For the past 18 months or so, healthcare REITs have been doing more selling than buying, at least of seniors housing and care assets. Some of the moves were strategic, such as Healthpeak Properties making the decision to exit the senior care market, at least for now. Others were more tactical, such as Welltower trying to sell high and buy low to better position its portfolio for the future.
But there is one common denominator for the REITs, especially the largest ones, and that is their cost of capital advantage and the ability to use it as we are emerging from the depths of the pandemic. Even though it is not looking to buy senior care assets right now, Healthpeak Properties is raising $450 million of unsecured debt in a note offering with a yield to maturity of about 1.37%, or close to 48 basis points over the five-year U.S. treasury rate, which is 0.89%. That is almost triple what the five-year rate was a year ago when it was an unbelievably low 0.29%.
With borrowing rates like this, one could reasonably expect cap rates for the large acquisitions to set record lows. And Healthpeak’s dividend yield is a low 3.6%. While this is just part of the expected equity return for shareholders, the combined cost of capital is as low as it gets.
Welltower also tapped the unsecured debt market, raising $500 million with a 2.05% coupon over seven and one-half years. That is just 86 basis points over the seven-year treasury rate, which has to be a record low spread for Welltower. Combined with its current dividend yield of just 2.87%, the REIT can continue on its recent buying spree. And let’s not forget the new $4.7 billion unsecured credit facility priced at LIBOR plus 77.5 basis points. Today, that would put its cost of borrowing under the facility below 1.00%.
It is no wonder that WELL CEO Shankh Mitra is so excited about the prospects in the acquisition market. With that kind of cost structure, he most likely believes only stupid money would be able to outbid the REIT. But we have seen stupid money before, especially when the market is on the upswing. The difference now compared with any other time period is that the baby boomers will be coming into play for the first time ever. Unfortunately, no one really knows what they will do and what they will want, despite what the pundits say.
