CareTrust REIT (Nasdaq: CTRE) is continuing to look for new partners and grow in the behavioral health space.
“The behavioral health asset class not only provides us with a new tool for finding a higher and better use for our own underperforming assets, but it also opens up a high-demand undersupplied investment opportunity for growth,” Dave Sedgwick, said during the company’s Q1 earnings call.
In Q4 of 2021 the company first announced its entrance into the behavioral health space.
Specifically the company reported its plans to reposition 32 assets that have either “hit a wall” or were deemed not to be sustainable in the future. Later the company announced that three of those assets will be repurposed into substance addiction recovery centers as part of deal with Landmark Recovery.
Sedgwick noted that 27 assets are in the early stages of the sales process, however, the company may still decide to retain some select facilities.
“We’re certainly in the early innings of developing the operator relationships necessary for meaningful growth here, but we are excited about the potential for growth in this property type,” he said.
The entrance into the behavioral health space brought with it interest from brokers and operators, according to CareTrust CIO Mark Lamb.
“We also suspect industry headwinds will force more and more undercapitalized operators to bring their properties to market,” Lamb said.
“[This includes] factors such as CMS’ recent announcement of the modest increase in Medicare funding, ongoing labor issues that continue to plague the industry, and lastly, the eventual end of the public health emergency, which has provided continued benefits to operators, including the waiver of the 3-day qualifying stay, FMAP in some states, and sequestration to name a few.”
Overall the company announced $46.48 million in revenue, missing its expectations by $3.52 million. The company missed its earnings per share guidance by $0.68.
Challenges in behavioral health
While CareTrust leadership sees an opportunity to grow in behavioral health, the industry is still relatively new, posing a unique set of challenges.
“This landscape is … very fragmented and immature, in terms of institutional quality, management and, and credit,” Sedgwick said. “It feels like the skilled nursing business [did] 30-40 years ago, both from a fragmentation and professional management and regulatory [perspective].”
Sedgwick notes that this makes it challenging to find sophisticated operators.
“It’s really hard to predict how long that will take for it to mature to a place like skilled nursing, even skilled nursing is still very fragmented,” Sedgwick said. “I suspect that looking five to 10 years from now, behavioral health will continue to have a pretty healthy range of mom and pops to more institutional [operations].”
CareTrust isn’t the only real estatement investment trust looking to move into the behavioral health space. Sabra Health Care REIT (Nasdaq: SBRA) has also prioritized behavioral health as it diversifies its revenue.
Similar to CareTrust, during Sabra Health Care’s Q1 earnings call, its executives discussed the challenges with finding sophisticated operators in the space. Within the last year Sabra has also inked a deal with Landmark Recovery.
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