1 MAGNIFICENT DIVIDEND STOCK DOWN 24% OFFERING A ONCE-IN-A-DECADE VALUATION

Real estate investment trusts (REITs) are making a comeback. As interest rates drop, lower rates mean cheaper borrowing costs. And this boosts profitability for these real estate-focused companies. This renewed strength makes REITs more attractive for investors seeking income through dividends and capital appreciation. With this rebound, it’s a great time for investors to hunt for valuable REIT stocks that may have been undervalued during the high-interest-rate environment. These stocks could offer a sweet combination of growth potential and solid income, thus making them smart additions to your portfolio as the market shifts. Let’s get into one to consider.

NorthWest REIT

NorthWest Healthcare Properties REIT (TSX:NWH.UN) has experienced a notable decline over the last few years, largely due to challenges in the global healthcare real estate market and the REIT’s own financial pressures. NorthWest specializes in owning and managing healthcare properties globally, including hospitals and clinics. It initially attracted investors with its focus on a stable and essential sector.

However, as interest rates rose, the REIT faced increasing borrowing costs. This squeezed its margins and profitability. Additionally, some of its international investments, particularly in Europe and Australia, faced operational challenges and currency fluctuations, further impacting its financial performance.

Another significant factor in NWH.UN’s decline is due to the high debt levels the REIT has maintained. This became more burdensome as interest rates increased. Investors grew concerned about the REIT’s ability to manage its debt and maintain its dividend payouts, leading to a loss of confidence and a selloff in its shares. This combination of external economic pressures and internal financial challenges caused NWH.UN’s stock to fall from its previous highs. All while the market re-evaluated the risks associated with its global portfolio and high leverage. While the REIT’s focus on healthcare properties still holds long-term appeal, these recent hurdles have weighed heavily on its performance.

Slight rebound

NWH.UN is seeing a rebound in its earnings as a result of strategic moves and improved portfolio performance. The REIT has successfully addressed over half of its 2025 debt maturities and streamlined its operations through the sale of non-core assets. This included a significant $1.1 billion sale of its United Kingdom portfolio. These actions have helped reduce debt and strengthen the balance sheet, positioning the REIT for future growth.

Furthermore, despite the challenges of higher interest rates and construction costs, the demand for healthcare real estate remains strong. The REIT reported a 4.2% increase in same-property net operating income (SPNOI) for Q2 2024. This reflects steady growth in lease rentals and high occupancy rates across its global portfolio.

Plus, NWH.UN’s focus on high-quality healthcare properties contributed to its resilience. The REIT’s long-term lease maturity profile, with an average lease expiry of 13.4 years and a global occupancy rate of 96.5%, ensures a stable and predictable income stream. The successful execution of its strategic review process and continued strong rent collection rate of 99% further demonstrate its operational strength. While there are still challenges ahead, the steps taken to simplify the business and reduce leverage are paying off. Thus leading to a more stable and potentially lucrative investment for unitholders.

Value to be had

NWH.UN is currently trading at a significantly undervalued valuation. This can be seen from its price-to-book ratio of 0.71 and a trailing price-to-earnings (P/E) ratio of just 7.42. These suggest that the market is valuing the company at a substantial discount compared to its underlying assets and earnings potential. Despite its challenges over the past few years, such as dealing with high debt levels and the global healthcare real estate market’s volatility, the REIT has made significant strides in addressing these issues, including selling non-core assets and reducing leverage. These efforts have strengthened its balance sheet and positioned it for more stable, long-term growth. Yet, the stock price hasn’t fully reflected these improvements, leaving it trading at a bargain relative to its book value and earnings capacity.

Plus, with a forward P/E of 11.64 and a dividend yield of around 7.03% at writing, NWH.UN offers an attractive income stream at a low valuation. The market seems to be overly cautious, likely due to past performance and the ongoing adjustment to a higher interest rate environment. However, the REIT’s recent strategic moves and the resilience of the healthcare real estate sector suggest that the current undervaluation might not last long, especially with its strong occupancy rates and long-term leases. For investors, this presents a potential opportunity to buy into a high-quality REIT at a depressed price — all while gaining the prospect of both capital appreciation and steady dividend income as the market eventually reassesses its value.

The post 1 Magnificent Dividend Stock Down 24% Offering a Once-in-a-Decade Valuation appeared first on The Motley Fool Canada.

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Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

2024-09-09T20:26:40Z dg43tfdfdgfd