Sabra Healthcare REIT (Nasdaq: SBRA), a real estate investment trust (REIT) based in Irvine, California, has made significant strides in the realm of healthcare real estate, with over $800 million invested in the behavioral health sector. Although the company has seen positive returns, it is clear that investing in behavioral health properties is not as frequent as investments in its other sectors like skilled nursing or senior housing. In its latest earnings call, Sabra’s executives shared their cautious yet steady approach to expanding its behavioral health portfolio, focusing on quality over quantity and incremental growth.
Strategic Focus on Investing in Behavioral Health Properties
Sabra’s approach to investing in behavioral health properties includes a portfolio of 17 properties and two mortgages dedicated to this sector. While the company remains committed to growing its holdings in the behavioral health space, it recognizes that opportunities to expand this sector occur less often than those in its other more established areas. As a result, Sabra has taken a measured, incremental approach to growth, preferring to build out its behavioral health investments slowly and sustainably.
The REIT is actively engaging with both large, established operators and smaller behavioral health providers to explore future opportunities. Despite the slow pace of growth, Sabra’s recent success with Recovery Centers of America, which was added to its stabilized portfolio in Q2, highlights the potential of investing in behavioral health properties. This acquisition has proven to be profitable more quickly than other investments, which is encouraging for future expansion in this area.
Talya Nevo-Hacohen, Sabra’s Chief Investment Officer, explained that the break-even point for behavioral health facilities comes at a much lower occupancy level than in more traditional healthcare properties like skilled nursing and senior housing. This makes investing in behavioral health properties an attractive proposition for Sabra, especially given the growing demand for mental health services.
In addition to acquisitions, Sabra has been focusing on redevelopment opportunities in the behavioral health space. A prime example is the 132-bed residential treatment center in Greenville, South Carolina, which completed its first phase of redevelopment in September. This is part of the company’s strategy to capitalize on opportunities for investing in behavioral health properties that provide essential care to individuals in need of specialized treatment.
Incremental Growth Strategy for Behavioral Health Investments
While Sabra’s leadership recognizes the potential in the behavioral health sector, it also acknowledges the limited opportunities available. Rick Matros, President and CEO of Sabra, explained during the earnings call that investing in behavioral health properties is less frequent compared to other segments. “On the behavioral side, those opportunities just don’t come up very often,” Matros noted. Given the sector’s relative youth and the dominance of a few established operators, Sabra plans to pursue incremental growth, focusing on smaller investments that offer stability and profitability.
Matros also highlighted that Sabra’s focus has shifted from broad diversification to prioritizing earnings growth. “We need to grow earnings again… So we’ll take advantage of the opportunities that we see out there,” he stated. This indicates that Sabra’s future growth in the behavioral health sector will likely be measured and steady, with the company carefully selecting projects that align with its financial goals.
The REIT is not focused on large-scale or transformative acquisitions. Instead, it aims to achieve “singles and doubles” in terms of growth. This approach ensures that Sabra can continue investing in behavioral health properties in a way that is sustainable and profitable, without overexposing itself to risk.
Addressing Labor Shortages and Partner Challenges
Like many in the healthcare industry, Sabra continues to face challenges related to staffing shortages. While labor conditions have improved, Matros pointed out that staffing issues persist, especially in the behavioral health sector. The company has seen improvements in staffing levels, and with a reduction in the use of expensive temporary staffing, Sabra is in a stronger position financially. However, these labor challenges still need to be addressed as part of the broader strategy for investing in behavioral health properties.
Sabra also faced difficulties with some of its partners. Landmark Recovery, a substance use provider in which Sabra has an interest, has been embroiled in controversy following the deaths of four patients. Despite the negative publicity surrounding Landmark, Matros was quick to point out that the financial impact on Sabra has been minimal. “As far as Landmark is concerned, they’re less than 1% of our NOI,” he said. Despite these challenges, Sabra remains committed to investing in behavioral health properties and continuing its partnerships, as long as financial obligations, like rent, are met.
Future Growth and Steady, Predictable Expansion
Looking forward, Sabra’s strategy for investing in behavioral health properties remains focused on steady and predictable growth. The company does not need to pursue large, noisy acquisitions but instead plans to continue making smaller, calculated investments that add value to its portfolio over time. This measured approach reflects the company’s commitment to building a stronger, more diversified portfolio without overextending itself.
As the behavioral health industry continues to grow, Sabra’s cautious yet optimistic outlook positions it well to capitalize on future opportunities. By staying true to its incremental growth strategy, the company is prepared to expand its behavioral health holdings in a way that aligns with both market demands and financial stability.
Conclusion
Sabra Healthcare REIT’s approach to investing in behavioral health properties reflects a cautious yet confident strategy for long-term growth. With over $800 million invested in this space, the company continues to pursue steady, incremental expansion by focusing on profitable, smaller-scale acquisitions and redevelopment projects. While challenges like labor shortages and partner difficulties remain, Sabra’s flexibility and commitment to maintaining steady growth ensure that it is well-positioned to take advantage of future opportunities in the growing behavioral health sector. By prioritizing predictable, sustainable investments, Sabra is securing its place as a leader in investing in behavioral health properties for years to come.
