TGIF! This week has been very busy with lots of data and lots of economic news. We got a new report from the BLS on inflation. We got earnings reports from Home Depot, Target, and yesterday, Wal Mart indicating what we saw from the Conference Board – consumers are slowing their spending. I called the Holiday shopping outlook “meh” in Wednesday’s post (https://rhislop3.com/2023/11/15/wednesday-feature-cpi-economy-40-days-to-christmas/).
Yesterday, I caught up on some Ziegler data regarding non-profit ownership transitions (mergers, affiliations, sales, closures). And today, I grabbed some data from NIC (National Investment Center) on senior living/care, borrowing trends. Suffice to say, credit demand is very soft, principally due to high costs and access constraints. The NIC report is available for download here: NIC_Lender_Survey_Report__2Q23
In the chart/graphic, the orange line is senior housing, and the blue line is nursing care. In the second quarter, volumes converged at right around $1 billion. Of those totals, new construction loan volume remained historically low with no volume for nursing care in the second quarter of this year.
Not too surprising, as variable rate debt reprices, delinquencies are up, especially in senior housing, to nearly the same level as we saw in 2020 (pandemic related). Prior to 2020, senior housing delinquencies were fairly flat and below, the rate experienced in nursing care. Since 2020, the relationship between delinquent debt for senior housing and nursing care has inverted (senior housing more).
What has shifted to create the current status for borrowing is three things, not the least of which is borrowing costs.
- Interest rates (inter-bank rates) have risen 5 full points in the last eighteen months. The Fed Funds rate sits at 5 to 5.25% today. Translating to commercial lending rates shifting as SOFR and Treasury rates moved to reflect the higher costs of capital.
- The rapid rise in bank lending rates via the Fed caused a number of banks holding longer term bonds for yield maximization to face rapid devaluations of portfolios (mark to market requirements). This stressed banks, especially regional banks, creating in some cases, outright failures (Signature Bank for example). In follow, depositors began to flee banks as more favorable returns were available at money market funds and short-term Treasury funds. The leaner banks become on deposits, the less lending capacity they have.
- Other market changes such as Fannie Mae revising its guidelines to focus on lower leveraged loans with higher Debt Service Coverage Ratios (DSCR). This cautioned the lending market even more as senior living credit is viewed (often) less stable than other credits.
Combining these factors with an economic outlook that remains choppy, inflation while lessening, still a point to two points above Fed targets (CPI and Core), and Federal Reserve guidance that still hedges to the possibility of one more rate hike or a rate stance of “staying the current course, longer”, the result is a soft credit environment.
While credit remains available, it comes at a stiffer price than found across the prior decade plus. Interest costs are higher and fixed rate loans are scarce. Equity contributions are up significantly, netting lower loan to value loans. Terms are shorter and larger facilities require syndication in many cases (multiple banks). Credit enhancements are again, in the picture (letters of credit, payment guarantees, stand-by cash/equity on deposit). Even with banks, additional covenants and stricter covenants are part of the current lending picture.
What the above has done is stifle demand. Underlying demand is there but not for the terms/conditions present. Continued conditions such as what are present now, will impact organization viability and sector growth.
- Construction starts (new inventory) are the lowest since 2015. While this has been beneficial for occupancy recovery in existing projects, the trend if it continues, will impact the ability of a growing cohort of seniors, to access housing and care.
- Senior housing affordability will continue to be tested. Greater costs for borrowing and credit will roll through to price and in many ways, that is already the case. With higher commodity and energy costs plus higher labor costs, rental rates will see continued upward pressure, in many cases higher than fixed income returns/estate value growth/returns.
- With virtually no new skilled nursing development and continued sector contraction (closures and bed reductions far outpacing new growth), access in some markets and regions may be problematic.
- Debt re-pricing (variable) will stress more organizations creating more delinquency and the possibility of more default.
Wow, all that news is pretty somber as we near a holiday week (ahead). TGIF! Hoping for a better outlook next week.
Ray of good news? Turkey prices are down compared to last year, 5.6%! The family can expect to spend an average of $61.17 on a feast for 10 people ($6.12 per person) which is $2.88 cheaper than last year’s record-high average of $64.05. Unfortunately, this is still 25% higher than 2019.