HCN: Safe Harbor in a Nasty Market

Earlier this week, Health Care REIT (NYSE: HCN  ) reported solid fourth-quarter results. As a real estate investment trust (REIT) specializing in health-care facilities, it primarily owns nursing homes, medical office properties, and assisted-living communities.

REITs in general have taken a beating of late, and even some health-care REITs, like Healthcare Realty Trust (NYSE: HR  ) and Nationwide Health Properties (NYSE: NHP  ) , have reported quarterly losses or lower funds from operations (FFO). However, HCN reported a quarterly revenue increase of 56%, while net income per share more than doubled year over year. In addition, funds from operations -- the best measure of REIT strength, giving the most accurate picture of the company's cash flow -- increased 6% this year. It's expected to do the same for 2008.

Wow, that's really ... OK
The stock achieved a total shareholder return of 9% for 2007. Although these weren't numbers you'd brag about on a date with a supermodel, they look mighty good in the midst of the current credit crunch and ensuing market meltdown. Most analysts expect the health-care sector to be the best-performing REIT subclass for 2008.

The health-care REIT sector has been a rare bright spot -- or at least a less dim spot -- in a terrible market. The sector as a whole had a 2.1% return for 2007. Health-care REITs are defensive stocks with high dividend payouts, seemingly just what the doctor ordered for this market. The only problem? Doctors must have been prescribing these investments to every patient, because health-care REITs are selling at record-high historical valuations. HCN, for example, pays a hefty 6.2% dividend yield, but sells at an eye-popping 35 times earnings.

Dividends you can bank on
This week's numbers show that HCN is a solid, steady-as-she-goes investment in a dangerous market. But at this price, it's difficult to see investors earning much more than the dividend. You won't make a killing, but you may just find a rare port of profitability in a terrible storm.

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