Defensive stocks are an ideal investment during times of economic crisis, bear markets, and mounting uncertainty. The mounting economic fallout from the coronavirus has hit stock markets around the world hard.
In March 2020, the coronavirus triggered a stock market crash that saw the TSX plunge by over 36% from its record all-time high reached in late February. There are signs of further losses ahead for stocks, as the economic toll from the coronavirus pandemic mounts.
In such an uncertain environment, it is wise to bolster exposure to defensive stocks with wide economic moats and strong balance sheets that operate in industries with inelastic demand. One such stock is Northwest Healthcare REIT (TSX:NWH.UN). After losing 20% since the start of 2020, Northwest is attractively valued. It pays a distribution yielding a very juicy 8%, making now the time to buy.
Northwest’s key strength is that it owns a high-quality portfolio of healthcare real estate in Canada, Australia, Brazil, and Western Europe. Demand for healthcare is relatively inelastic and changes very little, even during economic slumps, making the REIT an ideal defensive stock. That will protect Northwest’s earnings during a difficult time for many businesses.
This is further supported by real estate being a hard asset. That means it holds its value over the long term and is resistant to economic downturns.
Northwest operates in an industry which has steep barriers to entry and is heavily regulated. Those characteristics endow it with a wide economic moat that augments Northwest’s solid defensive characteristics while further protecting its earnings.
When those attributes are combined with the contracted nature of Northwest’s revenues, the REIT’s earnings will prove resilient to the current crisis.
Northwest finished 2019 with a healthy occupancy rate of 97.3% and a notable weighted average lease expiry of 13.8 years. Both of those numbers point to the reliability of Northwest’s earnings and its strength as a defensive stock.
The REIT finished the year with a solid balance sheet, further enhancing Northwest’s ability to survive the latest economic downturn and economic fallout from the coronavirus. This is evident from Northwest’s debt-to-gross-book-value ratio of 49.6%. The REIT is targeting the reduction of net debt to be less than a manageable eight times EBITDA, which, along with recent interest rate cuts, will reduce financing costs and drive greater profitability.
Northwest finished 2019 with $192 million in cash, which it anticipates will be bolstered by the proceeds from the sale of $550 million of Australian and European assets. The REIT is also refinancing a range of mortgages, which it expects, along with those sales, to boost liquidity to around $380 million by the end of the second quarter 2020.
That bodes well for Northwest’s ability to weather the current crisis.
Northwest’s expansion into Australia and Western Europe will act as a powerful earnings driver once the global economy recovers from the pandemic. Aging populations in Northwest’s core markets, especially Canada, Australia, and the U.K., will act as a powerful long-term tailwind. Northwest has also embarked upon a $2.9 billion joint venture, which sees it entering the healthcare markets in Germany and the Netherlands.
Once the coronavirus pandemic ends and the economy finally returns to growth, Northwest’s earnings and asset value will expand at a solid clip.
Now is the time to buy Northwest, which is one of the best defensive stocks available. After its latest market decline, Northwest is trading at a 38% discount to its net asset value of $13.17 per unit. That fall in market value also sees it trading with a juicy 8% yield. While the distribution could be cut, a combination of a moderate 87% payout ratio, the security of Northwest’s earnings, and growing liquidity makes that unlikely.
For these reasons, Northwest is the ideal defensive stock to hold in the current harsh and highly uncertain environment.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Matt Smith has no position in any of the stocks mentioned. The Motley Fool recommends NORTHWEST HEALTHCARE PPTYS REIT UNITS.