Morningstar recently released an excellent report recommending several health-care REITs. Their favorite is Health Care Property Investors Inc. (HCP), which has a current yield of 5.48% and a beta of .87. Morningstar is enthusiastic about HCP because it is diversified in terms of geography and tenants, it has a portfolio heavily weighted toward private-pay assets, it has good management, a clean balance sheet, and a fully-covered dividend. The aging of our baby-boomer population makes the health care industry an attractive investment theme and ownership of hospitals and nursing homes is a relatively low-risk way to participate. When a REIT selloff occurs, I will be looking to add HCP to my portfolio. HCP is replacing HCN on my watchlist.
REITs have had quite a run over the past several years as investors have searched for higher yields, and now appear seriously overvalued. For example, VNQ, a diversified REIT ETF, is currently yielding .55 less than the 10 year Treasury, but with more risk. During an economic slowdown, it would not be surprising if the REIT sector had a correction. Such a pullback would probably be led by the apartment REITs or retail REITS, but in a general rout, it is possible the health care REITS could be taken along for the ride and this could create an attractive buying opportunity for HCP.