Will Rate Rise Signal End of REITs Dominating Senior Housing Finance?

While the largest week-over-week uptick in interest rates seen in decades sent many markets plummeting—including the share prices for publicly held REITS—the short term impact on senior housing finance is minimal, analysts say.

Yet a few potential long term scenarios could play out should the rate rise continue further, making it more difficult for REITs to compete in the space after a stronghold on the market.

The uptick, which came following an announcement from the Federal Reserve Bank indicating it would taper its bond-buying efforts in line with the economy improving, spanned more than 50 basis points for 30-year fixed rate mortgage loans and sent ripple effects through the capital markets.


Markets fell in response, with certain asset classes—REITs included—seeing a disproportionate response, though they have since bounced back somewhat. Ventas REIT (NYSE: VTR) saw its share price fall nearly more than 8% to its lowest year-to-date level, from a peak at above $70 per share to below $65 following the Fed news. Health Care REIT (NYSE: HCN) experienced a similar response seeing its share price decline from more than $68 per share to just over $62.

REITs have long maintained a low cost of capital in the low interest rate environment and have held fast as the most active source of financing for senior housing in recent years, in 2011 counting four blockbuster deals totaling $19.2 billion, with two more than billion-dollar acquisitions in 2012 and the 2013 closing of Health Care REITs acquisition of Sunrise Senior Living for more than $4 billion.

In the short term, the rate shift should not have a notable impact on seniors housing finance and acquisitions, says Jeff Theiler, equity analyst with Green Street Advisors.


“We have not yet seen any drastic changes in pricing,” he told SHN. “I don’t think people are changing their pricing expectations immediately. REITs still have a historically low cost of capital. I’d expect they’d still be motivated to acquire assets in the private market, notwithstanding the recent drop in stock prices.”

Yet should rates continue on an upward path at a rapid pace, the outlook could become less positive for the REITs acquiring senior housing and health care properties, specifically.

“Health care reits in a rising interest rate environment fare worse than other types of REITs,” Theiler says, noting their concentration in long-term leases with small, fixed-increases.

Operators may shift their approach toward selling properties in response.

Sustained increases in rates could lead to two possible scenarios playing out, says Dan Bernstein with Stifel Nicholaus: repricing of assets and selloff of assets as sellers foresee higher rates on the horizon.

“If you’re a potential seller, you may see yourself moving past that peak in price and try to speed up your time line to try to sell your properties if you are worried rates will go up,” Berstein says. “The other possibility is repricing of assets [for buyers].”

Those scenarios have yet to play out, however, as most are taking a wait-and-see approach in the short term.

“The response is deer in the headlights,” Bernstein says. “People are going to pause.”

REITs will still maintain a competitive edge pending a drastic shift, says Theiler.

“Right now their cost of capital is still really low compared to historic norms,” he says. “It would take a sustained rise before it makes sense for them to turn off the acquisition engine.”

Written by Elizabeth Ecker