As the demand for behavioral health services increases, so does the number of investors looking to get into the space. One up-and-coming area of interest is behavioral health real estate.
While behavioral real estate hasn’t always been a big source of investment, slowly, companies have started to partner with providers to purchase the facilities in which they operate. The idea is that by selling their real estate, behavioral organizations can free up more capital to improve and expand their operations.
In recent years, big name real estate investment trusts (REIT) such as Sabra Health Care REIT (Nasdaq: SBRA) have eased into the behavioral space. While those deals still account for only a small part of Sabra’s portfolio, Wellness Real Estate Partners has built its entire business around behavioral.
Founded in 2018, Wellness Real Estate Partners is a private real estate company that focuses exclusively on acquiring real estate leased to behavioral health organizations, either through sale-leaseback transactions or the acquisition of de-novo locations.
Behavioral Health Business recently connected with Patrick Haynes, co-founder and managing principal at Wellness Real Estate Partners, to discuss the slow-growing behavioral health real estate investment trend and the opportunities it can present for providers.
You can find that conversation below, edited for length and clarity.
BHB: There aren’t many players in the behavioral real estate space. What inspired you to get into it?
Haynes: My business partner and I had been looking into ideas on how to leverage what we both did for a living – commercial real estate investments – to make more of a positive social impact on the world. We were not initially focused on the behavioral health industry, but the need for more treatment (or better access to it) was something of which we were both certainly aware.
As things tend to go, it was somewhat happenstance how we decided to focus on behavioral health. At the time, I was in the hospitality industry, and a friend of mine approached me about converting older hotels into residential treatment facilities. Through helping them assess possible opportunities, we saw that there was a lack of capital for behavioral health providers for real estate. We thought there would be a use for that – especially in context of helping operators grow to provide more treatment to more people. That was something that appealed to us.
Without the friends of ours in the industry who encouraged us to pursue this idea and provided tons of support and knowledge, we wouldn’t be here today.
Is converting old hotels locations into treatment facilities a common model for you? Or what does a typical deal look like?
We actually never did do anything in hotels, though those opportunities may be out there — and possibly a lot more on the way. There is a lot of distress in hospitality right now.
In terms of a typical transaction, we are operator-focused first, and having a strong relationship with the operator has been our primary objective to-date. We start there, then focus on the real estate. One of the reasons for this is we want to build long-term relationships with our potential tenants. Getting to know their needs and businesses allows us to be that much more efficient when reviewing a possible real estate deal with them.
Specifically, our transactions so far have been largely driven by operators bringing us into their deals, which has been great. In those deals, we provide 100% of the real estate capital to acquire a new facility and, in some cases, [we provide] renovation funding post-closing.
That being said, I think we will increasingly find that as we mature as a business and learn more about the needs of treatment providers, we can be a resource for them in terms of sourcing real estate that fits their needs.
How are you guys different from a REIT?
We are a private real estate investment company and invest capital into real estate transactions very much in the same way a REIT would. Technically speaking, the main difference between us and a REIT is how the business is organized and that structure’s impact on tax treatment.
I would say that the big difference between Wellness Real Estate Partners and REITs would be that we are a small company and our tenant’s get to interface with the “decision makers” of the business directly.
We make the decisions on the investments. Large REITs typically, though not always, have more layers and possibly more rigid structures. We believe we can be more flexible as a result.
Since your founding in 2018, can you give me an overview of some of the work you’ve done so far?
Sure. Since our founding we have acquired seven behavioral health properties – from SUD treatment facilities to a special education school portfolio in a sale-leaseback transaction.
We have conversations ongoing with a wide range of operators across the behavioral health spectrum. We’ve transacted on a number of opportunities.
What sort of behavioral organizations are you interested in working with? Any specific sub-sectors or geographic locations you have your eye on?
We’re location agnostic.
As I mentioned earlier, we’re very much tenant- or operator-focused. We want to understand their business, believe in what they’re doing and [know] that they want to do it for the long-term — because we’re long-term capital.
Our goal is to be long-term owners and partners of our tenants. And if they identify a piece of real estate in any market that they believe works for them, we will do what we can to find a way to make that happen.
But depending on the market, for each deal we do have to look at the underlying real estate value and make sure that makes sense.
In terms of the type of behavioral health use, we are agnostic. We want to work across the industry.
You guys specialize in sale-leaseback arrangements. What are the benefits of those for providers?
First and foremost, if you’re in the business of running and growing a behavioral health company, having a bunch of capital tied up in a real estate asset may not make a lot of sense.
And once you make the decision to explore a sale-leaseback, finding the right partner to be your landlord is important. You want the right lease structure that allows you to have all the comfort in the world that you will be able to do your job at that location for the long-term. That piece of mind is meaningful.
There are also tax benefits to sale-leasebacks, and, as I mentioned before, it’s a great way to raise money. Say you’re looking to grow your business and you’re considering selling a stake in the operating company to investors or getting a loan from a bank. The sale-leaseback is just another alternative — and we believe one with big benefits.
For instance, we do not have a seat at the table with your operating business. You retain complete control over your company, but at the same time you can access the capital tied up in your real estate.
Lastly, we like to tell operators that in doing a sale-leaseback with us, you also gain a partner for future growth. Let’s say we do a sale-leaseback together, which allows you to raise some money for your business. You then identify a new facility. Instead of having to buy that facility with your own cash, you now have a partner who can acquire that real estate, and you would already have a fully negotiated lease in place with us from the sale-leaseback transaction that can be easily and inexpensively replicated for the new deal.
So it’s a great way to grow efficiently. Real estate is inherently capital intensive. It’s not typically a great use of money for operating businesses.
As we’re entering 2021, what are your goals for this year and beyond?
As cliche as it sounds, we want to help behavioral health operators do more of what they do best. Buying, acquiring and financing real estate assets shouldn’t be something that’s holding back these treatment providers from moving into locations where services are needed.
The goal is identifying strong class-A operators, building relationships with them and hopefully helping them grow their platforms. That can be from doing a sale-leaseback on their existing real estate, which raises capital for the business and allows them to strengthen either their existing operations or grow their platforms, or from a partner identifying an expansion opportunity, such as with the Landmark transaction in Las Vegas.
We were able to help them expand, and I think that’s a great thing. We’re thrilled to be a part of that, and all the good Landmark should be able to do in that market.
Our goal is to just keep doing more of what we are already doing. That being said, I think we do need to do a better job of getting our name out there. I want operators to know that we’re happy to have a phone call, even just explain what it is we do.
What predictions do you have for behavioral health real estate overall?
It’s tough to say because I don’t think behavioral health real estate is really a well-defined sector today. We’re focused on it, but it’s hard to define broadly because there are so many different types of facilities and silos within the behavioral health industry.
Broadly speaking, though, the trend we see happening is more locations in regional markets, rather than in coastal cities, which is great.