How Do Higher Interest Rates Affect This High-Yield REIT?

Income investors are fond of real estate investment trusts (REITs) for their stable income. NorthWest Health Prop Real Est Inv Trust (TSX:NWH.UN) offers a yield of +7.5%, which is great for current income.

Should unitholders of this REIT be concerned about rising interest rates? How will higher interest rates affect NorthWest Healthcare Properties, which has lots of debt on its balance sheet, just like any normal REIT with mortgages on its back?

A business overview

NorthWest Healthcare Properties has an international portfolio of healthcare property assets with a weighted average lease expiry of ~11 years. It has 142 of mostly hospital or medical office buildings.

NorthWest Healthcare Properties generates ~39% of its net operating income (NOI) from Canada, ~28% from Brazil, ~26% from Australasia, and 7% from Germany.

In the first quarter, NorthWest Healthcare Properties had mortgage and loan interest expense of ~$20.3 million compared to NOI generation of $52.9 million. The company remains in good shape.

Its portfolio maintains a high occupancy of more than 95% and a payout ratio of 85%, which should keep its high yield safe.

The REIT’s expiry profile benefits from its Brazilian portfolio, which is comprised of seven hospitals, which are occupied by leading hospital operators and are subject to long-term leases that expire between 2024 and 2041.


Its debt

The REIT’s loan-to-value ratio (defined as total mortgage amount divided by appraised value of its properties) is ~41% without convertibles and ~50% including convertibles.

The company has ~81% of secured debt and ~83% of fixed-rate debt. Secured debt is backed by collateral, which reduces the risk of lending. Fixed-rate debt improves the visibility of the interest expense that needs to be paid. The REIT’s weighted average interest rate (for its secured debt with fixed interest rates) is ~4.32%.

About 48% of NorthWest Healthcare Properties’s debt is maturing from 2017 through 2019 with weighted average interest rates of 4.11 to 6.36%. That’s almost half of its debt, so it’d be helpful to the REIT if could refinance in the next few years at low interest rates.

Investor takeaway

NorthWest Healthcare Properties operates in a defensive asset class; management expects the portfolio to maintain an occupancy of ~96% going forward. This combined with a weighted lease expiry of ~11 years and a reasonable payout ratio of 85% results in a great holding for investors looking to generate stable monthly income.

More than 80% of the REIT’s debt is secured or incurs fixed-rate interests. So, its interest expense should be competitive and largely predictable. That said, about half of the REIT’s debt will mature through 2019. So, interest rates remaining low would be preferable for the REIT for next few years.

Since NorthWest Healthcare Properties borrows in the local currency, it’s not as exposed to rate changes in any one country. Additionally, for some of its leases, it has rental indexations, which always help as they more or less keep pace with inflation.

1 Massive Dividend Stock to Buy Today (7.8% Yield!) – The Dividend Giveaway

The Motley Fool Canada’s top dividend expert and lead adviser of Dividend Investor Canada, Bryan White, recently released a premium “buy report” on a dividend giant he thinks everyone should own. Not only that – but he’s created a must-have, exclusive report that outlines all the alarming traits of dividend stocks that are about to blow up – and how you can avoid them.

For this limited time only, we’re not only taking 57% off Dividend Investor Canada, but we’re offering you special access to two brand-new reports, free of charge upon signing up. They will outline everything you need to know so you steer clear of dividend burn-outs AND take advantage of the dividend giants in the Canadian market.

While this offer is still available, you can find out how to get a copy of these brand-new reports by simply clicking here.

Fool contributor Kay Ng owns shares of NORTHWEST HEALTHCARE PPTYS REIT UNITS. NorthWest  is a recommendation of Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.