Crozer’s landlord uses complicated financial maneuvers to mitigate a troubled investment

The future of Crozer Health is as murky as ever as the Delaware County health system’s landlord, a massive real estate investment firm based in Alabama, undertakes complicated financial maneuvers to mitigate a troubled investment.

The landlord, Medical Properties Trust Inc., known as MPT, acquired the health system’s real estate in 2019 from Crozer’s parent company, Prospect Medical Holdings Inc., as part of a $1.55 billion deal. This required Crozer and other hospitals to rent their facilities from MPT.

But since last year, Prospect has not been being paying rent. In February, MPT conceded that the real estate occupied by Crozer’s four Delaware County hospital buildings was worth $171 million less than the $420 million it paid for them.

In an update last week, MPT told Wall Street analysts that it plans to convert its lease on Crozer’s buildings into a first-lien mortgage. Two experts said the change is highly unusual.

“It could conceivably give MPT some protection in the event of a Crozer bankruptcy, because MPT would likely have higher seniority to be paid back as a lender than as a landlord if Crozer goes under,” said Eileen O’Grady, research & campaign director at the Private Equity Stakeholder Project.

Bankruptcy rules also treat a mortgage differently than a lease. During bankruptcy, a mortgage can be renegotiated for a lower interest rate or a lower principal amount. That’s not true of a lease. It can only be accepted or rejected in bankruptcy.

MPT did not respond to questions seeking more information on its move.

Crozer and its parent company, Los-Angeles-based Prospect Medical Holdings Inc., which bought Crozer in 2016 in a deal valued at $300 million, either declined to comment or did respond to a request for comment.

Since early last year, Prospect, which started in California and owns seven hospitals there, has been trying to sell its East Coast operations. It owns hospitals in Connecticut and Rhode Island, in addition to those in Pennsylvania.

A preliminary agreement to sell Crozer to ChristianaCare, Delaware’s largest health system, fell through last August. Yale New Haven Health has agreed to pay $435 million for three hospitals Prospect owns in Connecticut. The deal, first announced in February 2022, remains under regulatory review.

MPT’s chief financial officer told analysts that Prospect is “making progress” on the sale of two Rhode Island hospitals, but “we’re not aware of any advanced negotiations” in Pennsylvania. To keep Prospect as a whole afloat, MPT has lent the company $50 million and has agreed to lend as much as $75 million more, MPT officials said.

Crozer officials said last year that Prospect wanted to turn the health system back into a nonprofit, the status it held before the sale to Prospect. That sale happened after a protracted search for a local buyer.

Crozer filed its application to become a nonprofit under IRS rules in January, and expects its new status to take effect by the end of this year, a spokesperson said Monday.

Becoming a nonprofit would save Crozer money if it were able to secure property tax exemptions from local authorities, but the system would still face the challenge of needing to pay rent to MPT, the owner of its real estate.

Crozer-Chester Medical Center in Upland, next to Chester, is Crozer’s main hospital. It also has Taylor Hospital in Ridley. Two other hospitals, Delaware County Memorial in Drexel Hill and Springfield Hospital, have stopped offering inpatient services.