Market Turmoil Puts Senior Housing Occupancy, Cap Rates in Question

A chaotic day of trading on Monday ended with stock markets worldwide posting big losses, and senior housing owners and operators were not immune to the turmoil. While it remains unclear how long the turbulence will last and what the ultimate impacts will be on publicly traded senior housing companies, occupancy and cap rates are two metrics to keep an eye on in particular, according to an analyst who spoke with SHN.

The Dow Jones industrial average plummeted nearly 1,100 points after the opening bell Monday, for the biggest recorded decline in a single trading day. The volatility is being driven primarily by fears that China’s economy is faltering, and factors such as a potential interest rate hike in the United States also are on investors’ minds. Although stocks surged mid-day, they sank again and the Dow closed down 588 points. The Standard & Poor’s 500 index closed down nearly 4%. Markets in Asia and Europe also experienced sharp drops and closed down 4% or more.

One potential effect of this instability could be a hit to senior housing occupancy, Stifel Nicolaus & Company analyst Daniel Bernstein tells SHN. This is because there’s a potential “deer in the headlights” effect when prospective residents or their family members see the markets tank and their own wealth impacted, and decisions to move into a senior living community might be put on hold, he says. It’s a phenomenon that some operators reported after the Great Recession, he notes, and the current market volatility has not been seen since that 2008-2009 period.

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The turmoil in the markets might not change a final decision about relocating to senior housing, but if potential residents delay moving in, providers might see lower third-quarter occupancy, Bernstein says. If the current instability persists through September, some third quarter occupancy could be pushed to the fourth quarter, he says.*

As for the large-cap senior housing real estate investment trusts (REITs), Bernstein was circumspect with regard to share price. The REITs have seen their share price slide over the course of the year, but they did not dip precipitously on Monday. For instance, Ventas Inc. (NYSE: VTR) was trading at mid-afternoon Monday at about the same price it commanded in mid-July.

“The big key difference is that REIT prices were going on the fear of rising interest rates, and now it’s a broader market panic,” Bernstein says.

If the markets remain troubled, health care REITs actually could emerge as relative safe havens, given that they have the earnings stability inherent in a needs-based asset. The REITs outperformed the broader market during the 2007 to 2009 period, Bernstein points out.

But the REITs might have to contend with overall costs of capital rising as there is a widening of bond spreads versus Treasuries, Bernstein says. The spread has been 11 basis points month-to-date and 25 bps year-to-date, according to Stifel’s bond desk.

“It’s a very simple equation,” Bernstein says. “With more expensive equity and flat to more expensive debt costs, you’d expect cap rates to moderate in senior housing, particularly for portfolios.”

Even prior to the current market correction, the REITs’ lower stock prices hurt their ability to be aggressive on lower cap rates, and company leaders were moderating their language to reflect this, Bernstein says.

For high-quality senior housing assets, cap rates currently are in the 5.5% to 6% range, Ventas Chairman and CEO Debra Cafaro said during a recent second quarter earnings call.

As for when the markets might regain some equilibrium, investors will be watching government policy closely, both in the United States and abroad.

“Everything is going to be dictated by government policy,” Kevin Kelly, chief investment officer of Recon Capital Partners, told The New York Times. “Whatever noise is coming from policy makers is going to determine the next couple weeks.”

And some pundits already are declaring that the long-anticipated move by the Federal Reserve to raise the main interest rate—which has been influential in REIT strategy and investments—will now be further delayed. Fed policy makers are scheduled to gather in Jackson Hole, Wyoming, for an annual meeting this Thursday through Sunday, so investors may not have to wait long to get strong signals about whether rates will rise in the fall.

Written by Tim Mullaney

*Editor’s Note: This has been corrected from a previous version, which stated that fourth quarter occupancy might be lower if market instability persists through September. 

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