Massachusetts moves to limit REITs' hospital ownership

The collapse of Steward Health Care System has Massachusetts lawmakers pointing fingers at the hospital operator’s landlord and other companies like it. Real estate experts say their proposed fixes miss the mark. 

A sweeping health-care oversight bill that passed the state House of Representatives with almost unanimous support includes a provision that would ban hospitals from leasing their main campuses from real estate investment trusts, known as REITs. Other types of landlords would still be allowed to own hospitals and existing leases with REITs can continue. The crackdown would be among the first of its kind in the US.

A similar measure singling out REITs is included in federal legislation introduced this month by Massachusetts Senators Elizabeth Warren and Ed Markey with the broader goal of rooting out “corporate greed” from the health-care industry.

The moves are in response to Steward’s May bankruptcy filing, which cast doubt on the future of its eight hospitals in Massachusetts and drew widespread political outrage over the hospital chain’s various financial maneuvers. This includes the 2016 sale of Steward’s hospital properties to a REIT called Medical Properties Trust Inc. Private equity firm Cerberus Capital Management owned a majority stake in Steward at the time; it exited its position in 2020. 

Lawmakers say the sale-leaseback transaction with MPT saddled Steward with exorbitant rents and triggered its financial unraveling. Their goal is to stabilize the health-care industry by curbing what they see as overly aggressive dealmaking, rather than specific criticisms of REITs’ business model. But banning REITs alone from undertaking property transactions with hospital operators is unlikely to do much to achieve that stability, said Michael Lewis, an analyst at Truist Securities. 

The Steward situation “is hard to watch. Nobody wants to see communities lose their hospitals,” Lewis said in an interview. “The government should be looking at it. I just don’t think that targeting the REIT is the right answer.”

Representatives for Steward, MPT and Cerberus didn’t respond to requests for comment. 

The main difference between REITs and other landlords is that the former are typically publicly traded and generally don’t pay corporate taxes because most of the income they generate from rent is passed on to their investors. 

A provision barring REITs from owning hospital property seems “odd and misinformed,” Jacques Gordon, a lecturer at the Massachusetts Institute of Technology’s Center for Real Estate. “If a hospital has a poor operating model, that is a much riskier problem than the fact that it owes rent to a REIT every year.”

Steward runs 31 hospitals across 10 states and owes an estimated $6.6 billion in future rent to MPT through 2041, according to the company’s bankruptcy filing. MPT has deferred some rent bills and shoveled money into Steward to help keep it afloat, including a $75 million emergency lifeline to ease the company into bankruptcy.

Steward’s Massachusetts hospitals include St. Elizabeth’s Medical Center in Boston and Good Samaritan Medical Center in Brockton.

Massachusetts House lawmakers initially proposed a rule that would require hospitals to own their own land. Lawmakers realized that could be problematic because some of the state’s facilities sit on land owned by universities, Speaker Ronald Mariano told State House News. They settled instead on singling out REITs. 

Under the bill’s current language, other alternative real estate financing sources would still be accessible to hospitals. Hospitals would be required to provide more details about lease arrangements as part of the government licensing process. 

The bill still needs sign-off from the state Senate and Governor Maura Healey. “This bill is the most significant health-care market oversight and cost-containment legislation in more than a decade,” Mariano said in a May statement. A spokesperson didn’t have an additional comment on the REIT rule. 

Other major owners of property include private equity firms, high net-worth individuals, sovereign wealth funds and institutional investors. MPT in 2022 sold a 50% interest in Steward’s Massachusetts-based hospital properties to Macquarie Infrastructure Partners V, a private fund overseen by Macquarie Asset Management. 

“REITs are not the largest owner of real estate, not even close,” said Bloomberg Intelligence analyst Jeffrey Langbaum. If Steward had been prohibited from selling its land to a REIT and wanted to raise capital, there are plenty of other options for securing loans on its real estate, he said. 

MPT has said the lease arrangements with Steward were fair. Cerberus has also defended the property deal. 

“It is incorrect and unfair to suggest that this transaction was a ‘looting’ of the company,” Cerberus said in an April statement. An independent third-party analysis of the sale-leaseback transaction indicated Steward had ample resources to support its rent obligations, Cerberus said. 

Steward’s initial bankruptcy filing didn’t mention rent as a contributor to its foundering finances. Other large creditors include medical-device manufacturers, a food service company and health-care staffing providers. 

Hospitals may not be a good fit for sale-leaseback transactions more broadly, particularly as labor inflation and low reimbursement rates from government programs such as Medicaid squeeze profit margins, said Lewis of Truist. Still, there’s a risk that banning hospitals from leasing properties from REITs would remove a competitive source of financing and end up making it harder for lawmakers to fulfill their goal of finding new tenants or owners for Steward’s Massachusetts hospitals. 

Some real estate experts believe restrictions like those proposed by the Massachusetts bill are long overdue in health care and would help ensure investors share the consequences of financial blowups. 

“What’s happening here is real pain is being inflicted on everyone else except for MPT,” said Rob Simone, a REIT analyst at Hedgeye Risk Management. “If this bill gets enacted, suddenly all of those other people become winners and MPT loses. I think that’s a good trade.”