Healthcare REIT CEO Switches Teams: BMO's Take

In a new report, BMO Capital Markets analyst John Kim updates the firm’s outlook for healthcare REITs National Health Investors Inc NHI and HCP Inc HCP following the announcement that former NHI CEO Justin Hutchens is leaving the company and joining the team at HCP as EVP and CIO-Senior Housing and Care. Kim sees NHI’s loss as HCP’s gain and adjusted his outlook for the REIT’s accordingly, including a downgrade of NHI to Market Perform.

Big surprise
According to Kim, the move came as a “significant surprise.” However, he wasn’t alone in getting caught off guard by the move, as the announcement sent NHI’s shares down 5.1 percent on Monday, while HCP gained 0.6 percent.

What NHI lost
Since taking on the CEO position in 2011, Hutchens has successfully balanced growing tenants, maintaining a strong balance sheet and delivering outsized shareholder returns. Not only did NHI lose an effective leader, Kim sees very little managerial depth when it comes to replacing Hutchison. He notes that interim CEO Eric Mendelsohn has only been with the company since January of 2015.

Although NHI still has a strong portfolio, Kim reduced BMO’s target price for the REIT by 13 percent to $65 in addition to the downgrade. The target still represents a 6 percent premium to BMO’s estimated forward net asset value (NAV).

What HCP gained
Kim believes that HCP has gained a senior executive with a proven leadership track record to lead a division if its operations that accounts for two-thirds of the company’s income. Kim also sees Hutchens as a leading candidate for the CEO position if it opens up at some point in the future.

Despite a cautious approach due to a Department of Justice investigation into HCP tenant HCR ManorCare, Kim raised BMO’s price target by 1 percent to $38.50 following the acquisition of Hutchens.