Should You Buy Northwest Healthcare for its 7.5% Dividend Yield?

Northwest Healthcare REIT just cut its monthly dividends by 55%. Is this REIT stock a good buy right now?

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Interest rate hikes in the last 20 months have driven valuations of real estate investment trusts, or REITs, significantly lower. Typically, REITs fuel their expansion plans by increasing balance sheet debt, which needs to be serviced by making regular interest payments. As interest rates have more than tripled since 2021, the rising cost of debt has made investors extremely wary.

One such REIT that trades on the TSX is Northwest Healthcare (TSX:NWH.UN). Shares of this healthcare-focused real estate company are down 68% from all-time highs. In fact, the stock is down over 33% in the last month after Northwest announced it would cut its dividend payout by 55%.

A dividend cut was inevitable for Northwest Healthcare

Valued at a market cap of $1.12 billion, Northwest Healthcare owns over 230 hospitals and medical offices worth more than $10.5 billion. Around 60% of its real estate portfolio is geared toward hospitals, while medical office properties account for the rest, making Northwest Healthcare fairly recession resistant.

Northwest Healthcare ended the second quarter (Q2) with $3.7 billion in debt. Over 30% of its debt is tied to floating rates, which increased the company’s interest expense by 60% year over year in 2022. Moreover, in the first six months of 2023, Northwest Healthcare reported an operating loss of $6.3 million, compared to a profit of $48 million in the year-ago period.

Its highly leveraged balance sheet and recent losses forced the REIT to slash its monthly dividend from $0.067 per share to $0.03 per share. A report from RBC Capital Markets in August emphasized that Northwest had a payout ratio of 130%, which was unsustainable. The investment bank had then claimed the company’s dividends would reduce by at least 50%.

What’s next for Northwest Healthcare stock?

Northwest Healthcare has identified certain non-core assets it intends to sell. The sale of these assets should bring in $74 million, with additional proceeds of over $50 million expected in Q4 of 2023. These properties are located in the United States and Brazil, where Northwest owns a total of 33 properties.

The proceeds of the asset sales would be used to repay balance sheet debt, reducing its interest expenses in 2024.

In June 2023, Northwest announced its intention to sell its 70% stake in 14 properties located in the U.K. for $276 million. However, the deal failed to materialize, which then led to the massive dividend cut by the REIT.

In Q2 of 2023, Northwest Healthcare increased the same property net operating income by 5.1% year over year. Its defensive portfolio allowed the company to end the June quarter with an occupancy rate of 96% and a weighted lease expiry of 13.5 years. Around 83% of these leases are subject to rent indexation.

Northwest Healthcare stock has trailed the broader market by a wide margin. Despite the dividend cut, Northwest Healthcare stock currently offers you a tasty dividend yield of 7.5%. However, the REIT needs to maintain a sustainable payout ratio while reducing its debt levels and improving cash flows in the next 12 months to regain investor confidence.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends NorthWest Healthcare Properties Real Estate Investment Trust. The Motley Fool has a disclosure policy.

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