NorthWest Healthcare Properties: Deserves More Credit Than Given

Editor’s note: Seeking Alpha is proud to welcome WS Investing as a new contributing analyst. You can become one too! Share your best investment idea by submitting your article for review to our editors. Get published, earn money, and unlock exclusive SA Premium access. Click here to find out more » Fly View Productions Introduction The following article discusses my point of view as to why NorthWest Healthcare Properties (TSX:NWH.UN:CA) (OTC:NWHUF) is a diversified and sound way to invest in the real estate sector, with exposure to North American, European, South American (specifically Brazil), and Australasian regions. Its assets are owned primarily in countries where healthcare is nationalized. NWH owns a total of 210 properties with a Weighted Average Lease expiry of 13 years. Its main portfolio of properties consists of hospitals, medical office buildings and clinics. Below is a breakdown of NWH’s investment by regions and by the types of assets. NorthWest Health REIT NWH’s primary revenue consists of two streams of which the majority of its revenue comes from long-term leases indexed to inflation and a lesser, but growing fee-based asset management channel. NWH NWH’s lease profile indicates that its rental contracts have a weighted average lease expiry of 13.2 years, an average occupancy rate of 96.5%, and an average rent collection rate of 98%. Of its portfolio, 84% of the leases are indexed to inflation. The overall lease maturity profile is shown below. NWH Thesis Given the fact that the majority of NWH’s assets are in geographic areas where the healthcare system is either fully nationalized in Canada or a balanced system between a well-established nationalized and privatized system that works together, rather than a predominately privatized system. This provides for more stability throughout economic cycles for its assets and provides for a more stable source of income as the healthcare is generally more affordable. This fact coupled with a growing aging population also fuels demand for NWH’s assets. The chart below published by Statistics Canada shows overall population growth among the G20 countries. In 6 out of 8 countries where NWH has assets experienced positive growth and over half of its portfolio’s assets fall in the top 50% of G20 countries with the highest population growth, namely Australia and Canada. Statistics Canada In addition to increased overall population growth, the estimates provided by the OECD below show an increasing aging population as well. Specifically, the chart below provided by the OECD website shows the ratio between the number of individuals aged 65 and over per 100 people of working age, defined as those between the ages of 20 to 64. These statistics indicate a growing population pool that may require more medical assistance in the future due to aging. Overall, this will also contribute to the demand for assets within the health industry. OECD Risks To Investment Despite some near-term headwinds, such as 46% of NWH’s debt maturing in 2025, which are predominately in North America and Europe, given that BOC and ECB have begun their rate cuts already, this should improve the valuations of assets in a lower-rate environment and simultaneously stimulate the market for more M&A deals. On the Q1 2024 call, NWH alluded to a stabilization in Cap Rates, which should translate into a better situation to offload assets and pay down debt. Offloading Balance Sheet With a breakdown of investment properties within NWH’s portfolio, there have been comments made on a potential sale of its Brazil assets on the company’s Q1 2024 call. Seeing NWH’s track record of proportionate sales of 566.5 million and 696.2 million on a consolidated level, perhaps with a lower rate environment they will be able to continue with their dispositions and pay off higher rate debt. With cap rates remaining steady at these levels, and valuation strengthening from rate cuts, improving their balance sheet should be likely moving forward. NWH’s Portfolio Breakdown (NWH Q4 2023 Report) Valuation Using information provided by the company’s Q1 financial results, total Variable & Fixed rate Debt at the end of the quarter totaled 3.53 billion, with assumed assets sale of 250 million would put total debt at 3.28 billion. Assuming 9% refinance rate for Year 2025, debt weighted avg. interest rate increases from 6.19% to 6.72%. NWH Estimated effects of revenue from sale and refinance decreases FFO by 4.07 Million. AFFO diluted is 0.11 to 0.10 per unit, with a payout ratio increase from 80% to 93%. Using a Canadian REIT Sector Multiples provided by RBC Research at 14.6x, or NWH’s own 2021 P/AFFO multiples around 15.5x. Based on “Post Sale” figures, current valuation trades around 13x, with provide a 12% upside based on Canadian REIT Sector Multiples and a 19% upside based on NWH’s 2021 Multiples. This does not factor in any growth in revenue of 4% each year for the next few years for inflation adjustment. A brief calculation is shown below. NWHNWH Peer Comparison Comparing with two other healthcare REITs: (1) Medical Properties Trust (MPW), also a multinational company, currently trading at P/AFFO Multiple of 5.8x with Debt/TBV of 140% and (2) CareTrust REIT (CTRE), a primary operator within the US, currently trades at 18.3X P/AFFO, with a Debt/TBV of 36%. In comparison to the above two REITs, NWH has a healthier balance sheet and a better lease profile as compared to MPW and has a more diversified asset mix as compared to CTRE. Conclusion With a solid lease profile residing in nationalized healthcare systems, the future outlook for the company remains positive, in my perspective. This stock should experience steady growth of 4%-6% per NWH’s CEO comments and would benefit from a re-rating moving forward. As a diversified play across different countries with a lease profile similar to the latter company in the peer comparison above, should further provide a reason for NWH to be re-rated higher. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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