Long-term care-related defaults had been decreasing as of May. 

Hilltop surveyed 125 market participants. Half of the respondents to the Hilltop Securities High Yield Impact Survey were investors; bankers and advisers accounted for 16%; sell side intermediaries accounted for 9%; and bond counsel, insurers and rating analysts contributed 16% of the responses. Other market participants (including bond evaluators and researchers) contributed the remaining 9%.

The top three sectors in which participants said they expect to see defaults are in senior living, skilled nursing and project finance. Those top three were the same as in 2022, Hilltop noted, although higher education was No. 4 in 2023 compared with hospitals in 2022; “​​some of the extreme labor and revenue pressures in the hospital sector have begun to moderate,” the company said.

“Generally, responders assigned little to no concern to the behavioral health, hotels, workforce housing sectors, or the impact that work from home will have on credits,” according to Hilltop. 

The company noted that pre-pandemic occupancy levels haven’t returned to most senior living communities, which face continued revenue challenges that could affect muni bonds. According to NIC MAP Vision and the National Investment Center for Seniors Housing & Care, however, sustained supply-demand trends could drive those occupancy rates to return to pre-pandemic levels this year.

But experts are somewhat pessimistic in general about some muni bond yields this year, Bloomberg reported.

“Junk muni bonds posted a 9.2% advance for the full year, the most since 2019. Returns were buoyed by a lack of high-yield supply and a widespread market rally starting in November,” according to the media outlet. 

“The market could look different this year if the Federal Reserve cuts interest rates and muni issuers rush to borrow. A slowing US economy also doesn’t bode well for a sector that’s largely made up of nursing homes, tobacco bonds and charter schools,” John Flahive, head of fixed income at BNY Mellon Wealth Management, told Bloomberg.

According to the Hilltop survey, the green bond designation has little effect on investors. Hilltop has asked a question about the bond type in its three most recent annual surveys. Less than 1% of respondents said that the green bond designation was a priority for them. Investors conveyed that although the designation is a nice thing to have, they aren’t willing to pay extra for it.

“Green bond designation does not help my recovery when a deal defaults. Equity does,” one respondent said.

The commercial real estate services and investment company sought feedback from senior housing investors, developers, lenders and brokers throughout the United States. The survey was conducted in October, and results were released in December.

Seventy-five percent of survey respondents reported cap rate increases of 50, 75 or 100 basis points across all senior living and care categories during the six-month period. Thirty-one percent of the respondents noted increases of 100 basis points or more.

Skilled nursing cap rates increased by 71 basis points between April and October after falling by 34 basis points between CBRE’s previous two surveys. Aron Will, vice chairman of capital markets at CBRE, told the McKnight’s Business Daily that the turnaround in skilled nursing is likely due to Medicaid rate increases in certain states. For example, he said, Ohio increased Resource Utilization Groups (RUG) rates by approximately 50% on Jan. 1

Cap rates among independent living, assisted living and memory care communities increased by 73 basis points, on average, since the previous report. Increases were greater for Class C assets compared with Class A assets, CBRE said, noting that the finding was a reversal from the April survey, which found the biggest increases in Class A assets and core markets.

The average cap rate for active adult communities increased by 68 basis points between April and October.

For additional coverage of the survey results, including predictions about rent increases, see McKnight’s Senior Living.

The full report is available here.