Fed Rate Hike May ‘Pour More Cold Water’ on SNF Transactions – But it Could Have Been Worse

The Federal Reserve’s decision to raise interest rates again by 25 basis points on Wednesday will likely slow deal making in the nursing home sector, especially in the aftermath of the Silicon Valley Bank’s (SVB) closure last week and its impact on regional banks.

Experts told Skilled Nursing News that it’s a good thing, however, that the Fed’s move was as anticipated, even though the hurt will no doubt be felt.

Tao Qiu, research analyst for Stifel Financial Corp., said that the bump might make debt funding more scarce and underwriting more restrictive as well. The Fed’s latest move could “potentially pour more cold water on transactions,” Qiu added.

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Beth Mace, chief economist for the National Investment Center for Seniors Housing & Care (NIC), said the rate hike will also impact refinancing. Nursing home operators with maturing loans are facing costly refinancing, placing more stress on cash flow amid already razor-thin margins, she said.

The rate hike brings pain and further dampens transaction activity, Mace said.

“It’s the same as you or me, right? If we take out a mortgage at a higher rate, then we have the same level of income with a higher mortgage rate and higher payments. Sort of the same concept,” said Mace.

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From an operator’s perspective, pressure on capital markets means tougher underwriting and lower borrowing capacity for operating lines, or new loans for deferred maintenance and capital expenditures, added Stephen Taylor, a principal within the health care group at CliftonLarsonAllen (CLA).

“Without access to capital to invest, taking calculated risks and innovating can be a challenge for operators and owners as well,” said Taylor. “Strategy, focus, and execution are very important in this environment.”

The Fed decision comes on the heels of SVB’s collapse, which raised concerns about long-term impacts to the banking sector while adding another challenging factor to the skilled nursing financing outlook.

Signature Bank, a 23-year-old regional bank in New York, was shuttered a couple days after news broke on SVB. This particular bank had ties to the nursing home industry, offering accounts receivable lines of credit to operators, Walker & Dunlop managing director Mark Myers told Skilled Nursing News.

“There are still some concerns about Signature. All in all, the Feds expected this fall out. They were prepared to step in and rescue and it looks like they’ve done that … and still taking the posture of reining in inflation, while not causing any further damage,” said Myers.

A “significant chunk” of Signature will be bought by New York Community Bank in a $2.7 billion deal, according to a report from AP News on Sunday. A little more than a third of Signature’s total assets will be purchased for $38.4 billion.

Signature’s health care arm was sold, said Bob Kramer, founder and fellow of Nexus Insights. Kramer is also co-founder and strategic advisor at NIC.

“It’s a good sign that what they purchased from Signature was the health care team, and the health care piece of business,” said Kramer. “They didn’t want the traditional commercial real estate book of business. To me, that’s a positive thing.”

However, some experts do believe that the Fed’s move, while not helpful, was likely factored in, and they don’t expect much downside for companies in the sector given that most aren’t planning to take on new debt.

Finance leaders in the space were already pricing the increase into their business models, Myers said. Had it been higher than expected, it would have been a problem.

“I would think the market was prepared for this. I think everyone is also, on the flip side, hoping that the Feds are done or just about done raising rates,” said Myers.

Meanwhile, Kramer said it would be a mistake to make too much out of the impact this quarter point hike would have on skilled nursing lending.

“The damage has already been done. There are other factors beyond a quarter point increase … we are going to need more stable capital markets,” said Kramer. “Are we done with rate hikes, to get lenders to come back in?”

Right now, lenders are more concerned with their own liquidity, their own reserves, said Kramer. They’re making sure the loans they have out are covered, rather than originating new loans in the present environment.

“I don’t think the Fed’s action compounded that problem, but it also didn’t solve it,” said Kramer.

Rate hikes certainly won’t help the skilled nursing industry – the change will only make a tough capital environment for operators even tougher, Kramer said.

Still, a quarter of a point is better than half or three-quarters of a point, he said. And, the impact really depends on how the financial market interprets the Fed’s signal of where things are going, and next steps to take.

The industry is already in a “tight credit market” compared to three years ago, said Myers.

Operators are seeing an elevated interest rate environment, with skilled nursing cap rates holding steady at 12% to 13% over recent periods, according to Bryan Lockard, co-managing director of JLL Valuation & Advisory Services.

Fewer deals are being completed in the space, NIC reported in January, because of higher interest rates. And the deals that do close at higher prices have a significant impact on average prices.

“The increase in rates is pressuring capital markets, resulting in less availability of capital for operators to borrow. We see the obvious impact of this through the significant decrease in deal volume in late 2022 and early 2023,” said Taylor.

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