Seniors Housing Weekly Update - Cap Rates and Risk
March 19, 2013
Cap Rates and Risk
Our 18th Edition of The Senior Care Acquisition Report will be going to the printer this week, and one of my favorite graphs is the one that compares the cap rate with the 10-year Treasury note rate. Since 2007, the average 10-year Treasury rate has declined by 280 basis points, to 1.8% in 2012, but the average skilled nursing cap rate has increased by 40 basis points from the 12.1% low in 2007 to 12.5% in 2012. One would think that as borrowing costs go down, the cap rate would decline by at least some percentage of the Treasury rate drop. Yes, I know, more equity is required today than back in 2007. Still, the spread between the two has widened from 750 basis points in 2007 to 1070 basis points in 2012. Capital markets may not be perfect, but this tells me that the market has definitely priced in the increased risk of the SNF business. And that return is all going to the equity holders. And in this market, it should.