REITs Are Making Moves in Behavioral Health — But Challenges Remain

Health care real estate investment trusts (REITs) have largely been absent from the behavioral health market, but major players have started to invest and could change the financing landscape for years to come.

Health care REITs that have high exposure to senior housing and skilled nursing properties see similarities with the behavioral health space to potentially drive new development and consolidation.

At the same time, these REITs are also hoping to break into a market that sees higher margins and ballooning demand for their services.


David Sedgwick, the CEO of the San Clemente, California-based CareTrust REIT Inc. (Nasdaq: CTRE), said in an interview with BHB that his company will use its entry into the behavioral health space as a way to flip struggling assets to “a higher and better use” through a partnership with Franklin, Tennessee-based addiction treatment provider Landmark Recovery.

CareTrust owns 227 properties, with 160 being skilled nursing facilities and the remaining 67 consisting of independent living, assisted living or multi-service campuses.

As the company approached 2022, a dip in occupancy and the realities of wage inflation and the health care worker shortage inspired the company to run stress tests of its portfolio.


This led CareTrust to capitalize on a seller’s market in skilled nursing and senior housing and sell poorly performing assets. But then, Landmark Recovery put a leading bid on one of CareTrust’s facilities.

“That’s when for me it clicked and I said, ‘I’m not going to sell to Landmark. I’m going to take this as an opportunity to get into the space. And we’re going to look at our buildings that are chronic drags and we’re going to convert those into higher and better use into this new space,” Sedgwick said.

Switching a facility operator from skilled nursing or senior housing to addiction treatment isn’t all that much of a stretch, according to Sedgwick.

Both operations are highly mission-driven and idealistic in their approach to care for a vulnerable population; in a notable number of instances, a senior care facility is zoned in a way that would allow it to operate as an addiction treatment facility; and it wouldn’t take much investment to change a CareTrust property to fit the needs of an addiction treatment facility.

The similarities to behavioral health and senior care make behavioral health a prime area for expansion for REITs seeking to diversify or convert struggling properties, according to Ben Firestone, CEO and founding partner of Chicago-based transaction advisory firm Blueprint Healthcare Real Estate Advisors.

“I think that all the demand drivers are there,” Firestone said in an interview with BHB, pointing to stats that reflect the disparity between the need for mental health care and those that actually receive it.

Bringing institutional capital and consolidation opportunities

Sedgwick said that the behavioral health industry doesn’t appear to have the same level of maturity as senior care or regulations facing the skilled nursing sector but is similar in the sense that it’s highly fragmented.

Firestone added that Blueprint started off doing most of its business in the senior living and care spaces and is now poised to jump into behavioral in a big way.

“As we see more and more utilization of real estate in [behavioral health], there’s a considerable amount of fragmentation in the market now which stands to benefit from consolidation, which leads REITs and other investors to be attracted to this space for consolidation opportunities … just like skilled nursing represented a decade or so ago,” Firestone said.

And if REITs jump into behavioral health and consolidate behavioral health facility ownership, Firestone says that the industry could see greater operator consolidation as a result of the massive amounts of private equity flooding the space.

Last year was a banner year for mergers and acquisitions, with 251 deals completed in the space, up about 33% from 2020, according to data from The Braff Group. Experts on a recent Behavioral Health Business webinar said that de novo growth and acquisitions of smaller companies will likely define 2022 and that high multiples for behavioral health company valuations will likely persist.

However, they also said that high valuations could tamp down investment in the space.

Firestone said that Blueprint has helped Landmark Recovery successfully execute senior care facility conversions to addiction treatment.

“That type of deal is a capstone on our thesis that we can repurpose buildings that have reached their obsolescence or [are] getting beat out by shiny new competitors on the private pay side for seniors housing — and also nursing homes that fit the mold,” Firestone said.

Talya Nevo-Hacohen, chief investment officer for Sabra Health Care REIT Inc. (Nasdaq: SBRA), said that the company started seriously exploring the opportunities in the behavioral health sector following the company’s acquisition of Care Capital Properties, Inc. (NYSE: CCP) in 2017.

The Care Capital portfolio included psychiatric hospitals that also housed addiction treatment as well as facilities that serve those with acquired brain injuries. As the company explored behavioral health, Sabra zeroed in on addiction treatment.

In 2020, Sabra Health Care REIT CEO Rick Matros told BHB in an interview that the company was targeting more institutional and accessible facilities: “We’re not interested in the fancy Malibu retreats.”

As of today, Sabra owns six facilities operated by Landmark and recently announced a $325 million loan agreement with Recovery Centers of America that’s secured by eight inpatient addiction treatment facilities.

Other major players like Chicago-based REIT Ventas (NYSE: VTR) have started to dabble in the space as well, with Ventas executing a $58 million acquisition of an Eating Recovery Center building — but the company declined to comment on its plans or ambitions in the space long term.

REITs see a lack of scale in behavioral heal as a challenge 

There is plenty of interest in the space from REITs, but the lack of large, top-flight operators is a challenge.

“It’s not that easy to find operators, really simple,” Nevo-Hacohen said.

The behavioral health space is comparatively young as well.

“[Behavioral health has] not been highly institutionalized,” Nevo-Hacohen said. “It’s incredibly fragmented and I don’t think there’s been much access to capital. The sponsors tend to be focused on building up, creating scale, which means their focus is typically on the operating platform, not on the real estate — and real estate sucks up a lot of capital.”

Sedgwick similarly pointed to a lack of a clear leader at a national level in the addiction treatment space and noted that deals will require smaller arrangements with operators.

Matt Boyle, CEO of Landmark Recovery, said in an email that his company first did a sale-leaseback deal with Sabra Health Care REIT in 2019. At the time, it was a means of raising capital for new deals.

While selling and leasing back facilities made less sense as the company’s capital demands changed, Boyle said he learned from the Sabra relationship that the best health care assets are usually controlled by REITs, and that they don’t often sell them.

“We were able to create this win-win scenario where I was able to get much better assets than I could find on the open market, and Sabra got rent on buildings that would otherwise sit vacant,” Boyle said.

Landmark Recovery’s unique approach to its real estate comes from Boyle’s background in his family business.

In the 1990s, Matt Boyle’s father, Clifford, pivoted his real estate development firm, Simsbury Associates Inc., and launched a company called Landmark Senior Living. In 2014, Matt Boyle helped the company to shift its focus again, with the goal being portfolio diversification that led to addiction treatment.

The lack of large national operators amenable to selling their facilities limits big-dollar, platform-type deals to jump into behavioral health, Nevo-Hacohen said.

“The publicly traded companies in the space don’t need our capital,” Nevo-Hacohen said, adding that companies like Acadia Healthcare Co. Inc. (Nasdaq: ACHC) do very well owning their real estate.

Acadia Healthcare is the largest pure-play behavioral health provider in the U.S. and owns and operates 238 behavioral healthcare facilities with approximately 10,500 beds in 40 states and Puerto Rico. About half of Acadia’s revenue comes from acute inpatient psychiatric facilities while 39% comes from specialty treatment centers and residential treatment centers account for 12% of revenue, according to its latest annual report with the SEC.

Universal Health Services Inc. (NYSE: UHS), another major operator of behavioral health facilities, owns the vast majority, more than 90%, of the 335 inpatient facilities and 14 outpatient behavioral health facilities it operates in the U.S., United Kingdom and Puerto Rico. All told UHS operates 403 inpatient and outpatient acute and behavioral health facilities.

What major deals are out there could fetch major investments from REITs. Nevo-Hacohen pointed to Medical Properties Trust’s (NYSE: MPW) $950 billion deal to acquire 18 inpatient behavioral health hospital facilities and an interest in the operations of Springstone from the private equity firm Welsh, Carson, Anderson & Stowe. But opportunities like Springstone are rare.

“I think that the big REITs can do one [deal] here or there but it’s never going to be an initiative — it’s very hard to create scale,” Nevo-Hacohen said. “I think for the smaller REITs, it’s probably easier to take advantage of these opportunities.

“But you have to invest time and resources into understanding what it is you want to do, how you want to do it, what makes the most sense, and frankly, the relationships with those operators.”

Despite these challenges, Nevo-Hacohen is optimistic.

“It’s all doable,” she said.

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