A real estate investment trust, or REIT, is an asset that allows investors to invest in the real estate sector. It has a low correlation with other investment assets, while providing consistent dividend income and cash flows. Canadian REIT Northwest Healthcare Properties REIT (TSX:NWH.UN) is one of the best in my view.
Here’s why you should consider it for your portfolio.
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Strong long-term fundamentals for this REIT
The Canadian healthcare sector is experiencing positive fundamentals at this time. An aging population, a growing population, and innovations in healthcare all support the need for high-quality real-estate assets. Northwest’s properties include hospitals, outpatient and ambulatory care centres, medical office buildings, specialty clinics, and more.
The need for Northwest’s real estate assets is clear. These are essential assets that support the core basic needs of a population – health. As such, Northwest’s assets have certain characteristics that reflect this.
Most importantly, these assets are characterized by long leases and they’re very sticky. The average weighted-average lease expiry is currently 13.4 years, its occupancy rate is at 96.9%, and almost 85% of the leases are subject to rent indexation. Also, in the REIT’s latest quarter, they saw a 90% retention ratio on expiring leases.
So all of that really highlights the stability and reliability of Northwest’s assets. And it highlights why I think that this Canadian REIT is one of the best.
Learning from mistakes
There are a couple of reasons why I think that many individual investors are not really aware of or open to investing in this Canadian REIT. The high-level reason for this could be that REITs are generally smaller cap investments, and are not as well-covered and researched. Beyond this, we can look to Northwest Healthcare’s own missteps to understand why investors might shy away from it.
As you might know, Northwest got into a big heap of trouble a couple of years ago. Rising interest rates collided with Northwest’s heavily indebted balance sheet. This left Northwest with nowhere to turn. Its only option was to cut its dividend. A death blow that can take years to recover from.
But today, Northwest is doing just that – recovering. The REIT is refocusing and simplifying its business. Dispositions are bringing in some much-needed cash flows. In turn, Northwest’s leverage and payout ratio are falling.
In the REIT’s latest quarter, its adjusted funds from operations increased 16% to $0.11 per share. This puts its payout ratio at 85%, compared to 99% in the same period last year.
Looking ahead
As an investor who owns Northwest Healthcare Properties REIT, I feel confident in the long-term outlook. The fact that it’s simplifying its business is a good thing. The fact that it’s concentrating on the North American market is also a good thing. And of course, the fact that this has allowed the REIT to strengthen its financial metrics is the best of the good things.
Today, this Canadian REIT is marching forward in a way that is enabling it to fully benefit from a business environment which is relatively low risk and predictable. As an investor, I like this risk profile. And I’m comfortable including Northwest Healthcare REIT in my dividend portfolio.
