Elizabeth Sauer and Mary O’Kelley, partners on Bradley’s Long Term Care and Seniors Housing team, sat down with Andrew Sfreddo, recently appointed head of Behavioral Healthcare at Blueprint Healthcare Real Estate Advisors, to discuss trends in the burgeoning behavioral health space. Below are excerpts from their interview.
Congratulations on your new position at Blueprint. Tell us about your department and what you hope to accomplish. Can you share Blueprint’s intentions for creating a distinct behavioral health department?
My goal is to bring specialized and top-tier talent to the behavioral healthcare space under one group of proven leaders to best deliver for our clients – whether they are looking to grow or exit the behavioral healthcare sector. Both my team and Blueprint at large recognize the dramatic need in this country to bring both capital and operators into this space to ensure the best results for patients and providers. Our approach slightly deviates from the traditional healthcare real estate model, but we’re confident in the framework Blueprint has established and have already seen success since our launch.
Given all of the chatter about behavioral health these days, what do you think is driving the increased interest in behavioral health in the long term care sector?
As mentioned, there is an intrinsic need to advance and redefine the behavioral healthcare space in our country, in order to mitigate the mental health crisis that we’re seeing. Recently, we’ve seen significant efforts at the city, state, and federal levels as it relates to government support and funding, as well as commercial insurance funding, which was started with the Mental Health Parity and Addiction Equity Act of 2008. With that comes an opportunity for our business to play a role in delivering in this new market and advancing the patient, provider, and operator experience.
Within the spectrum of what it means to offer behavioral health, what do providers seem most ready to pursue?
Surprisingly, operators are well-positioned to pursue a wide range of services, including in-patient psychiatric treatment, medically supervised opioid detoxification, addiction recovery, and therapy services for patients with autism spectrum disorder. There are current shortages across all sectors, but I think there’s a particular shortage within the adolescent psychiatric space, as we’re unfortunately in a climate where this population is still treated by their primary care physicians. As operating models expand, and more funding and attention goes to this population, we’re hoping to see a shift here.
What opportunities are you seeing for skilled nursing facility (SNF) operators who are interested in adding a behavioral health services component to their portfolio? What factors and challenges should they be considering? How can Blueprint assist as operators navigate the changes?
Blueprint’s existing model, as well as the network my team brings, has been an incredible resource for our clients as the pipeline is already there — and we have been fortunate enough to help several clients expand their footprint in the industry with several deals already under agreement. We are very well-positioned to help our clients navigate every type of conversion or addition of behavioral healthcare to their current portfolio. There will of course be hurdles, ranging from the staffing shortages and complexity that comes with varying city, state, and federal laws, as well as physical plant and zoning. The margins and regulatory environment can be more favorable than other healthcare asset classes, but not every asset is generating a net positive cash flow due to labor concerns, and not every building works if you are looking to implement an adaptive reuse conversion of the facility to offer behavioral health services. Fortunately, Blueprint has built a model that thrives on analytics, and we plan to continue to leverage our internal resources to minimize exposure to these risks for our operators and clients.
From your perspective, what are the similarities and differences between skilled nursing and behavioral health?
Both asset classes require a heavy focus on the operator and ability to deliver top-tier services of care — and both are areas that require a uniquely qualified level of medical care. Licensure, care, and revenue cycle are all similarities that both sectors share, but I would say the verticals of behavioral healthcare are more specific to caring for specialized acuity, while skilled nursing manages care for multiple diagnoses under one roof.
What would you tell others to consider from an investment perspective?
If anything, right now is the time to invest in behavioral healthcare. We are at a pinnacle when it comes to attention on this space right now — and why not be a part of solving the shortage of behavioral healthcare operators in our country? While inflation is, of course, a concern for many right now, I’d argue that we’re seeing an offset in the risk associated in this particular space, given the amount of funding that’s still flowing into behavioral healthcare from our legislators.
What do you see happening on the financing front? For pricing and underwriting, do you think lenders would consider behavioral health to fall within an asset class for which they already have a lending program, is it a hybrid asset class, or would it depend on the particular facility?
The lending market in the sector is still in its infancy, but we are already seeing both banks and specialty lenders enter the market as comparables, and data points are becoming more prevalent. Most lenders in the space right now are doing relationship-type lending on behavioral assets if they have other performing assets with that borrower. We are also seeing specialty finance platforms looking to get into the space, especially where there is an in-patient behavioral model with real estate collateral included. The lending market will continue to increase leverage points here in the future as the industry evolves, but right now, the behavioral industry is setup perfectly for REIT-type capital. These behavioral businesses are trying to scale to meet the increasing demand within the sector, and REITs are currently well-positioned to provide growth capital, as there is not currently a defined agency product — yet — which I do think will come in the near future.
Any parting words for folks wanting to sit this out and not pursue any behavioral health opportunities?
If anyone is questioning if they should pursue or not, I encourage them to reach out to me or my team directly — either in person at the Treatment Center Investment & Valuation (TCIV) Retreat in Scottsdale, Arizona on December 5-7, 2022, or by email — and we can give them our thoughts and hopefully change some investors’ minds.