US/EMEA Special Situations: Medical Properties Trust – Risk Primer

Medical Properties Trust’s largest tenant, Steward Health Care, filed for chapter 11 bankruptcy protection in Houston on Monday. The Dallas-based for-profit hospital chain accounts for around 20% of MPT’s annual revenues while also serving as counterparty to various debt and equity arrangements. The latest addition to MPT’s array of financing instruments is a $75mn DIP facility approved yesterday by Judge Christopher Lopez in the Southern District of Texas.

Steward was desperately low on cash in the months leading up to the bankruptcy filing, court documents show, unable to make regular payments to vendors and medical staff and for operating facilities. The hospital chain filed with just $75mn of up to $300mn DIP commitments in place, suggesting that seeking court protection was an emergency measure. DIP financing provided by MPT, together with the REIT’s other secured claims against Steward, could mitigate potential losses stemming from $6.6bn of future rent obligations that may go unpaid.

With Steward—MPT’s largest tenant, in which it also holds a 9.9% equity stake—now in bankruptcy, the healthcare REIT’s outlook has considerably dimmed. The company has $10.1bn of debt on its balance sheet, including $1.44bn scheduled to mature in early 2025. Short sellers have piled into the stock over the last year, bringing the short interest to 37%, while the stock price has fallen 65% since the beginning of 2023.

To fend off a liquidity shortfall of its own, MPT recently announced two asset sale transactions that brought in a combined $1.3bn of cash. The REIT first divested five hospital properties in California and New Jersey for $350mn, with proceeds including $250mn cash and a $100mn mortgage note. That was followed by a complex transaction with Blue Owl that saw MPT sell its stake in five Utah hospitals to a JV for $886mn, receiving an additional $190mn of proceeds from JV borrowing. (See LFI’s breakdown of the asset sale transactions here.)

MPT is scheduled to release results for the quarter ended March 31 tomorrow morning with a conference call scheduled for 11:00 ET. (See LFI’s synopsis of Steward’s first day hearing here.)

 

MPT’s change of fortunes follows years of rapid growth by means of property acquisitions, funded primarily by corporate borrowing. Real estate assets have more than doubled over the last five years, peaking at $17.4bn in 2021, before more than $3bn of asset sales in 2022 and 2023. At the same time, the company’s balance sheet debt has increased from $4bn in 2018 to more than $10bn at the end of last year.

After Steward stopped paying rent to MPT in October 2023, MPT’s revenues fell precipitously, declining more than 44% on the year to $872mn. That included straight-line rent adjustments that resulted in reported revenues of negative $122mn for Q4. After annual interest expense increased to more than $400mn, the REIT generated annual pretax loss of $687mn.

 

Risk Factor: Steward Exposure 

MPT’s outsize exposure to Steward has a long and complex history. The hospital group was founded in 2010 through the acquisition of six hospitals by Cerberus for $246mn plus the assumption of $220mn of pension liabilities from Caritas Christi Health Care in Massachusetts. In 2016, Cerberus entered a $1.25bn sale-leaseback agreement with MPT, generating proceeds used to facilitate a merger with IASIS Healthcare and acquire a portfolio of hospitals from Community Health Systems.

In May 2020, in the early days of the pandemic, Cerberus exited its equity investment through a recapitalization of Steward that transferred control to a management group led by CEO Ralph de la Torre. At the same time, MPT agreed to acquire certain Steward assets for $400mn cash. In January 2021, MPT purchased a $350mn convertible note held by Cerberus at a discount, completing Cerberus’s exit from the capital structure. MPT has since increased its exposure to Steward through additional debt investments, culminating in yesterday’s $75mn DIP facility.

Now the question for MPT is whether Steward can resolve its capital structure issues in court sufficient to meet rent obligations on reorganized properties. To that end, the 2018 bankruptcy of HCR ManorCare—now ProMedica Senior Care—could prove instructive: The skilled nursing facility backed by Carlyle filed a prepacked bankruptcy after years of unpaid rent following a $6.1bn sale leaseback deal. The restructuring ultimately transferred ownership to HCR landlord Quality Care Properties, which gave up its REIT status to complete the deal. AlixPartners’s John Catellano also served as chief restructuring officer to HCR ManorCare.

Steward has two long-term leases with MPT under master lease agreements expiring in 2041, with nominal rent obligations stated at $6.6bn over the lease term. With 36 leased properties and a remaining lease term of 17.5 years, that equates to average annual lease payments of $10.5mn per property. In an alternative scenario, those 36 properties could become vacant and would have to be re-leased to new hospital tenants, making a massive dent in MPT’s balance sheet. As of Jan. 1, MPT switched to cash basis accounting for leases and loans with Steward, recording $700mn of total impairments on real estate and its 9.9% equity interest.

Risk Factor: Tenant Concentration

In addition to its exposure to Steward, MPT’s tenant base is concentrated in a high-risk corner of the healthcare market. The REIT’s business model primarily relies on sale-leasebacks of land and buildings with hospital and healthcare services counterparties. That means its tenant base is largely comprises operators opting to pursue such transactions, either through distress—in need of quick cash—or as a means of leveraging the balance sheet. The sale-leaseback model focuses MPT’s footprint and rent collection efforts on tenants particularly vulnerable to adverse economic or regulatory events—as the Steward case aptly demonstrates.

MPT’s rental income is also concentrated among its largest customers. Its top five tenants occupying 127 properties contributed more than 50% of last year’s billed rent, namely Steward, Circle, Priory, Prospect, and CommonSpirit Health. The clustering at the top end means the failure of any single tenant has an outsize impact on MPT. Moreover, due to the unique nature of MPT’s assets, properties can be difficult and time-consuming to re-tenant, accessible only to similarly scaled healthcare groups that may be facing similar industry headwinds. That puts MPT on the hook to support its largest tenants in the event of distress via flexible contract terms, rent deferrals, emergency loans and other concessions needed to ensure their survival.

The concentration effect is somewhat mitigated by diversification across geography and facility type. MPT has more recently expanded its footprint into Europe, where healthcare facilities are supported by stable government payors, which has the additional benefit of diversifying exposure across legal regimes. The REIT has also acquired behavioral health facilities that tend to be steadier than acute care hospitals. Further, because operating facilities are essential to the day-to-day functioning of on-site providers—and rent is a relatively minor line item for large healthcare groups—rent is often among the last of an operator’s costs to be cut.

 

 

Risk Factor: 2025 Debt Maturities 

With Steward’s $340mn annual rent payment to MPT in jeopardy, the REIT is approaching $1.4bn of debt maturities in early 2025. Those consist of a $891mn GBP term loan scheduled to mature in January followed by $552mn of senior notes due in March. MPT reported $250mn of cash on the balance sheet and $286mn available on its $1.8bn revolver as of Dec. 31, ending the year with $536mn of total liquidity. A large chunk of the $1.5bn outstanding on the revolver was likely paid down in last month’s asset sale transactions, however, putting pro forma liquidity at around $1.4bn.

On the Q4 call held Feb. 21, MPT management outlined its plan to raise $2bn of additional liquidity this year through asset sales and secured financings. The two recent asset sale transactions made significant headway toward that target, generating $1.3bn of cash proceeds used to pay down 2024 debt maturities along with the revolver. As a benchmark for a potential secured debt issuance, investors might look to Diversified Healthcare Trust‘s refinancing in December, by which the healthcare REIT issued $941mn of 11.25% secured bonds to repay impending 2024 debt maturities.

For now, hospitals and other healthcare facilities across the MPT portfolio continue to cope with the after-effects of the pandemic. Disrupted supply chains, inflated labor costs and declining reimbursement rates have proven stickier than anticipated industry-wide. At the same time, increased interest rates have driven up interest expense on floating rate instruments and driven down property valuations, reducing the proceeds of potential asset sales. Even after 2025 debt maturities are addressed, the company will face another $2.3bn of debt coming due in 2026, perhaps requiring a more comprehensive balance sheet solution.