If Sebastian River Medical Center and 28 remaining Steward Health Care hospitals are to be sold later this month, Steward must quickly broker a compromise with its mega-landlord Medical Properties Trust and its creditors, as there appear to be no bidders willing to take over any of Steward’s leases, and certain bidders may want to own the buildings and the land instead of leasing from MPT.
Under two global leases covering all the hospitals, Steward has paid MPT what’s been characterized as unsustainably high rents, which contributed in part to Steward’s financial woes, leading to a May 6 Chapter 11 bankruptcy filing in a Texas federal court.
“The current rents are not sustainable,” Steward’s lead restructuring counsel Ray Schrock said, explaining why those leases needed to be rejected in bankruptcy for the sale of the hospitals to move forward.
At the start of the bankruptcy process, both Steward and MPT expected big hospital chains to make bids to purchase hospitals, and then take over Steward’s leases with MPT for the land and buildings. The biggest issue, or so they thought, would be tweezing out which assets would convey to the purchaser of the hospital business, and which assets were a permanent fixture of the real property. That still has not been ironed out, but now the problem has grown more complex.
“It’s a tough issue, because we don’t have any buyers who want to buy all the hospitals and assume the lease,” Schrock said.
Qualified bidders with the wherewithal to safely operate and financially support the hospitals don’t necessarily want to be tenants of MPT – at least not under the current lease terms. Having a binding bid to buy a hospital and being left at MPT’s mercy in negotiating a lease does not seem like a smart position for a bidder to be in, either. Having a fair allocation of the assets is critical, so Steward doesn’t wind up in a position where there’s little or no money flowing in to put toward the $9 billion it owes to its creditors.
“We can’t have all the value swallowed up unfairly and in a disproportionate way by the real estate,” Schrock said, adding that Steward would be required to petition the court for its rights under the law at that point. That could block the sale of hospitals from going forward, causing more delays that Steward cannot afford.
Each time an auction date for hospitals is postponed, Steward bleeds cash as payroll must still be met, but census numbers at the hospitals are dwindling.
“The key issue that we’re dealing with right now is, the company continues to suffer losses, it’s a tremendous strain on the system. We’re going to need funding. I know none of the stakeholders like this, but we need to have the funding so that we can take care of the patients,” Schrock said.
“If it becomes clear for whatever reason that we’re not going to have funding, I’m going to be the first one to come back to the court and say, judge, we need to get ready to move patients to someplace on a safe basis,” he said. “That is not where anyone wants to be. I think that’s a nightmare for everybody, for the stakeholders, for the company and everybody who works for Steward, but getting the necessary funding, and keeping the funding is very much our focus. Ensuring the continued high-quality patient care.”
One suggestion floated during the July 31 hearing was to simply split the value of the assets 50/50 – half to MPT for the real estate and half to Steward for the hospital business and the assets contained in the buildings. The impasse on the asset valuation immediately affects the sale of the Massachusetts hospitals, but it will come into play in every hospital transaction. A last-ditch negotiating session was set for last week, with not only MPT, but the bank that holds the note on MPT’s real estate present.
“As firmly as I can say this, we need the right parties at the table,” Schrock said.
Should the key parties not be able to break the impasse, federal bankruptcy Judge Chris Lopez may need to play King Solomon and determine how to fairly “split the baby” for each hospital’s bid. Lopez is tasked not only with overseeing the equitable dissolution of Steward’s assets, but also with trying to keep as many of the hospitals open as possible to serve patients, and as many of the employees as possible in their jobs.
If bidders walk away, Steward could be forced to close more hospitals. Then MPT would be left with no tenants in those properties, no rent revenue coming in, and empty hospital buildings.
“These doctors and nurses are working under very challenging circumstances and they’re doing a great job, and without that, there wouldn’t be anything here for anyone, frankly,” Schrock said.
Healthcare regulators from Florida, Massachusetts, Pennsylvania, Texas and the federal government also raised issues about the sale process and the timing, but those arguments won’t matter much unless there are viable bidders in play.
Attorney Jim Donohue, representing the Florida Agency for Health Care Administration, objected to the short time frame he had, only two days’ notice that the court would be considering general procedures for closing hospitals last week.
“The State of Florida has had very little contact with the debtors about this case,” Donohue said, agreeing with the other state officials that a more thoughtful plan should be put forward to govern how any further hospital closings are handled. That was set to be taken up this Tuesday, but hopefully no hospitals in Florida will be left without an actionable bid.
“We received numerous indications of interest for the Florida assets,” Schrock said, describing the Florida hospitals as profitable and “highly valuable.”
As of July 31, Schrock said Steward was working with bidders interested in the hospitals in Pennsylvania and Texas, that it had “multiple bidders for the Stewardship Health physicians’ group,” plus successful bidders for the Louisiana and Arkansas hospitals, which are on hold pending the negotiations with MPT. Asset Purchase Agreements are in the works on binding bids from “a number of high-quality operators” for six hospitals in Massachusetts. The State of Massachusetts offered to front its state’s hospitals $30 million in Medicaid funding to help with the transition, provided signed purchase agreements are in place.
If all goes well, the Stewardship Health physicians’ group final sale hearing should take place on Tuesday the 13th. The deadline for bids on the Florida hospitals is Monday, with a final sale hearing set for Aug. 22. Steward is working on a transition plan to assist the buyers with all the things Steward provided or handled within its network of hospitals or through the corporate headquarters. “When buyers come in and pick a piece of a hospital (system) off, they’re going to need transition services,” Schrock said.
