REITs that own office buildings have seen rental income fall as tenants give up space and embrace hybrid workplaces. However, Northwest’s portfolio – which is roughly 60-per-cent hospitals and 40-per-cent medical office buildings – is 97 per cent occupied by more than 2,000 tenants.ETHAN CAIRNS/The Canadian Press
A company that owns one of the Canada’s largest portfolios of medical facilities has cut its monthly dividend by more than 50 per cent, becoming the latest real-estate investment trust to slash its payout to deal with rising interest rates.
Northwest Healthcare Properties Real Estate Investment Trust (NWH.UN-T), which owns 231 hospitals and medical offices valued at $10.6-billion, on Friday cut its dividend from 80 cents to 36 cents annually. The REIT, largely owned by income-oriented individual investors, said it made the move as part of a strategy to pay down its $3.7-billion debt, a third of which is at floating rates. So far this year, the price of Northwest units has fallen by 36 per cent.
Northwest also announced that its management team and financial advisers, including Scotiabank, RBC Capital Markets and Deutsche Bank Securities, are now working on transactions involving the sale of properties in northwestern U.S. and Brazil. (The REIT has 25 buildings in the former country and eight hospitals in the latter.)
Prior to last week’s distribution cut, Northwest paid out about 130 per cent of its cash flow as dividends, according to a report in August by RBC Capital Markets analyst Pammi Bir. He predicted the payout to investors would fall by at least 50 per cent. In the report, Mr. Bir also said the REIT would take further steps to raises capital and “additional asset sales will likely also form part of the conversation, in our view, particularly as Northwest works to bring in investment partners in the US and UK.”
Other property owners that cut distributions this year include Slate Office REIT, which lowered its payout by 70 per cent in April, and True North Commercial REIT, which announced a 50-per-cent decrease in March. REITs have been vulnerable to recent increases in interest rates, as they typically take out mortgages for between 50 per cent and 60 per cent of their properties’ values, with some REITs raising capital with variable rate mortgages. Approximately 34 per cent of Northwest’s debt is at floating rates, according to Mr. Bir.
Activist funds have have pushed for asset sales and new boards at perceived underperforming REITs, including H&R Real Estate Investment Trust and shopping mall owner First Capital Real Estate Investment Trust, with varying degrees of success.
REITs that own office buildings have seen rental income fall as tenants give up space and embrace hybrid workplaces. However, Northwest’s portfolio – which is roughly 60-per-cent hospitals and 40-per-cent medical office buildings – is 97 per cent occupied by more than 2,000 tenants.
In June, Northwest cancelled plans to sell a 70-per-cent stake in its British portfolio of 14 hospitals to an unnamed institutional investor, a transaction that would have brought in $276-million.
“De-leveraging and growth took a step back after the termination of the previously announced UK joint venture,” Mr. Bir said.
In early August, the REIT launched a strategic review that included the potential sale of all or parts of the company after announcing a loss of $6.3-million in the first six months of the year, compared with a $48-million profit in the same period a year ago. Chief executive officer Paul Dalla Lana resigned at the time. Later in the month, Mr. Dalla Lana disclosed he was negotiating a potential transaction with the company.
On Friday, Northwest board said since launching the review, it has received “a broad range of enquiries from third parties, including expressions of interest and non-binding proposals regarding certain potential asset dispositions.” In a press release, REIT chair Dale Klein said “the board supports the management team as they focus on fortifying the REIT’s balance sheet.”
Northwest also extended the maturity of a US$127.5-million credit facility due in January, 2024, by one year. In a press release, interim CEO Craig Mitchell said cutting distributions and potentially selling properties “significantly improve the REIT’s near term financial flexibility.”
In addition to its properties in the U.S. and Brazil, Northwest also has 64 properties in Europe, including its British hospitals and 50 facilities in the Netherlands and Germany.
Andrew Willis