The Federal Reserve recently signaled that it might pull back on future rate increases after several consecutive hikes. But even as the Fed pumps the brakes, the central bank’s moves in recent months haven’t put a damper on borrowing in the skilled nursing space.
Part of the reason may simply be the number of moving parts that the SNF business entails each and every day, Cambridge Realty Capital President and founder Jeffrey Davis told Skilled Nursing News.
“There’s so many other challenges, so many other day-to-day challenges that it’s very hard for people to focus on everything at the same time,” he said. “You’ve got to pick your poison, so to speak. I don’t want to say interest rates are subordinate, but there’s only so many things people can focus on.”
One reason for SNFs’ indifference to rising rates is that there are more limited funding options for SNFs than for properties in other asset classes, such as senior housing developments. The latter has several different forms of available capital: Fannie Mae, Freddie Mac, and insurance companies, Lancaster Pollard vice president Kyle Hemminger told SNN.
“The skilled nursing side, you’re pretty limited to financing options either with REITs, bank loans, and then HUD,” he said.
In December 2018, the Fed boosted interest rates by a quarter percentage point, or 0.25 of 1.00%, a move that came after other increases in the year. But Fed chairman Jerome Powell said on Wednesday that the central bank has “the luxury of patience” in choosing whether to boost rates again, The New York Times reported.
Powell cited the possibility of another federal government shutdown, slowing growth in China in Europe, and sluggish inflation in arguing that the case for increasing rates has somewhat weakened, but the Times noted that the change is “a sharp reversal of the Fed’s stance just six weeks ago.”
Nursing home owners and operators, though, haven’t changed their borrowing behavior much in response to those increases from last year, at least not from what Joe Munhall — senior vice president and director of syndications at the Columbus, Ohio-based Lancaster Pollard — has seen. If anything, the changes have come from the senior housing side of senior living, he told SNN.
“The costs on that side of the fence are usually a little bit higher, especially on the construction side, especially on these higher-end type buildings that they’re building right now,” Munhall explained. “The margins on the skilled nursing side, or what they’re getting per bed on the skilled nursing side, is so much higher that usually it doesn’t really affect that as much.”
One wrinkle for skilled nursing operators, who rely so much on the Department of Housing and Urban Development (HUD) for their long-term financing, was the 35-day government shutdown. During the impasse, HUD stopped endorsing loans, the last step in closing deals through the Federal Housing Administration’s (FHA) Section 232 financing program. And though Munhall does not believe refinancing for skilled nursing will be greatly affected by rate increases, he does see a small ripple for HUD deals.
“People are going to be asked to try to fix the longer-term rate through HUD maybe a little bit quicker than they were, but there hasn’t been those huge rate increases on the long-term financing that way,” he said. “So yeah –there’s been increases on the short-term rates, but those short-term rates are usually only used during a construction or bridge period anyway. They might be motivated to get something off of a bridge loan a little bit more quickly, but I don’t really think it’s going to modify behavior all that much.”
That said, HUD fixed rates are still attractive and have not gone up much, Hemminger and Munhall both noted. New projects in the seniors housing and health care world, however, have been somewhat affected: Two years ago, they could generate enough debt service coverage to work at higher-leverage rates; now they can’t make the same debt service, Munhall said.
“They have to put more equity into development deals in order for them to work from a debt service coverage standpoint,” he explained. “There’s just not a lot of skilled nursing construction going on, number one, and number two, the construction deals that go on in skilled nursing compared to seniors housing are lower in leverage anyway. So they’re just not as affected.”