RE:RE:RE:RE:RE:RE:The effect of rate hikes...monty613 wrote: pat yourself on the back for reading your economics text book?
I would comment as follows:
- WELL's bank spreads will not change for a number of years because of rising rates - they have committed credit. even at term renewal, the medical space is highly competitive amongst senior lenders due to its low risk, stable cashflow generating profile and it is doubtful their credit spread will increase in a meaningful way. WELL can weather the increased cost of borrowing based on movements in CDOR/LIBOR/SOFR.
- WELL offers a substantial risk/reward premium over risk-free assets to investors / lenders.
- maybe you missed my post on valuations, but the private marketplace for healthcare is more robust than ever. especially as we head into a recessionary enviroment. multiples have not been materially hit by the increased cost of capital. the PE space is clamoring for companies like this. WELL is building this company to sell.
no - I don't work with WELL. I'm just an accredited investor and an experienced lender.
I would also add a couple of things...
The short term rate isn't necessarily indicative of the long term rate. So, if you're looking at investing long term, the risk-free rate might differ from the short term rate (which is why an inverted yield curve matters).
Also, the premium over the risk free rate isn't fixed or linear. Even if the long term risk free rates are at 1% and long term inflation is at 2%, you might still look for a minimum return on your investment. Let's say that minimum real return for your money is 6%, then with those numbers you'd be looking for a return of 8%. If long term risk free rates move up to 4% but long term inflation stays at 2%, then a return of 8% still brings you back a real return of 6%, which is still higher than the risk free rate. Is a 4% premium over the risk free rate enough? Well, that will depend on many factor. However, just because the risk free rate moved from 1% to 4% doesn't mean that the expected return for a riskier investment will move up 3%... This will depend on both the saving rate and the money flow to safer investments vs riskier investments. A lot of moving parts.
Considering all the factors that come into effect, it is tempting to say that multiples will contract. Based on historical values, the market's overall multiples might effectively contract, but it may not be due straight up to the increase in interests rates rather than in the general market being overvalued. When you look at one specific stock, the starting point for the stock might not be the same as the general market. And so, multiples might not contract but expand, despite the headwinds.
Coming back to WELL, they have shown serious organic growth in the past year and they are generating increased cashflows every quarter. Compared to its sector, the stock is quite cheap considering its current metrics. I'd treat the macroeconomic environment as a headwind more than as a cap on the value of the stock.