Partnering with real estate investment trusts (REITs) could be a great opportunity for certain behavioral health operators.
That’s the case Talya Nevo-Hacohen, chief investment officer at Sabra Health Care REIT (Nasdaq: SBRA), made during a panel chat at Behavioral Health Business’s INVEST event.
Specifically, sponsor-backed operators who rely on a facility might be a good fit for such a partnership.
The norm in most segments of behavioral health is to avoid owning real estate. Both investors and providers would prefer capital to go into services and care operations.
“[Real estate] it sucks up a lot of capital, essentially, with no other return,” Nevo-Hacohen said. “That’s where we feel like we’ve stepped in as the knight in shining armor and can say, ‘We’ll buy that property…and lease it to you long-term.’”
Sabra Health Care REIT, headquartered in Irvine, California, represents a nascent REIT movement in the behavioral health space. The company first began examining behavioral health through its 2017 acquisition from Care Capital Properties Inc. That portfolio included buildings formerly owned and operated by Signature Healthcare Services LLC.
The exchange of real estate for equity and lease terms leverages “essentially debt-free” backers’ investments in additional growth capital, Nevo-Hacohen added.
“They really don’t want the real estate,” Nevo-Hacohen said of the investors. “If someone else can provide the real estate, that’s a huge plus for your business.”
Substance use disorder centers are an access point for REIT offerings. In fact, Sabra and Clemente, California-based CareTrust REIT Inc. (NYSE: CTRE), have focused on addiction treatment.
CareTrust REITs have used behavioral health settlements as a way to turn around underperforming nursing home and care facilities. to a more profitable use. Both REITs are heavily invested in skilled nursing facilities (nursing homes) and senior housing.
David Sedgwick, CEO of CareTrust REIT, compared the behavioral health space to the skilled nursing industry in the 1990s.
“It feels like the Wild West in terms of regulations and fragmentation between carriers,” Sedgwick said. “There are a lot of similarities to (skilled nursing), particularly in the addiction recovery segment that sounds real or similar to us.”
Both Sedgwick and Nevo-Hacohen said the biggest challenge for REITs in behavioral health is finding operators big enough to do business with. Both said they have adjusted their expectations regarding the size and sophistication of behavioral health operators as it relates to the senior care space.
“On the skilled nursing side, because of our operations experience, we’ve been able to launch a handful of operators where their first buildings are through leasing relationships with us,” Sedgwick said. “We don’t have that same experience honestly on the behavioral side. That further reduces the pool of operators.”
Nashville, Tennessee-based Landmark Recovery, an addiction treatment provider, has agreements 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, Landmark Recovery’s director of operations.
Started in addiction treatment after 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 sought to purchase three CareTrust facilities.
The company chose to downsize from a previous investment and work with REITs so as not to cede ownership of the company to outside investors, Quattrochi said.
“We have aggressive, aggressive growth plans and that’s why REITs make so much sense for us: It’s a lot less money up front for us to continue our growth,” Quattrochi said.
Private equity backers and other businesses 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 part of their portfolio and investments. Sabra is considering behavioral health to eventually account for 25% of its portfolio, Nevo-Hacohen said. Sedgwick said it was too soon 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 for older people, has raised costs in the form of additional treatment and prevention efforts. At the same time, staff shortages and isolation protocols limited census counts, slowing revenue growth.
Since then, REITs with large exposure to the skilled nursing industry have sought to diversify their portfolios. Sabra Health Care REIT will use the proceeds from the sale of facilities to fund its investments in behavioral health. CEO Rick Matros called this “capital recycling.”
“We are open for business, this is something we are really committed to,” Nevo-Hacohen said. “We are willing to develop in space. We’re willing to share our portfolio because we’ve done 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 where we can actually bring in a carrier, it’s not just the other way around.”
