MEDICAL PROPERTIES TRUST INC

Previous report

Steward’s deteriorating financial condition has material adversely affected our operating results and financial condition, and Steward’s recent Chapter 11 filing adds further risks and uncertainties that could materially adversely affect us.

Previous report

On May 6, 2024, Steward filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas. At March 31, 2024, affiliates of Steward lease 28 of our facilities under a master lease totaling approximately $2.4 billion, along with eight properties pursuant to a separate master lease agreement with one of our unconsolidated joint ventures in which our investment is approximately $406 million. In addition to the master leases, we hold a working capital and other secured loans totaling approximately $346 million, which the working capital loan consists of multiple tranches with varying terms. We also have a $362 million loan due from affiliates of Steward that was made in 2021, and we hold a 9.9% equity investment in Steward. At March 31, 2024, our aggregate investments in Steward and its affiliates represented approximately 18.5% of our total assets. In addition, our approximately $220 million loan to an international joint venture is collateralized by the equity of Steward held by an investor in both Steward and the international joint venture. Subject to approval by the bankruptcy court (including with regards to financing terms), we separately anticipate entering into agreements to provide debtor-in-possession financing to Steward of up to $75 million.

Previous report

As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, we moved to the cash basis of accounting for all leases and loans with Steward effective December 31, 2023. This resulted in the reserving of all unpaid rent and interest receivables at December 31, 2023 and the reversal of previously recognized straight-line rent receivables. In addition, we recorded impairment charges on certain real estate assets and on our 9.9% equity interest in Steward. In total, the Company recorded approximately $700 million of impairment and other charges as of December 31, 2023. Due to Steward’s ongoing operational and liquidity challenges and new bankruptcy filing, we recorded approximately $470 million of additional impairment charges in the quarter ending March 31, 2024 that fully reserves for the remaining value of our 9.9% equity investment in Steward and the $362 million loan due from affiliates of Steward along with the accrual for property taxes and obligations not paid per Steward under its master leases. In addition, we recorded a $220 million unfavorable fair value adjustment in the quarter ending March 31, 2024 to fully reserve for our loan to the international joint venture. We cannot assure you that we will not have any additional impairments in future periods.

Previous report

Steward’s bankruptcy filing constitutes a default under the terms of our master leases and loan agreements with Steward, and imposes a stay on our ability to exercise contractual rights with respect to these defaults. The bankruptcy filing bars us from collecting pre-bankruptcy debts from Steward, unless we receive an order permitting us to do so from the bankruptcy court. While we expect to engage in negotiations with Steward and other stakeholders and to pursue all legal remedies to maximize our recovery with respect to our Steward investments, the outcome of any such negotiations and remedies is uncertain at this time and will be subject in all cases to the approval of the bankruptcy court. In addition, there is a risk that third parties may seek to bring claims against us in Steward’s bankruptcy proceeding.

Previous report

If our Steward master leases are rejected by the bankruptcy trustee, in whole or in part, we would have only a general unsecured claim for damages. Any unsecured claim (including our equity interest in Steward) may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. We may recover none or substantially less than the full value of any unsecured claims, which would materially harm our financial condition. Moreover, any secured claims we have against Steward may only be paid to the extent of the value of the collateral, which may not cover any or all of our losses.

Previous report

Steward’s filing and other defaults under its master leases may give us the right to terminate the leases and seek one or more replacement operators for these facilities. However, the process for transferring the operations of healthcare facilities is highly regulated, which may result in delays and increased costs in locating a suitable replacement tenant. There can be no assurance that we would be able to find another tenant in a timely fashion, or at all, or that, if another tenant were found, we would be able to enter into a new lease on favorable terms. If we are unable to re-let the Steward properties, we may be forced to sell the properties at a loss.

Previous report

In addition, the terms of our unsecured credit facility and the indentures governing our outstanding unsecured senior notes are subject to customary financial, operational, and reporting covenants, including covenants relating to our total leverage ratio, fixed charge coverage ratio, secured leverage ratio, consolidated adjusted net worth, unsecured leverage ratio, and unsecured interest coverage ratio. The terms of our unsecured credit facility also require us to maintain a minimum amount of total unencumbered assets and a 10% cap on unencumbered asset value attributable to tenants subject to a bankruptcy event, such as Steward. In April 2024, the lenders under our unsecured credit facility agreed, among other things, to waive the 10% cap on unencumbered asset value attributable to tenants subject to a bankruptcy event for purposes of determining compliance with the unsecured leverage ratio for the trailing four fiscal quarter periods ended June 30, 2024, and for purposes of determining pro forma compliance with the unsecured leverage ratio for certain asset sale and debt transactions. The amendment does not provide relief beyond its specific provisions and other adverse consequences of the Steward bankruptcy filing may occur. Such waiver and modified covenant are temporary, and we will be required to meet the standard covenant threshold when the waiver period expires on September 30, 2024, unless extended. Our continued ability to incur debt and operate our business is subject to compliance with the covenants in our debt instruments, breaches of which could result in defaults and cross-defaults that could have a material adverse effect on our financial condition and results of operations.

Previous report

Steward is early in its bankruptcy proceedings and the ultimate outcome of such proceedings is uncertain. At this time we are unable to predict the timing of any of the foregoing matters or the timing for a resolution of the Steward bankruptcy proceeding.

Previous report

As a result of this Quarterly Report on Form 10-Q not being filed timely, we are currently ineligible to file a new short-form registration statement on Form S-3 or access our existing registration statement on Form S-3 for sales of securities, including under our ATM program, which may impair our ability to raise capital on terms favorable to us, in a timely manner or at all.

Previous report

Form S-3 permits eligible issuers to conduct registered offerings using a short-form registration statement that is automatically effective and allows the incorporation by reference of past and future filings and reports made under the Exchange Act. In addition, Form S-3 enables eligible issuers to conduct primary offerings “off the shelf” by registering an indeterminate amount of specified securities which, combined with automatic effectiveness and the ability to forward incorporate information, allows issuers to access the capital markets in a more expeditious and efficient manner than raising capital in a standard registered offering pursuant to Form S-11.

Previous report

As a result of this Quarterly Report on Form 10-Q not being filed timely, we are currently ineligible to file a new short-form registration statement on Form S-3 or access our existing registration statement on Form S-3 for sales of securities, including under our ATM program, until June 1, 2025, which may impair our ability to raise necessary capital to repay our debt obligations as they become due, pursue acquisition and development opportunities, and execute our business strategy. If we seek to access the capital markets through a registered offering during the period of time that we are unable to use a registration statement on Form S-3, we may experience delays in the offering process due to SEC review of a registration statement on Form S-11, experience downward pressure on our share price given that we will have to disclose the offering prior to formal commencement, and incur increased offering and transaction costs. If we are unable to raise capital through a registered offering, we would be required to conduct financing transactions on a private placement basis, subject to pricing, size and other limitations for equity raises under the NYSE rules, or seek other sources of capital, which are not guaranteed. The foregoing limitations on our financing approaches could have a material adverse effect on our results of operations, liquidity and financial position.