The popularity of real estate investment trusts (REITs) is soaring. A mix of near historically low interest rates, juicy yields, and defensive nature has made them popular investments among retirees and other income-hungry investors. A top REIT that has a long history of delivering value is Northwest Healthcare Properties REIT (TSX:NWH.UN). Since the start of 2019, it has gained a stunning 31% and appears poised for further strong growth as we head into 2020.
Improved outlook
The Fed’s interest rate cut at the end of October combined with growing optimism that there is an end in sight for the trade war between the U.S. and China has sparked optimism over the global economic outlook. This will drive greater demand for Northwest’s properties, thereby giving earnings a lift.
For the third quarter 2019, it finished with an impressive occupancy rate of 97.1%, whereas net operating income grew by 7% year over year while funds from operations shot up by 8% year over year. Northwest also reported a profit of $17.7 million compared to a loss of $28 million a year earlier.
Not only will earnings continue to grow because of an improved economic outlook, but also because of recent acquisitions, including the transformative $1.2 billion Healthscope deal, which added 11 freehold hospital properties to its portfolio. Northwest also recently acquired a German healthcare property, another in Canada, and is in the process of purchasing two medical office buildings in the Netherlands. Those deals, once bedded down, will give the REIT’s earnings a solid boost and allow it to unlock further synergies over time, further lifting net income.
The healthcare market is expected by analysts to experience solid long-term growth because of aging populations in developed nations and improved treatments and technology. This will act as a powerful tailwind for medical property REITs like Northwest.
The Fed’s rate cut also reduces financing costs, which is particularly beneficial for companies operating in capital-intensive industries like real estate. Northwest finished the third quarter with long-term liabilities, including bank loans, debentures, and financial instruments totalling around $3 billion. Such a significant amount of debt means that as the REIT refinances, it will be able to secure lower interest rates and substantially reduce its interest expense, further boosting profitability.
It should also be noted that for a REIT, Northwest has a conservative amount of leverage and is focused on strengthening its balance sheet. The REIT finished the third quarter with a debt to gross book value of just under 53% compared to 55.7% at the end of 2018.
Northwest also operates in an oligopolistic industry, which is heavily regulated and has steep barriers to entry, endowing it with a wide economic moat. When that is considered in conjunction with the relatively inelastic demand for healthcare, its earnings are shielded from economic slumps, making it an ideal defensive stock.
Foolish takeaway
It is very difficult to find a high-quality business such as Northwest, which offers a mix of solid growth potential and defensive characteristics. For the reasons discussed, the REIT is the ideal addition to any portfolio to bolster growth and resilience to a recession. Patient investors, while they wait for Northwest’s stock to appreciate, will be rewarded by its sustainable distribution yielding a very juicy 6.4%.
