Volatile Market, Rising Interest Rates Add to Skilled Nursing Pressures
Just when it seemed like the skilled nursing industry had enough potential issues on its plate for 2018 — potential cuts to Medicaid and Medicare, ongoing reimbursement pressures, and staffing woes — the historically healthy stock market took a major tumble.
Sabra Health Care REIT (NASDAQ: SBRA), Ventas Inc. (NYSE: VTR), and other health care and seniors-housing focused real estate investment trusts (REITs) saw their stocks drop along with the Dow Jones Industrial Average early this week.
And while the market continues to swing wildly in either direction — the Dow closed Tuesday’s trading up 567 points — the volatility could spell trouble for skilled nursing investors.
“The broader equity market is seeing huge downside and volatility as investors grapple with higher long-term U.S. Treasury yields and the potential for higher inflation,” Michael Knott, managing director of health care and net lease for Green Street Advisors, told Skilled Nursing News. “The health care REIT share price reaction is a reflection of these broad equity and debt market forces.”
Beth Burnham Mace, chief economist for the National Investment Center for Seniors Housing & Care (NIC), also pointed to macro-level pressures for senior housing and health care operators. With new leadership at the Federal Reserve, investors may be skittish about the newcomer’s motives.
“Jerome Powell taking the helm of the Federal Reserve has also added some uncertainty, since the markets generally understood Janet Yellen’s intentions and words,” she told SNN.
Mace called out wage increases across the board: The Bureau of Labor Statistics in January reported unemployment at a 17-year low of 4.1% for the fourth consecutive month — a number that, Mace noted, is lower than the Federal Reserve’s definition of “the natural rate of unemployment.”
Average hourly wages for non-farm workers have spiked 2.9% over the last year, the highest figure since 2009, and private-sector wages and salaries rose by 2.8% during the last three months of 2017.
“This was the fastest growth since the recession,” Mace said. “It is also notable that 18 states began the new year with higher minimum wages.”
Higher interest rates could also make funding for new projects and renovations difficult; the Federal Reserve is widely expected to make three hikes in 2018 amid record growth in the U.S. economy and historically low interest rates stretching back all the way to the Great Recession.
“This will have many repercussions for businesses directly involved in development, as well as for those with indirect ties to development activity,” Mace said.
All this uncertainty comes amid a year that was already expected to be difficult for skilled nursing providers. Writing at the beginning of 2018, Mizuho Securities USA warned that the tax bill could prompt leaders to start looking at Medicare and Medicaid to help offset the resulting deficit, and noted that “there are many questions left to be answered when looking at the health care REITs in general.”
“That being said, there could also be some value in the resolution, particularly as individual REITs sell assets or otherwise reset their business plans for a new U.S. healthcare paradigm,” Mizuho’s analysts wrote in a January 10 research note. “So we are keeping a close eye on the sector, but would at least recommend investors wait for a better entry point to begin the year.”