Behavioral health deals could represent a large opportunity for Sabra Health Care REIT (Nasdaq: SBRA) in the future, according to CEO Rick Matros.
Irvine, California-based Sabra is a real estate investment trust (REIT) with a portfolio of 429 properties across the United States and Canada. It has historically specialized in senior housing, skilled nursing and transitional care facilities.
Sabra dipped its toes into behavioral health in the third quarter of 2019, when it made its first investment in the space, buying two addiction treatment facilities from Landmark Recovery for $14.8 million. Sabra is now leasing the spaces back to Landmark, who has said the deal will help it expand.
The REIT waded a little deeper into behavioral waters in Q4, when it completed its second addiction treatment center deal.
Sabra spent $3.75 million on a shuttered HealthSouth Corporation long-term acute care facility in Monroeville, Pennsylvania. Sabra will fund the renovation and redevelopment of the facility, which it will own at cost, and Recovery Centers of America will lease the building under a long-term lease.
While these deals are new to Sabra, they’re somewhat familiar to Matros, who did some work in behavioral on the operating side before starting the REIT. On top of that, his wife is a psychologist.
Matros recently connected with Behavioral Health Business to discuss Sabra’s interest in the space, from the kind of facilities he’s interested in to the type of operators he’s pursuing.
And while behavioral transactions currently make up only a small chunk of the company’s nearly $1 billion acquisition pipeline, Sabra is commited to seeing the slowly growing segment through. In fact, it’s open to exploring a number of opportunities in the behavioral space, with a keen eye on those that are “a little bit more institutional” over “fancy Malibu retreats,” Matros told BHB.
You can find BHB’s conversation with Matros below, edited for length and clarity.
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Can you give me an overview of the work Sabra is doing in the behavioral health space and where your future interests lie?
We originally got into behavioral health through the merger we did with Care Capital Properties, so we had the Signature [HealthCARE] behavioral platform. They’re one of the larger providers, even though they aren’t public like Acadia and Universal [Health Services].
It’s a space that we really like that we think, both in terms of behavioral and addiction, has some very nice growth potential.
It seems like finally, in our country, policy is changing, and there’s a growing awareness and realization that mental health issues are real and deserve to be funded. Insurers are coming around, too.
The challenge, though, is that the addiction space is very young, and the behavioral space is still relatively young compared to other spaces in healthcare. When you’re looking at potential investments, there aren’t a whole lot of tried-and-true operators that have strong balance sheets behind them and a long track record. There aren’t that many opportunities even to begin with.
The growth is going to be slow, but we are committed to it.
We’re not interested in the fancy Malibu retreats. We’re interested in settings that are a little bit more institutional but focused on middle class individuals that are really dealing with issues, whether it’s opioid addiction or alcoholism. We’re seeing reasonable reimbursement from insurers in that space.
When you say behavioral, are you speaking to mental health specifically? Or are you including autism, eating disorders and IDD in that?
It’s kind of all that.
When we look at potential behavioral investments, operators approach things differently and have different sorts of products within their facilities.
On the addiction side, though, that is very specific to addiction only.
Speaking of addiction treatment, that’s where you made your first investment back in Q3, with Landmark Recovery. Can you provide any color on that and tell us how things are going?
It wasn’t a big investment for us, but it’s going really nicely.
We spent probably six months with the team, just really getting to know them because it is a young team. They hadn’t done that much.
We spent much, much more time understanding them and their model and programming than we probably have ever spent on anything else. It’s because we really do want to make the commitment and understand different approaches.
We’ve seen enough now that we want to do more with them. They know that we want to do more with them, so we’re just looking for different opportunities.
We’ve done another deal with another provider since then. It’s not a big investment, but it’s a start.
The operator of whatever it is we invest is always the most critical component. For example, if we are looking at investing in a really nice asset in a really nice market, but it’s a sale-leaseback and the operator is going to stay in place and it’s not an operator that we believe in, we won’t do the deal. It’s never been about just aggregating assets for us.
This is a new area that not many real estate folks are in yet. Why is that and what spiked your recent interest?
It’s a complex business. We’re not in the storage business.
Even the apartment business, as dynamic as it is, is simpler in terms of the model than the healthcare spaces that we’re in.
Some of the REITs in the health care REIT space stay away from those service areas because they view them more as high risk and a lot more complicated. But having spent my whole life in these spaces, it’s normal.
There’s a growing awareness in our country that there are people that legitimately need these services. As more time goes by and families feel less stigmatized, I think there’s gonna be more and more dialogue around it and more support around it.
There are some good talons there that I don’t think are temporary. That provided the opening, if you will, or the opportunity to start getting involved because it can actually be viable. You can actually get adequate insurance reimbursement to provide the kind of quality services people need.
We thought it was important that we were the first REIT to enter the space.
Like any business space, it’s a small community. Similar to the reputation we have in the senior housing and skilled space, we have a pretty deep operating background here, which is a little bit different than a lot of our peers.
We wanted the word to get out that we’re a good partner for these folks.
You’ve talked about the opportunities that exist between behavioral and skilled nursing in the past. Can you provide more details on that?
I would never have an interest in mixing a traditional skilled facility with a behavioral unit.
We currently are working with a couple of our operators who are converting or have converted some skilled facilities into behavior facilities. You can’t necessarily do that everywhere. Every state’s got different regulations, so it’s a state-by-state issue. I don’t expect that to be a huge thing that we’re going to see happening.
But if you have a skilled nursing facility or even a senior housing facility, if you want to change the kind of business that you’re running, whether it’s because you want to or you have to … there aren’t very many alternative uses.
We have one relatively new senior housing facility that one of the operators we’re working with in the addiction space is looking to work with us on and convert into an addiction facility.
I think we’ll see more of that, but it’s never going to be a big driver for us. It’s going to be more incremental.
For our operators, to have a capital partner like us that not just gets it, but is really interested in it and encourages it and is willing to participate as a capital partner, we think that’s helpful.
We want to develop a reputation for understanding the space and having a connection to the space, relative to the mission of providing care, not just as purely as an investment.
How big of a business opportunity is behavioral health for Sabra?
I really don’t have any idea, as lame as that may sound.
We have a pretty big acquisition pipeline, and only a small piece of it is in that space, but there’s starting to be a little bit more activity.
Given our current size, it’s not going to be a big growth engine, but hopefully over time it will continue to grow both in terms of finding new investment opportunities with new operators and … operators that we’re [already] working with.
I think it’s gonna be slow, and I have no idea how big it can be because it’s all too new.
In terms of future behavioral health targets and partners, what are you looking for, whether it relates to type of facility, operator, location or anything like that?
It’s really more opportunistic. I don’t normally set targets like that.
Generally speaking, we’ll look at any opportunity. Then we’ll do the deeper dive and look at the market that [facility] is in, the operations, the programming and all that kind of stuff.
We want to keep it wide open — because there’s no reason for us not to at this point.
Fair enough. Can you speak generally on your future ambitions in the space?
Even though we were assuming it’s going to be slow growth, we want it to be a component of our portfolio that people will look at and see that there is dependable growth there and that we have an ongoing commitment to it.
We’ll actually get to the point where we could completely segment it separately from other asset classes because it’s big enough to do so.