Fed delivers first rate cuts of 2020, ‘welcome relief’ for senior M&A

The U.S. Federal Reserve cut interest rates by 50 basis points on Wednesday, helping to boost lending and transactions for seniors.

On Wednesday, the Fed announced that the U.S. central bank had lowered its federal funds target range to 4.75%-5%.

The Fed had previously held off on cutting rates since March 2020, tying any future cuts to inflation. On Wednesday, Fed Chairman Jerome Powell said the Fed believes the risks to its employment and inflation goals are “roughly balanced,” which partly led to Wednesday’s actions.

“This recalibration of our policy stance will help keep the economy and labor market strong and enable continued progress on inflation,” Powell said.

Relatively higher interest rates since the start of the pandemic have made it difficult for many senior care organizations to obtain financing for debt service or new growth, and in August many mergers and acquisitions in the industry were still driven by financial concerns.

Given the continued improvement in occupancy rates across the industry’s primary and secondary markets, as monitored by NIC MAP Vision, lenders, buyers and sellers could soon be stepping off the beaten track in 2025.

VIUM Capital Managing Director Steve Kennedy said Wednesday’s rate cut was a “welcome relief” for borrowers in the senior housing sector looking for variable-rate debt and “we hope this is a signal of more near-term rate cuts to come.”

“The decline in short-term interest rates was one of the other major improvements to the income statement necessary to achieve market NOI to drive asset reinvestment and M&A activity,” Kennedy told SHN. “Today is a good day for senior housing borrowers.”

Walker & Dunlop managing director Mark Myers told SHN that the combination of lower interest rates, increased occupancy and a lack of new supply will “significantly improve transaction speeds as sellers come off the sidelines and into the game”.

“Many of these sellers exited the market when interest rates rose faster than cap rates, causing cap rate/loan rate arbitrage from zero to negative,” Myers said. “They were waiting for that moment to sell on good news, rather than selling purely on historical performance and limited arbitrage.”

The Fed’s action Wednesday could ease the many challenges facing sellers and would-be borrowers when it comes to nursing home loans, which have led to a halt in buyer activity that has in turn dried up the pool of buyers for once-desirable deals — but the ultimate relief won’t be immediately felt in the sector, according to Dave Balow, executive vice president at SLIB.

“We hope that in the coming months, more lenders will be willing to issue term sheets, leaving buyers with more options for financing their acquisitions,” Balow said. “We hope that more buyers will actively seek out acquisition opportunities, which will allow brokers to create a more competitive bidding environment for each transaction. We hope that a competitive bidding environment will result in higher valuations for our clients.”