Fed Decision Not to Taper Bond Purchases May Boost Senior Housing M&A

The Federal Reserve’s bond buying program will continue at its current pace rather than taper off starting this month, the Federal Open Market Committee announced Wednesday following a two-day policy meeting.

Depending on the announcement’s impact on interest rates, this news could have strong implications for the senior housing market.

Remarks made by Fed chairman Ben Bernanke over the summer led the market to speculate that the $85 billion-a-month quantitative easing program would begin to downshift in September, prompting a rise in rates. The Federal Reserve has been buying $40 billion of residential mortgage-backed securities (MBS) and $45 billion of longer-term Treasury securities each month.

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If maintaining the quantitative easing program at its current level keeps interest rates low, analysts expect senior housing M&A activity to remain elevated.

“The low interest rate environment we’ve been in for the past few years has been very favorable for the publicly-traded health care REITs—boosting their share prices, which in turn has driven massive acquisition activity,” says Jeff Theiler, Research Analyst at Green Street Advisors. “If rates stay low as a result of QE, I would expect the healthcare REITs to continue to expand aggressively, especially in the senior housing sector which has been their favorite target.”

Despite a strengthened housing market and indicators that labor market conditions have improved in the last few months along with the overall economy, the Fed notes that unemployment rates remain high and economic growth is still limited.

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“Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth,” said the Federal Reserve in a statement.

The FOMC  has decided to “await more evidence” that the economy’s recovery progress is sustainable before it will adjust the pace of its MBS and Treasury securities purchases, it says in the release.

Interest rates have been rising since the beginning of the year, and rates for 30-year fixed mortgages are up from 3.34% in early January to 4.57% as of September 12, according to Freddie Mac’s primary mortgage market surveys. With higher interest rates impacting the cost of capital, some analysts have predicted the potential for reduced M&A activity by commercial real estate investors.

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The Fed’s announcement is not expected to have an immediate impact on the senior housing market, unless the 10-year Treasury rates were to go back to below 2.5%, or if REIT stocks rally another 10%, says Dan Bernstein, an analyst at Stifel Nicolaus.

“Right now, the cost of capital is still around 2011-2012 levels, so it’s hard for me to see cap rates eclipsing low- or mid-6% for large, high-quality portfolios, or 7-9% for smaller portfolios or ‘B’ assets,” he says.

Written by Alyssa Gerace