Passive income is income earned while we sleep, while we vacation, and while we daydream. It’s the result of getting our money to work for us so we don’t have to. In our quest to maximize passive income, there are many opportunities worth our consideration. Northwest Healthcare Properties REIT (TSX:NWH.UN) is one of the many compelling passive income ideas out there.
Let’s take a look at the reasons to buy this REIT.
Passive income ideas
Northwest Healthcare Properties is currently yielding a generous 6.8%. While this is lower than what it was yielding over a year ago, the company got caught with high debt levels as interest rates were rising. This meant that servicing its debt became a problem. Therefore, management had to make the tough decision to cut its dividend and sell off non-core properties in order to survive.
While this is not a desirable situation, this is now in the past. A new management team has taken over, high-interest debt has been re-negotiated, and Northwest’s balance sheet is on the mend. Today, the stock is still 44% lower than it was at the end of 2022, but a few compelling realities remain true. The first is Northwest’s attractive yield, which makes it a prime candidate for passive income generation.
Northwest has exposure to strong secular trends
The second compelling reality of Northwest’s situation is its exposure to one of the strongest secular trends today – the aging population. While this trend hurts some industries, the healthcare industry is facing booming times because of it.
Northwest Healthcare Properties is the owner and operator of a portfolio of medical office buildings and healthcare real estate. This means that its properties will be in high demand as the aging population increasingly requires medical care and attention. The cash flow streams are steady, stable, and ideal for passive income investment.
Another benefit that’s connected to this is the fact that healthcare assets are characterized by long leases and they’re inflation-indexed. This makes the cash flow profile of these assets quite stable and predictable. In Northwest’s case, its weighted average lease expiry is currently 13.2 years and 84% of the leases are subject to rent indexation.
Falling interest rates
Contrary to the last couple of years, Northwest is finally getting a break with the direction of interest rates. In fact, earlier this week, the Bank of Canada cut its key interest rate by 50 basis points to 3.8%. This is a key positive for this dividend stock, as it and other real estate investment trusts require significant amounts of debt to function in this capital-intensive industry.
But falling interest rates aren’t the whole picture when it comes to Northwest’s balance sheet. As previously mentioned, Northwest is in the process of fixing up its balance sheet. As of the second quarter of 2024, the company has paid down $1.1 billion in debt and significantly reduced its weighted average cost of debt.
After the quarter ended, more of the REIT’s debt was refinanced, further extending maturity dates. In conjunction with this, the company listed more non-core assets for sale. The proceeds of these asset sales will go toward the repayment of high-cost debt.
The bottom line
With a dividend yield of 6.8% and a defensive and predictable cash flow stream, Northwest Healthcare REIT is worth considering for investors’ passive income needs.
