REIT Share Prices Rise But Outlook Remains Mixed

As the stock market rallied around the news that the Federal Reserve would refrain from raising its benchmark interest rate in March, the senior housing industry saw some immediate short-term gains but remained in the midst of a shifting environment.

The Central Bank’s Federal Open Market Committee (FOMC) announced it would not raise interest rates for the time being following its mid-March meeting; instead of four rates hikes this year, the Fed downgraded its strategy to two quarter-percentage point moves. The stock market immediately responded positively to the news as investors took comfort in Federal Reserve Chairman Janet Yellen’s comments, Reuters reported.

Several REITs saw their share prices decline amid a jumpy investor environment following end-of-year earnings results at the start of 2016. By the end of March, the “big three” health care REITs—Ventas Inc (NYSE: VTR), HCP Inc. (NYSE: HCP) and Welltower Inc. (NYSE: HCN)—all saw their stock prices boosted, in line with a slightly steadier stock market during the month.

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Real estate investment trusts (REITs) had long been preparing for interest rates to rise last year, but had a shaky start to 2016, influenced by significant ups and downs across the global economy. Even before the Federal Reserve changed its policy to raise its benchmark interest rate 25 basis points in December, senior housing transactions were expected to slow down as REITs faced higher costs of capital and lost their advantaged position over private equity and other investment groups. The rate decision is unlikely to have much of an effect for REIT acquisition activity.

“One factor that will certainly influence senior housing values is the rising cost of capital for public REITs given the declines in their share prices and wider bond spreads,” Britton Costa, director at international ratings agency Fitch Ratings, told Senior Housing News. “We believe transaction volumes are being impacted by the gap between what REITs are now willing to pay and where owners are willing to sell.”

As REITs are pressured by higher costs of capital and acquisition prices hitting an all-time high last year, there is some uncertainty about where cap rates will go in the current M&A environment.

Low interest rates and a slowly recovering economic environment is likely to keep cap rates low, at least temporarily, according to Costa. However, cap rates are likely to react more to the bigger economic trends, rather than be affected by a short-term decision.

“Commercial real estate cap rates tend to be based more off of the longer end of the yield curve and the risk premium, both of which can change independent of the Federal Reserve’s actions,” according to Costa.

The Fed’s cautious approach to increasing interest rates was based on many of these mixed signals across the U.S. and global economy.

“Ratings on the U.S. economy since the turn of the year have been somewhat mixed,” Yellen said in a speech at The Economic Club of New York on March 29. “On one hand, many indicators have been quite favorable.”

Yellen pointed to lower unemployment rates, consistent job gains over the last several months and higher consumer spending. On the other hand, Yellen mentioned that other areas of the economy, slower global growth and significant appreciation of the dollar over the last few years have put a damper on business sentiment.

These varied economic markers have kept the Central Bank’s outlook more neutral as of late, a slight downtown from its bullish expectations late last year. However, Yellen was quick to point out the outlook has not changed much, and the bank will observe economic conditions and continue raising its benchmark interest rate.

“All told, the Committee continues to expect moderate economic growth over the medium term accompanied by further labor market improvement,” Yellen said.

Written by Amy Baxter

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