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San Clemente, CA-based CareTrust REIT is moving into the behavioral health segment after reaching an agreement to convert three of its underperforming assisted living communities into residential addiction recovery centers.

During Friday’s first-quarter earnings call, CareTrust President and CEO Dave Sedgwick said that Landmark Recovery, a Franklin, TN-based addiction treatment provider, presents a new opportunity in an immature and fragmented market that, in some ways, resembles the skilled nursing business of 30 to 40 years ago. Redevelopment work on the three former senior living communities is expected to begin this summer.

“The behavioral space presents the company with a new and high-demand asset class, where it can reposition certain existing assets in a way that fits our mission of matching great operators with great opportunities,” Sedgwick said, adding that CareTrust is in the early stages of developing operator relationships in the sector, but he’s excited about the potential for growth in the property type.

CareTrust’s news came a day after Irvine, CA-based Sabra Health Care REIT announced that its diversification strategy for 2022 would focus on assisted living and addiction treatment centers, with plans to convert some of its existing senior housing properties and skilled nursing facilities into addiction treatment centers.

For CareTrust, the three repurposed properties come from 32 previously announced senior living and skilled nursing facilities that the company identified as “hitting the wall or not sustainable” due to COVID-19. The announcement followed a comprehensive review and repositioning plan in February. The “vast majority” of the communities are senior living communities.

Of the 32 previously identified underperforming properties, 27 are in the early stages of the sales process, although Sedgwick said that some properties may be retained and re-tenanted. Two have not been formally taken to market and may be retained if solid gains on a sale are not expected, he said.

Sedgwick said the current environment continues to provide opportunities for CareTrust to strengthen the portfolio through a combination of growth, key dispositions and re-tenanting and repositioning of assets. Reinforcing that its senior housing platform is a high priority, Sedgwick said that CareTrust has positioned itself for accelerated growth for years to come.

More deals in 2022

Regarding investments, in March, CareTrust acquired a Decatur, IL-based skilled nursing campus that includes 46 assisted living units and five independent living units. WLC Management Firm took over operations on March 1. 

Chief Investment Officer Mark Lamb said that he was encouraged by the increasing deal flows crossing his desk this year. The REIT’s investment pipeline is a mix of senior living communities and skilled nursing facilities, as well as debt investments, he said.

“We are excited by the new operators and opportunities that we are currently seeing from our bread-and-butter skilled nursing and seniors housing acquisitions, potential debt investments from the planned debt partnerships we announced last quarter, and from the expansion of our investment box to include behavioral health,” Lamb said.

To address growth opportunities, the company announced the hiring of Scott Grossman as vice president of asset management. The REIT said the hiring of Grossman will allow the company to reposition some employees from portfolio management work to focus on building the company’s operator and investment pipelines, with an emphasis on sourcing off-market deals.

Occupancy up 1% over previous quarter

CareTrust’s seniors housing portfolio occupancy, after being flat for most of 2021, saw a 100 basis point (1%) increase over the fourth quarter of 2021 to 77%, compared with a rate of 75% as recently as November.

The REIT reported collecting 95% of rent due for the first quarter and 93% of rent for April. So far, Sedgwick said, May rent collections are in line with April collections.

“The tight labor market continues to pressure occupancy recovery and margins,” Sedgwick said, adding that operators have reported that the worst appears to be behind them.