NetLease Q & A: Savillis’ Oppenheim Says Seniors Housing Has Special Cases

CPN NetLease recently had a talk with Meredith Oppenheim, senior vice president of Savillis, the New York branch of London-based global real estate firm Savills Plc, about how net lease as it applies to seniors housing. Oppenheim, a specialist in seniors housing, assembles capital-operator-developer teams to launch new projects or turn around existing properties. She’s also an advisor to investors in the seniors housing space. CPN: How is the net lease structure used in seniors housing? Oppenheim: Net lease as it applies to seniors housing shares basic similarities with other property types, but there are differences. In seniors housing as a whole, there are two basic structures, though there are hybrids. There can simply be a management contracts in place with third-party owners, or you can have a net lease structure. In a net lease structure, the operator essentially pays the owner a fixed amount over a specific term, and pays all the operating expenses. So in the critical point is that the owner has to be very comfortable with the operator’s ability to cover these expenses. Owners go through a very throughout analysis of the operator’s financials. CPN: So it isn’t for everyone. Oppenheim: That’s right. It isn’t a good model, for example, if the operator doesn’t have the balance sheet to carry the early stages of a seniors housing property — one that’s coming out of development or in a turnaround situation that involves a comparable leaseup period. Some operators simply can’t afford to play in this model, especially if they’re small. CPN: Who uses the net lease structure in the seniors housing business? Oppenheim: Major owners, REITs especially, are important users of the structure. The revenues are effectively guaranteed by long-term leases with built-in rent escalators, and REITs like that kind of stability. In the unlikely event that the operators can’t make it work, the REIT typically is allowed to find a new operator under the terms of the deal, one they’ve done business with. When it works, however, it’s a good situation for the REIT, since the operator is absorbing all the risk. CPN: What’s in it for the operator? Oppenheim: With the risk, comes the potential upside. If the properties do better than expected, or the operators can devise ways to improve the returns from the properties, they benefit directly from it. After paying the payments to the owner, under a straightforward net lease structure the operator will enjoy that extra measure of profit.