Are Health Care REITS on the Mend?

At the NAREIT Law and Accounting Conference a few weeks ago AG Edwards REIT analyst Art Havener hinted there were values to be found in health care REITs. That got me thinking about the group and places you might put cash to work. (It also generated a lot of questions from you!)

The Recovery Room

The cream of the health care REIT crop is Health Care Property Investors (HCP Quote). The company, led by health care REIT pioneer Ken Roath, has executed its business strategy through the good and bad of the last four years. The company's first-quarter Funds from Operations (FFO) -- a REIT measure of cash flow -- increased 6.3% from a year earlier and consensus estimates suggest the company can grow its FFO at a 7% to 8% annual rate over the next couple of years. Add a nearly 11% dividend -- about an 85% FFO payout -- and the total return potential is pretty attractive. At just under 27, the stock trades at a very reasonable 7.8 times current FFO and just 7.5 times next year's estimates.

What makes Health Care Property unique? Unlike most health care REITs which hold mortgages, Health Care Property owns nearly 90% of its assets. The company does have exposure to health care operators with financial issues. About 19% of its properties are leased to Tenet Healthcare (THC Quote) and more than 5% are leased to HealthSouth (HRC Quote); both companies have encountered financial stress as a result of government changes in health care reimbursement. However, many analysts, including Morgan Stanley's Byron Wien, say the worst is over. ...