Not a deal-breaker
Sale-leasebacks still attractive to skilled-nursing operators despite rate cuts
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.