Canadian investors can probably find the biggest group of monthly paying dividend stocks in real estate investment trusts (REITs). Right now, NorthWest Healthcare Properties REIT (TSX:NWH.UN) offers a high cash-distribution yield of almost 9.8%, but is it rock solid?
Let’s take a closer look at the dividend stock idea.
The global healthcare REIT
NorthWest Healthcare Properties REIT is a globally diversified REIT with a high-quality portfolio of healthcare properties. More than 70% of its portfolio is in gateway cities like Toronto, Phoenix, Sydney, London, Berlin, and Sao Paolo. Its portfolio consists of 18.6 million across 233 properties.
NorthWest has properties in eight countries and rents to more than 2,100 tenants, including hospital operators, rehabilitation clinics, life sciences practitioners, and individual practitioners. Its essential real estate assets lead to a high occupancy of roughly 97%. Over 80% of its tenants receive government funding such as from public healthcare systems. Coupled with an weighted average lease expiry of close to 14 years, investors would expect its dividend to be pretty safe.
The big dividend stock seems to be on sale
The dividend stock is battered down. Specifically, it’s down close to 41% over the last 12 months!
NWH.UN data by YCharts
The selloff has driven its cash-distribution yield to almost 9.8%. At $8.15 per unit at writing, the healthcare REIT trades at a discount of about 25% according to the analyst consensus 12-month price target of $10.93. It means the undervalued stock could potentially deliver total returns of approximately 34% over the near term. If materialized, that’d be a super return versus the long-term average stock market return of roughly 8.4%.
There are risks in every investment, though
Every investment has risks. In the case of NorthWest Healthcare Properties REIT, investors are probably worried about a potential dividend cut in the current environment. The REIT has about 83% of its rents indexed to inflation, which is helpful in today’s relatively high inflationary environment. However, it hasn’t translated to higher funds from operations (FFO) on a per-unit basis. Its FFO per unit actually declined about 23% over the past five years.
Last year, its revenue from investment properties climbed 20% to $448.8 million. On the positive, in the period, its property operating costs rose at a lower rate of 18% to $100.5 million. However, its loan and mortgage interest expense jumped 64% to $148.6 million. Higher interests are its biggest expense.
In today’s higher interest rate environment, the REIT has a greater risk of cutting its dividend. NWH.UN’s 2022 FFO was $0.70 per unit, implying an extended payout ratio of 114%. However, it does has retained earnings that could act as a buffer for about two years of dividend payments. So, if interest rate cuts occur within the next year to two, the stock’s dividend may stay intact.
Income tax on REIT distributions
REITs pay out cash distributions that are like dividends but are taxed differently. In non-registered accounts, the return of capital portion of the distribution reduces the cost base. The return of capital is tax deferred until unitholders sell or their adjusted cost base turns negative.
REIT distributions can also contain other income, capital gains, and foreign non-business income. Other income and foreign non-business income are taxed at your marginal tax rate, while half of your capital gains are taxed at your marginal tax rate. If you hold REITs inside tax-advantaged accounts, such as a Tax-Free Savings Account, Registered Retirement Savings Plan, Registered Disability Savings Plan, or Registered Education Savings Plan, then it may be simpler to hold REITs. When unsure of where best to hold REIT units, seek advice from a tax professional.