Last week, the Federal Reserve of the United States raised its benchmark interest rates by 25 basis points to 5-5.25%. After raising interest rates, the central bank indicated that it was nearing the end of its monetary tightening initiative. However, investors are worried that higher interest rates could lead to contagion risk in the United States banking sector. Some economists are projecting a mild recession later this year.
So, given the uncertain outlook, it is prudent to invest in high-yielding dividend stocks to earn stable passive income, irrespective of the market movement. So, I am betting on Northwest Healthcare Properties REIT (TSX:NWH.UN), which pays a monthly dividend with a yield close to 10%.
Northwest Healthcare’s 2022 performance
Northwest Healthcare is a REIT (real estate investment trust) that focuses on acquiring and managing healthcare properties across eight countries. The company owns and operates 233 properties, with a total gross leasable area of 18.5 million square feet. In 2022, the company generated a net operating income of $300.2 million, a year-over-year increase of 21.4%. However, its AFFO (adjusted funds from operations) per unit fell by 16.4%. The decline was primarily due to non-recurring items, lower transaction volumes, and higher interest expenses amid a temporary increase in its leverage.
Meanwhile, the company’s operating metrics still look solid, with the occupancy rate of its portfolio at 97%. The company has placed long-term agreements with its tenants, with the weighted average lease expiry at 14 years. Also, around 83% of its rent is inflation indexed, while 80% of its tenants have government backing, thus providing financial stability to its financials. Now, let’s look at its growth prospects.
Northwest Healthcare’s outlook
After acquiring assets of around $1.1 billion last year, Northwest Healthcare continues to expand its portfolio. It had a capacity of approximately $4.5 billion by the end of last year, which it plans to deploy at a pace that is in line with its historical average. However, amid the rising interest expenses due to higher interest rates, the company is focused on lowering its debt levels.
The company has identified around $220 million worth of non-core assets, which it plans to sell. It is lowering its stake in the United States and the United Kingdom’s joint ventures. All these initiatives could generate $425-$500 million in net proceeds. The company plans to utilize these net proceeds to pay off higher interest-bearing debt. Given its initiatives, Northwest Healthcare’s management expects its AFFO per unit to increase by 10% this year. So, I believe the company is well equipped to continue paying dividends at a healthier rate.
REITs are excellent means to earn passive income, as these companies should pay over 90% of their cash flows to their shareholders. However, the rising interest rates have made these stocks less desirable, thus leading to a selloff. Amid the weakness and decline in its fourth-quarter AFFO, Northwest Healthcare has lost around 40% of its stock value compared to its August highs.
The steep pullback in its stock price has raised its dividend closer to 10%, while its price-to-book multiple has declined to an attractive 0.8. So, I believe investors should utilize the steep pullback to accumulate the stock to earn a stable passive income.