Understanding Steward Health's Bankruptcy

Could it impact healthcare real estate transactions?

The recent bankruptcy filing by hospital operator, Steward Health, has significant implications for its stakeholders, particularly the shareholders of Medical Properties Trust (MPT), which is intricately linked to Steward through real estate investments. The potential impact of Steward's financial struggles on MPT's shareholders, along with the potential for federal intervention to maintain healthcare services in affected markets, could have far-reaching implications for regulations on real estate transactions in the healthcare sector.

Impact on Medical Properties Trust's Shareholders

Steward Health's bankruptcy poses an obvious direct risk to MPT, given that a portion of MPT's rental income is derived from Steward-operated facilities. The inability of Steward to meet its rental obligations could lead to significant revenue shortfalls for MPT, potentially affecting its dividend payments and stock value.

The trust reported solid results for its first fiscal quarter, maintaining its dividend at $0.15 per share, and normalized funds from operations were able to cover the trust's dividend payment with a coverage ratio of 1.6X. In future quarters, however, shareholders could see diminished returns and a decrease in stock price as the trust grapples with the financial instability of one of its major tenants. The uncertainty surrounding Steward's operations may also lead to volatility in MPT's stock, as investors react to developments in the bankruptcy proceedings and their implications for MPT's financial health. For now, though, 96% of MPT's tenants are paying rent on time, helping to soften the impact of Steward's non-payment, which accounts for less than 4% of the trust's overall rental revenue.

Federal Government Involvement: Is It Time for Oversight?

The federal government has a vested interest in ensuring that healthcare services remain uninterrupted, especially in underserved or economically vulnerable communities where Steward operates. There are several ways in which the government might intervene:

  1. Financial Assistance: Direct financial aid to Steward Health could be a temporary measure to stabilize the hospital operator while a more sustainable solution is sought.
  2. Regulatory Forbearance: The government could offer temporary relief from certain regulatory requirements, allowing Steward more flexibility to manage its financial crisis without compromising patient care.
  3. Facilitating Acquisition or Partnerships: The government could play a role in facilitating an acquisition by, or partnerships with, financially stable healthcare providers to ensure continuity of services.
  4. Legislative Changes: New legislation aimed at protecting critical healthcare facilities from closure due to financial distress could be proposed, including possible incentives for healthcare providers to operate in high-need areas.
  5. Regulate Sale Proceeds: The government could elect to mandate how proceeds derived from a sale-leaseback arrangement are used. To ensure sufficient reinvestment into operations, limitations could be imposed on distributions that financially benefit top executives.

Impact of Steward Health's Sale-Leaseback to Medical Properties Trust

The transactional relationship between Steward Health and MPT initially aimed to free up capital for Steward, but it also increased its operational costs significantly due to lease commitments. Currently, Steward owes approximately $6.6 billion in long-term lease payments and $1.2 billion in total loan debts to more than 30 different lenders. Furthermore, according to the bankruptcy filings, Steward is projected to owe MPT more than $6.9 billion in debt and lease obligations by 2041.

This strained relationship that now exists between Steward and MPT highlights the critical balance required in sale-leaseback arrangements for healthcare real estate, suggesting a potential area for regulatory improvement. The federal government might consider regulatory measures to oversee such transactions more closely, ensuring that they do not just serve financial goals, but also operational sustainability goals. Potential regulatory actions could include:

  • Setting minimum standards for the financial health of healthcare operators engaging in large-scale real estate transactions.
  • Creating frameworks for emergency federal support for healthcare facilities in financial distress, preventing a sudden loss of healthcare services in vulnerable communities.

Potential for Future Legislation

Given the systemic risks highlighted by Steward's bankruptcy and its impact on MPT shareholders, future legislation might focus on enhancing the stability and transparency of real estate transactions in critical sectors like healthcare. This could include:

  • Stricter oversight of leaseback arrangements, possibly requiring federal approval for deals exceeding certain thresholds in critical areas.
  • Incentives for investment in healthcare real estate that prioritize long-term operational stability over short-term financial gains.

A Favorable Outlook for MPT

While Steward's bankruptcy presents a significant challenge, it also offers an opportunity for MPT to restructure and possibly improve its financial standing by transitioning hospitals to more solvent operators. This strategic move, coupled with planned asset divestments aimed at reducing debt, positions MPT favorably for future stability and growth. The robust dividend coverage and attractive valuation suggest that, in the near term, MPT is likely to maintain shareholder returns. This would be supported by strategic portfolio management and could possibly be enhanced by favorable regulatory changes aimed at sustaining healthcare infrastructure stability.

Toby Scrivner is Senior Vice President at Northmarq

Source: GlobeSt/ALM