High-yield dividend stocks always deserve consideration. Sometimes, they’re high-yield because they’re about to blow up. But sometimes, there’s a mispricing at play. And this is when things get very enticing. Let’s look at 9.4% yielding Northwest Healthcare Properties REIT (TSX:NWH.UN) as an example.
Is this the opportunity of a lifetime?
A 9.4% yield is a big deal
Northwest Healthcare Properties REIT (TSX:NWH.UN) is a real estate investment trust (REIT) that owns and operates a lucrative portfolio of global healthcare real estate assets. In fact, its $10.6 billion , 233 property portfolio is complimented by a $12.5 billion funds management business.
All told, Northwest’s business is a well-diversified business that is relatively well sheltered from rising inflation and economic hardship. This plays out in two ways. Firstly, revenues are directly tied to inflation. Essentially, its assets (properties) are long-leased and inflation indexed. Also, the healthcare industry is immune to economic shocks, as healthcare spending must continue regardless of anything else.
In 2021, Northwest reported revenue of approximately $375 million, flat versus 2020 and up 19% compared to five years ago. In the latest quarter, Q3 2022, Northeast reported revenue of $115.8 million, 21% higher than the same quarter last year. Trends are strong, as the aging population is driving a booming healthcare sector. In fact, Northwest’s health care properties currently have an occupancy rate of 97%, reflecting this fact.
Northwest’s elevated dividend, which has proven to be stable over time, is also a reflection of these strong fundamentals. Since 2010, Northwest’s annual dividend has held steady at $0.80 per share. Furthermore, Northwest has a history of a high dividend yield. Today, it stands at a very generous 9.4%.
A defensive dividend stock that’s benefitting from major health care trends
By looking under the hood of this high-yielding dividend stock, we can easily get very excited about it. In fact, I can’t stress enough the defensive qualities of Northwest Healthcare Properties. We already went over the inflation-protected revenue stream, and the defensive nature of the healthcare sector.
But there’s one more very strong driver for Northwest – that is the aging population in the Western world. According to the Fraser Institute, 14% of Canada’s population was 65 or older in 2010. This number is currently at 19%. And in 2030, it is expected that 22.5% of the population will be 65 or older in Canada.
This is a very large and significant demographic shift that has and will continue to pose many problems for society. One of these problems relates to healthcare. Currently, healthcare systems are experiencing significant levels of demand. We can expect this to accelerate. One of the beneficiaries of this trend is, you guessed it, Northwest Healthcare Properties REIT.
Deleveraging the balance sheet
While the trends that are working in Northwest’s favour are powerful, we can’t escape the fact that the real estate business is very capital intensive. As such, Northwest has periods of high leverage, with uncomfortable levels of debt.
Today, the REIT has taken steps to improve this situation. For example, Northwest has completed a number of refinancings, which have reduced interest costs. Also, Northwest recapitalized its UK portfolio, and used the proceeds to repay higher cost debt. These moves have resulted in a lower debt-to-market capitalization ratio, which fell to 48% recently. Furthermore, its dividend payout ratio has been reduced to 67%.
