Sabra Health Care REIT (Nasdaq: SBRA) on Thursday announced its impending entrance into the growing addiction treatment and behavioral health marketplace, with a specific eye toward potentially repurposing skilled nursing facilities for the task.
“There aren’t very many other uses for skilled nursing facilities,” Sabra CEO Rick Matros said on his company’s second-quarter 2019 earnings call with investors and analysts. “There are some others for seniors housing, but there’s some limitation there as well. This is a perfect avenue to pursue in those markets that lend themselves to having those kinds of services.”
The real estate investment trust (REIT) first floated an entrance into the substance abuse treatment market on its first-quarter earnings call back in May, with Matros characterizing the space as a rapidly growing, low-risk arena without a dominant player. At the time, Sabra chief investment officer Talya Nevo-Hacohen said the company was exploring both the conversion of existing properties in its portfolio, as well as the acquisition of existing addiction and behavioral treatment centers.
Matros expanded on that idea Thursday, indicating that the company is close to finalizing its first transaction in the behavioral and addiction space.
“It’s not that material, but it will allow us to get into the space and start developing a reputation as a capital partner there,” he said.
During the call, Matros said that some of its existing skilled nursing partners are currently interested in converting select properties to accommodate behavioral and addiction treatment — though he declined to name them when reached by SNN Thursday afternoon, citing the ongoing deal processes.
The repurposing effort would not require much capital investment, Matros said in response to an analyst question, noting that a traditional SNF’s physical plant can lend itself easily to other types of inpatient treatment. In his view, the SNF-to-addiction conversion is more a matter of adjusting programming to focus more on social and psychiatric issues; during his time as a skilled nursing operator, Matros said, he frequently oversaw behavioral health programs within the traditional nursing home setting.
In addition, Matros expressed confidence in the company’s existing roster of nursing home operators and their ability to adapt to new forms of care.
“We don’t necessarily anticipate needing to create new partnerships to do that, because we have operators that understand that business and can segue into it, and it’s not going to be a huge move in the context of their entire portfolio,” he said.
In an era of low census and increased competition from other care settings, the idea of converting SNFs — either completely, or on a partial basis — to behavioral health facilities has gained traction, particularly as the nation confronts high levels of opioid addiction and the stigmas surrounding mental health treatment steadily erode.
“If we can start from a building that has all these pieces and make it perfect, it’s a lot faster than to have a piece of land and build a building,” Deni Carise, chief scientific officer for addiction treatment chain Recovery Centers of America, told SNN back in 2018.
But operators and investors that have tried to take the plunge have run into issues in certain markets, as neighborhoods that may have supported a nursing home tend to balk at the idea of inpatient drug and alcohol rehabilitation facilities.
A non-profit that runs addiction treatment centers was forced to back out of a deal to take over a portion of a county-run nursing home in Urbana, Ill. last spring amid logistical and regulatory issues, for instance, while facilities in other areas have run into community resistance.
Passing on major SNF deals
Matros addressed fellow REIT Omega Healthcare Investors’ (NYSE: OHI) blockbuster $735 million deal to acquire 58 nursing homes, announced earlier this week. In response to a question, Matros said that he and Sabra were “intimately” aware of the properties that Omega purchased, but ultimately passed on the opportunity in order to maintain a more balanced portfolio.
“We are not going to do anything that’s complicated or requires explanation,” he said. “We’ve had a lot of noise in the stock price over the last couple months, about a year and a half. Doing a deal of that size really puts us on the road to being a skilled REIT, and it becomes harder and harder to come back from that.”
Ever since the company closed on its August 2017 merger with the SNF-heavy REIT Care Capital Properties, executives have taken strides to emphasize its steady reduction in skilled nursing exposure; the company on April 1 pulled off the sale of 28 buildings operated by the bankrupt Senior Care Centers for $282.5 million.
As he has in the past, however, Matros classified the SNF reduction as a strategic move to create a diversified portfolio, and not a referendum on the health of the industry itself.
“Everybody knows we love the asset class; it’s got nothing to do with that,” he said.
The CEO also reiterated his optimism over the potential for the Patient-Driven Payment Model (PDPM) to boost reimbursements for the industry, as well as his interest in in-house Medicare Advantage programs known as Institutional Special Needs Plans (I-SNPs).
“That is just starting to gain momentum, and it’s a real game-changer for the industry, particularly when you look at how much the Medicare Advantage insurer takes off the table profitability-wise,” he said.
Sabra reported net income of $83.7 million for the second quarter of the year, down from $200.8 million this time last year. Shares rose $0.72, or 3.50%, in Thursday’s trading to close at $21.32.