Sabra Sees Opportunity in SNF-to-Behavioral Conversions, But Warns: Operators Must Go All In or Face Failure

Sabra Health Care REIT (Nasdaq: SBRA) is in the midst of a push to diversify its real estate holdings into behavioral health assets, and despite some overlap between those care sites and skilled nursing, its leaders say operators must pick one or the other to succeed.

On paper, adapting a portion of a skilled nursing facility for use as an inpatient psychiatric or other behavioral care site makes perfect sense. The United States faces a massive shortage of these services, and the stigma around treating mental illnesses has rapidly eroded. At the same time, skilled nursing operators find themselves with persistently low occupancy at facilities tailor-made for inpatient treatment, with private and semi-private rooms incorporated into existing medical and pharmacy infrastructure.

Sabra’s leadership first began discussing its addiction-treatment plans on a May earnings call with investors and analysts, with CEO Rick Matros describing a limited entry into the industry as a low-risk play in a space without a dominant operator. He then expanded on the potential for skilled nursing conversions on an August call.

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“There aren’t very many other uses for skilled nursing facilities,” he said. “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.”

It’s an idea that’s been floated multiple times by other players in the space, with some real-world examples: Substance abuse treatment companies, for instance, have eyed SNF assets as they seek to fill the significant need for opioid dependence care. In addition, the state of Washington has encouraged skilled nursing facilities to specialize in behavioral health needs with Medicaid rate add-ons, which the Avamere Family of Companies has used to turn around the fortunes of some of its skilled nursing and senior living properties.

“Right now, we have expanded this into five facilities that — I don’t want to say they were hemorrhaging money — but they definitely were not making money, and with occupancy in the 80 [percent range],” Avamere chief development officer Ryan Haller said at an event this past spring. “Now these are some of our most profitable facilities.”

But the reality isn’t as simple as cordoning off one area of a SNF and dedicating it to residents with behavioral needs, and as Sabra begins to dip into the space, the real estate investment trust (REIT) will likely focus on operators willing to fully commit to specializing individual buildings.

“You’ll have facilities that are in tough markets, and they have occupancy issues, so they’ll open a behavioral unit — but the rest of the facility is still skilled nursing,” Matros told SNN during a recent interview at the REIT’s Orange County, Calif. offices. “And you just can’t do that.”

The problem, according to Matros, is that the combined operation is less than the sum of its parts: The facility isn’t necessarily known as a behavioral health center, and the changing nature of the census may make existing residents and their families uncomfortable or confused.

“Who are you? Skilled nursing patients don’t want to be there anymore,” he said. “I’ve never seen that model work. You’ve either got to be all in or all out.”

But that doesn’t mean that skilled nursing operators can’t diversify into behavioral care. Matros pointed to a group of buildings in Southern California, which he had originally overseen during his time at the helm of Regency Health Services in the 1990s. The properties, which have since migrated into the portfolios of Genesis HealthCare (NYSE: GEN) and Omega Healthcare Investors (NYSE: OHI), specialize in behavioral health services for a skilled nursing population, Matros said, with a range of ages served.

Those properties also benefit from a generous reimbursement structure for behavioral care in California, he noted.

“You have to be careful,” he said. “It’s very state-specific.”

In addition, skilled nursing operators generally have more in common with inpatient psychiatric providers than addiction treatment companies, Sabra chief investment officer Talya Nevo-Hacohen said, with one operator in its portfolio achieving success through a push into psychiatric care.

“That can have no age specificity around it, and it can also be focused on geriatric,” Nevo-Hacohen said. “But typically, it’s a short-term kind of acute care, discharged back to wherever appropriate. That population is underserved.”

That said, Nevo-Hacohen acknowledged that converting skilled nursing assets to serve these residents isn’t cheap, and noted that the space faces the same tricky reimbursement math as the post-acute and long-term care industry.

Addiction treatment conversions, meanwhile, are relatively less expensive to pull off.

“You can modify any building that is residential in its nature — whether it’s student housing or senior housing or skilled or an LTAC,” she said, referring to long-term acute care hospitals.

Depending on the specific politics of a given neighborhood, one of the addiction treatment center’s biggest liabilities could also be a major strength. When looking to convert nursing homes into inpatient treatment centers, operators in the space have faced staunch opposition from local residents concerned about having people with substance abuse issues living in their neighborhoods: For instance, a company that had sought to take over a portion of a county-operated nursing home in Illinois was forced to back out of the deal amid regulatory problems last year, while other projects have faced community objections.

But as the nation’s opioid problem receives widespread attention, and attitudes around addiction and those who suffer from the condition soften, having a community-based treatment center could become attractive to both local governments and potential residents. Many older nursing homes exist in “infill” locations, Nevo-Hacohen noted; originally standing alone when they were built years ago, homes and businesses have since filled in around them, making them a convenient choice for care.

“One of the important shifts we’re seeing is that the model is hopefully moving away from mainly Southern California and South Florida destination locations to community-based treatment — because most people actually need to work, and they need to continue in outpatient treatment,” she said.

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