IHC’s Higher Yields and Effects of Rising Interest Rates

Wally:
How do you guys accomplish that you pay a little bit higher yield. I know we love it. Our clients love it. But I know we don’t want to get into specific numbers from a compliance standpoint, but your yield has been a bit higher than some of the other sectors. Why is that?

Mike Jones:
Sure. Again, it gets back to the operational nature of this asset class. And the fact that it does produce a higher cash flow than other assets. So we do have higher cash flow in our communities than you would, say, in a multifamily or a student housing community, which allows us to go ahead and pay those higher yields.

Wally:
Okay. Are interest rates going to affect you guys much? How do you see that as far as the both interest rates and the cap rates changing in the near future?

Mike Jones:
Sure. So yeah, I’ve been thinking interest rates are going to go up substantially for a long time now, and they don’t seem to. So now, I’m starting to change my feeling that maybe they won’t go up as high as I thought, maybe they would. They are going to. The Feds already announced they’re going to move interest rates. And so we know they will. There’s some inflationary pressures. The Feds come out and said they’re not sure the nature of the inflation right now. But interest rates will rise. And again, this is a stable asset class where cap rates really haven’t moved that much. And so interest rates for us would really affect two things, one, cap rate, and two, our interest rate on our loans. And so with cap rates, as I said, cap rates have been relatively stable in this asset class over the last 10 to 15 years.

Wally:
Really? Okay.

Mike Jones:
So within our range, right? So depending on the property, the condition of the property, the size, the market. But they’ve been relatively stable. And so that’s one of the nice things about this asset class is it’s fairly predictable. Cap rates will come up, some with rising interest rates, but again, it’s not as susceptible to interest rate changes as you would have in other asset classes. And then on the second front with our loans, because they’re longer term loans, we’ve been able to either lock in fixed rate interest rates at today’s rates. Or if they’re a floating rate or we get into a floating rate period, we’ve hedged all of those floating rates so that we hit a cap. So we purchased caps on the couple that have had floating interest rates.

Sly Pusiri:
And, Jason, do you want to add too or Mike? This is an advantage to being in a month-to-month lease situation as compared to other commercial asset classes. We have a better ability to keep pace with inflations, maintain margins, grow the revenue.

Wally:
Well, the other unit is or the other sector is storage units. That’s one of the great things we like about the storage sector is the flexibility. People are in and out. You get just the prices accordingly. So I think that dynamic pricing is a big plus.

Patrick Lam:
I think one thing to remember is that we don’t count on cap rate compression. We don’t count on cap rates moving. And all we need to hit are investors’ IRR. And the returns that we want our investors to receive from being an investor into our facilities is the fact that we are able to grow rates and grow rents at a methodical and steady basis that’s usual and customary to the senior housing facilities. And so about cap rate compression, we’re able to hit our targets by just growing rents at a steady four or 5% a month or a year. And we will get to where we need to be at exit.

Wally:
Yeah. Well, I think the demographic driver for your sector is it’s hard to beat. I mean, it doesn’t insulate you from the market risks and from the economy, but people have to live somewhere.