For the past several years private equity firms and their portfolio companies have driven the behavioral healthcare M&A market, but a new mix of strategic investors have entered the field, from REITs to managed care providers and health systems. Although activity is slower than compared to 2021, the behavioral health market is still experiencing significant tailwinds from growing demand for mental health services and significant fragmentation in the industry. Deal volume for 2022 is sitting at just under 100 deals, but we expect to cross the 100-mark threshold before the end of the year. In 2021, investors and dealmakers announced 125 transactions in the Behavioral Health Care sector.
Optum, a significant part of UnitedHealth Group, purchased Refresh Mental Health in March 2022 from Kelso & Company. Refresh Mental Health runs 300 locations across 37 states that offer various services including psychiatry, eating disorder and substance abuse treatment.
The deal gave the UnitedHealth Group subsidiary a greater foothold in the behavioral health space, which has garnered greater interest during the pandemic. The value of the purchase is undisclosed, but Kelso bought Refresh at a valuation of around $700 million in December 2020, Axios reported.
LifePoint Health, a subsidiary of RCCH HealthCare Partners, acquired Springstone from Medical Properties Trust, a national healthcare REIT. Springstone operates 18 behavioral health hospitals and 35 outpatient locations across nine states. Medical Properties Trust will continue to own most of Springstone’s locations and retain its minority stake in Springstone’s operating company. The transaction is expected to be finalized in early 2023.
To diversify its portfolio and revenues, Sabra Health Care REIT said in its Q2:22 earnings call it will invest $800 million in behavioral health. Sabra Health Care is a major player in the Long-Term Care industry, but it sees new opportunities in behavioral health.
“In doing so, we are creating value in our portfolio by generating higher returns and durable income streams, as well as continuing to diversify our portfolio,” Talya Nevo-Hacohen, Sabra’s executive vice president and chief investment officer and treasurer, said during the call. “Our attention to this underserved factor is being noticed. And we are now in active discussions with more operators on additional conversion opportunities.”
Nevo-Hacohen is referring to the company’s plan to transition some of its skilled nursing facilities and senior housing buildings into behavioral health facilities.
Sabra has 14 behavioral health properties in its portfolio with plans to convert three more with a $27.6 million investment. The REIT is working with behavioral health operators in these facilities to convert them to inpatient substance use disorder facilities.
In 2019, Sabra purchased a set of real estate assets in Carmel, Indiana, and Louisville, Kentucky, from Landmark Recovery, a drug and alcohol rehabilitation organization. The deal included an agreement between Sabra and Landmark to work together on future Landmark Recovery locations.
Other REITs are entering the market as well. Ventas, Inc. purchased a 102,000-square-foot facility in Plano, Texas, leased to the Eating Recovery Center for $58 million in November 2021. The facility is 100% leased with 16 years remaining in the lease term. The acquisition price represents a 7.2% yield on the expected 2022 net operating income. Ventas announced the deal as part of its third-quarter 2021 financial performance disclosures. This marks Ventas’ entry into the behavioral healthcare market. The facility has 72 inpatient beds.
We expect to find much more activity buried in some of the REITs’ annual reports and filings, which we’ll cover. Demand for mental health services remains steady and investors will look to capitalize on those tailwinds throughout 2023.
