Behavioral health providers often face a challenging balancing act: they need to expand services and grow operations, but capital is limited. For many, owning real estate is a lower priority, as it ties up funds that could otherwise be used for patient care, staffing, and operational improvements. Enter real estate investment trusts (REITs), which are increasingly presenting strategic opportunities for growth. At the recent Behavioral Health Business event INVEST, Talya Nevo-Hacohen, Chief Investment Officer at Sabra Health Care REIT (Nasdaq: SBRA), highlighted how behavioral health REIT partnerships can transform the growth potential for sponsor-backed behavioral health operators.
Why Behavioral Health Operators Often Avoid Real Estate
Across much of the behavioral health sector, owning facilities is not considered the most efficient use of capital. Providers and investors alike typically prefer that funds be directed toward care delivery, program expansion, and operational enhancements.
“Real estate sucks up a lot of capital with, essentially, no other return,” Nevo-Hacohen said. “That’s where we come in as the knight in shining armor and can say, ‘We’ll buy that real estate … and lease it to you long-term.’”
For many operators, behavioral health REIT partnerships allow them to focus on their core mission—treating patients—without the financial burden and management responsibilities of real estate ownership.
The Emergence of REITs in Behavioral Health
Sabra Health Care REIT, based in Irvine, California, represents an early wave of REITs exploring the behavioral health space. The company began its involvement in 2017 with the acquisition of Care Capital Properties Inc., which included buildings operated and formerly owned by Signature Healthcare Services LLC.
By purchasing real estate and leasing it to behavioral health operators under long-term agreements, REITs provide capital that can be used for expansion, hiring, and operational improvements—all without operators incurring additional debt.
“They don’t really want the real estate,” Nevo-Hacohen said of investors. “If somebody else can provide the real estate, it’s enormous leverage for their business.”
Addiction Treatment Centers: A Key Focus for REITs
Substance use disorder centers have emerged as a particular area of interest for REIT investments. Both Sabra Health Care and CareTrust REIT Inc. (NYSE: CTRE), based in Clemente, California, have zeroed in on addiction treatment facilities.
For CareTrust, behavioral health deals sometimes involve converting underperforming elder care or housing facilities into more profitable behavioral health centers. Both REITs have extensive holdings in skilled nursing facilities and senior housing, providing them with operational experience that can translate into behavioral health investments.
David Sedgwick, CEO of CareTrust, likened the behavioral health landscape to the skilled nursing industry of the 1990s: fragmented, lightly regulated, and ripe with opportunity. “It kind of feels like the Wild Wild West in terms of regulations and fragmentation among operators,” Sedgwick said. “There’s a lot of similarities to skilled nursing, particularly in addiction recovery, that rings true or rings similar to us.”
Overcoming Challenges: Finding the Right Operators
While the potential is significant, REITs face a critical challenge: identifying behavioral health operators large and sophisticated enough to enter into viable partnerships. Sedgwick explained that CareTrust has extensive experience launching skilled nursing operators, where the REIT could support first-time facility owners through lease arrangements. Behavioral health, however, lacks that same depth of operational experience, narrowing the pool of potential partners.
Nevo-Hacohen echoed this sentiment, noting that REITs must carefully assess operators’ operational maturity to ensure long-term success and stability. Behavioral health REIT partnerships work best with operators who have proven growth strategies and a clear understanding of the sector’s regulatory and operational challenges.
Landmark Recovery: A Case Study
Nashville, Tennessee-based Landmark Recovery provides a real-world example of how behavioral health REIT partnerships can accelerate growth. Landmark operates 14 centers across nine states and plans to open 24 more facilities in 2023. The company first entered the behavioral health sector after its predecessor, Landmark Senior Living, sold some facilities to REITs. This liquidity event allowed Landmark Recovery to secure facilities and financing without sacrificing ownership or taking on significant debt.
“We have aggressive, aggressive growth plans, and that’s why the REITs make so much sense for us — it’s much less money upfront, so we can continue our growth,” said Scott Quattrochi, COO of Landmark Recovery.
Landmark Recovery began its relationship with CareTrust when it sought to purchase three facilities. Rather than downsizing or giving up company ownership to outside investors, partnering with a REIT allowed the company to expand strategically and maintain control over its operations.
Strategic Advantages of REIT Partnerships
Behavioral health REIT partnerships offer a number of strategic advantages for operators:
- Reduced Capital Burden: Operators can access facilities without deploying large amounts of cash upfront.
- Debt-Free Expansion: Long-term lease agreements allow organizations to grow without assuming additional debt.
- Focus on Core Operations: Operators can allocate capital toward staffing, programming, and patient care rather than property maintenance or acquisition.
- Preserved Ownership: Unlike private equity or venture capital, REIT partnerships do not require giving up equity in the company.
Nevo-Hacohen noted that private equity investors often require higher return thresholds, which can limit operational flexibility. REITs, on the other hand, provide tailored financing solutions that align with operators’ growth strategies.
Portfolio Growth and Diversification
Both Sabra and CareTrust plan to expand behavioral health as a proportion of their investment portfolios. Sabra aims for behavioral health to eventually represent 25% of its holdings, while CareTrust is still evaluating the pace and scale of its growth in the sector.
The COVID-19 pandemic highlighted the vulnerability of the skilled nursing industry, driving REITs to diversify. Elevated treatment costs, staffing shortages, and reduced census counts negatively impacted revenue growth. In response, REITs like Sabra are using proceeds from divested facilities to fund behavioral health investments—a strategy CEO Rick Matros describes as “capital recycling.”
The Future of Behavioral Health REIT Partnerships
The rise of behavioral health REIT partnerships signals a broader shift in how operators access capital. For sponsor-backed organizations, particularly those focused on addiction treatment, working with a REIT can provide the financial leverage needed to scale operations quickly and efficiently.
Nevo-Hacohen emphasized that Sabra is actively seeking opportunities in behavioral health: “We’re open for business — this is something we’re really committed to. We’re willing to develop in the space. We’re willing to share our portfolio because we have gone through a very serious deep dive into our portfolio and identified assets that we want to exit, assets that we want to convert. There are opportunities that we can actually bring an operator, it’s not just the other way.”
Conclusion
Behavioral health REIT partnerships are more than a financial arrangement—they represent a strategic growth tool for operators who want to expand without sacrificing ownership or operational focus. By leveraging long-term lease structures, operators can access critical facilities, invest in high-quality care, and scale rapidly in a fragmented but opportunity-rich sector.
As REITs like Sabra Health Care and CareTrust continue to expand their footprint in behavioral health, operators who embrace these partnerships may find themselves uniquely positioned to lead the next wave of growth and innovation in the sector.
