With interest rates likely to rise and some major players shifting their approach to skilled nursing, health care real estate investment trusts are facing potential challenges and decision points. National Health Investors (NYSE: NHI) certainly is no exception.
NHI has recently increased its involvement in CCRC ownership and expansion through a $154 million partnership with LCS, as well as additional CCRC financing. The company has grown steadily to a portfolio of 184 properties in 31 states, but conservatively, according to its chief executive.
Last week, NHI held its Music City Symposium in Nashville, a one-day gathering of senior living operators, developers, investors and service providers in Nashville.
Between sessions, networking breaks and a lunch keynote featuring former Speaker of the House and 2012 presidential candidate Newt Gingrich, Senior Housing News caught up with NHI President and CEO Justin Hutchens to discuss how the company stacks up against other real estate investment trusts (REITs), the hottest markets for development, and what NHI has in store for 2015 and beyond.
SHN: How is NHI positioned against its competitors to handle a rising interest rate environment?
Justin Hutchens: I actually think NHI is uniquely positioned in a rising interest rate environment because of the fact that we’ve managed our balance sheet so conservatively. We have, of all the health care REITs, the second-lowest leverage and we have the highest fixed charge coverage [ratio], and we have average debt maturities of eight years.
So with our low leverage balance sheet, our goal has always been to be the most bankable company at any given time. And we’ve actually positioned ourself in anticipation of rates going up so that we’re a more bankable company. We think we’re very well-positioned.
SHN: How is NHI’s size and scale advantageous in handling the interest rate environment?
JH: We’ve been active with regional companies, either helping to develop or acquire one-off and small portfolios, but we’ve also been a buyer of larger portfolios. And so we’ve actually had a deal size range anywhere from $1 million to $500 million for the past several years as we’ve grown.
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It’s advantageous for us to be able to work with smaller companies and give them the time and attention that they would get even if they were a larger company. We’re dealing with decision-makers on the front end, and they’re dealing with a REIT that has management with an operations background—so we’ve been in the shoes of the customer.
But meanwhile, we have the financial capacity to do large transactions and so I think we’re uniquely positioned to serve the smaller deal market as well as the large transaction market.
I started at NHI in 2009 and I was the Chief Operating Officer at Emeritus Senior Living before that. I had 15 years of operating background and so when I joined NHI, I was switching more toward the financial side of the sector. But I’ve been in the shoes of the customer; I’ve been a customer with other REITs.
And so I’ve had a track record of being with companies that are growing. It’s been really challenging, but very rewarding to work with operators and become a partner in their growth.
SHN: On the topic of development, does NHI see any markets as either tapped out or hotspots that it wouldn’t go near?
JH: Certainly there’s oversupply occurring. Kansas City has been a pretty hot market; many places in Texas from a private pay assisted living standpoint; Houston is way overheated; Dallas is experiencing some overbuilding as well.
We’re always cautious of Florida because there are certain markets that are being overdeveloped but there are also some pockets that are okay. One thing about Florida and Texas is there’s also very strong demand for senior services. There’s low barrier to entry, because zoning is less restrictive than in other states, but high in demand. So there’s a reason why there’s some overbuilding that occurs in Florida and Texas.
We like California because it’s high barrier to entry, so we’re looking for opportunities to build out there. We have one development that’s opening soon in Loma Linda. We partnered with Chancellor Health Care—they expanded their campus with an assisted living project. We’re excited about that opening.
We always look at the local market from a five to 20 mile radius and thinking from the market fundamentals. We’re examining new starts that are occurring to make sure that we’re not contributing to the oversupply in the market.
SHN: One of NHI’s operating partners is Bickford Senior Living. Any updates on the project pipeline with them?
JH: We have three projects that have opened and are in the process of stabilizing and we have five more that are opening this year. They’re an experienced developer/operator—they’ve been doing it for 20 years—and we’ve had good success with the recent three openings and we’re looking forward to getting the five others online.
They [opening projects] are in Virginia, Indiana and Illinois. We haven’t disclosed the local markets. We wait until we’ve actually broken ground.
SHN: Looking ahead, what does NHI have in store for the rest of 2015—what’s on the radar?
JH: We have a pretty active development commitment right now that’s fairly robust, so I think you’ll see us more focused on in-place cash flow and less focused on development in the near-term. The ultimate goal is to put in high-quality operators; the cash flow strength is sustainable for the long-term so that we can distribute dividends for our shareholders.
We’re always actively reviewing potential acquisitions, primarily on private pay senior housing and more selectively in skilled nursing. We’re very selective about the quality of the assets, age of the assets and the quality of the operator in both cases. We’ve been more selective in skilled nursing over the past several years because we’ve been diversifying into private pay.
Right now 35% of our portfolio has a skilled nursing concentration. That has fallen from 80% in 2009. So over time, we’ve been adding more focus on independent living, assisted living, memory care and entry-fee communities that have brought more private pay, and less government reimbursement risk, to our portfolio.
And we’re always going to be mindful of this diversification as we grow. We like all of the sectors in health care that we’re involved in, and skilled nursing is one of them. But we’re mindful that we don’t want any one piece of our pie to get overexposed. So we’ll always be selective and mindful of diversification as we grow our portfolio.
Written by Jason Oliva