The recession which began in 2007 as the housing market declined has resulted in REITs (Real Estate Investment Trusts) entering nontraditional markets, looking for profit opportunities. The newer markets include senior housing – assisted living facilities and skilled nursing homes. Many of the larger senior housing chains have sold off their properties to these REITs, while keeping some aspect of the original business, usually the management side. The properties continue to operate as they have before (the communities are not vacated to make room for other businesses) but now the company (Sunrise Senior Living for example) acts as a tenant to the landlord, the REIT it just sold its real estate (land + buildings) to. The buyer pays cash for the assets. This is known as a sale-leaseback. The reasons for doing so include:
- Cash is usually the strongest asset on a company’s balance sheet. Exchanging cash for what might be an under performing and illiquid asset in today’s economy improves the company’s debt to equity ratio.
- Real estate is not essential to the company’s core business model and daily operations.
- Property value risks and management hassles transfer to the buyer, allowing the company to focus on its mission.
- Sale-leasebacks defer taxes due.
Most of the largest senior housing companies in the country have grown quickly since their inception (assisted living is a young industry). Without deep pockets, it is challenging to grow revenue. The industry is changing rapidly. Selling off real estate is one way to concentrate on core services. The competition for growth should translate to better choices for families considering senior housing.