criticizing its underlying business practices.

The REIT has employed a similar strategy with at least three other hospital operators: MPT acquires the properties and leases them back to the operators, and when they can’t pay the full rent, the landlord loans them money. At least two hospitals operated through MPT's sale-leaseback deals have closed.

Critics say this business model has inherent flaws that have put hospitals around the country at risk of closing.

"What you're dealing with are primarily very thin-margin businesses to begin with," said Rob Simone, REIT sector head at Hedgeye Risk Management, who advised shorting MPT in 2022 and has criticized the company on social media. "What MPT does is they come in and they put these egregiously high lease payments underneath that, almost like a payday loan."

After Steward last month hired a restructuring specialist to help deal with its losses and signaled it could close some of its nine Massachusetts hospitals as part of the process, a congressional delegation sent a letter raising alarms about the impact on patients and requested a briefing on the company’s financial position. The outcry continued as one Steward-run hospital in Massachusetts reportedly canceled surgeries last week due to a lack of equipment.

On Friday, Steward said it had secured financing to keep its Massachusetts hospitals open as it works to transfer control of the medical centers to other companies, the Boston Globe reported.

An MPT spokesperson, in response to Bisnow's outreach, declined to comment beyond a press release issued Jan. 4. Steward Health Care didn’t respond to Bisnow's request for comment. 

Steward and its landlord still don’t have a clean bill of health, and the latest scare is a symptom of a larger issue in real estate deals behind hospital properties across the country.

One year before the issues with Steward caused a public outcry, short-selling research firm Viceroy Research released a report in January 2023 alleging MPT "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 said MPT acquired equity in distressed properties or issued tenants loans in order to hide uncollectible rent. It also accused the company of bailing out tenants and spending millions of dollars on developments that don’t exist or haven't broken ground.

MPT filed a lawsuit against Viceroy in March, saying the short seller attacks companies to try to drive stock prices down and has now targeted MPT. The REIT trades under the stock ticker MPW. 

"We believe the Medical Properties Trust's lawsuit is a malicious & blatant attempt to deflect from their wrongdoings and deteriorating business," Viceroy Research wrote in a statement to Bisnow. "Steward's potential bankruptcy & MPW's recent business practices have validated the work we commenced exposing over a year ago."

Saving Steward

In the first week of January, Medical Properties Trust revealed it recorded $350M of write-downs due to Steward Health Care, and the REIT’s stock dropped over 30% after the news broke.

To keep its largest tenant afloat, MPT gave Steward a $60M loan and deferred some rent it owes in 2024. MPT hired consulting firm Alvarez & Marsal to help advise on restructuring, The Wall Street Journal reported.

MPT said in the January release about Steward that it planned to "accelerate its efforts to recover uncollected rents and outstanding loan obligations" in an attempt to reduce its exposure to the struggling healthcare operator.

"As part of this plan, Steward is pursuing several strategic transactions, including the potential sale or re-tenanting of certain hospital operations as well as the divestiture of non-core operations," the release says.

Steward has blamed its challenges in part on the relatively low rates it receives on services for Medicaid patients, and it said payments from patients with other commercial insurances were also less than what academic medical centers were receiving, the Boston Globe reported.

At least one Steward-MPT hospital has already closed, reportedly due to issues with the underlying real estate deal.

In 2017, Steward entered a sale-leaseback agreement with MPT at the 356-bed Texas Vista Medical Center in San Antonio, according to the San Antonio Report. MPT acquired the land and buildings on the property and required the operator to pay $5M in annual rent.

The hospital permanently closed in May, with the CEO of Texas Vista saying Steward had been "trying to get out of lease obligations."

The Steward situation is particularly dire for MPT, as the operator is its largest tenant and accounts for roughly a third of its $19B in total assets.

Some analysts believe the financial issues of the operator will greatly impact MPT's liquidity, as the company has provided financial support to Steward in recent quarters to help it bounce back.

“[Steward] has burned through cash at an alarming rate and appears to be headed towards a bankruptcy process barring a meaningful improvement in operations,” Green Street analysts wrote in a Jan. 5 report.

Vikram Malhotra, an analyst at Mizuho Americas who covers MPT, said he sees risks to the landlord from the Steward situation.

"Tenant challenges appear to be persisting and that causes risk to the dividend," Malhotra said in an emailed statement. "Separately, key for them is to sell properties and raise capital - in this market there is a lot of execution risk."

MPT's stock price dropped by 51% last year as it dealt with struggling tenants and looming debt maturities. It has $1.4B in loans due in 2025, nearly $3B in 2026 and $1.6B in 2027.

Steward’s situation isn’t the only challenge MPT has faced with its operators. The landlord has run into similar issues with tenants while using a business model that experts say very few real estate investment trusts have pursued.

"There's only one triple-net hospital REIT," Simone said. "I think, personally, that that tells everyone a lot. It tells me that the model doesn't make sense. The only way that these guys have made it work is by lending to their tenants to keep the whole thing going."

‘Behaves Like A Ponzi Scheme’

Medical Properties Trust spent over two decades and $23B building its portfolio of small and rural hospitals through sale-leaseback agreements, which has left some of these hospitals struggling to pay rent, cutting operations and closing down completely, The Wall Street Journal reported in August.  

The hospital REIT has invested in more than 440 medical properties, primarily hospitals, across 10 countries over the last two decades, using its strategy of buying brick-and-mortar hospitals and leasing them back to tenants. Between 2006 and 2008, the REIT saw its investments grow by 75% to $1.3B, and in 2020 alone MPT announced $1.6B in new or pending investments, according to its website. 

This growth has made MPT the largest U.S. hospital landlord. 

MPT has invested in mostly small and rural hospitals that have historically catered to older and poorer patients who rely on Medicare and Medicaid payments, the WSJ reported.

​​"This isn’t something that I feel like the average resident of these communities that are served by these hospitals can even fathom, that amount of money being moved around from one corporate entity to another,” Connecticut State Rep. Kevin Brown told the CT Mirror. “It’s a bit of a shell game.”

In December, a bipartisan group of U.S. senators launched an investigation into private equity firms' roles in declining healthcare. Letters were sent to Medical Properties Trust, Apollo Global Management, Lifepoint Health, Prospect Medical Holdings and private equity firm Leonard Green & Partners asking questions about the properties they own and how they became so underinvested.

"MPT has hidden behind Lifepoint to provide relevant documents and information on its behalf and has repeatedly failed to provide its own full and complete answers," Sen. Chuck Grassley of Iowa and Sen. Sheldon Whitehouse of Rhode Island wrote in a joint letter to MPT CEO Edward Aldag Jr.

Sen. Elizabeth Warren also raised alarms about the Steward situation in a Jan. 29 statement, in which the Massachusetts Democrat said she would investigate the decisions that led to the “public health crisis.”

The operators of these hospitals, sometimes backed by private equity firms, sell to MPT at high prices and receive high payouts in return, the WSJ reported. This has left some of these hospitals struggling to make rent payments, forcing them to cut services, reduce care options and, in some instances, close completely.

"They lend money to the operator to continue making that rent," Simone said. "So it's a Ponzi scheme, or at least behaves like a Ponzi scheme."

REITs that lease facilities to hospital operators face a challenge in finding new tenants to take over facilities when others have run into financial trouble.

Jonathan Morris, a Georgetown University professor who teaches a course on REITs, said this has led to MPT putting more money into keeping these hospitals and operators afloat rather than looking for someone new to take over a lease.

"You're trying to figure out who's out there," Morris said. "And the truth is there are very few."

Steward isn’t the first tenant to have problems while leasing from MPT.

In 2022, the REIT recorded $283M of impairment charges from its third-largest tenant, Prospect Medical Holdings, which is now paying rent at a reduced rate.

Like with Steward, MPT tried to enter into a recapitalization agreement with Prospect, which would pay off its debts and lease obligations with $375M from lenders. However, the proposition was held by California regulators looking to get more information on the deal, The Wall Street Journal reported in August.

The issues with Prospect involve a deal for three Connecticut hospitals it operates. In 2019, Prospect sold the land and buildings of the Waterbury, Manchester Memorial and Rockville General hospitals to MPT for $1.4B and leased them back from the REIT, the CT Mirror reported.

After their financial situations deteriorated, hospital executives told state lawmakers in September and October that if they don’t approve a deal to sell the facilities to Yale New Haven Health, the hospitals would close. MPT is slated to receive $355M in the proposed $435M sale.

Two other hospital operators, Halsen Healthcare and Alecto Healthcare Services, have been at the center of similar issues with MPT.

In 2019, a small hospital in Watsonville, California, was bought by a group of investors and later sold to MPT in a $40M sale-leaseback agreement with Halsen Healthcare, the WSJ reported. The REIT also provided the operator with a $15M loan to keep up operations. But three years later, the hospital went bankrupt, leaving the small town scrambling to keep it open.

In 2021, MPT sold Olympia Medical Center to UCLA Health after Alecto Healthcare Services, a tenant that MPT leased to, ran into financial issues. UCLA tried to keep the doors open but eventually shut down operations, the LA Times reported. Alecto, which has since filed for bankruptcy, said the center "has not been busy and does not provide enough services to justify staying open."

"When you cut through all of the complex methods of the news, in the end, they were effectively putting money in the pocket of Steward Health and the other three or four operators, and that money was getting paid back to MPW in rent," Georgetown’s Morris said.

MPT's growth has stalled in recent years as interest rates rose, and the company has shifted its strategy by beginning to sell assets and shrinking its portfolio.

"For more than 20 years, our business model has centered on profitable, long-term investments in hospital real estate," MPT's Aldag said on the company's Oct. 26 earnings call. "This business model has not changed. Our primary focus is on executing. Our current primary focus is on executing a capital allocation strategy that will provide the liquidity to satisfy our debt maturities, even debt that doesn’t mature for several years."

In October, the REIT sold all of its Australian assets for $470M. The company also sold back three hospitals in July to its tenant Prime Healthcare for $100M, according to a press release.

Although MPT is facing a series of allegations and financial hardships, the REIT has pushed forward in acquiring some properties.

The REIT and Oaktree Capital Management have created a joint venture called StoneBridge Healthcare, and last month they tried for a third time to take over Tower Health, a Philadelphia health system that operates several hospitals, for $706M, the Philadelphia Business Journal reported.

"It's the story of this company's entire life," Simone said. "Steward is just the latest manifestation of it."