Dramatic developments over the past few weeks have redrawn the lines on the playing field for senior housing real estate investment trusts operating in the shadow of the so-called “Big Three.” While it remains to be seen which of these smaller-cap REITs gain steam and which struggle given the new normal, at least one analyst already has begun to speculate that further consolidation could be on the way, with one of the potential acquisition targets perhaps coming as a surprise.
Among the big recent changes: the departure of CEO Justin Hutchens from Nashville-based National Health Investors (NYSE: NHI). Hutchens is making the move to the Big Three by joining HCP Inc. (NYSE: HCP) as chief investment officer for senior housing and care. In one measure of Hutchens’ value to his former company, BMO analyst John Kim promptly downgraded NHI to market perform and cut the price target by 13% on the news.
It’s a point that Mizuho analyst Richard Anderson also emphasized in a recent written comment on the changing REIT landscape. NHI was considered a “darling by many,” Anderson wrote, but that may have been contingent on having Hutchens at the helm. In fact, without him, the company may be a likely acquisition target for another REIT.
“The company continues to produce repeat business from an investment standpoint, and has strong rent coverage, most notably with its primary post-acute relationship, NHC,” he wrote. “Mr. Hutchens leaves NHI in solid condition—the company just needs to re-establish direction, and that may come from an external source.”
NHI’s interim CEO and President Eric Mendelsohn also emphasizes that the company is in sound condition upon Hutchens’ departure. “We will take it forward from here,” he told SHN Wednesday, saying he and his colleagues are focused on creating shareholder value through accretive acquisitions and maintaining a low-leverage balance sheet.
If NHI is a likely seller—at least in Anderson’s view—a newcomer to the field might be the most obvious candidate to buy.
Care Capital Properties Inc. (NYSE: CCP) is the newly minted pure-play skilled nursing facility REIT spun off from Big Three member Ventas Inc. (NYSE: VTR). The pedigree of its leaders and their stated goals for growth stand out to Anderson.
“CCP management cut its teeth under the flag of a major acquirer over the past 15 years,” he wrote. CCP leaders have emphasized in public earnings calls that the company intends to grow as a stand-alone entity, Anderson added.
In remarks to SHN, CCP Executive Vice President and Chief Financial Officer Lori B. Wittman confined her response to growing through operator relationships.
“We are focused on executing our strategy which is to grow our business with regional and local operators in the consolidating post-acute space,” Wittman told SHN Wednesday. “We are excited about all of the opportunities we have to work with our existing operators and to grow with new operators in the large and fragmented skilled nursing industry.”
In addition, CCP’s entry to the market may simply have created too much crowding, Anderson noted. There now are six REITs that are jostling in the same cohort: CCP and NHI are joined by LTC Properties Inc. (NYSE: LTC), Sabra Health Care REIT Inc. (Nasdaq: SBRA) and Omega Healthcare Investors (NYSE: OHI).
Six could be “one or two too many” players, Anderson concluded, stressing that he was not making any specific M&A predictions.
But perhaps adding some fuel to the speculative fire is the fact that consolidation already has come to this group of REITs. In October 2014, OHI acquired Aviv REIT in a stock for stock transaction, creating a single $10 billion REIT.
Written by Tim Mullaney