We have been building a database on senior living investment portfolios, and as investment consultants, we wanted to share some of that information with you. We started by looking at the largest senior living multi-site organizations. Some of these organizations have spread their tentacles into several geographic locations and states and have amassed significant assets to manage. We have decided to compile the database using mostly outside sources, such as financial statements, annual reports, credit rating agency reports and IRS Form 990s. Despite obvious obstacles with this methodology, we are able to access a larger number of organizations with similar characteristics than self-reporting surveys. While there may be some murkiness to the data, we have tried to focus our efforts on those organizations whose data is organized in a fashion that lends itself to easy categorization. For example a financial statement that states that 80% of its assets are in “mutual funds” is not offering a sharp enough breakdown for inclusion in our asset allocation analysis. On the other hand, many organizations are now reporting assets on their financial statements according to Level 1, 2 or 3 pricing clarity. This is helpful in counting alternative assets held in limited partnerships, which are generally Level 3. Of course, there are many mutual funds today (Level 1) which are also invested in alternative strategies. So as with most data compilations, take this one with a grain of salt.
Our database includes about 80 of the largest multi-site senior living organizations, nearly 1/3 of which carry an investment grade rating. The average asset size of $97MM is skewed by a handful of very large portfolios; dropping the top 3 portfolios brings the average down to $66MM. The median portfolio is just under $50MM. The asset allocations drawn from financial statements tend to show significant cash (13%). We believe some of that cash is actually operating cash, but regardless we were surprised by the high cash levels.
Almost 43% of assets are allocated to fixed income and about 40% are allocated to equity. This is a slightly higher equity mix than we generally see with smaller single site entities. The average allocation to alternative investments is less than 5%, with only about 20% reporting any exposure to alternatives. Of those who report holding alternatives, the allocation ranges from 10-25%. Surveys that have been conducted generally report higher allocations to alternatives as some participants will include REITs, MLPs and commodities with alternatives and our data perhaps doesn’t capture some liquid alternatives in mutual fund form.
It appeared that obligated groups and other consolidated portfolios had higher allocations to equity and alternatives, but there were many exceptions. One of the largest multi-site operators with assets at a multiple of the unadjusted average portfolio had very little exposure to equities or alternatives. One of the smaller portfolios had nearly 70% invested in equities.
There are 2 quick observations that we have after looking at the data.
- Cash Management – With all of the cash on balance sheets, we wondered how some of these organizations were preparing for the brave new world of cash management. Due to Dodd Frank, new rules are being imposed upon “prime” money market mutual funds, whereby starting October 2016 the highest yielding money market funds (“Prime” funds) will be subject to floating NAVs and possible exit fees and/or lock-ups. The idea that you can invest $1 and get that $ back with interest, will no longer apply to prime money funds. The alternative to prime funds will be “Government only” funds, which will be in high demand from risk adverse investors. This high demand will likely allow “Government only” money funds to offer very little in interest. For organizations, cash management will perhaps involve a little more strategy. You may want to segment your operating cash into 1, 2 or 3 different buckets in order to maintain required liquidity and improve returns.
- Alternative Investments – we would expect to see more interest in alternative investments as expectations of returns decline, particularly for fixed income. The classic 60/40 allocation has had a long term expected return over the years of 8% as stocks were pegged to return 10% and bonds 5%. Today, the starting yield on bonds is 2-3% and expected returns on stocks have dropped to 7-8%, with 60/40 portfolio expectations now around 6%. With interest rates low and poised to go up, albeit slowly, total returns on bonds will be lackluster. Finding strategies that will deliver higher returns than fixed income with less risk than equities is the new Holy Grail. Certain absolute return alternative strategies may now fit this bill for a number of senior living organizations today. Additionally, with stocks having tripled since the low in 2009, more aggressive alternative strategies, such as long/short strategies, may prove to be good substitutes for equities on a risk adjusted return basis.