Aging population, increasing life expectancy and a need for medical services has resulted in the healthcare sector outperforming the broader index by over 5% in each of the past three years. Benefiting from this trend is at least one Canadian REIT that, since its inception, has dramatically increased its total assets as well as its profitability.
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In the perpetual search for opportunities, investors have been focusing their attention outside of Canada. Often highly-regulated industries, like healthcare, are less risky in other countries. Nations like Germany, Brazil and Australia offer much greater opportunities, while being affected by the same demographic trends we have in Canada.
When investing in real estate, you want a stable tenant that has money to pay rent and will not damage your property. Two groups that meet this criteria are doctors and governments. After all, a hospital will not just close down one day. Bloomberg estimates strong demand for health-care real estate through 2015 and forecasts small-cap niche Healthcare REITs will be the best performing sub-sector.
One way for investors to take advantage of all these factors is NorthWest International Healthcare Properties REIT (TSXV: MOB.UN), which is the largest name on the TSXV by number of characters in its name. The company started in 2012, and has made a number of accretive acquisitions over the last two years.
NorthWest International has a diverse portfolio of assets in Canada, Germany, Australasia and Brazil, all places with rising incomes, aging populations, stable governments and increasing healthcare spending.
Since its inception, the company has dramatically increased its total assets as well as its profitability. In the REIT world, the most reliable way to gauge a company’s operations is the Adjusted Funds From Operations (AFFO). NorthWest’s AFFO per unit increased by 35% to $0.23 in Q3 2014. Total assets also increased over four times in the same period to $864 million.
This growth has not come at the expense of quality, with the trust having acquired properties that will pay dividends for years to come. The average property has a lease term of about 12 years and occupancy is over 96%. This means a stable and predictable cash flow to ensure the security of dividend payments for years to come. Leases are indexed to inflation with a majority being triple net (cordially referred to by the industry as “in-hell-or-high-water”), meaning the tenant is responsible for all costs including rent, taxes, insurance and maintenance.
The main issue NorthWest faces is the high debt levels from the acquisitions. While high, the quality of the company’s portfolio provides ample cash flow to pay interest and distributions while the company works on reducing this debt burden.
Northwest doubled the return of the TSX since the beginning of 2014 and still trades at a 75% discount to its North American peers based on its AFFO multiple.
