The Investment Model? Sell Your Hospital to a REIT. The Results?

It sounds like a great model.

Take a hospital that has a lot of debt on its books. Sell the hospital real estate to a public real estate investment trust. Use the proceeds to pay operating expenses. And the only cost to the hospital is rent.

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This is the model that a number of hospitals, private equity shops and Medical Properties Trust, the Alabama-based real estate investment trust (REIT), have pioneered in the last decade-plus.

Founded in 2003, MPT saw its assets grow from less than $1 billion in 2014 to more than $20 billion by 2021. Today the REIT is the second-largest, non-governmental owner of hospital beds worldwide and carries a U.S. portfolio of $7.9 billion. Its hospitals touch 30 states and dozens of cities as well as nine countries. 

And the firm has grown quickly. It bought 16 hospital properties from Ernest Health in 2012 for $300 million and seven hospitals from Capella Healthcare in 2015 for $900 million. MPT then purchased nine Steward Health Care hospitals for $1.25 billion in 2016 and an additional 10 Steward hospitals for $1.4 billion the year after that. In 2017, MPT also purchased 16 hospitals operated by Prospect Healthcare for $1.55 billion and 10 hospitals operated by Lifepoint Health for $700 million. 

In every one of these cases, MPT leased the hospitals it purchased back to the operators via sale-leaseback transactions. The move turned dozens of hospital operators into tenants and MPT itself into a de facto landlord of both hospitals and the real estate on which they sat.

The acquisition and sale-leaseback strategy proved pretty lucrative for MPT. As recently as January 2022, the REIT’s stock was $24 per share, up from $3 per share in March 2009.

So… how come so many of its hospitals are now in dire financial straits?

Under MPT’s ownership, no less than seven hospital operators — Steward Health Care, Prospect Health and Crozer Health (its subsidiary), Pipeline Health, Adeptus Health, Halsen Health and Alecto HealthCare Services — have either failed or entered bankruptcy proceedings since 2017.

On the surface, MPT offered hospitals a sensible proposition. In an industry ruled by thin margins, high demand, and the agonizingly slow reimbursements from Medicare, Medicaid and the private insurance industry, the sale-leaseback model offered hospitals a chance for an immediate, and large, capital infusion. 

“This economic reality is that hospital real estate is an extremely scarce and expensive resource that hospital operators can use to generate cash, and its [monetization] is an opportunity created by REITs,” explained Fred McKinney, formerly a board member of the Yale New Haven Health System’s Bridgeport Hospital, and author of a white paper supporting MPT’s sale-leaseback model. “The REITs are agnostic to who owns the hospital. The REIT is making a financial transaction and calculation based on the value of the property and its ability to charge monthly lease over a period of time that becomes profitable. It has to work for both parties.”

But after nearly a decade, and following the bankruptcies of some of the nation’s largest hospital operators, it appears only one side has benefited, with MPT buying the valuable hospital real estate only after the prior owners of these hospital operators — some of the biggest private equity firms in the United States — loaded the hospital systems with excessive debts and cashed out before the hospitals drowned under the weight of debt and new rent payments.   

In the case of Steward Health Care, once the country’s largest private hospital system with 33 hospitals in nine states, MPT agreed last September to find replacement operators for 15 hospitals bankrupted by its sale-leaseback agreements, in order to settle a lawsuit with creditors that alleged the REIT engaged in an illegal extraction of billions of dollars of value from 23 Steward hospitals. Not for nothing, MPT agreed to waive $7.5 billion in rent liabilities it claimed the hospitals owed.  

As for Steward’s prior owner, Cerberus Capital Management, which owned the hospital system from 2010 to 2020, the private equity firm walked away from its investment in 2020 with a $790 million profit after 10 years of hospital ownership. Meanwhile, Steward incurred losses of more than $800 million between 2017 and 2020, despite receiving $441 million in federal COVID relief in 2020, according to The Wall Street Journal. 

A little over four years later, by May 2024, Steward was $9 billion in the red, while eight Steward hospitals in Massachusetts were at risk of going under due to debts, before the state stepped in to save five of them. Two additional Steward hospitals closed in other states last year.  

“It seems like it’s the kind of thing that should be illegal,” said Mary Bugbee, health care director of the Private Equity Stakeholder Project, a watchdog nonprofit. “But it’s perfectly legal. [These firms] use dividend recapitalizations in different industries. But in health care, it’s particularly insidious because of the impact it has on patients when you don’t have cash anymore for operations because it’s being diverted to debt and interest payments.”

In our nation’s capital, it’s almost impossible to find a subject that Democrats and Republicans can agree on, but the ramifications of private equity’s incursion into the hospital space in the 2010s and early 2020s — and the use of the sale-leaseback model by MPT to profit off said operation — has led to a surprising level of bipartisan cooperation.

On Jan. 7, 2025, a committee led by Sen. Chuck Grassley (R-Iowa) and Sen. Sheldon Whitehouse (D-Rhode Island) released a damning report excoriating two private equity firms — Apollo Global Capital and Leonard Green & Partners — for effectively channeling hundreds of millions of dollars of dividends into its own coffers, leaving hospital operators to wallow in debts they couldn’t possibly pay without limiting operations. 

“Private equity has infected our health care system, putting patients, communities and providers at risk,” Whitehouse wrote. “As our investigation revealed, these financial entities are putting their own profits over patients, leading to health and safety violations, chronic understaffing and hospital closures.”

On Jan. 12, 2025, Prospect Medical Group — a safety net hospital system with 16 hospitals and 160 outpatient care centers across four states, which had been owned by Leonard Green from 2010 to 2021 — declared bankruptcy. (Safety net hospitals provide care regardless of a patient’s ability to pay.) Prospect announced in bankruptcy documents that its debts ranged between $1 billion and $10 billion, and that it had to close two hospitals in Pennsylvania, even after state legislators extended a $40 million lifeline.  

Leonard Green made as much as $645 million in dividends and fees before exiting its investment in 2021, when Prospect held $1.3 billion in debts, according to ProPublica. 

“These private equity firms can make all these promises, ‘We’re going to save you, we’ll provide the capital you need to not only stay afloat, but to grow and become a super innovative health system,’ and that’s really not how it works because they’re not injecting capital into these systems,” said Bugbee. “The private equity model uses debt, and lease liabilities in the sale-leaseback model are a form of debt. It often looks more like extraction than investment.” 

At the center of each of these hospital bankruptcies stands Medical Properties Trust. The REIT’s complex relationship with the hospital industry, and the private equity firms that entered the business of health care management in the early 2010s, forms the backdrop of the labyrinthine saga involving the ownership and operations of one of the most critical asset classes in America.   

The bet  

Historically, U.S. hospital real estate involved an operating company and the property management group working as a single unit, with both sides often owned by nonprofits, churches or university systems. As the general public primarily pays for hospital care through either Medicare and Medicaid or private insurance, hospitals typically operate on the thinnest of margins, due to delayed payments, and are very capital intensive — a business plan that doesn’t typically lend itself to debt financing. 

But much of this changed after the passage of the Affordable Care Act in 2010, when private equity subsequently saw the potential of millions of more insured patients coming into the hospital system. 

“Private equity is the starting point,” said Rob Simone, who studied this phenomenon while working as a REIT analyst at the investment research firm Hedgeye. “The thought of private equity was, ‘Let’s buy a public, or Catholic Church-run, or nonprofit safety net hospital system, take them private, and move them into a for-profit model,’ so they took out a ton of debt, used leverage, and bought these hospitals.” 

Investment poured into the hospital system. By 2011, seven of the country’s largest 11 for-profit hospital chains were owned by private equity, according to Rosemary Batt and Eileen Appelbaum, researchers at the Center for Economic and Policy Research, and authors of a white paper critical of the sale-leaseback model used on hospitals. 

The Commonwealth Fund, a health care nonprofit, estimates that private equity firms have poured $1 trillion into health care real estate in the past decade, which includes physician practices and nursing homes. The Lown Institute, a health care think tank, found that by January 2024 private equity owned 460 hospitals across the U.S., comprising 30 percent of all for-profit hospitals. 

But hospital operations turned into a different type of real estate investment than private equity anticipated. The model of third-party reimbursements — whether from federal and state governments or private insurance, coupled with the entire bureaucracy wall between customer and provider — proved a lot more expensive than private equity anticipated, according to McKinney.  

“You don’t go to a restaurant and submit a bill to the restaurant insurer — imagine how that would work: You’d demand the lobster and steak and a $500 bottle of wine, and you personally only have to pay 40 percent,” McKinney said. “That’s an inherently inflationary model that will drive up demand.”  

As such, the returns didn’t meet underwriting standards, or what private equity firms promised their investors on famously short five-year time frames, creating a tricky situation where private equity firms had to seek an immediate exit to get out of a surprisingly expensive proposition, according to multiple sources.

“They made an investment in a health care company, with a goal toward achieving a rate of return back to investors they raised money from, and what ended up happening is it became more challenging,” said Toby Scrivner, senior vice president and director of Northmarq’s health care specialty. 

But as the reimbursements from Medicare and Medicaid lagged, it became difficult for hospitals to keep up with real-time inflation and operating costs for things such as drugs, supplies and the well-educated and well-trained hospital labor. Something had to change or else private equity would be stuck holding a dying asset. 

Enter the sale-leaseback model and Medical Properties Trust. 

The savior 

Birmingham-based Medical Properties Trust is a REIT founded in 2003 by Edward K. Aldag Jr., at a time when REITs barely played in the health care space. Now, 18 publicly traded health care REITs exist in the U.S., including MPT, which today has an asset value of $14.9 billion. 

MPT’s bread and butter is purchasing hospital real estate, and then leasing it back to operators. These sale-leasebacks are common practice across multiple asset classes, where the tenant is usually locked into a long-term, triple-net lease, bearing costs such as insurance, maintenance and taxes in addition to rent payments.  

“The benefits for hospitals is we provide a source of capital that’s unavailable elsewhere to traditional borrowers of money,” explained Larry Portal, senior vice president at MPT, in a December 2024 interview with CO. “Our source of capital from a sale-leaseback is a permanent source of capital. We put money in, value assets at day one, and we provide 100 percent of the value in the form of financing.”

MPT’s sale-leaseback specialty emerged just as private equity was searching for an exit strategy to capture billions of dollars of hospital investments that had turned sour under the Affordable Care Act. 

“They learned [that] the model … can’t handle debt, so what private equity did was they sold all the real estate as a sale-leaseback to MPT and used the proceeds to pay themselves,” said Simone. “MPT is the sucker. They bought the real estate from private equity, providing an exit.” 

In a normal sale-leaseback, an owner sells its real estate in return for liquid capital that it wants to invest in operations or needs to pay off other expenses. The issue is how Leonard Green, Apollo and Cerberus, private equity owners of hospitals, allocated the billions of dollars they received after selling their hospital systems to MPT. 

“One of the things they do with this money is they pay down debt,” explained Appelbaum. “The real estate was collateral for the loans they took when they bought the company, and lenders need that money.  And, while the collateral is gone, a big chunk goes toward dividends, and those dividends go to private equity firms and the limited partners in the fund that own the hospital chain. The money does not go to the hospital.” 

In 2016, Steward, owned by Cerberus, signed a $1.25 billion sale-leaseback agreement with MPT for five Massachusetts hospitals, with the option to extend mortgages on five other hospitals. 

At the time of the deal, MPT’s Aldag said: “Steward believes in reinvesting in their facilities, not only in the physical plant, but also technology, equipment and new services. This mindset will prove very beneficial to the people of Massachusetts that they serve.” 

After the deal, Cerberus used the proceeds from the sale-leaseback to pay itself and its investors $484 million in dividends, according to the Private Equity Stakeholder Project, and went on a debt-driven strategy to acquire 27 hospitals across nine states between 2016 and 2019. Burdened by high rent payments and a lack of investment, Steward began losing money almost immediately. The hospital chain recorded a loss of $300 million three months after the MPT deal closed, even though it reported a $116 million profit in the year prior. Steward would declare net losses of $207 million in 2017 and $279 million in 2018, and would report losses every year before its 2024 bankruptcy, according to the Organized Crime and Corruption Reporting Project, an international journalism nonprofit. 

A source close to the sale-leaseback deal told CO that Steward’s senior leadership and board, not Cerberus, made the business decision to sell, and that Steward’s executive leadership had operating control of Steward and controlled the relationship with MPT.

But this same source provided CO with a rundown of how the proceeds of the $1.25 billion sale-leaseback were allocated, and they overwhelmingly favored Ceberus: $719 million to Cerberus ($246 million to return initial equity investments, plus a dividend of $473 million); $71 million paid out to Steward executive leadership; and Steward Health Care retained $460 million of pretax liquidity, of which $385 million was used to retire secured debt, leaving only $75 million for hospital operations. 

By the time Cerberus fully transferred operating control of Steward hospitals in 2020 to a conglomerate formed by Steward doctors, led by CEO Ralph de la Torre, the private equity firm exited with nearly $800 million, while Steward ownership paid itself a $111 million dividend, according to the Lown Institute. Not long after, de la Torre infamously bought a $40 million yacht.

In a September 2024 letter addressed to the U.S. Senate, Cerberus claimed it invested $900 million into hospital facilities and personnel during its ownership and that “throughout the entire time of Cerberus’ investment, Steward’s hospitals and facilities were, to the best of its knowledge, managed with the capital and liquidity necessary to provide high-quality health care.” 

The source close to the sale-leaseback deal also argued that at the time of the 2020 transaction, Steward was financially stable with substantial liquidity, and in compliance with all of its financial covenants, and that Steward had more than sufficient cash and liquidity to operate its business during Cerberus’ entire period of ownership.  

But an internal Cerberus memo dated April 8, 2020, shows that Cerberus identified Steward as needing $510 million “to keep the lights on,” even as real operating cash flow “was below [break-even] level” because the firm’s actual profit was only $376.5 million. The Cerberus memo adds: “Clearly, the business will need additional investment/money … a new financial structure.” 

A source with direct knowledge of the context of the Cerberus memo told CO that the memo was “a discussion document” and “thought exercise,” and that the document was a cursory assessment taken just after COVID-19 hit, which brought both immediate and potentially adverse operating impacts and uncertainty to the Steward hospital system. To this end, the memo did calculate that Steward would require $750 million over seven years, or approximately $107 million per year, which the source argued were projections consistent with Steward’s historical use of annual operating cash flow. 

Steward did not respond to requests for comment.

The same pattern of debt financing, dividend recapitalization and financial collapse played out in other hospital systems once owned by private equity firms and purchased by MPT in a sale-leaseback transaction.  

Between 2010 and 2021, Leonard Green & Partners owned Prospect Medical Holdings, where it paid itself $658 million in fees and dividends as the hospital system fell into debt — the hospital operator reported a $603 million cumulative loss between 2015 and 2020, according to the Private Equity Stakeholder Project. 

Rhode Island Attorney General Peter Neronha noted in a complaint that when Leonard Green paid itself a $457 million dividend in 2018, the amount represented 60 days’ worth of Prospect’s operating expenses, and came at a time when the hospital had one day’s cash on hand.  

Leonard Green & Partners did not respond to requests for comments. 

Seeking a way out of an investment gone sour, Leonard Green, which controlled Prospect as majority owner, turned to MPT and its sale-leaseback model to generate an immediate infusion of capital. The Prospect hospitals got $1.3 billion from the deal in July 2019 to sell 14 hospitals in California, Connecticut and Pennsylvania, in return for replacing the debt with lease liabilities, according to Blatt and Appelbaum’s research. 

“We are very pleased with the acquisition of these outstanding hospitals, which continues our sector-leading record of accretive growth,” said Aldag at the time. 

Six years later, as Prospect experiences a full-on Chapter 11 bankruptcy, its largest secured creditor is MPT, to which it owes $1.7 billion in unpaid rent and loans, according to Bloomberg. 

Finally, when it comes to Apollo Global Capital, that private equity firm created the 84-hospital conglomerate Lifepoint Health in 2018 through a $5.6 billion merger, and operated the Ottumwa Regional Health Center (ORHC) under Lifepoint.  

The bipartisan Senate report noted that prior to exiting its Lifepoint Health investment in 2021 with a $1.6 billion profit, Apollo had approved the sale-leaseback of 10 ORHC hospitals to MPT for $700 million in 2019. At the time of the deal, ORHC reported earnings of $9.2 million, but by 2023 the hospital system reported its earnings were now an $8.8 million loss. 

In response to a request for comment, Apollo pointed to its December 2023 letter to Grassley and Whitehouse, in which it said: “Apollo does not have management or decision-making authority with respect to the matters set forth. … In general, Apollo’s approach to investing is to back and support strong management teams at portfolio companies that manage day-to-day operations and decision-making.” 

A leveraged buyout model? 

The one constant in all the profitable private equity exits from U.S. hospital ownership is Medical Properties Trust. 

“We’re not private equity — we sometimes get conflated, when we’re the exact opposite of private equity,” MPT’s Portal said. “Private equity models put money in, leverage up a company as much as possible, and take money out. … We put money in and we never take our money out. We want to keep our money there as long as possible so the hospitals never have to worry about financing the real estate component of their business.” 

Simone, the former REIT analyst, noted, however, that by separating the property ownership from the company ownership under the sale-leaseback, the economics of the hospital system becomes unstable. 

“A safety net hospital gets up to 70 percent of revenue from Medicare and Medicaid, and, while they reimburse, they won’t allow the hospital to earn an excess return,” Simone said. “So all hospitals rely primarily on making expenses fit underneath that, and if you insert rent in there it becomes exponentially harder.”

MPT’s Portal dismissed concerns that MPT raised rents to an artificially high level: “I think they’re typically 5 percent or 6 percent of revenues, and they don’t fluctuate year to year, they only increase by [consumer price index] — it’s manageable and it’s a fixed cost,” he told CO. 

When REITs like MPT argue their rents are only a small percentage of hospital revenues, that’s true — but it doesn’t tell the whole story, according to Simone.

“Percentage of revenue is a meaningless statistic because you have other costs that occur to run the business, as well as very important capital investment, so rent might be 5 percent of hospital revenues, but it’s often 150 percent or more of the cash flow to service it,” said Simone. 

Then there’s the issue of MPT’s willingness to purchase the hospital systems at inflated prices and put its own money — or the proceeds it makes from the sale-leaseback — back into the hospitals themselves once they start failing under burdensome rent regimes.

Over and over again in the 2010s and early 2020s, MPT proved to be the only buyer for these hospitals, often paying above what they had been valued at only a few years prior. 

Take Steward’s nine Massachusetts hospitals, which had been valued at a combined $599 million in 2012, according to Commonwealth Beacon, a Massachusetts nonprofit. MPT purchased them for $1.2 billion in 2016.

Then there was its purchase of a trio of Prospect hospitals in Connecticut. MPT paid a combined $457 million in 2019 for three hospitals that had been valued at only a combined $139 million in 2016, according to property records and assessor reports.   

This begs the question: Why would MPT pay significantly more than the properties were worth? MPT appears to have engaged in a multiyear buying spree of U.S. hospitals due to the sentiment the purchases created among investors: The firm’s stock rose from $11 a share in January 2016 to an all-time high of $24 in February 2020 and $23 in January 2022.  

Simone argued that MPT’s compensation plan rewarded the firm’s executives with large cash bonuses based on the annual dollar volume of acquisitions, often in the first year or two of the sale-leaseback deals. That incentivized not only acquisitions but also paying the highest price. 

Securities and Exchange Commission documents reveal that MPT’s top three executives made a combined $125 million in cash and equity conveyances between 2019 and 2022. 

“They have happy shareholders, they make money by selling shares of stock, and they have to show performance and outperformance, and they are saying to their shareholders, ‘Look, all these expensive properties are paying rent,’” said Appelbaum. 

But what happens when operators like Steward, Prospect and Lifepoint can’t pay rent? 

In a normal sale-leaseback, those rents are usually restructured at much lower rates, which causes a direct hit to the landlord’s underlying portfolio value. But it turns out MPT finds a way to put money in the hands of its tenants often through a (large) direct loan, or they take equity positions equaling 9.9 percent (the maximum allowed under law).  

In 2017, one year after the sale-leaseback transaction, MPT issued Steward $700 million to acquire two hospitals in Utah. Three years later, as the hospitals experienced the full weight of COVID-19, MPT erased Steward’s mortgages and paid the firm $200 million, in return for Steward leasing those Utah hospitals back to them, according to The Wall Street Journal.  

“The reason the rent is being paid is they’re giving the failing hospitals the money to pay the rent. It allows their share price to rise,” Appelbaum told CO. “It’s Ponzi-lite.”

Blatt and Applebaum’s report documents that as Cerberus sought an exit from its Steward investment in 2020, the firm transferred its ownership to an LLC formed by Steward CEO Ralph de la Torre, in exchange for a note due in five years. But, in January 2021, a $335 million loan from MPT allowed Steward to buy out the Cerberus note. One month later, Steward bought four hospitals in Florida for $1.1 billion, and immediately sold the real estate under them to MPT for $900 million. 

Watchdogs like Appelbaum and Simone have noted that it appears MPT is creating a circular financing system, where it pays a certain amount of money to acquire real estate and become a landlord, then lends its hospital tenants money when they fall into trouble and can’t pay rents, or their tenants use MPT’s money to acquire real estate that is in turn sold back to MPT in a sale-leaseback transaction. 

When asked about Steward’s financial difficulties under its management, and the REIT’s role in managing them, MPT’s Portal responded by saying: “We don’t operate Steward, we’re not on Steward’s board, we are not responsible for any day-to-day decisions with regard to how Steward runs and operates their business. From our perspective, it’s all about the real estate.”  

MPT had approximately $717 million invested in Steward Health Care’s operating business as of the third quarter of 2023, according to the firm’s supplemental from that quarter. 

“MPT claims that it only underwrites the real estate, but what you find upon an examination of its history is that they repeatedly make investments in the operators, and then lose money on those op-co investments to prop up the value of their real estate, and then claim they made money,” said Simone. 

An October 2023 internal PowerPoint presentation from MPT included the following statement in a “key takeaways” box regarding MPT’s Steward investments and working capital loans: “For facilities with strong local coverage and temporary cash-flow challenges, working capital support is preferable to permanently destroying value by reducing rent (emphasis MPT).”  

As for the allegations that MPT paid itself with its own money, the REIT pointed to an April 2024 letter to Sens. Elizabeth Warren and Ed Markey, both Democrats of Massachusetts, in which it denied the accusation the senators made that its business “has the appearance of a Ponzi scheme.”

However, in the letter, MPT said that it provided Steward with “millions of dollars of support in bridge loans, rent deferrals, and other forms of financing,” and that in order to receive $225 million in annual rent from Steward, MPT “invested” $5 billion into hospitals leased to Steward during its ownership. 

Regardless of how the practice is characterized, lawmakers are cracking down on both MPT and private equity.  

In September 2024, Warren argued that MPT’s lease agreements drove Steward Health Care into bankruptcy, and that MPT’s “complex investment history with Steward raises questions about whether it has met IRS requirements regarding the limitations on a REIT’s ownership of a tenant or an operator.” 

In June 2024, the attorneys general of California, Connecticut, Delaware, Illinois, Minnesota, New Jersey, Oregon, Pennsylvania, Rhode Island, Washington and Washington, D.C., wrote a 30-page letter outlining the negative effects private equity and the sale-leaseback model have had on the health care system, and requested federal assistance from the Department of Justice and its Antitrust Division, the Department of Health and Human Services, and the Federal Trade Commission to address the issue.

A month later, Markey introduced the “Health Over Wealth Act,” a bill that would restrict REITs like MPT from owning hospitals. 

When asked about Markey’s bill, MPT’s Portal said, “That bill fails to understand how critical our capital is to hospitals, keeping hospitals open, and safety net hospital operators who don’t have access to traditional forms of capital. If that law goes into effect the way it’s drafted, hospitals will close and patients will suffer.”  

Investors appear to have reached their own call on MPT’s business model: The REIT’s stock is down 79 percent from its January 2022 high, and has traded between $3 and $6 per share for the last 18 months.  

On May 7, 2025, Warren and Markley wrote a letter to SEC Chairman Paul S. Atkins requesting a criminal investigation into MPT and its relationship with Steward. The senators wrote a separate letter to U.S. Attorney General Pam Bondi demanding prosecution of de la Torre, who the Senate unanimously voted in criminal contempt after he defied a subpoena to testify last year. It marked the first time since 1971 that the Senate has held someone in criminal contempt, according to CBS News.  

“If you had talked to me last summer, I would have said, ‘This appears to be an unsustainable business model.’ But here we are today,” said Bugbee. “And until there’s a consequence that’s not just financial. … As long as [MPT] has willing partners, willing hospital operators, and willing private equity firms to continue to work with them, we will continue to see this business model for quite a while.”

Brian Pascus can be reached at bpascus@commercialobserver.com