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Substance Use Disorder Treatment Facilities Attracting Investors

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With funding support from the federal government and the growing need for mental health facilities nationwide, this niche commercial real estate sector is evolving and emerging as a viable investment opportunity, including drawing the attention of REITs.

The Substance Abuse and Mental Health Services Administration noted in a 2021 survey that nearly 1 in 4 adults 18 and older, and 1 in 3 among adults aged 18 to 25, had a mental illness in the past year.

“The fastest growing sector in this asset class has primarily been the substance use disorder treatment facilities,” writes Justin Butler, leader of the Healthcare Valuation Practice Group for Colliers.

Most facilities that treat substance abuse disorder are not purpose-built, according to Butler, and many are adaptive reuses of nursing homes, assisted living facilities, hospitals, schools, large homes, and sometimes even apartments and office buildings.

 “The behavioral health industry is currently riding a hot wave in terms of funding from the federal government,” Doug King, Vice President and Healthcare Sector Lead at Project Management Advisors, tells GlobeSt.com. “While this could always turn around if the political winds shift, it’s great to see so many behavioral health and addiction centers opening in communities across the country right now.”

Unlike other medical facilities, which often require specialized technology and higher power needs, behavioral health clinics have about the same requirements as the average office, albeit with the addition of specialized anti-ligature devices and additional surveillance for patients of higher acuity, according to King.

“When looking to lease space for behavioral health centers, the ideal clinic should be located in a centralized place that’s easy to get to on public transportation,” King said. “Especially for behavioral health clinics that focus on addiction, it’s important to find a property with space for socialization, which can be essential for recovery. That’s why we see a lot of behavioral health clinics feature outdoor areas (as many patients are smokers), cafes, and even diners where patients can mingle with each other before and after treatment.They also need to be designed with mental health in mind — lots of natural light, comfortable seating and biophilia, and an array of private areas to accommodate different kinds of patients.”

When it comes to adaptive reuse, one area of opportunity for the CRE industry is the conversion of former retail properties in strip malls and downtown areas into behavioral health centers, King said.

“Not only are these spaces already sufficiently embedded into the community, but they also have enough space for clinics to expand and partner with other community organizations, such as medical nonprofits and housing programs,” said King.

Avison Young’s Brooks Hauf tells GlobeSt.com he has seen an increase in the demand for behavioral health services nationwide.

“The largest challenge for the sector is staffing related as the supply for talent is more specialized and not as deep as other labor sectors,” Hauf said. “With demand for behavioral health services expected to continue, staffing will remain very competitive and will drive decision-making on specific locations that have deeper talent pools.”

Butler said the costs for purpose-built facilities compared to adaptive reuse are considerable, and the increased cost often doesn’t provide comparable increased utility. However, there have been purpose-built facilities in operation.

Sale leaseback transactions generally see year-one yields in the 8% to 10% range, Butler said, but this can vary above and below that based on rent levels, tenant strength, quality of the real estate, and location. Rents are commonly in the $30 to $40 PSF NNN range, and many operators can afford rent at these levels, according to Butler.

“We would expect to see more purpose-built facilities, as well as larger operators with national networks and in-network insurance relationships,” Butler said. “There already have been some publicly traded healthcare and net lease REITs that have been purchased these facilities, “and we would expect that to continue.”

 

Source: GlobeSt.

Trends And Challenges To Watch In Post-Pandemic Health-Care Construction

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A year ago, predictions indicated a spike in health-care construction planning and development across the country.

However, the post-COVID-19 shift is trending away from the traditional model to an emphasis on outpatient care to offload pressure from hospitals’ main campuses, according to Richard Simone, CEO & president of Central Consulting & Contracting, a construction management and general contracting company that specializes in health-care facilities.

In an interview with Commercial Property Executive, Simone explains why health-care construction is trending toward smaller outpatient care facilities and clinics and discusses challenges within the sector.

CPE: How has the initial health-care construction model changed since the onset of the pandemic? 

Richard Simone: The factors causing changes in health-care construction are largely due to labor shortages, limited or slow-to-get resources and new operational requirements. Since the start of the pandemic, we continue to do more tracking of workers and data logs on construction sites. For example, we’ve implemented contact tracing logs of when workers enter and exit work sites, temperature checks, cleaning logs, social distancing, no gathering for breaks etc., some of which affects the length of time now needed to complete certain projects.

Also, supply chain issues with closed factories due to COVID-19 have affected completion times and many of the issues persist as manufacturing struggles to keep up with demand, and attract and retain the workers required.

During the height of the pandemic, we saw the need for rapid deployment of resources to build emergency bed units on very short notice, which required a total integrated project delivery approach. Because of the speed in which it was done and the necessary collaboration, we are starting to see more property owners and project decision makers who want to explore this delivery method on their regular projects, not just emergency.

CPE: What is fueling change in health-care construction?

Richard Simone: Projects that were on hold during the pandemic now need to get online as quickly as possible. As such, clients are considering ways to speed up the process via design assist, design build and/or off-site manufacturing. While these options have been around for a fairly long time, adoption has accelerated due to their proven efficacy during the pandemic.

In terms of COVID-19-influenced design, where possible, hospitals are considering the creation of a mass casualty incident entrance at the emergency department. Basically, adding a third entrance to the ED, in addition to the regular walk-in and ambulance entrances, would allow patients to be quickly triaged and separated, moving infected patients into the MCI/COVID-19 unit.

Also, the redesign of waiting areas has increased to allow for social distancing, more room between chairs, low-height walls with glass separation panels, more compartmentalization and minimal wait times. There are also design changes happening in ways most lay people can’t see, such as catering to the need to add more ability or flexibility to change air flows to decrease the spread of future viruses. Many health-care systems now require larger, more robust, high-efficiency particulate air filtration systems, with MERV 16-level protection which captures more than 95 percent of particles within a specified range.

CPE: What types of health-care facilities are we starting to see more often and why? 

Richard Simone: We are starting to see much more activity for behavioral health facilities. Before the pandemic, there was a great need and after the pandemic there will be an even greater need. Substance abuse has been on the rise since the pandemic, as COVID-19 and post-COVID-19 anxieties are all real issues many people are dealing with. Treating patients with behavioral and mental health needs requires a long-term solution that incorporates brick-and-mortar and telehealth-equipped facilities.

Micro-hospitals—whereby health-care systems are bringing health care closer to its more remote patients in, for example, rural areas—is a rising trend as well.

CPE: Are these impacting main campus hospitals in any way? 

Richard Simone: The rise in micro-hospitals and specialty centers is not impacting main campuses negatively, but rather, they are filling a very important need by supplementing main campus care and reach by providing the support and specialty care that patients need.

CPE: What about telemedicine-influenced spaces? Will these be integrated into construction? 

Richard Simone: We are not seeing a significant increase in telehealth spaces yet, as many facilities are using existing spaces for this purpose. I think specific spaces will need to be designed and built in the future, especially given the fact the 2022 guidelines for design and construction will incorporate specific acoustical treatment requirements for noise reduction, interior noise and speech privacy for telehealth spaces. I believe future design will have to consider telehealth-specific spaces, disbursed throughout the facility, with easy access for doctors and staff.

CPE: What are the infrastructure and operational considerations developers should take into account when building health-care facilities in a post-COVID-19 world?

Richard Simone: Considerations should focus on flexibility, including the ability to quickly change HVAC systems from positive to negative and vice-versa. Developers should also efficiently design in possible surge capacities, which would require the ability to quickly change private patient rooms to semi-private and the option to add more patient beds in urgent cares, ICUs and ED settings.

CPE: What can you tell us about the challenges arising in health-care construction?

Richard Simone: Many health-care systems and facilities suffered a tremendous financial impact over the past 15 months, and as a result, several projects are still on hold. The challenge is getting the systems back to feeling financially stable to get back to planning and building.

CPE: How do you see the sector going forward? 

Richard Simone: We still believe the health-care sector is the strongest market, with the greatest short-term and long-term growth potential. It appears to be rebounding quicker than other sectors. Although not as quick as we hoped, it shows signs of coming back stronger than before.

I believe the government—federal and state—has realized how fragile and out-of-date some of our health-care infrastructures are, and they will make the dollars available for hospitals to expand, upgrade and, in some cases, build replacement hospitals.

CPE: Are there any other trends we should keep an eye on? 

Richard Simone: Not a positive trend, but certainly impactful, is the challenge regarding the shrinking availability of skilled labor, as a large bulk of the workforce is aging and there is a lack of a new generation interested in learning the trade.

 

Source: CPE

Medical Properties Trust To Invest $950 Million In Behavioral Health Platform

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Medical Properties Trust, Inc. (the “Company” or “MPT”) recently announced that it has entered into definitive agreements to acquire 18 inpatient behavioral health hospital facilities and an interest in the operations of Springstone, LLC (“Springstone”) from Welsh, Carson, Anderson & Stowe (“WCAS”) for total consideration of $950 million.

Springstone, based in Louisville, Kentucky, is a leading provider of behavioral health services in the United States distinguished by its purpose-built, inpatient facilities in carefully selected markets and care delivery across the full behavioral care acuity spectrum.

The hospitals, along with additional facilities that Springstone expects to develop and acquire, are expected to be master leased pursuant to terms that are anticipated to provide a GAAP-basis yield exceeding 9.0% and lease payment coverage of approximately 1.75x in the near-term. The lease is expected to include an initial 20-year term with CPI-based annual rent escalators subject to a 2% floor.

The Company expects to initially fund the total cash consideration using cash on hand and borrowings under its revolving credit facility and additional financing arrangements, which may include issuances of debt and equity securities, placement of new secured loans on the acquired real estate, or a combination thereof. The sources of financing actually used will depend upon a variety of factors, including market conditions. The transactions are expected to close during the second half of 2021, subject to customary closing conditions, including certain regulatory approvals.

“The Springstone investments give MPT a major presence in the rapidly expanding United States behavioral health care market, which has been underserved in our society despite importance on the same level as acute and post-acute care hospitals,” said Edward K. Aldag, Jr., MPT’s Chairman, President, and CEO. “MPT’s acquisition of the 18 purpose-built inpatient facilities, much like our recent investment in the Priory portfolio in the United Kingdom, appropriately targets the highest level of acuity within the behavioral care continuum, and we believe that our investment in the operating company will result in additional attractive real estate opportunities.”

MPT anticipates that Springstone will continue to be operated by the same senior management team that has created this distinct portfolio of entirely de novo, purpose-built inpatient and outpatient behavioral health facilities in carefully selected markets. It is expected that these highly experienced individuals, led by Executive Chairman Bill Wilcox, CEO Phil Spencer and CFO Greg Miller, will co-invest alongside MPT in the operating company and be responsible for the day-to-day operations of Springstone, which will be essentially unchanged going forward.

“We’re so appreciative of the job the management team did to build this business. We started this company from scratch 10 years ago and are incredibly proud to have built over 50 facilities, created more than 4,000 jobs, and treated tens of thousands of patients with the highest quality care,” said Brian T. Regan, Head of Healthcare and Partner at WCAS. “It was important to us that the management team has the opportunity to be part of Springstone’s ownership and to continue leading the company and its employees to the next phases of growth.”

Philip Spencer, Springstone’s CEO, added, “Over the past decade, Springstone has helped tens of thousands who struggle with mental health and addiction challenges, thanks to the support of Welsh, Carson, Anderson & Stowe and the dedication of our team of compassionate professionals. We look forward to working with MPT to expand our behavioral healthcare model to serve even more communities.”

Benefits of Transaction

Expected to Achieve Immediate Accretion. The strong cash and GAAP returns related to the sale-leaseback transaction and an accretive cash return on MPT’s investments in the operating company, along with MPT’s attractive cost of capital, are expected to result at closing in immediate improvement in per share net income and funds from operations.

Projected to Create an Unmatched Competitive Advantage in Accelerating United States Behavioral Health Care Market. Springstone provides a full continuum of behavioral care including inpatient, partial hospitalization, and intensive outpatient programs and has targeted diversified geographies with positive demographic trends and a commercial-heavy payor mix. These factors, along with its scale and the purpose-built nature of its facilities, differentiate Springstone from competing operators.

The COVID-19 pandemic has accelerated growth in demand for mental health services in the U.S., evidenced by improving Springstone operations throughout 2020. Like in the U.K., the U.S. government and payors alike acknowledge the need for incremental funding for behavioral health care. Multiple Avenues for Growth Including Development and Expansion Projects. Increasing demand for behavioral health services is expected to continue to generate additional attractive development and expansion projects not underwritten in this transaction.

Improved Portfolio Diversification. MPT’s largest individual property investment now represents only 2.6% of pro forma total gross assets. The consummation of the Springstone transaction is subject to customary closing conditions, including applicable regulatory approvals and the finalization of agreements with current management. MPT cannot give assurances that the transactions will be successfully consummated as described above or at all. Barclays and Guggenheim Securities, LLC acted as financial advisors to MPT.

About Medical Properties Trust, Inc.

Medical Properties Trust, Inc. is a self-advised real estate investment trust formed in 2003 to acquire and develop net-leased hospital facilities. From its inception in Birmingham, Alabama, the Company has grown to become one of the world’s largest owners of hospitals with 442 facilities and roughly 45,000 licensed beds in nine countries and across four continents on a pro forma basis. MPT’s financing model facilitates acquisitions and recapitalizations and allows operators of hospitals to unlock the value of their real estate assets to fund facility improvements, technology upgrades and other investments in operations. For more information (including additional details related to the Springstone investment as part of an updated investor presentation), visit the Company’s website at www.medicalpropertiestrust.com.

 

Source: HREI