Senior Housing M&A Activity Pressured by Rising Interest Rates

As interest rates creep higher and senior housing assets begin losing value as a result, brokers believe sellers may start feeling more pressure to offload properties to buyers who feel just as much urgency to enlarge their portfolios. 

Real estate firm Evans Senior Investments discussed the impact of rising rates on the senior housing market in a recent webinar hosted by Jeremy and Jason Stroiman, the brokerage’s owners. 

While mortgage rates are still at historical lows, they’re likely to continue increasing.

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“Everyone’s saying the feds will continue raising [interest rates] throughout 2014,” said Jeremy Stroiman. “It will directly affect senior housing merger and acquisition activity.”

That rise in interest rates is expected to begin impacting senior housing cap rates soon, if past trends are any indication. 

Ignoring the 2006-2007 “economic anomaly,” Stroiman said, independent living, assisted living, and skilled nursing cap rates have proved to be closely correlated with the 10-year Treasury notes. 

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On the skilled nursing side, in the past eight years the two metrics have averaged a 961 basis point spread. As 10-year Treasuries decrease, so do cap rates—resulting in higher prices for skilled nursing assets.

“History repeats itself. Treasury notes will go up, and so will cap rates,” said Stroiman.

Independent and assisted living cap rates measured similarly in the past eight years (again excluding 2006 and 2007), averaging a 608 basis point spread.

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With higher interest rates comes more expensive borrowing. In turn, that could lead to lower acquisition activity. Sales prices of properties may decrease to account for interest rate increases, and ultimately sellers are left with less money in their pockets, said the webinar.

Evans Senior Investment gave an example of a senior care asset that lost about $1.4 million of its value from January to May to August as interest rates climbed from 3.41% to 3.54% to 4.37%, in correlation with rising 10-year Treasury notes. The property’s cap rate rose from 12.5% to 13.35% as its value decreased from $22.1 million to $20.75 million. 

Despite value lost from higher interest rates, current market conditions are still favorable for sellers from a demand standpoint. 

As Medicare and Medicaid reimbursement rates fluctuate, the uncertainty of where federal reimbursement rates will go is actually raising values as buyers look to achieve economies of scale, Evans Senior Investment says. 

“It’s forcing folks that own five to 10 nursing homes to get to 25 before the end of 2014,” Stroiman said. “The mom and pops think [because of the uncertainty] that everyone wants to get out, and no one wants to buy [their] home. But that’s not true.” 

There are similar trends on the assisted living and independent living side, he said, relating to the difference in operating margins and profitability for owners with multiple properties, especially when they aggregate 20 or more communities. 

“Absolutely we see the same trends [for senior living assets],” said Stroiman. “The uncertainty with Medicare is really driving an increased sense of urgency [on the nursing home side] and the demand to get to 25—people are really anxious to get size quickly. But it’s on both sides of the business.” 

Written by Alyssa Gerace

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