Behavioral health real estate has long been overlooked by institutional capital.
The fragmented nature of the industry made worthwhile targets hard to come by. Plus, the wide variety of behavioral health facility types means the industry is more complicated to navigate than, say, the skilled nursing or medical office spaces.
But in recent years, that’s started to change, with a growing number of strategic and institutional investors taking interest in behavioral health real estate opportunities. Now, stakeholders believe the COVID-19 emergency could accelerate that trend even further, as behavioral health has proven not only to be recession-proof, but pandemic-proof as well.
One such stakeholder is Joshua Slaybaugh, co-founder and managing director of the Behavioral Health Properties Group at Swopes Lees Commercial Real Estate. He said it goes hand in hand with the huge amount of interest in and need for behavioral health services right now.
“There’s been an increased amount of attention from institutional investors in the space, and that naturally is going to drive real estate activity,” Slaybaugh told Behavioral Health Business. “The other thing we’re seeing is that [private equity] transaction volume was good last year and is expected to be potentially even better this year …, and that’s also going to drive a tremendous amount of growth and activity in the space on the real estate side.”
To understand why those factors will impact the demand for behavioral health real estate, one must consider the factors that have made it relatively unattractive in the past.
Typically, organizations sell their real estate to free up capital to improve and expand their operations without losing any control of their business. But an organization has to have a decent scale and business model for investors to take interest.
In the past, behavioral health providers for the most part were mom-and-pop shops with sparse credit profiles and little need for much real estate. But, now, the industry is consolidating, and providers are growing, both financially and geographically.
Last year alone the behavioral health industry saw 163 deals, the lion’s share of which involved private equity (PE) players. PE buyers have become interested in behavioral health transactions in recent years due to the high demand for services, from applied behavioral analysis (ABA) for children with autism to substance use disorder (SUD) treatment for those battling addiction.
Amid the pandemic, the demand for behavioral health services has only increased. Several studies have shown that COVID-19 has led to higher rates of drug overdoses and suicidal ideation for Americans.
While navigating the pandemic has taken a toll on behavioral health providers, who already operate on slim margins and are notoriously understaffed, many have remained attractive from an M&A perspective. Unlike other types of health care, most behavioral health services can be easily delivered via telehealth.
As a result, dealmakers predict private equity interest could even ramp up in 2021 and beyond, as PE buyers have fewer viable health care targets to pursue.
Long story short: Behavioral health providers finally have the size, scale, balance sheets and credit profiles for strategic and institutional investors to consider doing real estate deals with them.
Plus, cap rates in behavioral health are typically high, meaning investors can purchase properties for a lower price and stand to receive a hefty return on their investment.
“Now that [institutional investors] are seeing this tremendous opportunity with the entrance of private equity, we’re starting to see more institutional buyers like real estate investment trusts (REITs) create allocations to this space,” Michael Cabot, co-founder and managing director of the Behavioral Health Properties Group at Swope Lees Commercial Real Estate, told BHB.
Take Sabra Health Care REIT (Nasdaq: SBRA) for example.
Sabra first broke into behavioral health in 2019 and has been slowly and intentionally growing its behavioral portfolio since then. It’s most interested in behavioral opportunities that are “a little bit more institutional,” as opposed to “fancy Malibu retreats.”
On the company’s recent Q4 and year-end 2020 earnings call, CEO Rick Matros said Sabra has been seeing more behavioral opportunities, though he stopped short of attributing those opportunities specifically to the pandemic.
Meanwhile, Slaybaugh and Cabot are also seeing “tremendous demand” at their commercial real estate brokerage and consulting firm focused on behavioral health.
“We have operators who want to expand into other geographic locations to expand their operational footprint,” Cabot said. “We also are seeing tremendous demand from mom-and-pop operators who are selling their companies to private equity-backed platforms. They retain the real estate, and then they’re looking to do a disposition to a more traditional real estate fund to have a second liquidity event.”
Swopes Lees’ Behavioral Health Properties Group typically assists clients nationwide on both buy-side and sell-side real estate and behavioral health transactions, with a specialty focus on SUD treatment properties.
While it’s one of the few companies nationwide to focus specifically on behavioral health real estate, Slaybaugh and Cabot are betting that will change in the years to come.
“Most of the private equity companies who are adding platforms to their funds are fairly immediately looking to make new acquisitions and expand the footprint of those companies,” Slaybaugh said.