The healthcare real estate market has long been a popular and steady investment space, with senior housing and skilled nursing facilities typically offering reliable returns. However, over the past decade, a new and intriguing segment has been gaining traction among real estate investors: behavioral health real estate investment. While these facilities present a compelling opportunity due to their relatively low break-even points and higher reimbursement rates, they come with a set of challenges that make them riskier and more unpredictable than traditional healthcare investments. Investors need to understand the unique economics of behavioral health facilities, as well as the potential risks and rewards associated with this market segment.
A Different Economic Model for Behavioral Health Facilities
One of the most attractive features of behavioral health real estate investment is the ability of behavioral health facilities to hit profitability with significantly lower occupancy levels compared to other healthcare facilities. Rick Matros, CEO of Sabra Health Care REIT, explained in the company’s second-quarter earnings call that some behavioral health facilities can achieve their break-even point with occupancy levels as low as 50% to 60%. This is far lower than the occupancy rates typically required for senior housing and skilled nursing facilities, which often need occupancy levels of 85% or higher to maintain profitability. For investors, this presents an opportunity to achieve a quicker return on investment.
However, Matros also points out that behavioral health businesses operate under a very different economic model, one that is far less predictable than the more established sectors like senior housing and skilled nursing. “It’s a much different economic model,” Matros said. “Folks aren’t yet looking at it differently than senior housing and skilled nursing.” The unpredictability of patient needs, combined with shorter lengths of stay, means that while a behavioral health real estate investment might have a lower occupancy requirement to break even, its revenue can be more volatile and subject to fluctuations.
Understanding the Financial Dynamics of Behavioral Health Facilities
To understand why behavioral health real estate investment can achieve profitability at lower occupancy rates, it’s important to take a deeper look at the financial model behind these facilities. Talya Nevo-Hacohen, the Chief Investment Officer of Sabra Health Care REIT, shared several reasons during the company’s earnings call that help explain why behavioral health facilities can be more financially efficient than traditional skilled nursing or senior housing facilities.
One of the key factors is the reimbursement rates that behavioral health facilities can secure. According to Nevo-Hacohen, these rates are significantly higher compared to those received by senior housing and skilled nursing operators. This higher payer rate allows behavioral health operators to generate more revenue per bed, even if they do not maintain high occupancy levels. Behavioral health real estate investment typically requires fewer clinical staff compared to skilled nursing facilities, which helps reduce operating costs while still covering similar fixed costs related to maintaining the property.
Furthermore, the revenue generated by these facilities is largely driven by patient turnover, as opposed to the longer stays seen in traditional senior housing or skilled nursing facilities. Nevo-Hacohen pointed out that the average length of stay in behavioral health facilities is relatively short—often around 19 to 20 days. This shorter turnover time can be an advantage in terms of revenue generation, as it allows facilities to treat a larger number of patients in a given time frame. In effect, this creates a business model that resembles a “super-high Medicare rate for everyone,” as patients are cycled through the facility more rapidly.
However, as Nevo-Hacohen noted, the largest expense for these facilities tends to be a centralized customer acquisition model, which must be applied across the entire portfolio of behavioral health facilities. The ability to attract patients, and the costs associated with that, become key factors in the financial success of these properties. While the revenue potential is higher, the unpredictability of patient turnover and varying reimbursement rates can create instability in earnings, especially when compared to the more predictable nature of senior housing and skilled nursing facilities.
The Unpredictable Nature of Behavioral Health Investments
Despite the financial advantages of behavioral health facilities, one of the major drawbacks is the unpredictability and volatility that comes with this market segment. As mentioned, the length of stay for behavioral health patients tends to be much shorter than those in skilled nursing or senior housing. This leads to higher turnover rates, which can create fluctuations in occupancy and, consequently, revenue. This volatility is one of the primary reasons why behavioral health real estate investment is seen as riskier than traditional investments in senior housing or skilled nursing.
Michael Costa, the Chief Financial Officer of Sabra Health Care REIT, further elaborated on the variability of net operating income (NOI) from the company’s behavioral health segment. He noted that even though the property count in the behavioral health segment had remained consistent, the NOI could fluctuate from quarter to quarter, making it harder to predict returns. In fact, Sabra’s behavioral health segment posted a $859,000 loss in the first half of the year, despite its sizeable investments in the space.
The unpredictability of behavioral health assets can be attributed to several factors, including fluctuating patient demand, changes in reimbursement rates, and broader economic conditions that can impact patient volumes. Moreover, the specialized nature of the facilities—catering to individuals with specific behavioral health needs—means that the demand for services can be more erratic than in other healthcare sectors.
As a result, behavioral health real estate investment can be a challenge to manage from a financial perspective. While the potential for high returns exists, these investments are subject to more frequent adjustments in earnings, which can be concerning for investors who rely on more stable and predictable cash flows.
Sabra Health Care REIT’s Strategy in the Behavioral Health Space
Sabra Health Care REIT has made a considerable commitment to the behavioral health real estate investment space, but the company is also cautious in its approach. As of the end of the second quarter of 2014, Sabra had invested approximately $480 million in behavioral health assets, owning 18 facilities with roughly 1,200 beds. Despite this investment, the company has kept its focus on the more established segments of skilled nursing and senior housing, which together account for the majority of its portfolio.
Interestingly, while Sabra’s management has noted that interest in the behavioral health space is on the rise, the company’s investment in this area has remained relatively static in recent years. Sabra’s behavioral health portfolio, which represented about 14% of the company’s overall portfolio in the second quarter, continues to generate a mixed financial performance. For instance, despite maintaining a stable property count, the behavioral health segment’s NOI has fluctuated, and the company has not yet found as many investment opportunities in this space as it has in senior housing or skilled nursing.
This cautious approach reflects the uncertainty surrounding the long-term viability and stability of the behavioral health real estate investment sector. For Sabra, and many other REITs, the ability to repurpose underperforming senior care and post-acute care properties into behavioral health centers can offer a timely and cost-effective solution. However, the unpredictable nature of the market, combined with challenges related to patient turnover and reimbursement rates, has made it harder to scale up investments in behavioral health properties as aggressively as in other areas.
Conclusion: A High-Risk, High-Reward Investment
Behavioral health real estate investment undoubtedly offers a unique and potentially lucrative opportunity for real estate investors. The relatively low occupancy break-even point, higher reimbursement rates, and lower clinical staffing requirements make these facilities financially attractive compared to traditional senior housing and skilled nursing facilities. For savvy investors, the ability to capitalize on the unique economic model of behavioral health facilities can yield strong returns, especially in markets with high demand for these services.
However, the trade-off is the volatility and unpredictability that comes with investing in the behavioral health real estate investment space. Shorter patient stays, fluctuating demand, and inconsistent reimbursement rates can lead to earnings that are far less predictable than other healthcare investments. For investors willing to take on this risk, behavioral health real estate investment could prove to be a high-reward addition to their portfolios, but the uncertainty surrounding the sector must be carefully managed.
In the end, the behavioral health industry presents a complex investment landscape—one that requires a deep understanding of the financial model and risks involved. While it offers attractive growth potential, investors must be prepared to navigate the challenges that come with the territory.
