Big hospital property owner expects earnings hit
Medical Properties Trust is contending with rising interest rates and weak tenants
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Medical Properties Trust Inc., one of the country’s biggest owners of hospital properties, expects to take an approximately $300 million charge to earnings tied to a deal involving some of its holdings, company executives said.
The profit hit would be the second in recent months linked to its two biggest tenants.
The expected charge stems from a deal by MPT’s biggest tenant, Steward Health Care System, to sell its operations at five Utah hospitals. The Utah hospitals have a $1.2 billion book value on MPT’s financial statements, which would decline to about $900 million, the company’s chief financial officer, Steven Hamner, said in an interview.
Mr. Hamner said the hospitals’ market value hasn’t declined and isn’t impaired. Instead, the charge would be tied to the change in tenants at the five hospitals. He said the company is still consulting with its auditors and accountants about the matter, which hasn’t been finalized.
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MPT shares soared during the period of low interest rates and buoyant stock markets, raising cash to buy up hospital real estate. The deals, some of which were linked to private-equity firms, left many hospitals that had owned their real estate now paying rent.
The company’s shares are down by two-thirds since the start of 2022. The real-estate investment trust, once a favorite of investors looking for stable dividend income, has become a target for short sellers.
Among other things, the shorts believe that Steward, MPT’s biggest tenant, and Prospect Medical Holdings, its second biggest, are in financial distress. Last week, MPT sued one of the short sellers, Viceroy Research LLC, and its founding partner, Fraser Perring, alleging defamation. Mr. Perring said Viceroy hasn’t been served with the lawsuit yet, and "we look forward to strongly contesting any of MPW’s claims," referring to the company by its ticker symbol.
Last year, MPT’s earnings were hit by $283 million of impairment charges related to Prospect. MPT, based in Birmingham, Ala., owns more than 400 hospitals, and reported 2022 net income of $903 million on $1.5 billion of revenue.
In a March 10 report, Standard & Poor’s cut MPT’s credit rating to BB, or two notches below investment grade, citing multiple signs of distress at Steward that "called into question the credit quality of Medical Properties Trust’s largest tenant." Noting the investment-grade rating of the buyer, a unit of CommonSpirit Health, S&P said the Utah transaction would improve MPT’s tenant quality and allow Steward to reduce debt, including early repayment of loans made by MPT.
Steward spokeswoman Josie Martin said the pandemic took a high toll on the company and that it "has taken all appropriate steps to ensure financial stability for the company" and continue serving its communities.
Steward in February agreed to sell its Utah operations to CommonSpirit, a nonprofit Catholic healthcare system. MPT in February said it agreed to lease the Utah hospitals to CommonSpirit, pending its purchase from Steward, a Dallas-based for-profit hospital operator.
Pediatrician and State Senator Yadira Caraveo examines a patient at her clinic. (Melina Mara/The Washington Post via Getty Images / Getty Images)
Mr. Hamner and MPT’s chief accounting officer, Kevin Hanna, described the expected write-down during an interview with The Wall Street Journal, in response to questions about a footnote disclosure in the company’s fourth-quarter earnings release. The footnote said MPT would reclassify $900 million of the Utah hospitals’ book value as a CommonSpirit-related asset. The footnote didn’t say what would happen to the remaining $300 million, or if it would remain classified as Steward-related.
MPT recorded the $300 million of "lease intangible assets" when it bought the properties, to reflect the difference between their value at the time, with a tenant in place, and the value with vacant properties. If a lease is terminated early, the unamortized portion of the lease intangible is charged to expense, according to the accounting policies described in MPT’s annual report.
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MPT in February said CommonSpirit initially would pay yearly cash rent of about $95 million. During a February call with analysts, Mr. Hamner said that would be about $6 million less than what Steward paid in 2022.
In the interview, Mr. Hamner said the expected write-down isn’t related to the rent reduction. "The value of our real estate, we believe, in Utah overnight increased by virtue of the Steward sale of its operations and our lease to CommonSpirit," he said.
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Mr. Hanna said, "If Steward would’ve stayed as the tenant, that $300 million would’ve never gone away." He added: "It doesn’t have anything to do with valuation," and the expected charge is "specifically linked to a contract that is now being terminated."