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REIT transactions offer treatment centers source of capital

December 14, 2016
by Julie Miller, Editor in Chief
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While it’s true that private equity investors remain bullish on behavioral healthcare organizations, the near future seems to include another financial mechanism that industry leaders might not have considered previously: the real estate investment trust (REIT). A long-time model found in other business sectors, such as the hotel and apartment building spaces, REITs are just beginning to emerge as an option for treatment centers.

The model functions very much like a mutual fund, in which many shareholders pool their money and together invest in a diversified portfolio. For a REIT, the portfolio is exclusively real estate. That portfolio generates income in the form of lease payments from the users of the properties.

Simply put, instead of directly owning land and brick-and-mortar facilities, behavioral health organizations can opt to sell them to a REIT and then lease the space back from the REIT. The organization becomes a tenant rather than an owner of the property it operates.

“It’s not like in private equity where we would want control of the business or want to run it and manage it,” says Alex Florea, corporate finance and strategy for Care Capital Properties Inc., which owns portfolios of 340 properties in 36 states. “Instead we’re looking to partner because we need the operating partner to run the business.”

The operating partners would be the entities that already own the treatment center business and manage its mission and financial goals. Additionally, REIT transactions can be structured tax-efficiently, where the selling organization can receive either cash or shares and become an investor in the REIT that owns its real estate.

REIT deals are common for hospitals and long-term care facilities.

Source of capital

The benefit of selling to a REIT is that the deal offers a good source of capital for the treatment center, unlocking the equity that’s been built up in the real estate, says Lori Wittman, CFO of Care Capital Properties. And selling a property to a REIT wouldn’t mean taking a hit on the final price or enduring above-average rent payments. The REIT wants the business to succeed because the associated real estate would ideally experience improving value.

“We want to make sure that there is cash flow over the rent so that the rent is protected,” Wittman says.

Although REITs aren’t a fit for every treatment center operation, Florea believes REITs will gain some traction in the behavioral health market over time.

“Behavioral health has been interesting because it’s an area with a lot of organic need for treatment with interim and long-term tailwinds,” he says.

The Internal Revenue Service estimates that there are a total of 1,100 REITs in the United States.

 

 

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