EXPERT OPINION: A Conversation with Justin Hutchens
November 11, 2013
In this "Expert Opinion" interview, Justin Hutchens, CEO and President, National Health Investors, discusses healthcare REITS, NHI, deal volume, RIDEA joint ventures, changes, and more.........
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J. Justin Hutchens joined National Health Investors (NYSE: NHI) in February 2009 as President and COO. Pursuant to a succession plan, in March 2011 he was appointed CEO. Prior to joining NHI, Mr. Hutchens acquired 15 years of senior care operations experience. His background includes multi-site management with assisted living and skilled nursing facilities (1997 – 2003). He has national operating experience (2003 –2009) as the Senior Vice-President and COO of Summerville Senior Living and Executive Vice-President and COO of Emeritus Senior Living (NYSE: ESC). Mr. Hutchens holds a Master of Science in Management from Regis University and a Bachelor of Science in Human Services from the University of Northern Colorado. He was awarded Executive Certificates in Measurement and Control of Organizational Performance from the University of Michigan, and Strategy and Innovation from the MIT Sloan School of Management.
J. Justin Hutchens
President & CEO
National Health Investors, Inc.
222 Robert Rose Drive
Murfreesboro, TN 37129
Watch the video of the interview:
Healthcare REITs have been dominating the market. They’ve been growing very quickly in the senior housing side, and I’m here today with Justin Hutchens. He is the CEO and president of National Health Investors. Justin, when you came on board three and a half years ago as president of the REIT, did you have any idea that you would be growing the REIT like you have? I think you’ve more than doubled your assets and more than tripled your market value in the three and a half years you’ve been there.
Steve, we’ve had some unique opportunities open up for us. One was the low cost of capital environment, with the low interest rates, which helped to generate large-cap deals and leave the small one-off asset, the small portfolio of marketplace, open for us. So we filled a niche that was needed, which was for regional companies that had development plans, acquisition plans, to be able to deal with a smaller shop like NHI, deal with decision-makers. We’ve added 11 new customers over that time frame; half of those have come back for repeat business, which has really helped to generate our growth and helped to keep us out of the open market, the bidding market that occurs.
I always thought of NHI as more of a skilled nursing focus. You’ve been growing a lot in the private-pay senior housing side. Has that been by design, and do you have any kind of percentage mix you’re looking for?
The plan has been to diversify. When I arrived at NHI, we had 80 percent skilled nursing. We also had one tenant that supported 80 percent of our revenue. In order to attract the institutional investor base and to give our shareholders and ourselves confidence that we had a very reliable income stream, we knew we had to diversify. So we’ve diversified into private pay.
We’ve acquired senior living campuses and we’ve acquired assisted living communities. We have also been buying skilled nursing along the way, it’s been newer assets, assets that we feel would have relevance for years to come, very high-quality assets, high-quality mix. The net result has been to reduce our skilled nursing concentration down to around 50 percent. The senior living campuses and the assisted living are about 35 percent. And then remaining are some mezz loans and then some investments in hospitals and medical office buildings.
We’re a little bit ahead of schedule, we thought we’d be down to 50 percent in the next year or two. We’re ahead of that game plan. I could see the skilled nursing dropping a little lower, but not a lot. Because we still do have a lot of confidence in skilled nursing as well. We’ll look to make opportunistic investments there moving forward as well.
How about a mix between new customers and doing business with existing customers? Is there any target with that?
We don’t have a specific goal in mind. We have a handful of existing customers that we’ve also done some repeat business with over the past few years and will continue to help support their growth plans. And of course we’re always on the lookout for regional companies in particular that have growth plans and are looking for that personalized approach that we offer. We’ll be happy to bring new customers into the mix. But there’s not really a target in mind. The only real target we have is to make sure that we’re being responsive to new customers, existing customers, and helping them to fulfill their growth plans.
For a new customer coming in, is there a minimum kind of deal size you’re looking at, or is it really just who that customer is?
Our smallest deal has been a $650,000 mezz loan for a new customer. Our largest deal—and this was an existing customer—was $135 million. So we have a wide range in terms of deal size, capability and interest. We are first and foremost interested in meeting our customers’ needs, and they don’t always need a $50 million acquisition. They may just need a one, two, five, $10 million capital infusion, which could lead to more business down the road.
How about your home office? Are you still lean, or are you growing that with your growth?
We’ve doubled our FTEs. We’re up to 11 employees. We have the leanest REIT management team in the entire REIT industry, I’m pretty certain, in the publicly traded REITs, healthcare or otherwise. But what we’ve done that I’m proud of is we’ve hired people that are very well educated. We’re growing from within. We have people with finance and economic backgrounds and accounting that we’ve brought on board. That’s helped to really solidify our bench strength and help some of the rest of us to continue to focus on the business development and raising capital.
You have one major RIDEA joint venture partner, Bickford Senior Living. I assume that is going pretty well?
It’s going very well. My initial reaction to the RIDEA structure was that I wasn’t fond of it. This is because it’s a healthcare REIT, and the reason is, I have an operating background, and I have a real, I think, deep understanding that operations have both up and downside risk. And the idea of subjecting a REIT, which has historically attracted investors looking for a very reliable income stream, to operating downside risk, wasn’t attractive to me or the rest of our management team.
When we found Bickford, and we started doing triple-net leases with them, they had an interest to do development. We had an interest to finance some development, based on their 20-year track record of having success in doing so. I found myself very comfortable with the fact that, over a ten-year period, their same-store operations grew an average of 6 percent a year, NOI. We get 3 percent in an escalator, and banking on their track record gives us the opportunity to get some more potential growth. So we entered into the joint venture. We started with ten properties. We’re up to 30 now. I think there will be potential for that to grow some more.
We’ll be happy to consider doing the RIDEA structure and joint venture with other operators. We’re always going to be mindful of that operating track record, though, and I do think it’s a relatively small group of operators that have over 10 years of experience of taking care of seniors and creating value for their shareholders, and we’re looking for the very experienced operators if we’re going to subject ourselves to any kind of potential downside operating risk.
How important is the new development side of the RIDEA joint venture where, once it’s built, you can add brand-new buildings into your portfolio? Is that a key component of it?
It is, when you’re dealing with an operator that has a development background. We’re very confident because they have 49 properties, and 42 of them they’ve built. It’s the same model that they’ve been running for 20 years. So if we were going to move into development, Bickford was an ideal partner for that. It definitely does help the returns.
We also like the opportunity to expand on some of their existing campuses with new construction. We might do some new acquisition, but with this particular operator, they really enjoy running their model and building their model in their select secondary markets and will continue to focus there. But I wouldn’t say that construction was a reason to do the joint venture, but it certainly in the long run is going to help to juice the returns of that.
No, absolutely. And for 2014, do you think you’re going to have as active a year as 2013?
You know what, I’ll be honest: We’re actually ahead of schedule. We are a very selective, conservative company, and we’ve really stuck to selectivity. We’ve probably had opportunity to grow even more volume, but we’re being very picky about operators and assets and making sure we have a perfect fit on every investment that we make, at least as perfect as it could be at the time.
So fortunately we’ve found enough to actually get ahead of our stated growth goals. If the opportunity is there, it’s high-quality, it’s an experienced operator, it’s generally a private-pay asset or a very high-quality skilled nursing facility with long-term relevance, then we’ll consider making the investment. We’re going to go one investment at a time, and hopefully we’ll continue at a brisk pace. But we’ll just have to wait and see.
All right. So maybe you’re going to triple your size in another three years? Nah, no commitment; a public company, you can’t say anything like that. Anyway, good luck and you’ve done a great job so far, and wish you continued success.
Thanks, I appreciate it, Steve.