IHC’s Due Diligence Process

Wally:
One of the questions we get a lot from our listeners, from our clients is that they’re really trusting us to have their back to do the due diligence. They don’t know how to ask the right questions. They don’t know what questions to ask. Mike, could you chat a little bit about your due diligence process, how you vet particular deal?

Mike Jones:
Sure. There’s a few different categories that we look at with respect to the due diligence and underwriting. First of all, Jason talked about demographics. So we try to identify the primary market area of a certain property. So depending on where it is in relation to a metropolitan statistical area, how far out the property will draw. We’re in some areas in secondary markets where a property might draw from a 15 to 20-mile radius. Some markets, for example, our property in Brookhaven, suburb of Atlanta. That’s a smaller market area, a three-mile radius there.
So we’ll look at the market area, the competition in the market, what the occupancies are in the market and where a property sits in relation to its competitors from a rent perspective and a marketing perspective. On top of that, we do order a full set of third-party reports on each property. So appraisal, environmental report, and a property condition report. So with that, that property condition report, we look at all the aspects of the property from electrical systems, roofing, how their walls are built, et cetera, and make sure that it’s properly built and maintained and something that doesn’t have a huge immediate capital expenditure need.
And then on top of that, we do our own site visit. So I go and look at… I’ve looked at every single one of our properties prior to acquiring it and kick the tires a little bit and really look at operations. The value component of seniors housing is in its operations, right? And so, I’ve been looking at properties for the last 12 to 15 years in underwriting seniors housing assets. So I’ve developed an idea of what to look for as far as operations staff engagement with residents, et cetera. So we look at that. And then obviously, like all real estate, we look at the numbers. So we model out the financials to create then a pro forma moving forward based on a particular operator. That’s in the property and who will be in the property going forward.

Wally:
Can you address that…

Mike Jones:
Yeah. Sure.

Wally:
So when you buy a property, do you maintain… I mean, you’re looking for a successful operation. Who operates it ultimately then? Do you guys put in a new operating group? Is that a creative when you do that? Are these individual standalone facilities that you’re buying and then now they’re part of corporate? Can you address that a little bit?

Mike Jones:
Sure. Typically, we take the approach of, “If it isn’t broken, don’t fix it,” right? Typically, what we’re finding and what we’re offering to 1031 exchange investors is a stabilized asset that has done very well and has a track record that we can rely on moving forward. And so for the most part, what we have found is that our operators want to stay in and want to continue to operate the buildings. It’s done very well for them in the past, and they assume it will do very well for them in the future.
So we have third-party management agreement. We put third-party management agreements in place with the existing operators for the most part. There has been cases where the operators have been the owners themselves and have looked to exit. There’s a couple of those instances where we have put a new operator in place, a strong regional operator or a national operator that we’ve developed relationships with over time. That works. There is a transition period there where they’re installing new culture and such. But for the most part, we put in successful operators who can do the job and take it moving forward. But for the most part, we keep people in.

Wally:
Very good. Is everything you’re doing right now 1031? Is it always a DST model now? Are you doing any other or any TICs or any other models?

Patrick Lam:
Right now, we are going to focus on the DST model. If advisors and different partners like yourself would ask us for a TIC model, we would definitely consider it. And one thing about what Mike was answering earlier is the beauty of our structure and the beauty of the way we do things here is that we have the flexibility of either continuing to lead the operator that’s doing a good job. Maybe they’re a hundred percent occupied and has a two-year wait list. Then of course, at that point, the best thing to do for our investors, keep that operator in there. But at the same time, if we ever see through our quarterly reviews or do our in-person reviews at the facility level where the operator is starting to slip or not doing the best job for our investors, we have the ability at that point to replace that operator with somebody in-house or another operator in that region that is very successful.