Published on March 16th, 2023 by Aristofanis Papadatos
NorthWest Healthcare Properties Real Estate Investment Trust (NWHUF) has three appealing investment characteristics:
#1: It is a REIT so it has a favorable tax structure and pays out the majority of its earnings as dividends.
Related: List of publicly traded REITs
#2: It is a high-yield stock based on its 9.2% dividend yield.
Related: List of 5%+ yielding stocks
#3: It pays dividends monthly instead of quarterly.
Related: List of monthly dividend stocks
You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics that matter like dividend yield and payout ratio) by clicking on the link below:
NorthWest Healthcare Properties Real Estate Investment Trust’s trifecta of favorable tax status as a REIT, a high dividend yield, and a monthly dividend make it appealing to individual investors.
But there’s more to the company than just these factors. Keep reading this article to learn more about NorthWest Healthcare Properties Real Estate Investment Trust.
Business Overview
NorthWest Healthcare Properties Real Estate Investment Trust is an open-ended real estate investment trust with a portfolio of high-quality international healthcare real estate infrastructure comprised of interests in a portfolio of 232 income-producing properties and 18.5 million square feet of gross leasable area located throughout major markets in Canada, Brazil, Europe, Australia and New Zealand.
Source: Investor Presentation
The REIT’s portfolio of medical office buildings, clinics and hospitals is characterized by long term indexed leases and stable occupancies. With a fully integrated and aligned senior management team, the REIT leverages over 200 professionals across nine offices in five countries to serve as a long-term real estate partner to leading healthcare operators.
NorthWest Healthcare Properties REIT has a high occupancy rate of 97.0% and a weighted average lease duration of about 14 years. The long duration of leases offers great visibility in future cash flows. The REIT is also highly diversified geographically and, more importantly, it is somewhat protected from high inflation thanks to contractual rent growth year after year.
Thanks to the essential nature of the healthcare industry, NorthWest Healthcare Properties REIT has proved markedly resilient throughout the coronavirus crisis, in sharp contrast to many other REITs. The trust grew its adjusted funds from operations (FFO) per unit by 3% in 2020 and by another 5% in 2021 while it also kept its dividend flat.
On the other hand, NorthWest Healthcare Properties REIT has decelerated lately. In the third quarter of 2022, it grew its revenue and its net operating income by 21% and 20%, respectively, over the prior year’s quarter but its adjusted FFO per unit decreased 29%, from $0.21 to $0.15, primarily due to lower transaction volumes and increased interest expense. The latter resulted from the aggressive interest rate hikes implemented by the Fed in an effort to restore inflation to healthy levels. As interest rates are not likely to decrease anytime soon, they are likely to continue to take their toll on the bottom line of NorthWest Healthcare Properties REIT in the upcoming quarters.
Growth Prospects
The healthcare real estate market has many attractive characteristics. First of all, it is one of the largest industries in the world, accounting for more than 10% of global GDP. About $8 trillion is spent on global healthcare every year. In addition, healthcare spending is growing at a 4%-7% annual rate.
Source: Investor Presentation
Moreover, the healthcare industry enjoys favorable demographics thanks to a growing and ageing global population. As the 65+ group continuously grows and it is the group with the greatest spending power, global healthcare spending is likely to continue growing at a fast pace for the next several years.
Furthermore, NorthWest Healthcare Properties REIT has built a rapidly growing asset management platform. Thanks to this platform, the trust enjoys fast-growing management fees. While management fees somewhat cooled in the latest quarter, they are likely to remain a material growth driver in the upcoming years.
Overall, NorthWest Healthcare Properties REIT has ample room for future growth thanks to the secular growth of the healthcare industry. On the other hand, high interest rates are likely to take their toll on the bottom line of the trust in the upcoming quarters.
NorthWest Healthcare Properties REIT has grown its FFO per unit by 1.6% per year on average over the next five years. Given the above factors, we expect the REIT to grow its FFO per unit by about 2.0% per year on average over the next five years, roughly in line with its historical growth rate.
Dividend & Valuation Analysis
NorthWest Healthcare Properties REIT is currently offering a 9.2% dividend yield. It is thus an interesting candidate for income-oriented investors, but the latter should be aware that the dividend may fluctuate significantly over time due to the gyrations of the exchange rates between the Canadian dollar and other foreign currencies and the USD.
Moreover, the REIT has an elevated payout ratio of 84%, which greatly reduces the margin of safety of the dividend. On the bright side, thanks to its solid business model and its strong interest coverage of 6.1, the trust is not likely to cut its dividend in the absence of a severe recession. Nevertheless, investors should not expect meaningful dividend growth going forward and should be aware that the dividend may be cut in the event of an unforeseen downturn, such as a deep recession.
We also note that NorthWest Healthcare Properties has a high debt load. Its net debt is currently standing at $2.7 billion, which is nearly double the market capitalization of the stock. The high payout ratio and the high debt load of the REIT significantly reduce its resilience to a potential future recession.
In reference to the valuation, NorthWest Healthcare Properties REIT is currently trading for only 9.8 times its FFO per unit in the last 12 months. The cheap valuation has resulted primarily from the expected impact of higher interest expense on the bottom line and the effect of high inflation on the valuation, as high inflation greatly reduces the present value of future cash flows.
Given the material debt load of the REIT, we assume a fair price-to-FFO ratio of 11.0 for the stock. Therefore, the current FFO multiple is lower than our assumed fair price-to-FFO ratio. If the stock trades at its fair valuation level in five years, it will enjoy a 2.4% annualized gain in its returns.
Taking into account the 2% annual FFO-per-unit growth, the 9.2% dividend, and a 2.4% annualized expansion of valuation level, NorthWest Healthcare Properties REIT could offer an 11.4% average annual total return over the next five years. This is an attractive expected return, especially for the investors who expect inflation to subside swiftly to its normal levels. Nevertheless, the stock is suitable only for the investors who are comfortable with the risk that comes from the material debt load of the trust.
Final Thoughts
NorthWest Healthcare Properties REIT has the advantage of operating assets in the global healthcare industry, which enjoys strong and reliable secular growth. Despite its high payout ratio of 84%, the stock is offering an exceptionally high dividend yield of 9.2% and hence it is an attractive candidate for the portfolios of income-oriented investors, particularly given that the stock has an attractive expected return of 11.4% per year over the next five years.
On the other hand, investors should be aware of the risk that results from the weak balance sheet of the REIT. If high inflation persists for much longer than currently anticipated, high interest rates will greatly burden the REIT. Therefore, only the investors who are confident that inflation will soon revert to normal levels should consider purchasing this stock.
Moreover, NorthWest Healthcare Properties REIT is characterized by exceptionally low trading volume. This means that it is hard to establish or sell a large position in this stock.
Don’t miss the resources below for more monthly dividend stock investing research.
- The Monthly Dividend Stocks List
- 20 Highest Yielding Monthly Dividend Stocks
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- 3 Top ‘Hold Forever’ Monthly Dividend Stocks
And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.
- Dividend Kings: 50+ years of rising dividends
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- Dividend Achievers: 10+ years of rising dividends and in the NASDAQ
- High Dividend Stocks: 4%+ dividend yields
- Blue Chip Stock: Kings, Aristocrats, and Achievers
- MLPs: List of MLPs and more
- REITs: List of REITs and more
- BDCs: List of BDCs and more