When investors take into consideration municipal bonds, safety and stability often come to mind. Afterall, a city or state government has the power to tax their residents to assist pay for the bonds. Consequently, munis often form the cornerstone of many conservative fixed-income investor’s portfolios. But not all munis are secure and regular, some are a tad on the dangerous side. But for investors trying to pick up extra yields, these bonds might be an actual opportunity.
Today, that chance lies inside munis tied to senior living and nursing homes.
The senior living sector has long been one in every of the riskiest within the high-yield muni space — skewing default rates higher for all muni bonds. Those issues have only gotten worse because the pandemic. But with an aging population and increased elderly care needed, the sector could provide an interesting mix of risk and reward for some income seekers.
The Riskiest of the Dangerous
Municipal bonds are issued by state and native governments in addition to their entities. As such, when investors are inclined to take into consideration municipal bonds they consider so-called general obligation (GO) bonds. The flexibility to repay these bonds is directly tied to the State of Texas’s or City of Sacramento’s ability to tax its residents and businesses.
Nevertheless, the muni market is a two-sided coin.
And here, the opposite side is a bigger share of the pie. Revenue-backed bonds are tied to specific projects. These bonds are issued to fund essential services which are financially independent of town, county or state they serve. They’re repaid by the revenues generated from the project. Some examples include mass transit, utilities and even sports stadiums/concert venues.
Senior living facilities fall inside this category.
These bonds are issued by governments to finance construction of senior living facilities, similar to nursing homes, assisted living facilities, continuing care retirement communities, and memory care facilities. States and native governments get entangled to satisfy the needs and to entice private owners. Owners of the ability pay back the bond based on the revenues they generate. But, aspects similar to occupancy rate, operating costs, competition and, mockingly, enough government regulation can impact revenues. And if that money is insufficient to cover the debt service payments, the bondholders may face a default.
And so they do default.
As of the tip of the primary quarter of this 12 months, greater than 8% of senior living munis were in default. In 2023, the default rate for the senior living sector was a whopping 10.8%. To place this in perspective, taking a look at your complete municipal bond sector, the default rate is about 0.41%.
COVID-19 definitely has added additional pressures on the sector. Other than the impacts of the pandemic, the senior living sector is, by far, the leading area where defalts occur throughout the muni space.
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Why Tackle the Risk?
So, why even hassle with the sector? For starters, yields for senior living bonds are among the highest within the municipal space. You’re talking 5% to eight%. That’s a fairly juicy yield regardless of the way you slice it, and is on par with regular junk bonds before muni’s tax benefits kick in. For income seekers, it’s a simple method to boost a portfolio’s yield.
Another excuse to think about senior living munis? Our aging population. Demand for senior living and elder care is simply growing. In roughly five years, in keeping with the usCensus Bureau, the U.S. population will hit an inflection point. It’s at that cut-off date that the large Baby Boomer generation will hit 65. By 2040, nearly 81 million people might be of retirement age within the U.S., representing 22% of the population.
Source: Thornburg
As modern medicine increases our lifespans, it’s putting a strain on elder care needs. In response to asset manager Thornburg, that is wonderful news for the senior living bond sector. Money flows for these bonds should only strengthen as more people begin to make use of these services. Furthermore, COVID-19 and the problems from the pandemic put the kibosh on construction activity and issuance of bonds. The reduction within the variety of facilities is bullish for the rents and money flows of existing centers. And with less bonds being issued, those which are might be in greater demand.
For investors today, this reverses the entire risk-reward equation. Yes, they’re dangerous, but the long run seems rosy as demand increases. This risk-reward equation is highlighted by the indisputable fact that default rates have continued to say no in recent months. Investors could also be buying more reward with even less risk than simply a 12 months ago.
Betting Big on the Aging Population with Senior Living Loans
Now, senior living bonds are still dangerous when put next to the general muni market, and even the high-yield muni marketplace for that matter. But for those investors trying to juice their income or who’re younger and may tackle more risk, they may make sense. Long run, they’ve loads of reward.
The query is learn how to buy them.
Buying individual municipal bonds is a difficult proposition without certain state government bonds. And given the additional risks related to senior living bonds, investors should want to stay clear of them individually.
Luckily, as a significant a part of the high-yield category, senior living bonds feature prominently in lots of ETFs that track the sector. Sadly, there aren’t any muni bond ETFs that track different segments of the space … yet. Lively management might be key find senior living bonds with great risk-reward prospects.
High-Yield Municipal Bond ETFs
These funds were chosen based on their exposure to the high-yield municipal bond market. They’re sorted by their YTD total return, which ranges from 3.4% to 9.9%. They’ve assets under management between $82M and $2.92B and expenses between 0.32% and 1.82%. They’re currently yielding between 3.3% and 5.6%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| XMPT | VanEck CEF Muni Income ETF | $239M | 9.9% | 5.6% | 1.82% | ETF | No |
| HYMU | BlackRock High Yield Muni Income Bond ETF | $82M | 7.1% | 4% | 0.35% | ETF | No |
| HYMB | SPDR® Nuveen Bloomberg High Yield Municipal Bond ETF | $2.59B | 5.7% | 4.3% | 0.35% | ETF | No |
| FMHI | First Trust Municipal High Income ETF | $573M | 5.5% | 4% | 0.70% | ETF | Yes |
| JMHI | JPMorgan High Yield Municipal ETF | $175M | 4.9% | 5.1% | 0.59% | ETF | Yes |
| HYD | VanEck High Yield Muni ETF | $2.92B | 4.5% | 4.4% | 0.32% | ETF | No |
| SHYD | VanEck Short High Yield Muni ETF | $329M | 3.4% | 3.3% | 0.35% | ETF | No |
While the previous funds aren’t pure vehicles, they do include senior living bonds of their holdings — and that is perhaps enough to assist boost yields and total returns. For investors, the sector is dangerous, but there are tailwinds that help propel it forward. Considering broadly might be their best bet.
Bottom Line
Senior living municipal bonds have long been the place for prime default rates amid high yields. However the risk-reward proposition might be changing. And the aging population might be strengthening the money flows for these facilities. That is bullish news for these municipal bonds and their investors.