A Healthy Buy in Real Estate

Irrespective of the President’s proposals for reform or even overall economic growth, the major demographic trends affecting health care in this country have been firmly established since the end of the Second World War. As it is, health care represents the single largest industry in the United States, with total health-care expenditures expected to top $2.8 trillion in 2011. As baby boomers retire, living longer and healthier lives, the demand for senior and health-related facilities will continue to rise, no matter what happens in Congress.

It is unquestionably older people that are fueling the boom. According to research firm CMS, individuals 75 years and older spend 300% more on health care than the population average. As the grandson of a 105-year-old lady I’ve witnessed first hand how the demand for medical services grows exponentially in the later stages of life.

Medical services require medical-related real estate. Yet because most people’s biggest investment is their home, it’s easy to forget that real estate as an asset class encompasses a much broader range of opportunities, including a number of specialty REITs specifically designed to own the health-related properties which are specifically poised to benefit from this macro-demographic trend.

Since March, shares of health-related REITs have far outperformed the broader asset class, with names like Ventas (VTR), Health Care REIT (HCN) and Nationwide Health Properties (NHP) up sharply in recent months yet still down double digits over the past 52 weeks.

A Healthy Bounce

Ventas Inc. (VTR), Health Care REIT Inc. (HCN) and Nationwide Health Properties (NHP) vs. iShares U.S. Real Estate (IYR) – 1 year

Most intriguing of the bunch is Care Investment Trust (CRE), a small-cap company with a diversified real estate portfolio of medical office buildings, senior living facilities and mortgage interests in nursing, assisted living and other medical properties.

Care Investment Trust’s Properties

Source: The Company

The company came public in June of 2007, just in time to bear the brunt of historic meltdown in real estate and mortgage markets, a drop which saw its shares drop from $15 to $4 in less than two years. Having recovered to a recent $7.40, the current yield now rests around 9%.

A Positive Prognosis

Care Investment Trust (CRE) – 1 year

Beyond interest rates, regulation and the general trend for real estate, an unquestionable risk for the company is its manager, CIT Healthcare LLC, a subsidiary of beleaguered small business lender CIT. This might initially seem like a negative for shares, although given the strength of the company’s underlying holdings, one can easily imagine a scenario in which Care survives and thrives, even if CIT as we know it does not.

Given the overwhelming demographic and governmental trends now underway, performance of health-care related REITs is likely to continue to outperform. Care is one that deserves a look.

Stung by holding cash during the historic rally in stocks, active managers are again plowing money into equities. According to data from the Investment Company Institute, cash holdings as a percentage of stock mutual fund portfolios have fallen to 4.19%, down from nearly 6% earlier this year and less than 1% higher than the all-time-lows seen in mid-2007.

Cash Holdings in Stock Mutual Funds

Source: Investment Company Institute

At one time cash holdings were a fairly reliable contrary indicator, but even during 2008’s meltdown, active managers held nowhere near the 7%, 8% and 9% cash levels that were commonplace in the aftermath of the 1987 crash. Mutual fund managers now tend to stay more fully invested than in previous years, leaving the decision to hold cash up to individual investors, who buy and sell shares and allocate based on their own outlook and needs.
Ironically, the foresight and ability to move to cash is precisely what many investors complained their portfolio lacked during 2008, and exactly what is fueling the demand for new “absolute return” funds designed to ideally profit even in a weak environment for stocks.