Northwest Healthcare Properties Real Estate Investment Trust (TSX: NWH.UN) provides investors with access to a portfolio of high-quality healthcare real estate. The company provides investors exposure to a well-diversified portfolio of healthcare real estate located in the greater areas of cities such as Australasia, Brazil, Germany, and Canada, of which Australasia derives most of the revenue to the company.

Revenue Mix

Source: Annual Report

Investment Rationale

• Recession-Proof Business Model: The healthcare sector is recession-proof, and this Canadian REIT- Northwest Healthcare Properties REIT provides investors with access to a portfolio of healthcare properties in Canada, Brazil, Australia, and New Zealand. NorthWest Healthcare has interests in 190 income-producing properties totaling 15.4 million square feet of a gross leasable area consisting of medical office buildings, clinics, and hospitals. These contracts are backed by long-term indexes leases and stable occupancies. Also, its portfolio of properties gives investors exposure to a defensive asset class and necessity-based tenancies.

• An Income Play: The stock closed the previous trading session at CAD 13.13, with a market cap of CAD 2.54 billion and was offering a juicy dividend yield of 6.1%. The dividend yield is significantly higher given the low interest rate environment and is significantly above the risk-free Government 10-Year Bond Yield of ~1.5%. Further, NorthWest aims to capitalize on strong healthcare and demographic trends making its dividend payout sustainable.

Dividend Payment History for past 10-Years. Source: Refinitiv (Thomson Reuters)

• Stability of Cash Flow: The group reported decent cash flow during the full-year 2020, led by higher wale and higher occupancy rate. The REIT’s reported occupancy for the FY20 was 97.1%, at par with the full-year occupancy of 97.3% in the same period of the previous financial year, and Wale (Years) of 14.5 years as compared to 13.8 years reported in the previous financial year. The occupancy of 97.1% was largely driven by 99% international portfolio occupancy.

Source: Company Presentation

• Strategic Transaction to Bolster Business Model: The REIT, together with a capital partner, has entered into an option agreement to acquire a strategic 16% stake of the units in the Australian Unity Healthcare Property Trust (AUHPT). AUHPT is a high-quality CAD 2.4 billion (A$2.5 Billion gross assets) healthcare property trust with highly complementary to NWH’s existing portfolio and attractive tenant base representing a strong, reliable source of income. This would give NWH a dominant position in the region with A$7B of AUM. Following the transaction, the REIT is well-positioned for any future strategic transactions in relation to AUHPT.

Australian Unity Healthcare Property Trust Key Highlights: Source: Company Presentation

• Expanding European Asset Base: European platform exceeds CAD 1.6 billion in assets, led by expansion within the UK through the acquisition of 10 hospitals for CAD 620 million (₤358 million) at a 6.5% capitalization rate. Also, the group is advancing strategic initiatives and scaling third party management platform to increase fee income.

Scaling European Asset Base. Source: Company Presentation

• REIT is likely to Benefit from Key Healthcare Trends: The REIT is likely to benefit from the key healthcare trends, such as ageing population growth, rise in health awareness and spending. Most of the factors are likely to have a positive impact on the REIT’s operations.

Source: Company Presentation

• Outperformed TSX REIT Index: The REIT reported a total unitholder return of 13.4% in 2020, outperformed the S&P/TSX capped REIT index and the TSX by approximately 2,650 bps and 780 bps, respectively, implies a solid business model of the company and investment-grade clientele.

• Risk Associated to Investment: The REIT’s business is exposed to a wide range of risks including, Credit Risks: Risk arises from the possibility that tenant may experience financial difficulty to fulfil their lease commitments; Currency Risk: as REIT has a presence in many countries; therefore adverse fluctuation in the Canadian dollar in the international market would have weighed on the group’s performance; and Occupancy: lower occupancy would also have a weigh on the group’s performance.  

Financial Highlights: FY20

 Source: Company Filing

• IFRS revenue increased 2.1% in 2020 to CAD 374 million, primarily driven by acquisition activity.
• Proportionate management fee income increased by 7.5% to CAD 40.4 million in the year ended December 31, 2020.
• AFFO per unit increased by 1.0% to CAD 0.85 in 2020 (CAD 0.92 per unit on a normalized basis) as a result of accretive strategic acquisitions and increased proportionate management fees partially offset by lower parking income in Canada owing to stay at home orders due to COVID-19.
• After adjusting for the foreign exchange impact, constant currency AFFO/Unit increased by 4.8% to CAD 0.88.
• AFFO payout ratio stood at 94% (87% normalized) based on the REIT's CAD 0.80 per unit annual distribution.
• In the FY20, source currency and Canadian dollar cash recurring SPNOI growth came in at 3.4% and -2.1%, respectively, driven primarily by annual rent indexation and occupancy gains in the REIT's international portfolio.
• Weighted average lease expiry was largely flat at 14.5 years against 13.7 years in FY19, underpinned by the international portfolio weighted average lease expiry of 17.3 years.
• The group reported a strong portfolio occupancy of 97.1%, with the international portfolio holding stable above 98% occupancy.
• Total assets under management "AUM" increased by 20% from CAD 6.5 billion to CAD 7.8 billion.
• Further, the REIT expanded its European footprint to the UK with the acquisition of 10 high-quality hospitals for a combined purchase price of CAD 620 million (£358 million) at an approximately 6.5% weighted average initial capitalization rate. The UK hospitals were acquired in two transactions completed in Q1, 2020 and Q3, 2020. The properties are 100% occupied on an absolute net lease basis, on long-term leases subject to annual rent indexation. Including normal course acquisitions and revaluation gains, European AUM increased by 115% YOY to CAD 1.7 billion.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 30.66% of the total shareholding. NorthWest Healthcare Properties Real Estate Investment Trust is holding maximum shares in the company at 13.42%. NorthWest Value Partners, Inc. is the second-largest shareholder, with a holding of 8.72%. The institutional ownership in the company stood at 27.24%, and strategic ownership stood at 9.4%.  

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: The REIT has a strong business model and operating in a recession-proof industry. It reported decent performance in the FY20, with total assets under management, increased by 20% from CAD 6.5 billion to CAD 7.8 billion. Further during the FY20, the REIT delivered solid operating results with AFFO per unit and NAV per unit growth of 4.8% and 3.2%, respectively.

Also, the REIT was also successful in advancing all of its 2020 strategic objectives, including completion of a new CAD 3 billion European JV, geographic expansion into the UK and simplification of its Australasian platform.

Moreover, as the world looks to emerge from this pandemic, with societies everywhere focused on reinforcing their health systems to cope with pent-up demand as well as planning for additional capacity to meet challenges in the future, the REIT is exceptionally well-positioned to continue to broaden and grow it business as the partner of choice for institutional investors and health systems around the world.

Moreover, the REIT is yielding significantly higher given the dividend yield of 6.1%, with a track record of dividend payment over the past 10-years.

Also, its shares are hovering in the bullish momentum, with its shares traded well above the short-term as well long-term moving averages of 10-day, 20-day, 30-day, 50-day and 200-day SMAs. Moreover, moving averages are also expanding, which is a bullish trend.

Therefore, based on the above rationale and valuation, we suggest a “Buy” recommendation at the closing price of CAD 13.13 on April 26, 2021.   

Technical Price Chart (as on April 26, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at April 27, 2021 price as well.

Disclaimer

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