An income investor may want to earn a reliable 6.86% distribution yield from one of the most internationally diversified and growing Real Estate Investment Trust (REIT).
It’s a prime opportunity to be paid a 3% incentive to reinvest the monthly pay checks back into financially strong and well managed healthcare properties operator Northwest Healthcare Properties REIT (TSX:NWH.UN).
The trust ticks many boxes for a dividend investor. Let’s have a look.
The business
Northwest Healthcare holds 169 income-producing properties comprising 13.8 million square feet of gross leasable area spread over major markets in Canada, Brazil, Europe, Australia and New Zealand.
The healthcare properties are composed of professionally medical office buildings, clinics, and hospitals with very long lease terms and very stable occupancy.
I like the strong occupancy…
The trust reported a strong total portfolio occupancy rate of 97.2% exit June this year, which was 50 basis points higher than that reported for December 2018. Even better, the international portfolio was much stronger at 98% occupancy, but that’s not the best part.
This strong occupancy is well supported by lengthy average lease terms averaging 14 years at the end of June 2019. Earnings and cash flows are indexed and are very visible over the next decade and a half, and the market will pay a premium for equity into such a beautiful portfolio.
…and the improving financial position
Management expects the REIT leverage to decline by 260 basis points after the closing the oversubscribed July 31, $172.3 million equity offering that was used in part to retire an expensive 7.25% convertible debentures, and a cheaper $109.5 million new loan from New Zealand that attracts a 4.3% annual interest raised to repay a $96.4 million loan bearing 6.9% annual interest.
Northwest Healthcare is not only reducing leverage, but it’s also replacing expensive debt with cheaper loans and recently issued a notice to repay existing expensive Brazilian financing with an average interest rate of 7.84%.
I expect the portfolio interest rate to be significantly lower than the 4.21% weighted average during the last quarter, and for average interest to trend towards the 3.9% range for other local REITs. That frees up some funds toward internal growth and improved distribution coverage.
Investors will love the improvement in same property net operating income too. Same property net operating income growth of 1.8% before foreign currency translation adjustments.
The juicy and well-covered distribution
Northwest Healthcare pays a $0.067 per unit monthly distribution that has been sustained since, for a juicy 6.86% on cost. The company’s annualized normalized adjusted funds from operations (AFFO) per unit stood at $0.92 during the second quarter for a payout rate of 89% or 93% on a fully diluted basis. This is a safe coverage by any standards; no wonder units trade at a premium to net asset value.
Investors can DRIP the monthly pay checks back into more units and get a 3% incentive added.
Growth prospects are impressive
Portfolio growth is happening here too. A $1.2 billion acquisition of 11 high quality hospital properties was recently completed in Australia together with a joint venture partner there. The joint venture has been upsized by a further $1.6 billion, bringing total commitment to $3.4 billion.
Economies of scale can be enjoyed here, and there’s growth traction in Germany and Canada too.
Global demand for healthcare isn’t likely to decline anytime soon. It’s supported by population growth, an increasingly ageing population and better individual wealth levels.
Foolish bottom line
Northwest Healthcare ticks many of the nice boxes for a dependable income investment today, yet with a promising growth profile. Its global presence offers exposure to growth regions and diversification and the financial health profile is improving too.
At 28% in year-to-date total returns, it’s not very far from its best-performing peers this year. You may want to check it out.
