EXPERT OPINION: A Conversation with Justin Hutchens

November 2, 2010

In this "Expert Opinion" interview, Justin Hutchens, President and COO of National Health Investors, discusses the REIT’s investing expectations over the next 12 – 18 months in the M&A market for seniors housing and care.

Justin HutchensWatch the video      Read the transcript

J. Justin Hutchens was appointed as the President and Chief Operating Officer of National Health Investors on February 25, 2009. Prior to joining NHI, he held both regional and national management positions with assisted living and long-term care operating companies. Mr. Hutchens has national operating experience as the Senior Vice-President & COO of Summerville Senior Living in 2003 until the Summerville merger with Emeritus Senior Living (NYSE:ESC) in 2007 at which time he was appointed the Executive Vice-President & COO role of Emeritus. He received a B.S. degree in Human Services from the University of Northern Colorado in Greeley, CO. Mr. Hutchens undertook his graduate studies in Management at Regis University in Denver, CO. He completed an Executive Management Program studying Measurement and Control of Organizational Performance at the University of Michigan in Ann Arbor, MI.
 

Contact Information:
J. Justin Hutchens
President & COO
National Health Investors, Inc.
222 Robert Rose Drive
Murfreesboro, TN 371296
(615) 890-9100
 
Watch the video of the interview: 
 

 

Read the interview transcript:

Steve Monroe:
In today’s market, a lot of people are thinking that health care REITs are going to be the driving force in the M&A market for seniors housing and care, and because of that, I’m here with Justin Hutchens. He’s the President and COO of National Health Investors, a New York Stock Exchange REIT.

Justin, most of NHI’s investments are in senior housing and care. You’ve got over 80 nursing home investments, almost 30 assisted living investments. Where do you see the REIT investing in the next 12 to 18 months? Staying in that focus area? 

Justin Hutchens:
We will. Ninety percent of our revenue right now comes from our leased assets and about 80% of that is from senior housing. We have a little bit larger percentage of skilled nursing, we’re at about 69%, and that’s actually down from a year ago. The reason is we’ve diversified more into assisted living. So we’ll continue to diversify into assisted living.

We’ll also look at other opportunities. We get a lot of credit as a REIT for diversification. Our investors want to invest in a high-quality diversified portfolio. So as much as we like skilled nursing, we like senior housing in general, other assets that are opportunistic will also get our attention. An example would be an acute psychiatric hospital that we bought last year; we actually closed on it earlier this year. It is Medicare/HMO backed, no Medicaid, really strong coverage. It’s based in San Diego, so very limited opportunity to compete with it. And it had a 12% yield, so that was a good opportunity for us to diversify.

Steve Monroe:
That’s a good yield and a good market. Do you have a target investment goal for the rest of 2010 and then going forward into 2011, a dollar amount you’d like to do?

Justin Hutchens:
We did give guidance for the second half of 2010 of $30 million. Twenty of that we’ve already put out. We don’t actually have a goal that’s based on volume, though. We’re looking at investments on a per-deal basis. We’re looking for the combination of good credit and high yield and those assets that help our diversification, and we don’t have a goal to become any certain size or to hit any certain volume of deals per year. We’ll give an FFO [funds from operations] guidance each year and we’ll factor in some amount of investments.  We’re probably going to get ahead of that. But if we don’t, that just means that the particular investments in our pipeline weren’t right for us.

Steve Monroe:
And how much are yields, the initial yields for skilled nursing investments versus assisted living? Are they similar? Are skilled nursing a little higher?

Justin Hutchens:
The skilled nursing does run higher. We feel comfortable we can get a 10% lease rate on a skilled nursing asset, consistently. That hasn’t really changed much even this year with the cost of capital from other sources dropping; 10% is still there for us.  For assisted living, there is more competition there because like us, other REITs also want to diversify and a lot of the health care REITs have a big skilled nursing holding, so they’ll look at assisted living assets as well. Usually you’ll see anywhere from 8 ½ to 9 ½% lease rates. We haven’t done any below 9%, but the market is drifting down a bit.

Steve Monroe:
How about your customer profile? I don’t see you doing the large companies. Are you more the regional and mini-regional type clients?

Justin Hutchens:
The advantage of having large companies – and the one that I’d point out that is a tenant is National HealthCare Corporation, which is our anchor tenant; their master lease represents 45% of our revenue. That’s down from 60% a year ago.

Steve Monroe:
And that’s pretty much how NHI got its start.

Justin Hutchens:
That’s right. They founded NHI in 1991. They have very little to zero debt,
$500 million of equity, real solid credit. They don’t need us to grow, so I don’t know that we’ll do a lot more business with them on an ongoing basis. We did add Emeritus Senior Living as a tenant. They also have very strong credit and they do grow, so very good to have them because there will be opportunities that come our way just by virtue of doing business with them.

But the really good operators are the regional-size operators.  We have a very high level of talent focused on a smaller number of buildings, and you can see it in the operating metrics –

Steve Monroe:
Like Bickford?

Justin Hutchens:
Bickford Senior Living is a great example of that. They’re a regional player that we’ve done two different transactions with and they’re a tenant of ours. They fulfill the credit side of the underwriting with their very strong operational track record. So we do enjoy working with the regional companies.  But in the interests of diversification, you want to have good strong credits. I don’t lose sleep over Emeritus or NHC paying their lease payments, with their credit and balance sheets. The regional operators have really good operations and we feel really good about the potential with those; even smaller companies as well.  Having a blend of all of those is really where we want to be.

Steve Monroe:
I know earlier this year you did a $13.9 million construction loan on a skilled nursing rehab facility. Do you see yourselves doing more on the construction side, because there’s such a need for financing on that, or was that kind of a special one-off transaction?

Justin Hutchens:
That was the start of what will become a construction program for us. We are interested in constructing – we like the newer assets, and we’ll certainly fund construction where it puts us in a position to own assets. And what was unique about that is we negotiated the purchase option and actually fully negotiated a lease, so that when we do step in and buy the property, we’re ready to turn around and lease it back to the operator at a mutually beneficial cap rate. They’ll have strong cash flow, we’ll have strong coverage.

Steve Monroe:
And you’ll have a beautiful new building.

Justin Hutchens:
A beautiful new building. And also assisted living as well. We’ll look into funding some construction for assisted living. It’s a great market. No one’s doing it right now, and so there’s an opportunity to take advantage of it.  Certain markets have a lot of demand and growing demand that could really benefit from new supply.

Steve Monroe:
I know a lot of your competitors in the REIT industry are diversifying into the medical office building space. Is that something you guys want to target, or do you just want to stick to your knitting in senior housing and care?

Justin Hutchens:
We’ve told those that call us and offer us MOB investments that if you can bring them at a 10 cap and they’re on campus and they’re guaranteed by the hospital, then we’ll do them. And we haven’t had any come our way. So the yield’s not quite where we want it, it’s a lower-risk investment. 

Steve Monroe:
Lower risk, lower yield?

Justin Hutchens:
Yes, and I think for certain players it’s a really good investment. For us, it just doesn’t quite fit our profile.

Steve Monroe:
Yes - that makes sense. I mean, you want to be able to support your dividend yield. That’s great, I hope you can get some more construction financing out there and get the word out, because there’s definitely demand.  Thanks for spending time with me.

Justin Hutchens:
Yes, I appreciate it, thank you.
 

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