When you get behind on your rent, you can be sure the landlord will come knocking at your door.
That's what happened last week at Charter Behavioral Health System, the nation's largest chain of psychiatric hospitals, which has been deferring part of its rent for months and now must allow its landlord to sell up to 53 of its 92 facilities during the next 12 to 18 months.
Charter also is seeking an investor to pony up the $50 million needed to finance debt, pay for facility closings and provide working capital for the 39 hospitals it will continue to operate.
Fort Worth, Texas-based Crescent Real Estate Equities, founded and chaired by healthcare mogul Richard Rainwater, owns 85 of Charter's hospitals and has refused to give Charter the cash it needs.
Only 34 facilities generated 95% of Charter's cash flow, according to John Goff, Crescent Real Estate's chief executive officer.
The decision to chop Charter by more than half came a month after a transaction that changed its ownership structure from a 50-50 partnership between Fort Worth-based Crescent Operating and Atlanta-based Magellan Health Services to one in which Crescent Operating controls 90% of the company.
Rainwater also chairs Crescent Operating, a diversified management company that Crescent Real Estate spun off in 1997.
In the months before the ownership change, Charter closed several of its hospitals or trimmed services after news reports that the facilities provided poor-quality care. Last month, two weeks after the ownership change, Charter announced it would close nine more money-losing hospitals.
Crescent recently wrote off almost $30 million in rent receivable since July 1997 under its master leases with Charter.
Goff said letters of intent have been signed to sell nine hospitals. He estimated the sale of all 53 would generate between $150 million and $200 million.
Charter Chief Executive Officer Michael French said the move would give Charter a "great opportunity" to expand its outpatient and nonhospital-based businesses. Inpatient psychiatric facilities have seen recent cutbacks in Medicare revenues and shorter lengths of stays because of pressure from managed-care payers and new treatment protocols. Only 10% of Charter's business is on the outpatient side, he said.
French said that in the next few months Charter would launch several other new initiatives, including group homes, juvenile justice programs and Internet services.
Goff said the company will decide on a case-by-case basis whether facilities earmarked for sale will continue to provide psychiatric services.
Some facilities might be converted into nursing homes, office buildings, ambulatory surgery centers or corrections facilities, French said.