As stigma decreases and demand for behavioral health services grows, institutional capital is taking notice, with behavioral health real estate being one hot new area of interest.
First movers like Sabra Health Care REIT are hoping to take advantage of the emerging market.
“None of our peers are in the space at this point,” Sabra CEO Rick Matros said during a 2019 earnings call. “It’s a very fragmented space, [and it’s] not easy to find deals. But hopefully [with] Sabra being the first ones [in the space,] we’ll develop a reputation of being the capital partners to folks.”
Investor interest isn’t just anecdotal: While not exclusive to real estate, the behavioral health industry saw 85 deals in 2019 and 97 the year before, according to M&A advisory firm Mertz Taggart.
Another early mover after a piece of the action is Cawley Partners, a Dallas-based commercial real estate company. Cawley is selling a three-story, 100,000-square foot health care facility in West Plano, Texas, which boasts Eating Recovery Center (ERC) as a tenant for the foreseeable future.
Denver-based ERC — which is a national, vertically integrated health care system that specializes in treating people with eating disorders — has signed an 18-year lease. Out of the location, it will offer inpatient, residential, partial hospitalization and intensive outpatient treatment for children, adolescents and adults.
Cushman & Wakefield’s Healthcare Capital Markets team, which specializes in health care investment sales, is representing Cawley for the sale of the facility. Gino Lollio, managing director at the global commercial real estate services company, co-leads that team.
“Our client — being an investor developer in that local market — has added the value to the facility as they sought,” Lollio told Behavioral Health Business. “We will now take that to the investment world and sell the building, where ERC will remain as a tenant.”
ERC’s leasing commitment adds value to Cawley’s asset, Lollio said, explaining that the same is true for behavioral health real estate in general.
“What makes it attractive is it goes one step beyond real estate,” he said. “The real estate, yes, is what investors are investing in, so that has to be of a certain quality. … However, it comes down to the operations and the strength of the tenant, who’s backing the tenant and [so on].”
Size and EBITDA coverage are also important factors, Lollio said.
Historically the Healthcare Capital Markets team has focused mainly on medical office buildings, however, he and his colleagues began feeling out behavioral health about a year ago. After watching PE firms and their platform companies deploy large amounts of capital, Lollio’s team took the plunge, with the ERC deal coming together around the second quarter of 2019, he explained.
“[Behavioral health] really hasn’t been a product type until recently that institutional capital would invest in on the real estate level,” Lollio explained. “We tend to follow the money because it does not make sense for us to market … to real estate investors if we don’t have a high level of confidence there are investors out there to acquire.”
Generally, behavioral health real estate is less straightforward than other types of real estate because facilities vary by treatment type.
While some behavioral health providers can operate out of hospital-type settings or former skilled nursing facilities, others occupy more resort-style campuses. Compared to the medical office and senior housing real estate markets, behavioral health falls somewhere in the middle, Lollio explained.
Going forward, Lollio doesn’t anticipate investor interest will be a problem, sharing his team’s ambitions to be involved with more behavioral health transactions going forward. If anything, he predicts the buyer pool, along with the number of transactions in the space, to grow in the year ahead.
That’s good for owners, as a more competitive environment can produce a better value. However, the earlier investors enter the market, the better.
“When everyone starts to follow, the returns start to shrink,” Lollio said. “They start to compress, and it gets really competitive. But it’s still in the first few innings of this game to invest in behavioral health from a real estate level.”