Not a deal-breaker

Sale-lease­backs still at­trac­tive to skilled-nurs­ing op­er­a­tors de­spite rate cuts

Modern Healthcare - - STRICTLY FINANCE - Paul Barr

Nurs­ing home com­pa­nies’ use of sale-lease­back deals is likely to con­tinue, at least on a rel­a­tively mod­er­ate scale, in the wake of an 11% drop in Medi­care re­im­burse­ment to skilled-nurs­ing fa­cil­i­ties that went into ef­fect Oct. 1, in­dus­try ex­ec­u­tives are say­ing.

Sale-lease­backs, which en­tail a com­pany sell­ing its real es­tate and com­mit­ting to a con­cur­rent long-term lease on the prop­erty with the pur­chaser, are likely to re­main at­trac­tive to se­lect skilled-nurs­ing fa­cil­i­ties, but not likely in the large-sized deals seen ear­lier this year, ob­servers say.

Even though sale-lease­backs gen­er­ally cre­ate a large fixed obli­ga­tion on the part of a seller, fi­nanc­ing rates be­ing of­fered by real es­tate in­vest­ment trusts to do sale-lease­back deals are likely to be too fa­vor­able for some op­er­a­tors of skilled-nurs­ing fa­cil­i­ties to pass up.

“The cap­i­tal mar­kets environment con­tin­ues to be very fa­vor­able to sale-lease­backs,” says Brent Hol­man-gomez, se­nior vice pres­i­dent for Chicago-based Cam­bridge Realty Cap­i­tal. De­pend­ing on the cir­cum­stances, in­clud­ing how the money from the sale is to be used, bor­row­ing through a sale-lease­back amid the drop in Medi­care re­im­burse­ment might ac­tu­ally work in the seller’s fa­vor, Hol­man-gomez says.

Although the lease pay­ments gen­er­ally are higher on a sale-lease­back deal than what the debt pay­ments would be had a SNF cho­sen to bor­row cap­i­tal in­stead—and thereby tougher to pay with rev­enue on the down­swing—the added cost may be worth pay­ing in cer­tain cir­cum­stances, he says. For ex­am­ple, at a time such as now when Medi­care re­im­burse­ments are fall­ing, that “trea­sure chest” of funds from sell­ing real es­tate may prove use­ful, he says.

The con­tin­ued in­ter­est in sale-lease­back trans­ac­tions comes in spite of the ex­pected loss of $3.9 bil­lion in re­im­burse­ment stem­ming from CMS’ de­ci­sion to cut Medi­care re­im­burse­ment for skilled-nurs­ing care in a fi­nal rule re­leased July 29 (Aug. 8, p. 14). The cut in Medi­care re­im­burse­ment will hit com­pa­nies dif­fer­ently de­pend­ing on what por­tion of their ser­vices is re­im­bursed by Medi­care as op­posed to Med­i­caid, pri­vate in­sur­ance and other pay­ers.

Medi­care skilled-nurs­ing re­im­burse­ment, which is for more com­plex care, gen­er­ally of­fers bet­ter re­im­burse­ment than Med­i­caid does. Moody’s In­vestors Ser­vice, in an Au­gust re­port, noted that among for-profit skilled­nurs­ing fa­cil­ity com­pa­nies it rated, the per­cent­age of rev­enue com­ing from Medi­care was about 36%. The CMS in its lat­est National Health Ex­pen­di­ture Ac­counts fore­cast says that of the $145.6 bil­lion ex­pected to be spent on skilled-nurs­ing fa­cil­i­ties and con­tin­u­ing-care re­tire­ment com­mu­ni­ties in 2011, Med­i­caid would pay for $45 bil­lion of it and Medi­care would cover $31.6 bil­lion.

Sale-lease­back trans­ac­tions can be a re­flec­tion of need rather than choice. Me­gan Neuburger, a di­rec­tor for credit-rat­ing agency Fitch Rat­ings, New York, noted that com­pa­nies do­ing a sale-lease­back deal are of­ten— but not al­ways—fi­nan­cially stressed, mean­ing they might be do­ing the deal be­cause di­rect bor­row­ing isn’t avail­able at fa­vor­able terms.

But part of the rea­son why sale-lease­backs might look good amid the Medi­care cuts for any skilled-nurs­ing fa­cil­ity bor­rower re­gard­less of fi­nan­cial health is that REITS, the ma­jor pur­chasers in sale-lease­backs, cur­rently have low costs of bor­row­ing to fi­nance their deals and are able to pay more for prop­er­ties and of­fer lease rates that are more ap­peal­ing to the sell­ers, Hol­man-gomez says. Be­cause REITS are flush with money to spend, the deals be­ing of­fered can be more at­trac­tive than bor­row­ing through un­wieldy govern­ment pro­grams or with banks.

Fo­cus on smaller deals?

Re­cent sale-lease­back deals in­clude a $15.5 mil­lion pur­chase of skilled-nurs­ing fa­cil­ity real es­tate in Pasadena, Texas, by LTC Prop­er­ties, a West­lake Vil­lage, Calif.-based REIT, an­nounced Oct. 11; and an Oct. 4 an­nounce­ment by Sabra Health Care REIT, Irvine, Calif., that it paid $18 mil­lion for two nurs­ing fa­cil­i­ties in Con­necti­cut and Mary­land, ac­cord­ing to news re­leases from Sabra.

But get­ting a han­dle on how many skilled­nurs­ing sale-lease­back deals have taken place since the Medi­care cut was made fi­nal is dif­fi­cult, given that most REITS re­lease only de­tails in­volv­ing larger deals, says Stephen Mon­roe, a part­ner with Irv­ing Levin As­so­ci­ates, Nor­walk, Conn., which tracks health­care trans­ac­tions.

Mon­roe says that more of the smaller deals are likely to be struck. “There will be lit­tle ones, $50 mil­lion and $100 mil­lion, here and there,” he says, but large deals are likely on hold un­til more is known about the ef­fects of the Medi­care rate cut.

There haven’t been any ma­jor trans­ac­tions since two large sale-lease­back deals that closed in April, be­fore the CMS an­nounced the re­im­burse­ment cut. HCR Manor­care, which man-


An 11% drop in Medi­care re­im­burse­ment for skilled-nurs­ing ser­vices such as re­hab is ex­pected to pres­sure sale-lease­back deals among large com­pa­nies.

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