Low Risk, High Return

Low Risk, High Return; not possible right?  It goes against everything you have been taught with regard to investing.  Myself, I truly believe in this axiom in the general sense; because it’s true nearly 100% of the time.  If you follow it, you will not be caught off guard and sufferthe usual financial consequences.  I also know, after 45 years of investing, that the true “Grand Slam” type investments, those which make people truly RICH, are those investments which contradict the “usual” laws of investing.  But, you have to realize, such contradictions are far and few between and you truly need to “keep your eyes wide open” for such rare opportunities.

If there has been one specific occurrence in our country’s history that has had a more transformative effect on our financial markets in the past 100 years; it has been the “Baby Boomer” generation.  The Baby Boomers have made an indelible mark on all sorts of consumer and financial markets; from diapers and baby food to stocks and bonds; the Baby Boomer’s have broken record after record due to the shear population explosion from 1946 to 1964.  When you increase the population of any group by 50% essentially overnight; its going to have a profound effect.  This has certainly been the case for the Baby Boomers.  A once in a myriad of generations occurrence.  Throughout the late 1940’s and into the early 1960’s; whether it be a manufacturer of diapers or baby food, it essentially guaranteed wealth.  In the early 1950’s, the toy business exploded like a nuclear bomb and was forever transformed; all because of the Baby Boomers.  Starting in the mid 1960’s, college enrollments nearly DOUBLED, and new universities started popping up in every state.  Then, the most important effect of the Baby Boomers occurred.  In 1980, the leading edge of the Baby Boomers started coming into “their own”.  They had graduated college in the mid to late 1960’s, established their families and then, after getting their feet on firm financial ground; they entered the “Spending” phase of their lives.  It was this age bracket; i.e., the 30-40 years old, that pulled our country out of its financial doldrums of the late 1970s and early 80’s, andinto starting the greatest financial market expansion in our country’s history.  Our country continued to benefit from the Baby Boomers for the next 30 years while the entire Baby Boomers moved through their “Spending” phase.  Currently, the Baby Boomers are now moving out of this phase and the effects to the financial markets remains to be seen.  Fortunately, our population numbers have remained static as the Baby Boomers have provided offspring of their own to help support the markets; unlike Japan who has suffered due to their population depression.

What is the next effect of the Baby Boomers?  Well, they are getting older and will start to die off.  So, there are only a few opportunities that remain which will benefit from the Baby Boomers.  All we have left to look forward to from this societal aberration from an investment standpoint is; Senior Housing and death; i.e., from providing final destination housing to funeral homes, caskets and cemeteries.  I know, morbid, but true.

We have been waiting since the mid 1980’s for the Baby Boomers to reach the “nursing home” stage so we could take advantage of the overwhelming population statistics entering the market.  It is this “overwhelming”  population that will provide the “Low risk” variable to the equation; i.e, the 85+ year old population will more than TRIPLE into 2045; from 6.1MM to over 18.6MM, (U.S. Census Bureau/Forbes July 2019).In just the next 5 years; the real estate market must increase its yearly Assisted Living unit production from its current 41,000 units 10% each year from 2020 to 2025 and increasing overnight to over 105,000 units per year from 2025 to 2030 and steadily increasing for the next 20 years.  This assumes a penetration rate of the current 18%; if penetration should increase to just 23% (as is our assumption since the Baby Boomers are the wealthiest generation in U.S. history, we believe this will have a significant impact on the assisted living sector overall and thus bolstering the estimation that penetration shall increase significantly).  Therefore, if a 23% penetration is experienced, the necessary production would have to increase 28% to 134,000 units YEARLY and increasing every year through 2040.Suffice it to say, no matter the level of penetration, the construction business will be overwhelmed.  It is tremendous population crush in the over 85 crowd will provide extremely strong occupancy numbers in the Assisted Living sector for the foreseeable future; i.e., next 30+ years.

POPULATION GRAPHS

Now, to find the “High return” variable we need only to enter the “Assisted Living” sector of Senior Housing which encompasses; Independent Living, Assisted Living, Contunuing Care (Nursing) and Memory Care.  Of these choices; Assisted Living offers the greatest opportunity with regard to margins and liability exposure.  The Assisted Living sector generates a gross revenue that is 500% higher than the general marketplace for the same physical product; i.e., a one bedroom apartment.  It only requires some minor adult supervision and dietary provisions (i.e., provide meals).  Granted, this is a simplistic presentation but it truly is a simple transition.  These additional requirements have a marginal impact on revenue, which creates our very attractive “High returns”.

If it were not for the “once in a myriad of generations” occurrence of the Baby Boom generation; we would not be having this conversation, as the business would literally follow the “Low risk, Low return” ~ “High risk, High return” mantra; and it will, once the Baby Boom phenomenon passes after 2040-50.  The Assisted Living sector will become an SOP type, cap rate investment.  It is only NOW, at this specific moment in time, that we have this “once in a Blue moon” low risk, high return scenario.  We rarely experience this type of opportunity during one’s lifetime, benefit while you can.

In assessing our timing; the current demand of 36,000 units per year will increase to 135,000 units in 2027 and beyond to 2050; a 300% increase.  Demand will be peaking just as we are completing our facility portfolio.  Shortages will be nearly catastrophic; REIT and Hedge funds will be paying exorbitant equity multiples for our portfolio

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