Why REITs can be a ‘knight in shining armor’ for behavioral health investors, operators

Partnering with real estate investment trusts (REITs) can be a big opportunity for certain behavioral health operators.

That’s the case Sabra Health Care REIT (Nasdaq: SBRA ) Chief Investment Officer Talja Nevo-Hakohen made during a panel chat at the behavioral health business event INVEST.

In particular, sponsor-backed operators that are dependent on a facility could be suitable for such a partnership.

The norm in most segments of behavioral health is to avoid owning real estate. Investors and providers would prefer capital to go into care services and operations.

“[Real estate] sucks up a lot of capital with essentially no other return,” Nevo-Hakochen said. “We kind of feel like a knight in shining armor here and can say, ‘We’re going to buy this property … and we’re going to lease it to you for the long term.'”

Irvine, California-based Sabra Health Care REIT represents a nascent movement of REITs in the behavioral health space. The company first began exploring behavioral health through its 2017 acquisition of Care Capital Properties Inc. This portfolio included buildings managed and formerly owned by Signature Healthcare Services LLC.

The exchange of real estate ownership for equity and lease terms attracts the sponsor’s “essentially debt-free” investment in additional growth capital, Nevo-Hakohen added.

“They don’t really want real estate,” Nevo-Hakohen said of the investors. “If someone else can provide real estate, that’s a huge lever for their business.”

Substance use disorder centers are a hot spot for REIT deals. Indeed, Sabra and Clemente, California-based CareTrust REIT Inc. (NYSE: CTRE) have focused on addiction treatment.

CareTrust REIT has used behavioral health deals as a way to shift underserved senior care services and residential facilities to more profitable uses. Both REITs invest very heavily 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.

“We kind of feel like the Wild Wild West in terms of regulations and fragmentation among operators,” Sedgwick said. “There are a lot of similarities with (skilled nursing), especially in the addiction recovery segment, which rings true or sounds similar to us.”

Both Sedgwick and Nevo-Hacohen said the biggest challenge for behavioral health REITs is finding large enough operators to do deals with. Both said they have adjusted their expectations regarding the size and complexity of behavioral health operators in relation to the senior care space.

“On the skilled nursing side, because of our experience in operations, we’ve been able to launch several operators where their first buildings are through a lease relationship with us,” Sedgwick said. “We don’t have the same experience, frankly, in terms of behavior. This further narrows the pool of operators.”

Nashville, Tenn.-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 Quattrocchi, chief operating officer of Landmark Recovery.

It began addiction treatment after its predecessor Landmark Senior Living sold some of its facilities to REITs. Following this liquidity event, Landmark Health began working with REITs to secure facilities and financing.

Talja Nevo-Hakohen, Chief Investment Officer at Sabra Health Care REIT Inc. (Nasdaq: SBRA), speaking at INVEST.

Landmark Recovery began its relationship with CareTrust when it attempted to purchase three CareTrust facilities.

The company chose to pare down a previous investment and work with a REIT to avoid handing over ownership of the company to outside investors, Quattrocchi 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 so we can continue our growth,” Quattrocchi said.

Private equity sponsors and other business sponsors require much higher return thresholds for their capital, Nevo-Hakohen said.

CareTrust REIT and Sabra Health Care REIT plan to continue to expand behavioral health as part of their portfolio and investments. Sabra is looking at behavioral health, which will eventually make up 25 percent of its portfolio, Nevo-Hakochen said. Sedgwick said it’s too early to estimate how much CareTrust will grow in behavioral health.

The coronavirus pandemic has shaken the skilled nursing industry. The virus, which is particularly deadly for the elderly, has increased costs in the form of additional treatment and prevention efforts. At the same time, staff shortages and isolation protocols limited the census, which led to revenue growth.

REITs with heavy exposure to the skilled nursing industry have since sought to diversify their portfolios. Sabra Health Care REIT will use the proceeds from the facility sale to fund its behavioral health investments. CEO Rick Matros called this “capital recycling.”

“We’re open for business — that’s something we’re really committed to,” Nevo-Hakochen said. “We have a desire to develop in the space. We’re ready to share our portfolio because we’ve gone through a very serious deep dive into our portfolio and we’ve identified assets that we want to exit, assets that we want to convert.

“So there are opportunities that can actually lead to an operator, it’s not just the other way around.”

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