Andrew Sfreddo of Blueprint Offers Insights For Investors
The behavioral health market has surged in recent years.
A rise in patients seeking mental health services coupled with an increase in access has transformed the sector, especially from an M&A perspective. In 2012, there were 17 deal announcements, mostly carried out by Acadia Healthcare Company, Inc., one of the largest publicly traded providers in the industry. Fast forward to 2022 when there were 108 deal announcements, with private equity-backed platforms, health systems, and managed care companies driving much of the activity. Most of these deals have focused on the operators and providers in the space, with scarce attention on the real estate aspect of the market. However, new market dynamics are changing and additional players and investors are moving into the space.
“There has been a programmatic shift for real estate investors to broaden their scope of investments and focus on evolving businesses with reimbursement tailwinds,” said Andrew Sfreddo, head of behavioral healthcare at Blueprint Healthcare Real Estate Advisors, LLC.
Blueprint is most known for its work in the senior care and Long-Term Care real estate space but recently has established teams to handle new verticals, including behavioral health care. The Blueprint Behavioral Healthcare Team recently closed on a sale-leaseback of two residential substance abuse disorder centers as well as a psychiatric hospital located in Virginia and Michigan respectively, with many other deals in the works.
“There have been a lot of tailwinds in the industry at the state and federal level, including more favorable reimbursements from Medicaid and commercial insurance,” said Sfreddo
REITs appear to be the biggest players in the behavioral health real estate market. Sabra Health Care REIT has a growing behavioral health portfolio representing an investment of approximately $730 million with a weighted average cash yield of more than 8%.
“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 company’s Q2:22 earnings 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.
Ventas, Inc., another REIT, purchased a 102,000-square-foot facility in Plano, Texas, leased to the Eating Recovery Center, for $58 million in November 2021.
However, there are some factors new investors looking to enter the market need to keep in mind.
“If you’re looking to convert an existing property to behavioral healthcare, the biggest thing to look for is zoning,” said Sfreddo. “Zoning is very local, and certain jurisdictions won’t allow substance abuse treatment centers, for instance. You also need to figure out how much it will cost to retrofit something. Construction costs are high right now, and converting existing properties can be much more cost-efficient especially since the inpatient floor plan and care model is already in place.”
The market isn’t insulated from other headwinds, such as inflation and labor shortages. Buyers also need to be cognizant of those factors when assessing properties. Urban areas have access to more mental health clinicians and nurses needed to staff inpatient rehabilitation facilities or psychiatric hospitals. Labor shortages can force employers to offer higher wages to retain staff. This could eat away at revenues and margins, which still play a role in the real estate market.
“Cap rates are somewhat similar to what we see in long-term care if you are purchasing the real estate and operations, but a lot of the M&A in the space has historically just reflected the sale of business operations which is traditionally based on EBITDA and revenue multiples,” said Sfreddo.
Navigating the healthcare market is challenging regardless of the vertical, but there is opportunity for various investors, especially in the behavioral health real estate market.
“Behavioral Healthcare wasn’t a flavor of choice for a long time, Sfreddo said. “There was a stigma to it, but now with mental health finally getting well-deserved focused, coupled with reimbursement tailwinds in the industry, the market is really expanding.”
