Very commonly in the healthcare sector, real estate investment trusts (REITs) operate through an operating company (OpCo)/property-owning company (PropCo) structure.
The REIT as the PropCo enters into partnership with an OpCo, which manages the actual healthcare business. Alternatively, a REIT may choose to partner with a housing association, which in turn engages with an operator to protect its revenue streams.
A REIT is only as good as the operator it partners with and an effective relationship between REITs and operators is vital. In an era where institutional investors are looking for longer term secure yields, a lease to a solid operator can attract that investment and retain value in a REIT, even if external market conditions change.
Five things to consider before entering into such an arrangement
1 Find the right REIT/Partner
Each REIT has its own focus and particular way of working. If you're thinking of entering into a partnership, find the most suitable REIT and benefit from its unique expertise.
There are REITs that focus on large private pay elderly care operators and there are REITs that focus on specialist housing and social care.
2 Look to the future
As the UK market matures, it will behave more like established REIT markets overseas. Mature markets like the US have seen an increase in value, and consolidation is more common.
Another trend in the US is REITs taking share ownership in the operator to make alignment stronger, while under the UK regime this is currently not permissible.
3 Get the right advice
If investors are properly advised, they can protect themselves by implementing safeguards for example step-in rights, which allow for operational assets to be taken over, or for another operator to be brought in if needed. It is essential to seek advice to ensure that any restructuring steps take account of the tax profile of all parties.
4 Plan your partnership
Building a strong partnership is key. Set agreed terms and future development goals, and make sure operations are a priority for both companies.
5 Know your yield
Although there are some high-yield REITs, these typically do not sit in the healthcare sector. REITs in the healthcare market provide a more secure, longer term stable yield for investors and operators
“REITs are a much needed source of long-term capital in the healthcare sector to drive future investment to help build the infrastructure we need to meet demand from an ageing population.”