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Fed rate hikes impact healthcare REIT projects

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Fed rate hikes impact healthcare REIT projects

Rising interest rates have begun to weigh on the development plans of healthcare real estate investment trusts, according to management at several healthcare REITs who spoke on recent earnings calls.

In its third-quarter earnings call, Healthpeak Properties Inc. said it sees life science ground-up and conversion projects being put on hold due to higher development costs and increasing rates.

"We are seeing projects getting put on hold. The interest rates are certainly having an impact on levered projects, making them infeasible," Scott Bohn, chief development officer and co-head of life science, said. "We think that over the next 18 to 24 months, some of the supply we were previously forecasting will decline."

To temper the effects of soaring inflation, the Federal Reserve has increased its interest rates by 375 points since March, including four consecutive 75-basis-point hikes, making borrowing costs more expensive.

However, the Fed may slow down its aggressive increases after inflation in October came in at 7.7%, slower than 8.2% the previous month and 8.2% expected by economists.

"Highly levered buyers have been very active in our space for several years, and the tight debt market today has caused difficulties for those buyers and therefore, slowed some of our pending dispositions," CareTrust REIT Inc. CEO, President and Director David Sedgwick said in the third-quarter earnings call. "But the flip side is that the rising rates are clearly tipping the scales in our favor on the acquisitions front."

National Health Investors Inc. is keeping its guidance for the year, saying it is prudent given the increasing interest rates and industry stress, which may lead to further dispositions, deferrals, rent restructurings or tenant transitions in the fourth quarter.

"While the third quarter results exceeded our expectations, the operating environment for our tenants in the [senior housing operated portfolio] remains challenging, with labor and other inflationary pressures weighing on margins," said D. Eric Mendelsohn, president, CEO and director.

Meanwhile, Ventas Inc. said the company is in an "advantaged position to succeed" even as the rate hikes provide headwind.

"Demographic demand fuels all our asset types and senior housing supply-demand fundamentals are highly favorable and improving. While we, like most companies across the real estate space, are affected by higher interest rates, we are happy to be in a business that has pricing power, upside from occupancy and margin expansion and has been historically resilient in a variety of economic environments," Ventas Chairperson and CEO Debra Cafaro said.