Get 8-10% Yields From Commercial Real Estate | The Motley Fool Canada

Get 8-10% Yields From Commercial Real Estate | The Motley Fool Canada: "NorthWest Health Prop Real Est Inv Trust (TSX:NWH.UN) owns a portfolio of international healthcare real estate throughout major markets in Canada, Brazil, Germany, Australia, and New Zealand. Specifically, NorthWest Healthcare Properties REIT receives rent from hospitals and medical office buildings (MOBs).

Its top tenant is Rede D’Or SL, a hospital in Brazil that contributes 13.3% of gross rent. Its other top tenants include Shoppers Drug Mart, Lawtons Drugs, Alberta Health Services, and the provincial government of Ontario. Together its top 10 tenants contribute 29.5% of gross rent.

NOI diversification

Its NOI is diversified across 123 properties. MOBs contribute 67% of NOI, and hospitals contribute 33%. Geographically, 55% of NOI comes from Canada, 23% comes from Brazil, 12% comes from Germany, and 10% comes from Australasia.

Is its 9.5% yield safe?

NorthWest Healthcare Properties REIT maintains a high occupancy rate of 95.8%. Further, its weighted average lease is 9.9 years. However, its AFFO payout ratio is also pretty high at 95.7%.

At $8.4 per unit, it yields 9.5%. Its distribution is covered, but its high payout ratio leaves little room for error. Investors who decide to buy this REIT should monitor its occupancy rate.

Unitholders can opt to reinvest NorthWest Healthcare Properties REIT distributions at a 3% discount.

Valuation and near-term targets

NorthWest Healthcare Properties REIT’s NAV is roughly $9.49 per unit. So, at $8.4 per unit, it’s discounted by about 11%.

For the next 12-18 months, the REIT targets AFFO per unit of 90 cents to 95 cents, NAV of about $10 per unit, and an occupancy rate of about 96%.

If the AFFO target range is achieved, it’ll bring down the REIT’s payout ratio to safer levels of 84.6-89.3%.

Tax on income

REITs pay out distributions that are unlike dividends. Distributions can consist of other income, capital gains, foreign non-business income and return of capital. Other income and foreign non-business income are taxed at your marginal tax rate, while capital gains are taxed at half your marginal tax rate.

The return of capital portion reduces your adjusted cost basis. This means that that portion is tax deferred until you sell your units or until your adjusted cost basis turns negative. So, if you buy REIT units in a non-registered account, you’ll need to track the change in the adjusted cost basis. The T3 that you’ll receive will help you figure out the new adjusted cost basis.

Of course, each investor will need to look at their own situation. For instance, if you have room in your TFSA, it doesn’t make sense to have investments in a non-registered account to be exposed to taxation."



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