By Jonathan Weil
In the spring of 2020, Cerberus Capital Management was faced with a tricky financial situation. It owned a struggling hospital chain that needed $400 million to dig out of a deep financial hole, but Cerberus wanted to sell rather than invest more.
With the surging Covid-19 pandemic making the financing more urgent, Cerberus convinced the hospital's landlord to put up the cash. The transaction didn't make financial sense and, until recently, was impossible to untangle.
The deal helped shape much of what followed for Steward Health Care System over the next four years, culminating this week in the Chapter 11 filing of Steward, one of the biggest hospital bankruptcies in U.S. history. It battered the landlord, Medical Properties Trust, which is one of Steward's biggest creditors and has been selling off assets before big debt payments came due.
The 2020 deal paved the way for Cerberus to sell its majority stake in Steward to the hospital chain's chief executive and others and lock in an eventual $800 million profit. It bought time for the CEO and new majority owner, Dr. Ralph de la Torre, who received a big cash payout himself the next year.
Steward operates 30 hospitals in eight states, after several closures and sales in recent years. It faced a mountain of lawsuits by vendors over unpaid bills, including a pest-control company hired to remove about 3,000 bats last year at one of Steward's Florida hospitals. It claimed Steward owed $1.6 million, including $936,320 for the bat removal.
The deal set MPT down the path of aiding its largest tenant with one financial-support package after another until finally Steward hit a wall.
MPT's shares are down 81% since peaking in February 2020. Last year MPT cut its quarterly dividend by almost half. Over the years, Steward paid $2 billion to MPT, mainly for rent. MPT has poured billions of dollars into Steward and its real estate. So far this year, MPT has disclosed $97.5 million of new loans to Steward and $714 million of write-downs related to Steward.
It was only in recent weeks, as congressional inquiries unearthed new revelations about Steward's finances, that the details and overarching purpose of the 2020 deal became known.
Cerberus in spring 2020 effectively had MPT over a barrel. MPT, a real-estate investment trust based in Birmingham, Ala., had bet its future on Steward, which then accounted for about 30% of its revenue. MPT had put more than $4 billion into Steward -- about 25% of its total assets at the time -- on its way to soon topping $5 billion. Those assets mainly were the hospital buildings that MPT leased to Steward, but also included loans and a 9.9% ownership stake.
The $400 million cash infusion that Steward needed came in two parts, according to Cerberus and Steward. The first deal in May 2020 involved the creation of a joint venture between MPT and Steward executives to invest in overseas hospitals.
MPT lent $205 million to the joint venture. Steward sold its international unit, which contained a handful of hospitals, to the venture for $200 million. The price didn't make sense because Steward had valued the assets of the international unit at just $27 million.
The second half of the capital infusion came two months later. Steward had been paying off a $750 million mortgage from MPT for two Utah hospitals. MPT forgave the mortgage and paid Steward an additional $200 million for the hospitals. The valuation was several times what MPT had paid for other hospital properties.
MPT disclosed each transaction individually in its financial filings. However, there was no way to tell from the disclosures that the two deals were linked or that they were designed to inject capital into Steward and put the hospital operator on firmer financial footing.
Drew Babin, a spokesman for MPT, didn't respond to requests for comment.
The $400 million deal came to light in a Feb. 26 letter by Cerberus, responding to questions by the Massachusetts congressional delegation ahead of a hearing on Steward's financial struggles.
"The transaction facilitated the infusion of $400 million of fresh capital into Steward," Cerberus said in its letter, calling the deal a "recapitalization transaction with MPT and its affiliates."
After the hearing, Cerberus released a statement with another revelation. Cerberus wouldn't have sold Steward to de la Torre's group without the capital infusion. MPT hadn't disclosed this. Steward, in a June 2020 press release announcing the ownership change, previously had referred to a "recapitalization transaction" but hadn't disclosed the terms or that MPT was a participant.
Cerberus has said that Steward "was financially healthy with substantial liquidity" at the time it ceased owning it. The implication was that Steward fell on hard times only afterward. But Steward's numbers show it was in a deep financial hole months before the $400 million infusion, and shortly afterward, too.
Steward's year-end 2019 balance sheet showed liabilities exceeded assets by $1.2 billion. At the end of 2020, the deficit was $1.5 billion, and total cash was $407 million, slightly more than the infusion from MPT. Steward's 2020 rent expense was $385 million, and it had a $408 million net loss, according to Steward financial data disclosed by MPT.
Steward spokeswoman Josephine Martin confirmed the recapitalization's terms, although Steward and Cerberus disagreed about some of the circumstances.
Martin said the $400 million was for working capital. She said Steward needed the money because Cerberus had suggested putting Steward into bankruptcy as it grappled with the unknown impact of Covid. Martin said that de la Torre opposed the plan and that he pledged his equity in Steward and the international assets as part of the 2020 transaction.
Cerberus spokesman Michael Sitrick said the firm "never recommended or even considered a Steward bankruptcy." Cerberus told the Massachusetts congressional delegation it sought the infusion from MPT because the pandemic had put severe stress on Steward, and the Cerberus funds that owned the company "were not able to invest additional capital in Steward."
Years before the 2020 infusion, another large deal with MPT enabled Cerberus's first big payday on Steward. MPT paid Steward $1.3 billion from 2016 to 2018 for eight Massachusetts hospitals that it then leased back to Steward. Several hundred million dollars of the proceeds went to Cerberus.
Cerberus's final piece of its $800 million profit on Steward came a few years ago. As part of the recapitalization transaction, Cerberus transferred its 90% stake to de la Torre's group in exchange for a $350 million promissory note. Cerberus said MPT bought the note in January 2021 for a $15 million discount to face value. In its disclosures, MPT described the transaction as "a $335 million loan to affiliates of Steward."
That same month, Steward paid out $111 million to its owners. Later in 2021, de la Torre bought a $40 million yacht.
Write to Jonathan Weil at jonathan.weil@wsj.com
(END) Dow Jones Newswires
May 07, 2024 05:30 ET (09:30 GMT)
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