The Federal Reserve cut interest rates by half a percentage point on Wednesday, marking the first reduction in four years and reflecting a shift aimed at supporting economic growth as inflation shows signs of moderation. Financial experts in the nursing home industry hailed the Fed’s action as “welcome relief.”

“[This] is welcome relief for skilled nursing borrowers with variable rate debt, and hopefully signals future short-term rate decreases still to come,” Steve Kennedy, executive managing director at VIUM Capital, told Skilled Nursing News. “Lower short-term rates immediately strengthen variable-rate borrowers’ debt service coverage levels and, in some cases, enable loans to be covenant compliant.”

The new rate, set between 4.75% and 5%, comes amid ongoing predictions with some analysts anticipating a smaller, 25 basis-point cut. This aggressive approach signals the central bank’s commitment to fostering an environment conducive to borrowing and spending.

Overall, the Fed’s rate cut is expected to reverberate through various sectors, including the nursing home sector as it navigates post-pandemic challenges. Short-term rates were seen as posing a stumbling block to deal-making in the sector.

“Now that skilled nursing occupancy is nearly back at pre-pandemic levels of 80%, Medicaid reimbursement rates have been rebased in many states to reflect higher pandemic-era related costs, and operating costs are stabilizing from the 2023 inflation-driven highs, a decline in short-term interest rates has been one of the remaining major income statement improvements needed to achieve market NOI in order to drive asset reinvestment and M&A activity,” Kennedy said. “Today is a good day for skilled nursing borrowers.”

Operator view on rates

Operators told SNN that the rate cut will be very helpful for key changes that bear on quality of care and better wages, but the Fed move could also come at a price.

“Rate cuts are typically a very positive thing for operators, as [cuts] lower borrowing costs and therefore improve cash flows from operations that can potentially be used for things like improvements to patient care, wage adjustments for staff, capital improvements at the buildings,” Steve Nee, CEO of Diversicare Healthcare Services, told SNN.

Moreover, the dramatic increase of interest rates after a long period of stagnancy was destabilizing for the sector, Nee said. Prior to 2022, businesses enjoyed historically low interest rates that were below 5% for a period of almost two decades, he explained.

“So it was a bit of a shock to the system when rates began their rapid ascent from virtually 0% at the beginning of the pandemic to over 5% in 2023, with the majority of rate hikes hitting in 2022,” Nee said. “I believe most operators are pleased to see the Fed adjusting these rates down as inflation begins to cool, and are hopeful for continued cuts as many will be eyeing refinancing options at lower rates.”

Of course, there is a potential downside to the rate cuts, Nee added, saying that the cuts could drive up the valuations and prices for new acquisitions due to increased demand as a result of lower interest rates.

Short-term rates determine variable debt refinancing, influence operating expenses, with lower interest rates encouraging companies to borrow for expansion or investment.

The 10-year Treasury yield is an important factor in the Fed’s assessment of the economy and its decisions on short-term interest rates.

“A material decrease in long-term rates is driving more cost effective permanent financing for skilled nursing assets through [Housing and Urban development] loans,” Kennedy said, noting that the 10-Year Treasury dropped from 4.7% in April of this year to 3.6% today – its lowest level in over a year since June 2023.

The nursing home industry aside, one of the most immediate effects of the latest rate cut will be felt in the housing market. Mortgage rates, which are closely tied to the Fed’s policy, have already dropped to a 19-month low of 6.2% for 30-year fixed loans. Experts expect this downward trend to continue as lenders adjust their rates in response to the Fed’s actions.