This story has been updated.
If Yale New Haven Health’s proposed $435 million acquisition of three Connecticut hospitals owned by Prospect Medical Holdings gets state approval, most of the money will go to a company that most state legislators, local leaders and residents have never heard of: the hospitals’ landlord.
Alabama-based Medical Properties Trust, or MPT, is one of the country’s biggest hospital landlords, with over 200 health care facilities in the U.S. and hundreds more around the world. MPT has also played a critical role in the rise of private equity investment in hospitals by providing investors with a way to generate cash off their health care investments, according to reports from The Wall Street Journal.
Prospect Medical Holdings, the Los Angeles-based company that owns embattled Waterbury, Manchester Memorial and Rockville General hospitals, is one of MPT’s biggest tenants.
In 2018, Prospect, then majority-owned by private equity firm Leonard Green & Partners, took out a $1.1 billion loan to fund a $457 million dividend for its executives and investors. The following year, to pay for the loan, Prospect sold the land and buildings from hospitals it owns in Connecticut, California and Pennsylvania to Medical Properties Trust for $1.4 billion, then leased back those hospitals from the trust, CBS News reported.
The transaction left the three CT hospitals with a new expense: rent payments to MPT.
In October 2022, when MPT announced the agreement to sell to Yale New Haven Health, or YNHH, the company said it had collected $104 million from the hospitals since the start of their lease agreement, for an average of roughly $35 million a year.
“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,” said Rep. Kevin Brown, D-Vernon. “It’s a bit of a shell game.”
Medical Properties Trust, a publicly traded real estate investment trust, or REIT, has built a $19 billion business on transactions like the one with Prospect, known as “sale-leasebacks.”
As part of the proposed acquisition in Connecticut, YNHH wants to purchase back the real estate of the three hospitals from MPT, which would mean they would no longer be on the hook for rent payments. Under the current sale proposal, MPT would receive $355 million, or roughly 80% of the total deal value.
But, after a cyberattack this summer crippled operations at the Prospect-owned hospitals, YNHH is now looking for amendments to the original deal, including state funding and a reduced purchase price. YNHH officials said the state funding would “not flow to or benefit” Medical Properties Trust, Prospect Medical or its own health system but would instead be used to narrow the financial deficit at Waterbury Hospital and Eastern Connecticut Health Network, which includes Manchester Memorial and Rockville General hospitals, as they recover from the cyberattack.
YNHH did not disclose an amount it is seeking from the state nor how much lower of a purchase price it is requesting. Sources have told The Connecticut Mirror it has asked for $16 million per year over five years in state funding, or $80 million total.
A YNHH spokesperson declined to comment. Spokespeople at Prospect Medical Holdings, ECHN and Waterbury Hospital did not respond to requests for comment.
‘At the very heart of health care’
MPT’s business works like this: the company buys the underlying real estate assets of hospitals, and then leases them back to health systems. The health systems’ owners make money off the sale, and MPT collects cash from lease payments.
On its website, MPT lauds itself as a company “at the very heart of health care.”
“Our business model has contributed to the clinical excellence in hundreds of hospitals globally,” said MPT CEO Edward Aldag in an October 2023 video message to investors. “By leasing, rather than owning real estate, hospitals create the capital flexibility to invest where it matters most — taking care of patients.”
MPT officials did not answer detailed questions from the CT Mirror, including whether it is open to adjusting the cost of the transaction, the burdens of rent payments on local hospitals, how its loans to Prospect were spent and when Prospect stopped paying rent and interest to MPT.
A statement from MPT said in part:
“Following a sale-leaseback transaction, operators benefit from a small rental expense which is a fraction of their average labor cost and predictable over the long term. Operators who choose this option to finance their real estate needs avoid the unpredictable interest expense and shorter-term principal repayment obligations that often come with debt funding options.
“As Prospect continues to recover from its recent cyber incident, all parties — MPT, Yale, and Prospect — have repeatedly made clear our commitment to completing this transaction. We’re encouraged by the recent steps Yale has taken to encourage the Connecticut Office of Health Strategy to expedite its approval process and we remain optimistic about closing in the near-term.”
Laura Alexander, a director at the Washington Center for Equitable Growth who researches private equity, explained that while sale-leasebacks can raise money for the hospitals, it’s not quite that simple.
“It’s true that a sale-leaseback does generate revenue, at least initially from the sale, but it also burdens the hospital with obligations to pay rent for a property that it previously owned,” she explained.
Hospitals in Wyoming, Pennsylvania, and California have, while under lease agreements with the company, faced bankruptcy, slashed services and stopped paying vendors.
In Connecticut, Waterbury, Manchester Memorial and Rockville General hospitals do not seem to have benefited from the “capital flexibility” of having MPT as a landlord.
In September, the presidents of all three hospitals warned Gov. Ned Lamont that the financial situation at the facilities is so dire they might have to close if the state doesn’t expedite approval of the pending deal to sell them.
An investigation by CT Mirror also found that, in the wake of COVID, Prospect took Rockville General Hospital from a short-term acute care hospital to a shell of its former self that today only offers emergency, one-day surgery and behavioral health services.
In some cases outside of Connecticut, state governments have had to step in with funding to prevent hospital closures.
In April 2020, the governor of Pennsylvania provided a $40 million bailout to a hospital operated by MPT’s largest tenant, Steward Health Care. At the time, Steward was owned by private equity firm Cerberus Capital Management.
“Easton Hospital will no longer be able to serve the community’s health-care needs and will be forced to close,” read a letter from Steward to the governor.
Aside from being one of the biggest hospital landlords in the world, MPT also fueled the rise of private equity investment in hospitals, according to reports from The Wall Street Journal. Most of its assets come from deals with private equity-backed health care facilities, whose investors were seeking ways to earn cash off their hospital investments.
In a low-interest environment where MPT could borrow cheaply to fund its real estate purchases, the business model worked. But, more recently, the company has faced mounting challenges.
Tenant woes
Over the last year, MPT’s stock price has plummeted by over 50%.
The nosedive is, in part, because of investor concerns over billions in loans the company has coming due in the next few years, which could force it to refinance at much higher interest rates.
Rob Simone, the REIT sector head at Stamford-based research firm Hedgeye, said MPT’s pending debt maturities put the company in a position where it can’t afford to lose out on any opportunities to bring in cash. The Connecticut hospitals sale serves as one of the most critical opportunities, with up to $355 million on the line.
“This is the single most important near-term catalyst for [MPT]. They NEED this deal to close, or they are going to run out of liquidity remarkably fast absent a capital raise,” Simone wrote in an analyst note published on Sept. 20.
Investors are also concerned about MPT’s exposure to the financial challenges of its biggest tenants. In May, The Wall Street Journal reported that both Prospect and Dallas-based Steward Health Care had hired advisors to help them refinance credit lines in the wake of financial struggles.
MPT is particularly vulnerable because it has made a practice of lending the hospital operators significant sums to keep them afloat.
“MPT has been faced with a choice regarding a few of their tenants, Prospect included. Either a) let the tenant fail and stop paying rent or b) give the tenant support. And they’ve chosen ‘b’ more often than not,” explained Simone.
“If you do that, there’s at least the chance the operator improves their financial situation over time and pays you back. That’s the bet they’ve made,” he added.
Between 2017 and 2020, Steward lost a total of $800 million, according to a Wall Street Journal report. Since the start of the pandemic, MPT has struck a series of deals with the health system to provide it with hundreds of millions of dollars, which, according to MPT employees, helped to keep Steward current on its rent payments.
Prospect Medical also has outstanding obligations to MPT totaling over $450 million, including a $150 million first lien mortgage, loans totaling $264 million, a $50 million convertible loan, and $56 million in accrued rent and interest, according to a May 2023 press release. MPT also reported that Prospect had secured an additional $375 million in financing from third-party lenders.
In September, a spokesperson with Waterbury Hospital said Prospect has funded between $25 million and $30 million in working capital to the Connecticut hospitals since completing a debt refinancing in June of this year.
Now, MPT and Prospect are on the brink of becoming even more intertwined.
In May 2023, MPT announced it would receive equity in Prospect’s managed care business “in lieu of cash payment for $573 million of loans, unpaid rent and interest, and other amounts owed.” In August, The Wall Street Journal published a story saying that MPT had misled investors into thinking the transaction was a “done deal,” even though a California regulator had issued a hold on the transaction the previous month.
MPT released a statement calling the article “false and misleading” and saying it expected approval “in due course.” The company also said the hold issued by the California regulator is “standard” and, as a result, “was deemed immaterial to MPT’s financials and thus did not require disclosure.”
Simone, the analyst, who has been tracking MPT for the last couple of years, said it stands out among all the companies he’s covered during his time in the REIT market.
“We believe it remains one of the more interesting and important stories in the REIT subsector,” Simone wrote of MPT in a Sept. 30 note. “We also believe we may never see another case like this again in our careers.”
‘We need to be resuscitated’
Medical staff and legislators gathered earlier this week to sound the alarm about the deteriorating conditions at Prospect’s Connecticut hospitals and urge OHS to approve the YNHH acquisition.
“Cardiologists, general surgeons, vascular surgeons are making phone calls — they are not getting paid for their services, including myself,” said Dr. Dushyant Gandhi, a cardiologist and president of the medical staff at ECHN. “We are in a dire situation. We need to be resuscitated.”
Sen. Saud Anwar, D-South Windsor, a co-chair of the Public Health Committee and a physician under contract at Manchester Memorial, attributed the hospitals’ diminishment, in part, to the lease agreements with MPT.
“They took the entire property and sold the property to a real estate investment trust and started to charge a very high rent from the hospitals to the point of being non sustainable,” explained Anwar, outlining how Connecticut and Prospect hospitals with lease agreements have seen similar signs of distress, including non-payment to vendors and cuts to patient services.
“It’s a slow death spiral of hospitals,” he said.
Correction
An earlier version of this story incorrectly reported that the state Office of Health Strategy did not comment on this report. OHS did provide information about what sort of financial transactions it does or does not monitor.
Also, an earlier version of this story did not include a statement from MPT that it issued in response to questions from the CT Mirror.