Valuing operational assets properly

Lease or management — the decisive difference

Under a lease the operator carries the operating risk and pays a fixed rent, often topped up by a turnover element. For the owner the asset behaves almost like ordinary let property — as long as the operator is solvent.

Under a management agreement the owner carries the operating result and pays the operator a fee. Upside is higher, volatility too. Banks underwrite management structures far more conservatively, usually with noticeably lower leverage.

What matters in operator review

Covenant, track record in the specific segment, group guarantee or letter of comfort, and how many properties the operator is ramping up simultaneously. An operator with eight openings in one year is a different risk from one with two.

We also test rent cover: how many times does operating profit cover the lease? Below a certain level the contract is not sustainable, whatever the paper says.

• Recalculate rent cover over the last three years
• Guarantee from the group parent, not just the propco
• Play through a replacement operator scenario

Valuation in practice

We run two approaches in parallel: an income valuation based on the contract, and a view of what the asset is worth on an operator change. The difference between them is the operator risk — and precisely what gets negotiated in the sale agreement.