It’s been a terrible year for real estate investment trusts. The S&P/TSX Capped REIT Index is down 26.1 per cent year-to-date. By comparison, the S&P/TSX Composite Index is off only 4.9 per cent, not including dividends.
But not all REITs have been hammered. Those that specialize in malls, hotels, office space and long-term care facilities have taken the worst of the pandemic sell-off. But others that focus on sectors that have thrived during this recession (data centres, for example) have done well.
Here is one that I like. It’s trading at about the same price at which it began the year and offers a yield of 6.9 per cent.
NorthWest Healthcare Properties REIT (NWH.UN)
The business: This REIT offers a portfolio of high-quality health care real estate composed of interests in a diversified portfolio of 183 income-producing properties and 15 million square feet of gross leasable area located throughout major markets in the Americas, Europe and Australasia. In Canada, the REIT is the largest non-government owner and manager of medical office buildings and health care facilities. The portfolio consists of medical office buildings, clinics and hospitals, and is characterized by long-term indexed leases and stable occupancies.
The security: The units trade on the TSX and are also listed on the U.S. over-the-counter market, although volume there is very light (often less than 1,000 units a day).
Why I like it: Not all REITs are created equal. This one focuses on health care facilities and they are, obviously, much in demand during a pandemic.
Financial highlights: Second-quarter results showed a modest year-over-year decline in adjusted funds from operations (AFFO) from $36.2-million in 2019 to $35.6-million this year. AFFO a unit in the quarter was 20 cents. Canadian occupancy was stable at 97.3 per cent. International was also stable at 98.8 per cent.
“The REIT’s properties have remained open during this challenging operating environment although some tenants have had to adapt their businesses to align with local government and health care guidelines,” said chief executive Paul Dalla Lana.
“Despite this, operating performance during the quarter remained defensive with 97.6 per cent of proportionate rent being collected or subject to formal deferral arrangements.”
Meanwhile, NorthWest Healthcare Properties continues to expand its portfolio. In August, it announced the acquisition of four hospitals in the area of Greater London for $454-million. The properties are fully occupied on long-term, inflation-indexed leases.
Risks: Even some medical businesses are being hurt by the pandemic (think dental offices), and there is a risk of some closing down the longer the crisis continues. That could raise vacancy rates and reduce cash flow in the future. However, the risk to the core business here is much lower than with some other types of REITs.
Distribution policy: Investors receive monthly distributions of 6.667 cents a unit (80 cents a year). The payout has remained the same for several years and is unlikely to change soon. The 6.9-per-cent yield is very attractive.
Tax implications: In 2019, the REIT reported that 59 per cent of the payout was treated as tax-deferred return of capital. The balance was fully taxable.
Who it’s for: NorthWest Healthcare Properties is a suitable investment for those who want to benefit from the current high yields in the REIT sector while minimizing risk potential.
How to buy: The units trade on the TSX, with an average daily volume of almost 300,000, so you should have no trouble having your order filled.
Summing up: The high yield and the focus on the medical profession make this an attractive option.
Full disclosure: The author owns units in this REIT.
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Gordon Pape