Senior Housing REITs Face Lower ROI as Capital Costs Rise

Healthcare real estate investment trusts are starting to see less upside on senior housing deals as a result of the current interest rate and acquisitions environment, among other factors.

Returns on senior housing investments are starting to decline for health care REITs due to rising interest rate that are boosting acquisition costs, analysts predict, yet cap rates still remain low. The longevity of these trends still remains a question, according to the analysts.

During NAREIT’s REITWorld conference held in mid-November in San Francisco, St. Louis-headquartered investment banking firm Stifel Nicolaus met with high-level executives of 11 public and two non-traded healthcare REITs and identified several trends and themes.


One of Stifel’s key takeaways from the conference is that cap rates have remained low for more popular senior housing and medical office building assets. This raises the question of whether these asset classes have earned permanently higher valuations similar to multifamily and commercial office sectors, says the firm in an industry update.

“A key emerging issue with healthcare REITs is the acquisition environment, as capital costs have risen while cap rates have not,” it says. “This has caused spreads to narrow, reducing the returns on new investments.”

An explanation to this trend is that private pay senior housing and MOB assets are being viewed similarly to multifamily and commercial office assets by some investors, says Stifel, suggesting that cap rates will remain lower relative to capital costs than they have been historically.


“By the same token,” Stifel continues, “it would also suggest that the asset values for these asset types should increase.”

Competition for high quality assets remains fierce with public and private REITs, private equity, pension funds, and institutional investors often crowding the table for the same deals. This has served to drive up prices and create “unrealistic expectations for sellers,” some REIT managers say, causing cap rates to remain steady even amid increasing capital costs.

Some healthcare REIT executives are questioning whether cap rates for private pay senior housing assets are “temporarily depressed by high demand” and could be permanent, but Stifel says it’s too soon to know.

While competition continues to crowd into the market, the industry shouldn’t expect to see a fourth quarter frenzy of deals a la 2012, when sellers were trying to beat an impending tax hike.

“As a result of these pressures, the pace of new investments appears likely to remain measured,” says the industry update. “Some recently completed or announced deals notwithstanding, the REITs in general appeared to us to have neither the bulging pipelines nor the highly motivated tax-related sellers of recent years.”

Written by Alyssa Gerace

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