Roberto Delgado, VP of Acquisitions for Scioto Properties recently spoke with Behavioral Health Business to discuss the rise of single-family residents as an asset class, and Scioto’s outlook for this type of real estate. He also breaks down the key real estate trends shaping the behavioral landscape today, as well as the steps rehab and behavioral health facilities are taking to adapt and meet these needs.
This following article is written by Mick Stahlberg for Behavioral Health Business Voices
Behavioral Health Business: What career experiences do you most draw from in your role today?
Roberto Delgado: I’ve been structuring sale leasebacks across different industries, real estate types and geographies for about 20 years. This background in corporate finance and real estate is very helpful in the way Scioto’s structuring transactions right now. We can build creative and customized structures for providers.
Talk about the rise of single-family residents as an asset class and your outlook for this type of real estate. What types of care providers are seeking these assets today?
We started buying residential facilities in 1999. That was before single-family residences (SFR) were classified an institutional asset class. This category wasn’t mainstream until the financial crisis, largely due to institutional investors scooping up a large inventory of empty houses across several major metros and renting them out.
A second factor was the deployment of new technologies that allowed property management companies to efficiently service renters in these communities. These technologies helped scale SFR investors into public companies and consolidate SFR as an institutional asset class.
There is no evidence the trend of renting SFR will diminish. In 2008, there were 36MM (million) rentals. This year we are up to 44MM rentals. With recent housing prices, not everyone has enough money to put down a payment or afford the operating expenses of home ownership.
Looking at the full spectrum of health care providers, our focus is long-term residential care. The longer people receive services, the more important it is for these settings to feel like home. Residential facilities can provide a home-like experience for people in a low-density environment. Residents are also more likely to be integrated into the community in low-density residential facilities. Having a residential facility feel like home is important for patient outcome and mental wellbeing.
How does Scioto Properties support prospective buyers as well as current owners of this type of real estate, and how does the organization assist with strategy?
We have two types of buyers: providers and private equity sponsors; and two types of services: financing and real estate services. We support providers in their real estate needs by dedicating a team to identify adequate residential properties that are conducive to good outcomes and economics. Provider organizations are not usually staffed with capital markets real estate specialists. This is a significant value-add service we offer to providers seeking to expand across regional markets.
Additionally, we can work with providers to make and fully-finance the necessary renovations and modifications for long-term residential use. If the property requirements are more customized, we can also build facilities across the country.
Private equity sponsors rely more on our financing services, which include real estate sale and leaseback as part of their M&A transactions. We also help them fill out markets by buying properties and leasing them to their portfolio companies. The third way we assist sponsors is building de novo facilities.
With an established history of SFR success in intellectual development disabilities (IDD), and over 20 years in the construction of traumatic brain injuries (TBI), SFR and rehabilitation centers , how is Scioto bringing value to the behavioral health space?
We can add the most value by helping providers move clients from institutional settings into more residential settings. Those settings can be single-family residential, or they can be campuses. We have a lot of campuses with rehabilitation centers in low density settings that are very conducive to long-term care. These tend to be step-down facilities to which people are transitioned when they need more care after that 60 or 90-day window.
We adapted what we learned in IDD and applied it to TBI. We are seeking to do the same in behavioral health. We are leaders in both of those segments because we’ve been able to provide settings for good outcomes and to make the economics compelling for providers. At the end of the day, we are offering housing to drive results for providers in a more economical way.
What types of properties are you seeing as targets, and how are rehab and behavioral health care providers renovating and adapting these properties to fit their needs?
We are most competitive in buying and building 20-bed or less residential buildings. These can be stand-alone or in a campus that aggregates several buildings. These residential buildings can also be integrated with rehabilitation facilities. We currently operate in 40 states with 2,000 properties.
Providers vary their real estate strategy based on their target market. Higher-end providers operate out of luxury residential facilities and purpose-built campuses. Providers focused on lower-income markets will tend to adapt existing facilities in their target markets.
Scioto is a good fit for both types of providers. We can cater to providers existing needs. We also see an opportunity to expand residential offerings in lower-income markets.
What key real estate trends are you focused on today as they relate to providers offering rehab and behavioral health services? What opportunities do those trends offer to providers?
This year we are seeing higher construction costs and labor shortages. From a provider perspective, if you want to build something right now it is substantially more expensive than it was last year. It is very difficult to make those new projects work right now, so we’ve been focused on helping providers renovate existing facilities. The cost tends to be far less than the cost of a new build.
Renovations can still be customized, and it’s faster. Instead of going through a two-year process to build, a renovation can be done in six months. It enables the provider to make money sooner than in new construction. We’re going to see that pendulum swing back at some point but right now, construction is a very difficult approach unless the reimbursements are high.
Finish this sentence: “The top strategy that care providers should employ in 2022 to best prepare for 2023 is…”
…to find efficiencies in their real estate footprint that ultimately lead to better outcomes.
Editor’s note: This interview has been edited for length and clarity.
View the article here.