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Finance and economics generally focused on real estate

Posts Tagged ‘National Real Estate Online

Tax Reform and Senior Housing

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We follow some REITs at Greenfield, and in general REITs are having a lackluster year. REITs in general have outpaced the S&P 500 this year (though some have done very well), the goal is for a REIT to outperform its underlying net asset value, or NAV for short.  NAV is the theoretical amount of cash the REIT would have if it liquidated its holdings at current market value.  If the REIT management is doing well, or if the sector is expected to grow, then the REIT price should be higher, and should grow faster than NAV in anticipation of those future earnings.

Unfortunately, this has not been the case, particularly in some sectors.  For that reason, health care REITs have backed off acquisitions a bit, since new acquisitions would be dilute current values.  In their stead, non-REIT players (private equity, for example) are snatching up senior housing under the SWAG analysis that “hey, people are getting older, so senior housing is good.”  Yeah…. Andrew Carle, a senior housing analyst quoted in a November 13 National Real Estate Online article by John Egan, notes that these new players may not be giving “proper consideration to market-specific dynamics.”  That’s a nice way of saying they’re not doing their homework.  This is not to say that senior REITs aren’t a good idea, but like every good idea, picking thru the produce rack for the best fruit is a must, particularly when you’re investing other people’s money.  By the way, private equity accounted for 47% of senior housing deals in the first half of 2017, compared with about 10% done by public entities.

One of the “known unknowns” (to borrow from Donald Rumsfeld) is what will happen in Congress to taxes.  One might think that lowering taxes is generally good for real estate, but that’s not always the case.  Consider the Reagan tax cuts in the mid-1980’s.  Market anticipated one thing, and the final bill had something else.  In the end, much of the mistaken anticipation (for example, failure to grandfather certain deductible items) was one of the straws on the camel’s back that led to the S&L melt-down, FIRREA, the need for Fannie/Freddie oversight, etc.  That said, just like the early 1980s, there’s a lot of private money chasing real estate deals.  Let’s hope it all gets invested properly.  Nothing beats good due diligence, analysis, and careful selection.

 

Written by johnkilpatrick

November 15, 2017 at 8:15 am