How a Small Alabama Company Fueled Private Equity’s Push Into Hospitals

As a result, the Birmingham-based company became one of the nation’s biggest owners of hospital property. The real-estate investment trust, or REIT, offered investors an appealing story: It had long-term leases with tenants that provide essential services, and it paid a lucrative dividend.

Yet as the company grew fast and bought more properties, it faced large losses at its biggest tenant, financial filings show.

Steward Health Care System LLC accounted for 30% of the company’s revenue in 2020, according to a filing by MPT with the Securities and Exchange Commission. Steward lost more than $800 million between 2017 and 2020, its financial statements show, with Covid-19 adding to its financial challenges.

Since the pandemic began, MPT has struck a series of deals involving Steward and its chief executive that together resulted in hundreds of millions of dollars flowing from MPT to Steward.

Former MPT employees familiar with the company’s transactions said they saw deals with Steward as a way for MPT to provide it with cash as it notched losses, which in turn helped Steward make its rent payments and kept MPT growing.

In response to questions for this article, MPT said that during the pandemic it collected almost 98% of rents and interest payments and that its financial results demonstrate the success of its strategy.

Regarding Steward, the company said: “Since 2016, Steward has paid MPT roughly $1.2 billion in rent and mortgage interest—and has never been even one day late.” It said Steward accounts for a smaller portion of its total portfolio today than in previous years as MPT has invested in facilities run by other hospital operators.

MPT said a deal announced in September, under which it will sell part of its stake in several Steward hospital properties in Massachusetts for a profit, further validated its approach. Both that deal and another pending transaction would reduce MPT’s exposure to Steward.

Steward, which until 2020 was controlled by private-equity firm Cerberus Capital Management LP, said in a written response that it “continues to do well financially with more than adequate liquidity.” It said it had been burdened by one-time expenditures resulting from rapid growth, and that it had continued to invest in serving patients through the pandemic.

“There is NO ‘free money’ (or bailout) from MPT,” it said.

All told, MPT has investments in the real estate of more than 400 hospitals and other healthcare properties. In many cases, its deals provided the financing that helped private-equity firms get deeper into the hospital business.

Hospitals are highly regulated and dependent on a complex system of government and private insurance. That makes it harder for private-equity firms to quickly boost profit margins. Their investments included small-town and rural hospitals, which often struggle financially because their patients tend to be older and poorer.

By financing acquisitions through property sales, private-equity firms transfer some of the risk to the hospitals and MPT. The resulting leases can extend for many years after the private-equity firms sell off their stakes, as Cerberus has done with its Steward investment.

Rhode Island’s attorney general, a Democrat, has restricted two hospitals in that state from doing deals with MPT, citing concerns over the hospitals’ financial health. That decision followed a state probe of hospital operator Prospect Medical Holdings Inc., long backed by private-equity investor Leonard Green & Partners LP. Prospect had used proceeds from real-estate sales to MPT to pay down debt it had incurred partly to fund hundreds of millions of dollars in dividends to its investors, including Leonard Green.

That issue drew attention from some members of Congress. “It is not appropriate for private equity firms to generate returns for their investors by extracting hundreds of millions of dollars from safety net hospitals,” Rep.

Katie Porter

(D., Calif.) and four other lawmakers wrote in a letter to Leonard Green in July 2020.

Leonard Green responded that the dividends were paid before the Covid-19 pandemic began and that the investors who benefited included public and corporate pension funds.

Defenders of private equity say the investments benefit hospitals by providing money that can keep struggling facilities afloat and provide time and resources to turn operations around.

MPT was co-founded in 2003 by

Edward K. Aldag Jr.

, who now serves as chief executive officer. For years, big corporations sold their real estate to third parties and leased it back to free up capital for other purposes, deals known as sale leasebacks. MPT offered such deals to hospitals, which typically owned their buildings.

The company’s mission dovetailed with the desire of private-equity firms to finance hospital acquisitions and extract cash from their purchases to help pay dividends to investors. MPT struck deals with hospital operators owned by Cerberus, Leonard Green,

Apollo Global Management Inc.

and others.

Its rapid growth, coupled with the requirement that REITs pay out most of their income as dividends, made it a popular stock with investors searching for better returns in a low-interest-rate world. That, in turn, helped it to raise capital, which allowed it to make attractive offers to hospitals for their properties. The company’s debt has tripled since 2017 to $11 billion, and it raised more than $5 billion from stock sales in recent years.

Real-estate research firm Green Street wrote in September that MPT’s deal to sell stakes in several Steward hospitals in Massachusetts was a stamp of approval on Steward, particularly “given the murky visibility on the fiscal health” of MPT’s tenants.

MPT’s stock is worth about $13 billion, putting it among the largest 15% of U.S.-traded REITs, according to FactSet data. It paid $568 million of dividends in 2020, up from $327 million in 2017.

Mr. Aldag earned about $17 million in 2020, according to MPT’s financial filings. He holds more than $75 million of MPT stock, according to company filings, after having sold $15 million worth last year.

MPT said it has around 120 employees. Birmingham airport records show it also had three Gulfstream jets in a hangar there.

When asked about the jets last year, the company said it used private aircraft for investment due diligence. MPT disclosed corporate aircraft in a November securities filing.

The Federal Aviation Administration later provided flight records to The Wall Street Journal showing that over the last three years the jets made 141 trips between Birmingham and Fairhope, Ala., where public records show Mr. Aldag owns a waterfront home on Mobile Bay.

Asked about those flights, MPT said its employees had been working remotely during the pandemic while its offices were closed.

No hospital company was more important to MPT’s growth than Steward. Private-equity firm Cerberus began building Steward in 2010 by buying six hospitals from a struggling operator affiliated with Boston’s Roman Catholic archdiocese. Steward now has dozens of hospitals across nine states.

In a 2016 deal, MPT paid Steward $600 million for five of its hospital properties, with Steward agreeing to lease them back. Steward also got another $600 million of mortgage financing from MPT for four other properties. Steward said the deal helped it pay down debt.

Several hundred million dollars of the proceeds went to Cerberus from the deal. As part of the transaction, Cerberus and members of Steward’s management acquired 10 million shares of MPT, filings show. MPT also took a stake in Steward, further tying the companies together.

Steward’s revenues nearly doubled between 2017 and 2019 as it acquired more hospitals. MPT financed that growth by buying the real estate, at times paying premium prices. In 2019, Steward bought a West Texas hospital for $11.7 million. The same day, it sold the hospital’s real estate to MPT for $26 million, agreeing to lease it back.

MPT said its investments are based on extensive underwriting, and that the price for the West Texas property reflected assessments about what returns Steward could generate from the facility compared with its former owner. MPT and Steward said proceeds from the deal funded improvements in the Texas hospital.

Although Steward isn’t a public company, MPT has had to disclose Steward’s audited financial statements. SEC guidance urges companies to release such information when a tenant makes up more than 20% of their assets.

Mr. Aldag told analysts in 2018 that Steward was on track for a “record year.” When the company’s financial statements came out, however, they showed Steward had actually lost around $271 million, compared with a net loss of roughly $207 million the prior year. MPT said Steward had record revenue and total assets that year.

Some of Steward’s hospitals reduced services or shut their doors completely. In Youngstown, Ohio, a Steward hospital closed about a year and a half after a deal to sell its real estate to MPT. The hospital was the last to offer childbirth in the city.

Steward said it closed the hospital because of growing losses and low occupancy, and that it had never closed a facility because of its lease payments to MPT. It said other hospitals in the nearby area still provide maternity services. It said it continues to pay MPT rent on the property.

Despite the MPT-financed growth, Steward struggled to turn a profit. Former Steward executives said the company at times delayed paying vendors, and it has been sued by a nurse-staffing company for allegedly withholding more than $40 million of payments, which Steward has denied. Steward said its finances and operations are in strong shape. Steward has sued the nurse-staffing company for alleged price gouging. That company said it charges market rates, which Steward had agreed to pay.

After Covid-19 arrived, Steward told Pennsylvania’s government it would shut down one of its hospitals in the state unless it received $40 million of financial relief. That hospital was saved when a local nonprofit operator agreed to buy it from Steward. Steward got more than $441 million of government relief funds in 2020, according to its financial statements, but saw its annual net loss reach $408 million.

Deals that year resulted in more cash flowing from MPT to Steward.

In May 2020, MPT formed a joint venture with Steward Chief Executive

Ralph de la Torre,

acting in a personal capacity separate from his role at Steward, to pursue international opportunities. MPT took a 49% stake in the venture, with the rest held by Dr. de la Torre and other executives, according to MPT.

MPT lent the joint venture $205 million, which bought Steward’s existing international assets and rights to future international opportunities, MPT said in an SEC filing. Steward’s financial statements say it received $200 million from the deal. It valued the assets sold at $27 million, and Steward booked a large cash gain, according to the statements.

Mr. Aldag told analysts the money opened new international opportunities for MPT, including in Colombia, where Dr. de la Torre had been laying the groundwork to operate hospitals. Steward said it believed it was compensated appropriately for the assets sold. Through Steward, Dr. de la Torre declined to comment.

In another case, Steward had acquired two properties in Utah as part of a broader 2017 deal financed by MPT. In July 2020, MPT converted the mortgages into leases and paid Steward an additional $200 million, according to securities filings.

The total price tag worked out to about $2.4 million per licensed bed for the Utah properties, compared with about $350,000 per bed for the other properties MPT acquired in the 2017 deal.

Steward said it was paid an “appropriate if not conservative price” for the Utah properties, and that valuing the properties on a per-bed basis wasn’t appropriate since the Utah properties generated significant revenue from outpatient services.

“We are highly confident that our investment in our Utah properties does not exceed their fair values,” MPT said.

Cerberus has cashed out of its stake in Steward. First, it transferred control of the company to Dr. de la Torre and other members of management, with new debt being exchanged for the company’s equity. According to Steward, Cerberus earned more than $1 billion from its ownership of the company.

Early last year, MPT issued a $335 million loan to Steward’s new owners to repay the Cerberus debt. Besides serving as Steward’s landlord and its minority shareholder, MPT had become a significant lender to Steward’s new investors.

MPT has since taken steps to reduce its exposure to Steward. It has announced plans to sell a 50% stake in the Massachusetts real estate it bought from Steward in 2016 to global investment firm Macquarie Asset Management. The deal is expected to bring in $1.3 billion for MPT, which has called the pending transaction a validation of its strategy.

Steward also has struck a deal to sell the operations of five of its hospitals in Utah whose property MPT owns, further cutting MPT’s exposure.

Write to Brian Spegele at brian.spegele@wsj.com