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Is "Sale-Manageback" for You?

FOUR ROSE INVESTMENT PARTNERS, HAVERTOWN, PENNSYLVANIA

Once upon a time, a good way for long-term care owner/operators to raise investment capital was to arrange a sale-leaseback deal with a real estate investment trust (REIT). In selling facilities to a REIT and leasing them back, owner/operators could obtain reasonably priced capital and stable terms, while still maintaining their involvement in operations. That was before 1999, though, when assisted living began flirting with overbuilding, skilled nursing facilities hit the PPS wall and REIT stocks lost most of their value, sending REIT investors back to the long-term care sidelines. Recent years, though, have seen the development of a comparable alternative, in fact one with certain advantages over the sale-leaseback, called the sale-manageback arrangement. For the right owners/operators, this meant that reasonably priced capital was still in reach, even in this era of relative drought. Recently Anthony J. Mullen, one of the developers of the sale-manageback alternative and a leader in the National Investment Center for the Senior Housing and Care Industries (NIC), spelled out the particulars in an interview with Nursing Homes/Long Term Care Management Editor Richard L. Peck.

Peck: Would you compare and contrast sale-leaseback and sale-manageback?

Mullen: Sale-manageback developed partly as a result of REITs, which are forced to do a sale leaseback because of REIT requirements, pulling out of the market, and partly because public longterm care companies saw sale-manageback as a way of improving their stock values by getting their real estate properties off their books. One of the advantages of sale-manageback is that it is easier to do that than with sale-leaseback, where accounting rules often treat the leased assets as still owned. Sale-manageback is an excellent way of releasing equity that you can't otherwise tap and, in many cases, obtain the lowest-cost equity capital available in the market today, perhaps 30 to 40% less costly.

But there are other differences from sale-leaseback. For one, with sale-manageback, you don't have to relinquish all ownership in your operating entity. As part of the arrangement, the new owners might give up a percentage of cash flow and residual value--perhaps 10 to 25%--to the owners/operators under a management agreement. This effectively aligns the interests of the owners and the operators in providing good management. Typically, the management fee is negotiated to provide a level of control satisfying to both ownership and management; the more control management gives up--for example, in the terms of the agreement or performance covenants--the better the cost of the money. In any event, the management fee can be adjusted to make up for operational shortfalls and restore the owner's return on equity. Usually a 10% shortfall will trigger this option, so if management significantly misses budget, it can expect to lose a proportion of its fee. Since we're talking about stabilized properties here, that mea ns they have to mess up pretty badly.

Peck: It sounds as though sale-manageback might not be for everyone.

Mullen: No, it isn't. It isn't for small operators who would likely be put out of business by any shortfall in the management fee. For that reason, we won't do a transaction with a smaller company that doesn't have at least 50% of its revenues from other sources. It is also not a good alternative for organizations that believe that owning real estate property remains in their longterm interest.

Peck: So who is it for?

Mullen: It is most suitable for organizations that own more than three properties, preferably less than 10 years old, each having at least 30 units or beds, located in solid markets of seniors, adult children or both, having no new competition and with at least three years' operating history.

Peck: My impression from the recent NIC meeting was that lenders these days are looking for near-flawless operating histories. Does that apply here?

Mullen: Basically, with sale-manageback, we're talking about stabilized properties. However, most investment professionals realize that people are not perfect. They try to make sense of any adverse circumstances they see, and as long as there isn't an integrity issue involved, they will usually take these in stride.

Peck: Any other comments on sale-manageback?

Mullen: For public companies and qualified private companies, it really is a "win-win," if structured properly. Managers continue to manage operations, which is what they are in business for, they can maintain some participation in cash flow, there are no noticeable impacts on residents and employees, and operators get probably the lowest-cost equity capital available today.
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Title Annotation:Anthony J. Mullen discusses financing for skilled nursing facilities
Author:Peck, Richard L.
Publication:Nursing Homes
Article Type:Brief Article
Date:Jan 1, 2001
Words:749
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