When we think of magnificent TSX dividend stocks, Northwest Healthcare Properties REIT (TSX:NWH.UN) is probably not what comes to mind for most investors. But maybe it should be. Down 60% from its 2022 highs and yielding 6.3%, it’s looking interesting.
Read on as I share why I think Northwest Healthcare REIT is a dividend stock on the TSX Index to buy and hold forever.
Healthcare properties have a bright (and stable) future
Northwest is the owner and operator of a portfolio of medical office buildings and healthcare real estate. This is important to note because these assets are characterized by long leases, and they’re inflation-indexed. In fact, the weighted average lease expiry is currently 13.2 years. Also, 84% of the leases are subject to rent indexation. This essentially means that Northwest has a portfolio of stable cash flow-producing properties that are relatively low risk as far as real estate assets go.
So, the fact that Northwest concentrates on healthcare properties is a very positive thing. It’s an industry that’s exposed to the expected growth of the healthcare industry. This growth is tied to the aging population, which is a demographic trend that is expected to continue to accelerate. The aging population means increased demand for healthcare properties, which translates into more tenants, higher occupancy rates and more reliable cash flow for Northwest.
Falling interest rates are good for Northwest (and the TSX Index)
Real estate investment trusts (REITs) all rely on debt in order to sustain their businesses. Northwest is an extreme example of this reliance on debt. The company got into trouble a couple of years ago because of this indebtedness. What happened next was a scramble to raise cash in order to climb out of it. First, management cut the dividend, which is, of course, not a good thing, but it was necessary. Second, management is divesting of non-core assets.
All of this is getting Northwest back on track. And the results of this restructuring are good. As of the second quarter (Q2) of 2024, Northwest has paid down $1.1 billion in debt. Also, the company has reduced its cost of debt significantly by refinancing at better, lower rates and repaying the highest-cost debt. In fact, the company’s weighted average cost of debt fell from 7.85% in December 2023 to 6.85% in June 2024.
Debt restructuring boosts confidence in Northwest
The work is not done. Although debt has been significantly reduced, Northwest continues to work to further improve its balance sheet. The company is also focused on growing earnings. Adjusted funds flow per unit came in at $0.09 in the second quarter.
In order to increase earnings, Northwest continues to focus on repaying high-cost debt, achieving greater efficiencies, and maximizing same property growth. In the second quarter, same-property net operating income increased 4.3%. All of this will hopefully drive Northwest’s unit price to trade closer to its net asset value, which the company estimates to be approximately $9.50, or 66% higher than today’s price.
The bottom line
Northwest Healthcare Properties has been disappointing in the last couple of years. The company got itself into trouble by taking on too much debt and expanding too aggressively. However, the company has a new management team today — one that’s focused on driving the bottom line higher and de-risking the business. So far, the progress has been good. Trading below $6, with a yield of 6.3%, I think this TSX Index dividend stock has a solid future.
