by Teri Buhl
Medical Properties Trust ($MPW) secured over $2 billion in new debt funding last month by putting up what it called ‘quality hospital operators’ leases as collateral and a few concentrated funds who held long positions in the company bought into it at only an 8.5% coupon. The deal out maneuvered and shocked credit funds short MPT’s near term maturities for the first half of 2026 when MPT announced it would use the new money to pay off two of the 2026 bonds. But according to internal MPT documents Ernest Health, a US health care operator, financial health doesn’t appear to show a financially stable company with high credit quality.
The real estate REIT told investors in January in a private presentation reviewed by this reporter that Ernest, among its top 3 secured assets in the deal, has a gross book value (GBV) of $656.7 million. This is behind Priory Group’s $1.362 billion GBV and Lifepoint Behavioral’s $867 million GBV. The GBV of an asset represents the gross investment by the landlord before depreciation and amortization.
If MPT was unable to pay off its newest debt creditors could come after those properties, but there is a common underbelly of doubt among long and short investors on how good those secured assets are if the hospital income isn’t enough to support the rent- without financial support from MPT.
Ernest became a MPT tenant in 2012. MPT invested $100.8 million to develop two new California care centers for Ernest, according to MPT’s 2023 10-k. The money was supposed to go towards building the new properties on land inherited from Vibra. But according to financials filed with the state of California, actual spending on the Stockton project was $38.396 million compared to the $53.408 million MPT said it spent from 2022-2023. A 50-bed acute rehab center in Bakersfield, Ca. total cost was $33.043 million, according to California state records; MPT said it spent $47.43 million. That leaves a mysterious $30 million dollar delta. According to sources familiar with MPT, this was just one way the company could get cash into the hands of its tenants to pay MPT’s high priced rent enabling the company to not have to take an impairment on its books.
Additionally, in the first quarter 2023 MPT made a cash disbursement to Ernest in the amount of about $4.6 million and then eight days later Ernest turned around and made a cash payment to MPT for around $4.5 million leaving the hospital operator with only about $35k for actual capex according to private internal cash flow accounts reviewed by this reporter.
Consolidated financials for Ernest (under its parent company name EPOCH Acquisition Inc) in 2023 show its cash and cash equivalents decreased by half from $17.5 million in 2022 to $9.7 million in 2023. Its income from operations went from a gain of $6.5 million in 2022 to a loss of $4.3 million the following year. Ernest Health Holdings didn’t appear able to support its basic operating expenses on a continued basis while MPT’s biggest tenant Steward Health Care had just hired bankruptcy lawyers and advisors in December 2023. Moreover, it appears that Ernest would have run out of cash in 2023 without an additional equity injection from its owners.
A review of internal documents from 2018 shows when MPT sold the OpCo to One Equity Partners and Vibra, one of MPT’s first tenants, they rejiggered the lease deal from 2012. For the Ernest master lease the board approved a $5 million reduction in rent. The rent reduction was in contradiction to the management statements, was undisclosed and at odds with their “counter-attack video” from the end of 2023 when its stock was under pressure from short seller reports. Insiders and analysts interviewed by this reporter see the non-disclosure as a move to not impair or obfuscate any reduction in the carrying value of the Ernest assets, at the time the transaction occurred.
According to a credit analyst, any impairment to leases that affect book value could impact incurrence and maintenance covenants in both the new secured bonds and remaining unsecured notes. MPT has shown over and over how it does everything it can to not take impairments and consistently tells credit funds it thinks their assets are investment grade. Impairments are important to watch and one of the reasons is highlighted in the newest bond issuance documents.
Section 4.09 ‘Limitation on Indebtedness’.
(a) The Issuers will not, and will not permit any of the Restricted Subsidiaries, to Incur any Indebtedness (including Acquired Indebtedness) if, immediately after giving effect to the Incurrence of such additional Indebtedness and the receipt and application of the proceeds therefrom, the aggregate principal amount of all outstanding Indebtedness of the Issuers and the Restricted Subsidiaries on a consolidated basis would be greater than 60% of consolidated Adjusted Total Assets of the Issuers and the Restricted Subsidiaries
This is a possible issue because it implies MPT would not have the ability to fully draw $1.28 billion of its revolving credit facility. Keep in mind the bond docs have covenants that affect whole company indebtedness not just secured bond indebtedness. I am told MPT plans to pay off the RCF with new money from the Senior Secured Notes and then redraw to pay off the two 2026 notes that mature in the first half of the year. And Goldman told investors during the sales process for the new issue, privately, MPT has no more secured debt capacity.
Here is an example: Say MPT had to take $1bn of impairments and they did it over the next 4 quarters cuz as we have seen they like to delay. If they had $16,660 billion of total gross assets it then becomes $15,660 billion. $15,660b x 60% = $9,400b allowable debt – $9,100b funded debt today would equity only $300mn borrowing capacity. Not $1.28 billion!
On February 19th, S&P issued another negative rating note for MPT saying its senior unsecured notes are still considered junk. Basically, the new notes (rated B) primed everyone and the rest of the bonds they don’t trust to get paid over the long term because of MPT’s high cost of capital and covenant constraints. The rater also thinks some of the unsecured bonds could be bought back at below par. MPT’s notes due in 2031 currently trade around 61.
But based on MPT’s internal financials and documents I reviewed, allegedly paying their tenants’ rents is just one questionable use of cash.
Ed Aldag Jr. enjoys the reputation of a philanthropist in his home state of Alabama and appears to have used MPT’s balance sheet to build that reputation without regard to fiscal controls, according to people familiar with company executives. Cash payments in the 5-figure thousands were made to: a college fraternity, Quarterbacking Children’s Health Foundation, the Birmingham Zoo, Crimson Tide Foundation, and tons of local charities appear to be regular payments made by the company according to cash flow statements reviewed by this reporter.
In audited financials from the end of 2023, reviewed by this reporter, there was a disclosure that two of Ernest facilities were under DOJ investigation, by the southern district of Texas, for violations of the False Claims Act. The entities are Laredo Specialty Hospital and its rehab center. According to one DOJ source, it’s a civil investigation for Medicare fraud. The company said in its disclosure it was cooperating with investigators. The impact could be high-dollar fines. The alleged health care fraud is like what Steward Health Care has been investigated for.
The DOJ’s investigation into Steward Health Care, MPT, and company executives is ongoing with a grand jury sitting in Boston and new witnesses interviewed by the FBI this month, according to people familiar with the investigation. Possible charges include wire fraud, money laundering, harassment of witnesses on top of making false or misleading financial statements.
MPT did not respond for comment.
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