A Discussion with Justin Hutchens, CEO of National Health Investors, Inc. National Health Investors (NHI), a healthcare REIT based in Tennessee, is focused on growth through acquisitions. Having made headlines with a sizable acquisition from Holiday Properties last winter, seniors housing now makes up about half of the company’s portfolio. Justin Hutchens, NHI’s CEO, recently spoke with NIC about the company’s acquisition strategy as well as his take on RIDEA, new construction and cap rates.
NIC: With the $491 million acquisition from Holiday Properties in November and a recently announced $42 million deal, you’ve been very active on the acquisition front. What is the focus of your recent acquisitions strategy, and do you expect to continue on this course and pace when it comes to acquisitions? How competitive is the current acquisitions market place, and who are your primary competitors in bidding on prospective acquisitions?
Justin Hutchens: Our primary focus has been to partner with operators that have established track records. We have forged these relationships through lease-back transactions, RIDEA, construction financing and on a limited basis, loans. We are targeting private pay seniors housing including IL, AL, MC and rental campuses. NHI is very liquid and poised to grow. Seniors housing properties are a very attractive, reliable investment, therefore, there are many competitors including REITs and private equity funds. We’ve benefited from a mix of investment activity provided by existing customers and new customers that desire a sale-leaseback transaction with NHI.
NIC: The Holiday Property acquisition helped to diversify your portfolio with independent living properties. Are you intentionally increasing your IL concentration? Will you hold all of these properties?
Hutchens: Our portfolio currently consists of 50% private-pay backed seniors housing assets. That number was 35% before the Holiday transaction. I suspect as we grow over time that concentration will continue to increase. We plan to hold all of the 25 properties that we acquired from Holiday. Holiday has entered a 17 year lease with NHI to operate the properties. We plan to continue to pursue investments in seniors housing, and, very selectively, skilled nursing.
NIC: It’s been five years since the inception of the RIDEA structure. Has this structure played a role in your company’s growth strategy when it comes to seniors housing properties?
Hutchens: We utilize the RIDEA structure in our joint-venture relationship with Bickford Senior Living. This relationship accounts for roughly 13% of our revenue. The structure offers the opportunity for the REIT to participate in ownership of operations which can potentially result in a cash flow stream that grows at a brisker pace than the typical 3% lease bumps. It effectively gives the operator access to the REITs public company balance sheet. REITs have proven to have superior access to capital over the past several years.
NIC: As construction increases in some markets, what are your thoughts on new development in the sector?
Hutchens: There are certainly several markets that are overheated, but overall the supply/demand characteristics seem to be in balance. New development is warranted in many markets due to aging existing properties, favorable aging demographics and muted new supply over the past several years. NHI is funding new construction of private-pay AL/MC communities on a limited basis and primarily with existing customers.
NIC: What is your expectation for cap rates? Do you think the spreads between seniors housing cap rates and the 10-Year Treasury yield and/or multifamily cap rates will narrow?
Hutchens: As the 10-year Treasury yield rises, I expect the seniors housing cap rate spreads to narrow initially. Eventually, I would expect the seniors housing cap rates to follow the likely upward trend of the 10-year Treasury yield.
NIC: Fundamentals appear to be strong in the seniors housing space. What opportunities do you see for seniors housing in the future?
Hutchens: The seniors housing and care industry is very fragmented, which presents an opportunity for regional and national players to consolidate through acquisition. Meanwhile, the healthcare REIT space is getting a bit crowded which could lead to M&A activity down the road when FFO multiple spreads materialize in the peer group. The aging demographics are very favorable for years to come. I’m excited about the growth opportunities in seniors housing.
It has been widely reported that an abundance of capital in various forms is currently available for investment in both existing and new seniors housing and care properties. In addition to new capital sources seeking information on the sector, three large regional and national multifamily developers who recently began expanding their operations into the seniors housing and care sector signed up as subscribers to NIC MAP data in the first quarter of 2014. These new subscribers are utilizing the NIC MAP data to better understand the seniors housing and care sector, decide which markets to consider, determine what type of properties are in demand and to evaluate alternative sites within the markets they select.
The companies, with operations based in the Southeast, Southwest and West Coast, reportedly own and/or manage more than 300,000 multifamily units in 30 states. They are currently actively looking for and acquiring sites to develop seniors housing and care properties. Numerous other smaller multifamily developers are also regularly inquiring about data available in the seniors housing and care sector within their market.
Fundamentals appear strong as NIC MAP is forecasting continued steady increases in occupancy and absorption, notwithstanding the level of new construction in many markets. Beth Mace, NIC’s chief economist noted while rent growth was unchanged in the first quarter of 2014, rent growth for both assisted living and independent living exceeded the estimated increase in costs for wages and food, two significant contributors to expense growth for the seniors housing sector.
Despite a dearth of sizeable portfolio deals, nearly $2b in property sales transactions volume closed during the first quarter of 2014. Although transactions volume slowed, there were 101 distinct sales transactions, which was up 20% versus the first quarter a year ago.
Single property transactions dominated the quarter, with 84 transactions totaling $1.1b, representing 55% of the quarter’s total volume. The first quarter of 2014 was the first time in the past four years that single property transactions volume exceeded that of portfolio deals. The last time was during the first quarter of 2010.
Pricing trends also show that the single property market remains active, as price per unit/bed has essentially recovered to peak levels. For seniors housing properties, the rolling four-quarter price per unit for single property transactions was $127k during the first quarter of 2014, on par with peak levels. Nursing care property prices have been strengthening for several years and displayed little cyclical movement, other than trending upward, since 2008. As of the first quarter of 2014, the rolling four-quarter price per bed for single property nursing care transactions was $67k, which was 48% higher than its level during the first quarter of 2008.
*Figures referenced are preliminary. Data as of 4/9/2014.
Start counting down because registration for the 24th NIC National Conference, October 1- 3, 2014, at the Sheraton Chicago Hotel and Towers will open in early May. Within the next few weeks we’ll be sending conference related announcements and reminders to help you plan ahead. The NIC National Conference, known for unparalleled networking and deal-making opportunities, is the annual gathering hub of some of the most influential players in the seniors housing and care industry.
As an added benefit, registered attendees will have immediate access to the Online Conference Community to start networking well in advance of the conference. The Online Conference Community lets attendees view profiles of other attendees, develop their personal itinerary, and schedule private meetings. As always, the NIC National Conference will have an outstanding educational program, with an impressive line-up of keynote speakers along with industry and financial experts. Plan to register early and we’ll look forward to seeing you in Chicago.
The Future Leader’s Council (FLC) developed a breakout session for the recent NIC Regional Conference on the affordability of seniors housing and the opportunity for both operators and investors in serving middle-income Americans. This session was developed from discussions among FLC members through the Idea Lab, an FLC initiative to provide the NIC board with targeted proposals.
Addressing the care needs of the moderate income population segment is a growing challenge. The session focused on expanding the awareness of lower cost capital opportunities and highlighted actual case studies of successful projects that allow the private market to offer more opportunities for moderate income seniors.
Phil Hoffman and Eric Mendelsohn of the FLC partnered with Bill Pettit, President and COO of R.D. Merrill Company, David Watkins of SHA Capital Partners, Ben Klein, CEO of Platinum Healthcare LLC and Mike Best, Principal at Cardinal Court Capital to present compelling data on the opportunity and challenge in serving the middle income segment of seniors.
Many new seniors housing customers lost critical years of wealth accumulation during the recent recession and the new/existing customer base can easily be priced out of what is predominately on the market. According to the Bureau of the Census (2011), approximately a third of 75+ households have incomes between $20k and $40k per year, yet median rent today for independent living and assisted living is approximately $33k and $49k, respectively.
Arguably this demographic, which needs assisted living care but is unable to afford an expensive level of services, is being under-served. “This situation is not likely to improve, given Baby Boomer’s lack of retirement preparedness,” said Watkins.
Solutions will have to be multifaceted and may include cheaper real estate, lower cost financing, scaled back operations and altering resident expectations. Pettit shared his experience as both an operator and developer of affordable seniors housing as well as his utilization of tax exempt bond financing while Klein discussed some of his company’s successes with repurposing older assets, which allow for moderate rents. Klein’s Platinum Healthcare is slated to open its first new development targeting moderate income residents, which features less common area space and fewer amenities to keep costs down. Klein said historically he has used market rate bank financing of HUD debt for his projects. Best addressed how tax credits and tax exempt bond financing avenues may also be used to achieve lower project costs and still get investors a yield that is attractive.
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