Brexit Aftershocks Reverberate Through Senior Housing

Markets around the world were reeling Friday on the news that the United Kingdom intends to leave the European Union, raising major questions about impacts to global business—including senior housing.

The potential good news is that senior housing as an industry might be essentially unscathed by any large-scale economic disruption following the so-called “Brexit,” experts told Senior Housing News. U.S. senior housing might actually benefit in some ways from the new world order that emerges as Great Britain become the first country to leave the E.U., which will have 27 remaining members. The separation process will not formally begin until October, when Prime Minister David Cameron leaves Downing Street; he announced his resignation after his side lost the national referendum on whether to remain in the European Union.

However, there’s plenty of ominous news as well. Britain’s separation from the E.U. is an unprecedented event, meaning its full implications are hard to discern. Worst-case scenarios put the very “stability of the international financial system” in peril, as The Washington Post put it. While economic armageddon did not transpire on Friday, the value of the British pound tanked, and U.S. stock markets plunged following sell-offs around the world. Senior living companies felt the Brexit aftershocks: Brookdale Senior Living (NYSE: BKD) was down 4.21% and Capital Senior Living (NYSE: CSU) was down 4.40% in late afternoon trading Friday.

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Yet, underscoring the somewhat mixed picture emerging for senior housing, some of the major real estate investment trusts (REITs) were having a good day: Ventas (NYSE: VTR) was up 1.26% and HCP Inc. (NYSE: HCP) also ticked up 0.41%.

In trying to understand this mixed picture and how Brexit might play out for senior housing going forward, there are considerations as to what will happen in the U.K. market—including for U.S.-based real estate owners that have significant investments there—as well as how the event could change the playing field here on home soil.

U.S. Gains Edge in ‘Occupancy War’

Put simply, Brexit is not likely to immediately change the major dynamics at play in the U.K.’s private-pay senior housing sector, which is favorable to some major U.S.-based companies, according to Keith Harris, London-based executive director for specialist markets at CBRE Limited.

Senior housing and care is a needs-based sector, and so demand for the product is largely resilient to larger economic dislocations, he emphasized to Senior Housing News. In addition, there is a diminishing supply of private-pay beds in the United Kingdom with no forecasted falloff in occupancy. Furthermore, increasing regulations are putting unsustainable pressures on smaller operators, leading to closures.

“Purpose-built, future-proof buildings are really winning the big occupancy war,” Harris said.

Two of the largest U.S. health care REITs have made significant plays to build portfolios of these types of buildings in the U.K.: Irvine, California-based HCP and Toledo, Ohio-based Welltower (NYSE: HCN).

Welltower owns 89 properties in the country, mostly in Greater London, and generates approximately 8% of its net operating income from investments in the U.K. HCP has a portfolio of about 30 senior housing properties triple net leased in the U.K., as well as a handful of post-acute and skilled nursing assets.

Both these REITs are largely hedged on their exposure to the currency devaluation in the U.K., putting them in a good position, Green Street analyst Kevin Tyler told SHN.

CBRE’s Harris concurred that these U.S. players may have an edge moving forward.

“[Brexit] will give them more of the field to themselves because the levered investors are going to find debt financing somewhat difficult in the next couple of quarters,” he said. “So, I think the international investor who can take a long view on currency hedging is going to be fine. If anything, the devalued pound against dollar and Euro is going to present [them with] opportunities.”

Those opportunities may extend to Canadian pension funds as well, he added.

Unlike HCP, Welltower did see its share price slide 0.71% on Friday. But the company is taking a circumspect stance publicly on Brexit.

“We evaluate regularly the markets where we have invested to determine the appropriate strategy to maximize shareholder value,” a company spokesperson told SHN. “This is the approach we are taking with the referendum.”

HCP declined to comment for this article.

Steady on the Home Front

Central banks were swift to respond to the Brexit vote, issuing assurances that they would take steps to maintain stability. For the U.S. Federal Reserve, this could mean that long-anticipated interest rate hikes again will be delayed.

“Certainly you would think this would delay the Fed’s plans to raise interest rates in the short-term, until [Brexit] implications are more fully understood,” said Stephen Theobald, CFO and Treasurer of Walker & Dunlop, a major lender to U.S. senior housing providers.

As for the ultimate timing—whether the Fed might raise its benchmark rate at its December meeting or forgo any increase in 2016—that is anyone’s guess, he said. Traders on the Feds Funds Futures market on Friday afternoon were not pricing in a full 25 basis point rise until 2018.

The interest rate environment may have been another factor that was driving investors toward REITs on Friday, and this could continue as the financial climate remains unsettled.

“As a general rule, if you believe interest rates are going to be remain low for a longer period of time, it makes higher-yielding stocks like REITs more attractive, assuming investors like the underlying assets,” Theobald said.

Other prominent capital providers in the senior housing space brought up how Brexit could change the behavior of overseas investors, considering the sharp drop in value for the British pound.

“U.S. real estate investments are now considerably more expensive for U.K. investors than they were yesterday, with negative consequences for expected investment returns. Likewise, but to a lesser degree, for investors from countries using the Euro and other European currencies” said Daniel J. Hogan, director of research at RED Capital Group. “In the short-term, this can only have the effect of reducing cross-border capital flows into U.S. real estate.”

However, investors might allocate more capital to U.S. real estate in the long-term, given that the Brexit will take several years of “tough negotiations” with the European Union to be completed, Hogan told SHN. During this time of uncertainty, investors are likely to see the United States as a bastion of stability.

“So, when the dust settles we are likely to find capital flows return to recent levels, especially should the pound rally as investors take a more measured view of the economic consequences of Brexit,” Hogan said.

U.S. markets indeed could see “incremental demand” from foreign investors looking for stability, but the direct effects for senior housing could be “minimal,” according to Green Street’s Tyler. This also is the position of Hogan’s colleague Kathryn Burton Gray, senior managing director at RED Capital Group.

“My position is that most capital that comes into the seniors housing/health care sector is primarily domestic, therefore I am not overly concerned that this Brexit will dramatically impact the sector in the long-term,” she told SHN.

Overall, while the Brexit raises the specter of prolonged uncertainty for the markets, U.S. senior housing companies may be comforted by taking the long view. The British separation from the E.U. is not likely to create a global recession, and the fundamental strength of the U.S. and Canadian markets should not be undermined by it, said Margaret Kerins, managing director-head of fixed income strategy at BMO Capital Markets, in a conference call Friday morning.

And for senior housing specifically, Brexit does nothing to change the huge demand expected due to growing ranks of seniors in the United States and around the world.

“At the end of day, from a seniors housing perspective, nothing that happened impacts the demographics,” said Walker & Dunlop’s Theobald. “We have an aging population.”

Written by Tim Mullaney

Photo Credit: “Flying the British Flag” by Sammy Albon, CC BY 2.0

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