IHC’s Due Diligence Process

Wally Smith:
Mike, can you talk through your due diligence process just a little bit? So when my clients ask me, how do we know this is a good deal? How do we know who’s looked at it? I try to describe to them how many sets of eyeballs have generally been on a deal from initially you guys to the banks, the financing inspection. What does that process look like?

Mike Jones:
Yeah. So when the communities come to our attention, we talked to the current operator. We talked to the broker and we get a relatively simple set of… We get financial statements. We can look up state surveys, et cetera, to see how the building’s operated. But then from a due diligence standpoint, yeah. We get a number of third-party reports just like you would in other a real estate asset classes. We get appraisals. We get environmental reports. We get property condition reports. We get real estate tax report from another third-party to make sure we’re underwriting real estate taxes correctly. And then we have data sources for the state regulations. So we’re looking at licensing issues and compliance issues from the licensing standpoint. Our banks order their own set of third-party reports that we have access to before we waive due diligence. So yeah, there’s quite a bit of eyeballs on
that purchasing.

Patrick Lam:
Yeah. Just with Inspired Healthcare alone, I think there’s about six people that sign off on a deal before we actually go to market with it. And then if you’re looking at a lended or leverage deal, there’s another probably four or five sets of eyeballs from the bank that will look at and underwrite that deal. And that’s just with Inspired and the lender. And then we focus in on getting it approved at Emerson Equity, our managing broker dealer. There’s another three sets of eyeballs there. So at least a dozen just on the fact that it needs to get approved through the due diligence process.

Wally Smith:
Well, without naming properties specifically, I think it’s good to know that you guys don’t take every single deal that comes along. On the contrary, you’re very picky and choosy. And I know recently, you got all the way up to the altar with a project and decided, “Nope, it wasn’t right.” So that due diligence process is continual.

Patrick Lam:
Absolutely. One thing about that, I’m glad that you brought
that up, Wally. Lakewood Ranch was a deal that we walked away from near the final hour, and we could have came out to market with it quite honestly. A lot of people were excited about it. And at the end of the day, when we finally just looked at the due diligence with some of the things that we were concerned with, it didn’t quite check all the boxes we wanted. It didn’t really quite fit all the requirements we wanted.

Patrick Lam:
And I’ll tell you that we made a really tough decision and decided to walk away from it. It was over 25… Actually excuse me, $32 million in capital raised in terms of just alone. I think that hurt everybody. We understand that would hurt everybody, including your clients. But we did the right thing. And it might hurt the short-term for everybody, but the long-term was we didn’t want to come out with a market or with an offering just to come out with the offering because we knew the market wanted it. We wanted to do the right thing for investors.