Partnering with real estate investment trusts (REITs) could be a major opportunity for certain behavioral health operators.
That’s the case Sabra Health Care REIT (Nasdaq: SBRA) Chief Investment Officer Talya Nevo-Hacohen made during a panel chat at Behavioral Health Business event INVEST.
Specifically, sponsor-backed operators that are dependent on a facility could be a good fit for such a partnership.
The norm in most segments of behavioral health is to avoid owning real estate. Investors and providers alike would much rather see capital go to care services and operations.
“[Real estate] sucks up a lot of capital with, essentially, no other return,” Nevo-Hacohen said. “That’s where we kind of feel like we come in as the knight in shining armor and can say, ‘We’ll buy that real estate … and lease it to you long-term.’”
Irvine, California-based Sabra Health Care REIT represents a nascent movement of REITs into the behavioral health space. The company first started examining behavioral health through its 2017 acquisition of Care Capital Properties Inc. That portfolio included buildings operated and formerly owned by Signature Healthcare Services LLC.
Exchanging real estate ownership for capital and lease terms leverages sponsor investments “essentially without debt” into additional growth capital, Nevo-Hacohen added.
“They don’t really want the real estate,” Nevo-Hacohen said of investors. “If somebody else can provide the real estate, it’s enormous leverage for their business.”
Substance use disorder centers are a hotspot for REIT deals. In fact, Sabra and Clemente, California-based CareTrust REIT Inc. (NYSE: CTRE) have zeroed in on addiction treatment.
CareTrust REIT has used behavioral health deals as a way to flip underperforming elder care and housing facilities to more profitable use. Both REITs are very heavily invested in skilled-nursing facilities (nursing homes) and senior housing.
David Sedgwick, CEO of CareTrust REIT, likened the behavioral health space to the skilled nursing industry in the 1990s.
“It kind of feels like the Wild Wild West in terms of regulations and fragmentation among operators,” Sedgwick said. “There’s a lot of similarities to (skilled nursing) particularly in the segment of addiction recovery that rings true or rings similar to us.”
Both Sedgwick and Nevo-Hacohen said the biggest challenge for REITs in behavioral health is finding large enough operators to do deals with. Both said they have adjusted their expectations in regard to the size and sophistication of behavioral health operators in relation to the elder care space.
“On the skilled nursing side, because of our experience in operations, we’ve been able to launch a handful of operators where their first buildings are through lease relationships with us,” Sedgwick said. “We don’t have that same expertise candidly on the behavioral side. That narrows, even more, the operator pool.”
Nashville, Tennessee-based Landmark Recovery, an addiction treatment provider, has deals with Sabra Health Care REIT and CareTrust REIT.
The company operates 14 centers in nine states. It plans to open 24 more facilities in 2023, said Scott Quattrochi, chief operating officer of Landmark Recovery.
It got started in addiction treatment after its predecessor Landmark Senior Living sold some of its facilities to REITs. Following that liquidity event, Landmark Health began working with REITs to secure facilities and financing.
Landmark Recovery began its relationship with CareTrust when it sought to buy three CareTrust facilities.
The company opted to downsize in a previous investment and work with REITs so as not to give up ownership of the company to outside investors, Quattrochi said.
“We have aggressive, aggressive growth plans and that’s why the REITs make so much sense for us — It’s much less money upfront so we can continue our growth,” Quattrochi said.
Private equity and other business sponsors require much higher return thresholds for their capital, Nevo-Hacohen said.
CareTrust REIT and Sabra Health Care REIT plan to continue to expand behavioral health as a share of their portfolio and investments. Sabra is looking at behavioral health eventually representing 25% of its portfolio, Nevo-Hacohen said. Sedgwick said it was too early to estimate how much CareTrust would grow in behavioral health.
The coronavirus pandemic left the skilled nursing industry reeling. The virus, which is especially deadly to seniors, elevated costs in the form of additional treatment and prevention efforts. At the same time, staffing shortages and isolation protocols limited census counts, kneecapping revenue growth.
REITs with heavy exposure to the skilled nursing industry have since looked to diversify their portfolios. Sabra Health Care REIT will use the proceeds of selling facilities to fund its investments in behavioral health. CEO Rick Matros called this “capital recycling.”
“We’re open for business — this is something we’re really committed to,” Nevo-Hacohen said. “We’re willing to develop in the space. We’re willing to share our portfolio because we have gone through a very serious deep dive into our portfolio and identified assets that we want to exit, assets that we want to convert.
“So there are opportunities that we can actually bring an operator, it’s not just the other way.”