The relative competition of health care real estate investment trusts, which have been the dominant source of senior housing acquisitions in light of historic low interest rates, is likely to shift in the near term if not already under way.
The magnitude of portfolio acquisitions is becoming out of reach for some REITs as rates have risen over the last six months and are expected to continue in the short term.
“Acquisitions of large portfolios and marketed transactions at accretive spreads will be difficult near-term,” wrote Stifel analysts Daniel Bernstein and Robert Mains in a report following the NIC conference in Chicago this month.
The market is unlikely to see portfolio acquisitions of the scope seen in the past two years, which included Health Care REIT’s historic $4.3 billion acquisition of Sunrise or the recent announcement of CNL Healthcare Properties that it will acquire 21 Bonaventure senior living communities for $457.3 million.
The shift is already taking place, following an announcement by the Federal Reserve Board of Governors in May that indicated the Fed would taper its asset purchase pace depending on economic improvement, which would lend to an uptick in interest rates.
“Rates started rising after the [Federal Reserve’s] taper speech on May 22, and we were hearing as early as June that healthcare REITs were becoming more cautious about committing capital,” Mains told SHN in an email. “Higher interest rates have raised their cost of capital, but there appears to have been no concomitant increase in cap rates for large senior housing portfolios. If rates continue to rise and cap rates don’t, the REITs’ spreads will get squeezed further.”
Operating relationships remain paramount in the ability of REITs to continue their purchases of senior housing assets and portfolios, Mains and Bernstein wrote, citing several examples.
“REITs with established relationship-driven strategies—Sabra Health Care REIT (SBRA), Health Care REIT (HCN), LTC Properties (LTC), and National Health Investors (NHI)—may have a greater ability to grow externally than peers next 12-24 months,” they write.
Further, a trend toward more construction may further impact the REIT landscape, they say.
“Ironically, construction cycle may flatten NOI growth but also provide large high quality portfolios for acquisition.”
Written by Elizabeth Ecker
Implications For Healthcare REITs
NAVs maintained on steady cap rates.
Acquisitions of large portfolios and marketed transactions at accretive spreads will be difficult near-term.
REITs with established relationship-driven strategies – Sabra Health Care REIT (SBRA: $23.96, Buy), Health Care
REIT (HCN: $63.66, Buy), LTC Properties (LTC: $37.97, Hold), and National Health Investors (NHI: $60.06, Hold) –
may have a greater ability to grow externally than peers next 12-24 months.
Ironically, construction cycle may flatten NOI growth but also provide large high quality portfolios for acquisition.
– Why the discrepancy between the competition advantage between public REITs and non-traded REITs? How long has this trend been under way?
– Do you see future rate increases as further widening the gap public REITs are experiencing in the senior housing sector?
– Is this merely the delayed response to the rise in rates that already took place or are there other factors at work?
1. I don’t think there is a competitive advantage at issue between public and non-traded REITs. The issue, in my view, is that non-traded REITs have more of an imperative to invest funds as they are raised. Public REITs don’t have analogous circumstances.
2. REITs are spread investors: they seek to make investments with yields higher than their cost of capital. Higher interest rates have raised their cost of capital, but there appears to have been no concomitant increase in cap rates for large senior housing portfolios. If rates continue to rise and cap rates don’t, the REITs’ spreads will get squeezed further.
3. I assume you’re asking whether a slower investment pace in senior housing assets by healthcare REITs is a delayed response to the rise in rates. My answer would be that hasn’t really been delayed. Rates started rising after the taper speech on May 22, and we were hearing as early as June that healthcare REITs were becoming more cautious about committing capital.