The behavioral health industry presents real estate investors with a compelling opportunity compared to more traditional facility portfolio operators. But it comes with a trade-off.

On one hand, some behavioral health facilities will hit their break-even point with just 50% to 60% occupancy. On the other hand, they are much less predictable businesses with shorter lengths of stay, Rick Matros, CEO of Tustin, California-based Sabra Health Care REIT Inc. (Nasdaq: SBRA), said during the company’s second quarter earnings call. 

“It’s a much different economic model, and I understand that this is new to everybody … Folks aren’t yet looking at it differently than senior housing and skilled [nursing],” Matros said.

Sabra Health Care REIT, as do several other REITs in the health care industry, focuses on post-acute care facilities. For Sabra, 56% of the company’s property portfolio is in skilled nursing and transitional care. Another 26% is in the senior housing space. Behavioral health comprised about 14% of its portfolio in the second quarter of 2014. 

There are several reasons why behavioral health facilities can have lower break-even points than post-acute care operators, Talya Nevo-Hacohen, chief investment officer of Sabra Health Care REIT, said during the earnings call. The payer rates behavioral health operators receive are much higher relative to senior housing or skilled nursing operators. Behavioral health facilities require fewer clinical staff but have similar fixed costs and more beds to generate revenue for those costs. 

“It’s like a super high Medicare rate for everybody, but you’re turning people over with an average length of stay [at] 20 days, 19 days,” Nevo-Hacohen said. “Your biggest cost really is a centralized customer acquisition model, which is over the whole portfolio of any recovery company.”

The trade-off is that the behavioral health industry is much less predictable, whereas other senior or post-acute-related businesses can be quite predictable. Shorter lengths of stay and, more fundamentally, the unpredictable needs of behavioral health patients can lead to adjusted earnings for real estate investors bouncing around each quarter. For example, the net operating income (NOI) for the behavioral health segment at Sabra Health Care REIT was somewhat lower in the second quarter. 

“Even though the property count in that segment has been the same, NOI jumps around quarter to quarter,” Michael Costa, chief financial officer for Sabra Health Care REIT, said on the earnings call. “So I don’t think this quarter is necessarily an anomaly.”

While Nevo-Hacohen and Matros said that interest and activity in the behavioral health space are up, the company’s investment in behavioral health assets has been “static” lately.

As of the end of the second quarter, the company has invested about $480 million in behavioral health assets and owns 18 facilities that encompass about 1,200 beds. Its cumulative behavioral health, specialty hospital and “other” facility occupancy was 83% for the quarter. The company did not break out behavioral health properties exclusively. Its largest behavioral health operators are Recovery Centers of America (59%) and Signature Healthcare Services (6.9%). On a non-adjusted basis, the behavioral health portfolio posted an $859,000 loss in the first six months of the year.

Sabra Health Care REIT has looked to behavioral health as a way to upcycle underperforming senior care and post-acute care facilities. For behavioral health operators, it provides a way to establish a new facility in a more timely and potentially cost-effective manner, especially in a market where an existing facility may not exist. However, in previous earnings calls, Sabra’s management team has said it finds fewer opportunities to invest in behavioral health facilities than its other segments.