Sabra Health Care REIT (Nasdaq: SBRA), based in Tustin, California, is signaling a shift in its investment strategy, stepping back from the behavioral health sector. In its Q3 2024 earnings call, Sabra’s leadership team shared that they no longer view behavioral health investments as a key area for growth. Once seen as a vehicle for diversifying its portfolio, the company now believes that the opportunity to expand within this space has largely passed, leaving little room for further meaningful acquisitions.
Sabra’s journey into behavioral health investments began several years ago, with the initial aim of repurposing existing properties—those no longer suitable for skilled nursing or senior housing—into behavioral health facilities. Talya Nevo-Hacohen, Sabra’s Chief Investment Officer, explained that this strategy focused on converting a fixed number of assets into investments. However, with most of these conversions now completed, the company is “sitting tight” on its existing holdings. “We’ve depleted that and converted those, so right now, we’re sitting tight on that,” Nevo-Hacohen remarked during the earnings call, signaling that Sabra’s pursuit of further behavioral health investments is winding down.
Sabra’s real estate portfolio currently includes 373 properties, 18 of which are dedicated to behavioral health investments, comprising both inpatient and outpatient care for substance use disorders (SUD) and mental health conditions. In previous years, the company had actively sought to expand its investments footprint, focusing on smaller, established operators with strong track records. However, Sabra’s leadership acknowledged that acquisition opportunities in the behavioral health investments sector are now far less frequent, and the quality of available opportunities has declined. The behavioral health investments Sabra is now encountering are described as “rarely of institutional quality,” which has led the company to adjust its focus.
This shift marks a significant departure from Sabra’s previous approach to behavioral health investments. The company had been one of the more active REITs in this sector, beginning with its first investment in the SUD treatment industry in 2019. Over the years, Sabra formed partnerships with prominent SUD providers, including Landmark Recovery and Recovery Centers of America. Landmark Recovery currently operates two Sabra facilities in Arkansas and Kentucky. Despite this partnership, Sabra’s interest in expanding its behavioral health investments portfolio has dwindled.
Landmark Recovery, however, has faced significant challenges. The treatment provider came under scrutiny in 2023 after four patients died while in care, leading to negative media attention and regulatory scrutiny. The company also faced financial difficulties, including the closure of three centers in Indiana and layoffs that affected a third of its workforce. Despite these setbacks, Sabra expressed little concern over its relationship with Landmark, noting that the operator contributed less than 1% of Sabra’s net operating income (NOI). In fact, Rick Matros, Sabra’s president and CEO, dismissed the concerns, emphasizing that the issues with Landmark were “immaterial” to the company’s financial standing.
While Sabra has not completely ruled out future behavioral health investments, it is now approaching these opportunities with greater caution. In the Q3 2024 earnings call, Matros stated that the company would be open to future high-quality partnerships, but such opportunities are expected to be “very, very few and far between.” Sabra’s preferred model for these types of investments involves collaboration with private equity funds, which bring additional capital and financial stability to the table. These partnerships provide Sabra with a more secure operating platform, as the private equity funds involved are often well-capitalized and offer a buffer against potential risks.
This change in strategy is a clear pivot for Sabra Health Care REIT, which once saw significant potential for growth in the behavioral health space. The company is now prioritizing investments in senior housing and skilled nursing facilities, which it sees as offering more stability and potential for growth in the current market environment. Behavioral health investments opportunities are becoming increasingly rare, and Sabra’s leadership is taking a more conservative approach, focusing on segments of the healthcare real estate market that are currently more promising.
While the behavioral health investments sector has seen growing interest from real estate investors and brokerage firms in recent years, Sabra’s experience suggests that this area is becoming less viable for large-scale institutional investors. As a result, the company has opted to concentrate its resources on senior housing and skilled nursing investments, areas that continue to show greater promise.
In conclusion, Sabra Health Care REIT’s decision to scale back its behavioral health investments marks a strategic shift in the company’s portfolio management. While Sabra has not completely abandoned the sector, its focus is now on maintaining its existing properties and seeking out select, high-quality opportunities, particularly those involving private equity partners. The company’s leadership has made it clear that, for now, senior housing and skilled nursing are the primary areas of focus, and growth within the behavioral health investments space will be minimal. This cautious approach reflects broader trends in the healthcare real estate market, where competition is intensifying and opportunities for meaningful acquisitions are becoming harder to find.
