TL/DR –
Medical Properties Trust (MPT) reportedly used a strategy of lending vast amounts of debt to risky firms, such as Prospect and Steward, which eventually led to significant challenges. Despite Prospect’s insolvency, MPT gave the company a $100-million loan and manipulated their property values to artificially boost their stock. MPT’s practice has raised concerns over the quality of its earnings, and a leaked Barclays report in 2023 suggested that MPT could recoup losses from the Pennsylvania hospitals over time if Prospect Health Plan, one of Prospect’s businesses given to MPT to offset debt, was managed properly.
MPT’s Deal with Prospect Medical Trust
The senior executive at MPT, in an email to CEO Edward Aldag, indicated that Prospect desired Leonard Green to exit the scene and sought no constraints from MPT, allowing it to clean up its balance sheet. MPT emerged as Prospect’s primary landlord and largest creditor, but the executives remained silent when questioned about it.
Simone, an analyst who publicly analyzed the deal, speculated that MPT aimed to dilute their Steward exposure, escalate rents and boost their stock through artificial earnings growth. Verification came as MPT indeed implemented these strategies; however, Prospect soon encountered significant business trouble.
Escalating Debt Issues and Declining Hospital Quality
When MPT took over, Prospect had already worsened under Leonard Green’s leadership, with excessive debt and the majority of its hospitals ranking poorly for care quality per the Centers for Medicare & Medicaid Services (CMS).
Despite these issues, MPT enjoyed significant earnings from Steward and Prospect, which constituted two of its top three income sources. Their stock price rose dramatically from 2016 to 2022, hitting an all-time high of over $24. The management issued approximately $3.2 billion in dividends during this time. Still, MPT’s practice of lending high amounts to risky companies was becoming increasingly unsustainable.
Prospect’s Insolvency and MPT’s $100M Loan
By 2022, Prospect was insolvent with substantial unpaid liabilities exceeding its assets by over 75 percent. The company began deferring rent payments, and bankruptcy appeared imminent. However, MPT attempted to salvage its tenant with a $100-million loan. Evidence of this loan surfaced in official property deed documentation, despite the company’s initial denial of such actions.
Questions arose over the value of Foothill Regional Medical Center, which benefited from part of this loan. The discrepancy between the $151 million debt burden and the recent resale price of $18.6 million highlighted MPT’s significant property value inflation.
The Pennsylvania Hospitals Deal
Further evidence of overpaying emerged when MPT bought four Prospect properties in Pennsylvania for $420 million, almost triple the price paid three years prior. Following questions from a Wall Street Journal reporter, internal emails revealed that MPT executives acknowledged their pricing did not follow market values.
End Game Scenario
In 2022, unsustainable rents led to financial trouble for the Pennsylvania hospitals. MPT reduced their value from $420 million to $250 million and forgave $112 million in overdue rent. Amidst growing uncertainty around Steward and the Pennsylvania hospital valuations, MPT aimed to replace the plummeting assets with one of Prospect’s affiliated value-care businesses, Prospect Health Plan (PHP). A leaked report indicated PHP could recoup $420 million over time if managed effectively.
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