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Massachusetts' Legislative Push to Restrict REIT Ownership of Hospitals


Massachusetts Hospital

Massachusetts is taking a bold step to stabilize its healthcare industry by proposing legislation that would ban real estate investment trusts (REITs) from owning hospital properties. This move comes in the wake of the collapse of Steward Health Care System, which has sparked significant political backlash and legislative action aimed at curbing aggressive financial maneuvers in the healthcare sector.


A sweeping healthcare oversight bill, which recently passed the Massachusetts House of Representatives with overwhelming support, includes a provision specifically targeting REITs, reports Bloomberg News This legislation would prohibit hospitals from leasing their main campuses from REITs, though it would allow existing leases to continue and other types of landlords to maintain ownership. This proposed restriction on REITs is among the first of its kind in the United States and has drawn both support and criticism from various stakeholders.


The legislative push is a direct response to the May bankruptcy filing of Steward Health Care System. The filing cast uncertainty over the future of Steward's eight hospitals in Massachusetts and highlighted concerns over a 2016 transaction in which Steward sold its hospital properties to Medical Properties Trust Inc. (NYSE: MPW), a REIT. At the time, Steward was primarily owned by private equity firm Cerberus Capital Management, which exited its position in 2020. Critics argue that the sale-leaseback deal with MPW burdened Steward with unsustainable rent obligations, contributing to its financial distress.


Despite the specific targeting of REITs in the proposed legislation, some experts argue that this approach may not effectively address the underlying issues. Michael Lewis, an analyst at Truist Securities, commented, "The government should be looking at it. I just don’t think that targeting the REIT is the right answer.” Jacques Gordon, a lecturer at the Massachusetts Institute of Technology’s Center for Real Estate, echoed this sentiment, noting that the real issue lies in the operational challenges faced by hospitals, not their rental agreements with REITs.


Massachusetts Senators Elizabeth Warren and Ed Markey have introduced similar measures at the federal level, aiming to eliminate "corporate greed" from the healthcare industry. These legislative efforts reflect a broader concern over the financial practices of hospital operators and their landlords, particularly in light of Steward's recent financial troubles.


Steward's bankruptcy filing indicated it owes approximately $6.6 billion in future rent to MPW through 2041. MPW has provided financial support to Steward, including a $75 million emergency lifeline to help it navigate bankruptcy. The proposed Massachusetts legislation aims to prevent similar situations in the future by limiting the influence of REITs in the healthcare sector.


The bill still requires approval from the Massachusetts Senate and Governor Maura Healey. House Speaker Ronald Mariano has emphasized the importance of the bill, describing it as the most significant healthcare market oversight and cost-containment legislation in over a decade.


Some real estate experts believe that restrictions on REIT ownership in healthcare are overdue and could help ensure that investors share the risks associated with financial failures. Rob Simone, a REIT analyst at Hedgeye Risk Management, stated, "What’s happening here is real pain is being inflicted on everyone else except for MPT. If this bill gets enacted, suddenly all of those other people become winners and MPT loses. I think that’s a good trade."


While the proposed legislation in Massachusetts aims to protect the healthcare sector from aggressive financial practices, its effectiveness remains a topic of debate. Investors and stakeholders in the REIT and healthcare industries will need to closely monitor the developments and potential impacts of these legislative changes.


For investors, the unfolding situation in Massachusetts highlights the importance of understanding the regulatory environment and its potential effects on REITs and the broader healthcare market. As the legislative process continues, the potential for significant changes in how hospital properties are financed and managed could have far-reaching implications for both industries.

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