The Bank of Canada’s benchmark interest rate is now 3.25% following the 75 basis point increase that occurred mid-week. Kevin Page, President and CEO of the Institute of Fiscal Studies and Democracy at the University of Ottawa, said, “They have set the stage for further rate hikes. They have to probably get their policy rate to 4%.”
Most economists agree with this assessment and predict two more rate hikes (October 26 and December 7) before the end of the year. The central bank said the tightening monetary policy is necessary to curb inflation. It adds that the effects of the global pandemic, ongoing supply disruptions, and the Eastern European conflict have dampened growth and boosted prices.
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Real estate investing at a halt
Meanwhile, Canadian housing markets are correcting. Homebuyers are delaying their purchase plans due to higher borrowing costs. According to Nasma Ali, broker and founder of One Group, the rate increases have also caused investors to hit the pause button. Many of them will instead rent out their properties and sell only when house prices recover.
Fortunately, real estate investors don’t need to stay on the sidelines to earn passive income. Two high-yield real estate investment trusts (REITs) are alternative options to direct ownership. NorthWest Healthcare (TSX:NWH.UN) is the only REIT in the cure sector, while True North Commercial (TSX:TNT.UN) boast government and credit-rated tenants.
Only REIT in the cure sector
NorthWest Healthcare rose to prominence in 2020 during the COVID-19 breakout. The $3 billion global diversified REIT owns and operates a portfolio of high-quality healthcare properties (232). Besides Canada, it has leased medical office buildings, hospitals, and clinics in the United States, Australia, Brazil, Germany, New Zealand, UK, and the Netherlands.
Apart from the defensive nature of this REIT, its $10.2 billion portfolio is indexed to inflation. In the first half of 2022, rental revenue increased 17.4% to $214.5 million compared to the same period in 2021. However, net income declined slightly by 6.5% year-over-year to $240 million.
Paul Dalla Lana, NorthWest’s Chairman and CEO, said the net operating income (NOI) growth of 27.3% to $88.88 million in Q2 2022 versus Q2 2021 demonstrates the value of the REIT’s indexed cash flows in an inflationary environment.
Management expects a lower near-term transaction volume due to the rising interest rate environment. Nevertheless, it remains optimistic that the long-term demand factors in healthcare real estate will drive value creation.
Solid tenant base
The stability of True North Commercial comes from its tenant base that includes the Canadian federal government and four provincial governments. Government and credit-rated tenants comprise 76% of its total revenue, while the federal government accounts for 13.8%.
This $1.09 billion REIT owns and operates 46 income-producing commercial properties. The properties in urban and strategic select secondary markets across the country are covered by long-term leases, which translates into stable, contractual cash flows. The REIT’s ongoing commitment to continuously expanding its asset base also increases distributable cash flow.
Despite the challenging environment this year, True North maintains strong rent collections and positive leasing activity. As of August 3, 2022, about 99.5% of the year-to-date contractual rent has been collected. Management anticipates the financial performance to improve with the broader scale return-to-office towards year-end 2022.
Dividend plays
NorthWest’s dividend yield is an attractive 6.33%, while True North offers a juicy 9.72%. At only $12.64 and $6.11 per share, respectively, these are two excellent dividend plays to add to your stock portfolio.
