All amounts are in CAD unless noted otherwise.

An Overview

Northwest Healthcare Properties Real Estate Investment Trust (OTC:NWHUF) is the owner and manager of medical office buildings or MOBs and healthcare facilities in North America, Europe and Australasia. Regional expansion and diversification have been the mantra of Northwest Healthcare for the past several years. The REIT has not taken a pause in rebalancing its NOI exposure since we last wrote on it in December 2017 and it is not done yet. Recent acquisitions have been centered on Europe and that region’s NOI has grown significantly over the last three years.

Source: 2017 Q3 & 2020 Q1 Presentations

Its 2020 European exposure comprises of the Netherlands and United Kingdom, along with Germany. The portfolio is almost evenly split between hospitals and healthcare facilities [51%] and medical office Buildings [49%] with a snapshot of the breakdown at a regional level as per below.

Source: 2020 Q1 Presentation

What Northwest Has Managed To Do

The story over the years has been of steady growth of funds from operations or FFO. Here we are referring to overall numbers. This has not been as accretive as expected on a per unit basis because the issuance of equity to partially fund aforementioned expansion has also been equally steady. Almost always this issuance has been slightly under Net Asset Value. Due to the dilutive impact of this on the units, the price has oscillated in a narrow range for most of the last 5 years without substantial capital appreciation for long-term investors.

The overall returns have, however, been bolstered by a steady monthly distribution as it has remained unchanged at 0.067 for the longest time. Please take note, the DRIP has been suspended at this time. All distributions are in cash.

We have traded in and out of this REIT profitably a few times over the last few years and became a buyer again at around $9 earlier this year. With the Q1 results out, we decided to take a peek to see where our investment stands and whether there is enough juice to recommend a buy at these levels. Stay with us.

Q1 Results

Q1 2020 had growth in FFO as has been the trend until now. It did not flow down meaningfully on a per unit basis due to equity issuances along the way, which included conversion of $48 million worth of debentures to units of the trust in 2020.

Source: Q1 MD&A

Capital activity in the quarter reduced overall portfolio size. The REIT had two big acquisitions.

On February 19, 2020, the REIT’s joint venture in Australia (“Australian JV”) completed the acquisition of two medical research institutes for $93.4 million. The buildings are fully leased on a triple net basis with structured 4% fixed annual reviews and 13.1 year WALE.

The REIT has a 30% investment interest in the Australian JV and also acts as the investment manager, for which it earns management fees

Source: Q1 MD&A

But that was offset by higher sales.

On March 16, 2020, the REIT completed sale of Australian assets to third-parties for $104.4 million. On March 23, 2020, the REIT completed the sale of three aged-care assets from its wholly-owned Australian REIT to Vital Trust for $50.7 million. The REIT partially used the proceeds to repay $89.8 million of Australian term debt bearing interest of 3.61%.

Source: Q1 MD&A

Portfolio metrics were steady with the NAV at $12.53.

Source: Q1 MD&A

It also boasts of an impressive 97.3% occupancy with a weighted average lease expiration term of 14.4 years.

Pandemic Impact

Boasting of a defensive healthcare portfolio with a diverse tenant roster, the REIT is well-positioned to combat the effects of the pandemic for the foreseeable future. Most of its hospital portfolio is seeing an increase in capacity in response to COVID-19. This has additionally helped with hospital operators receiving government funds and subsidies during these difficult times. Whereas for its medical offices portfolio, mainly concentrated in Canada and Germany, the services are ultimately funded by the public healthcare system. No doubt there will be short-term disruptions in rent collection due to telehealth appointments, but Northwest expects its tenants to be among the foremost to reach full capacity once normal operations resume. The timeline for that, however, is anybody’s guess at the moment. Most medical offices have exceptional rent coverage and any short-term deferrals are just that, deferrals.

As of May 14, 93% and 84% of the April and May rents that became due, respectively, had been collected. The REIT continues to work with its tenants on rent deferral arrangements subject to government programs such as the Canada Emergency Commercial Rent Assistance or CECRA, which results in collection of at least 75% of the rent as opposed to zero.

Northwest has also halted its early stage development projects and is working to identify opportunities to deliver operational efficiencies.

Buybacks

The REIT announced it intention to buy back its units late March and followed through by buying 800,207 units between March 31 and April 6 at an average price of $8.99.

Source: Inc Research

Granted these represent less than 1% of the outstanding units, but it has TSX’s blessing to purchase up to 10% of its units anytime until March 25, 2021. Hence it can swoop in to take advantage of the market lows for this stock down the line. We would expect this to be used in moderation and probably only in another panic sell-off. The good part here is that the REIT is buying units at a far cheaper price than its last issuance, which was at $12.20.

Conclusion

Northwest Healthcare is a steady dividend player but unless the management stops the acquisition binge, capital appreciation will not be in investors’ future. Insiders do own more of this REIT than almost any other that we monitor and while we are not thrilled with the acquisitions, we don’t think this will be its demise either.

Source: Inc Research

The healthcare sector is still the most defensive place in real estate. However, due to the lack of visibility on the tangible value of the properties held, we would put more eggs into this basket only if we get a good discount. We recently sold a small portion at $11.36, but will hold on to the majority and earn dividends while the scene unfolds. We also have funds ready to be deployed and should we see a swoon into the high $8’s or low $9’s, we will go “all-in.”

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Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

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Disclosure: I am/we are long NWHUF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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2020-06-29