This is an excerpt from a blog published earlier today: Stocks, Bonds & Politics: High Risk Junk Bond Strategy: Bought 2 Oasis Petroleum 7.25% Senior Unsecured Bonds Maturing on 2/1/19 at 89.347/Added 100 Northwest Healthcare Properties REIT at C$8.3/Sold 51 BHLB at $26.19
Several Canadian REITs have recently hit new 52 week or all time lows. While investors can debate the cause, the decline coincided with the substantial fall in crude oil prices.
The Canadian Dollar has also been declining in value against the USD for over two years: CAD/USD Interactive Chart For a U.S. investor buying Canadian securities on a U.S. stock exchange, the Canadian Dollar's decline in value has the same effect as a dividend cut and causes the USD priced Canadian security to underperform the same security priced in CADs.
For a U.S. investor who does not yet own the Canadian security, the price of that security has become cheaper due to the strength of the USD. I have mentioned in the past that I prefer to buy a foreign security when the USD is strong against the foreign currency, and the ordinary shares priced in that foreign currency have undergone a correction for non fundamental reasons related to the company. Those conditions exist in my opinion for Northwest Healthcare Properties REIT.
Added 100 Northwest Healthcare Properties REIT at C$8.3 (Equity REIT Common and Preferred Stock Basket)(see Disclaimer):
Snapshot of Trade: This trade brings my position to 500 units. I am in a hole and unwilling to comply with the first law of holes. Quit digging when you find yourself in one. I view this REIT to be undervalued, and consequently I will stay with my position.
I bought the ordinary units traded in Toronto using my CAD stash. The closing price that day was C$8.44 with a range between C$8.2 and C$8.55. NWH-UN.TO Historical Prices
The C$8.2 intra-day price was both a 52 week low and an all time low: NWH-UN.TO Interactive Stock Chart
The ordinary units can be purchased using USDs in the U.S. Grey Market, an illiquid and dark market where no bid and ask quotes are displayed to investors. Northwest Healthcare Properties Real Estate Investment (OTC:NWHUF) A symbol that ends in "F" denotes ordinary shares rather than an ADR. The symbols for ADR listings, which are traded on the pink sheet exchange or the grey market, will end in "Y".
I will generally avoid the U.S. Grey Market whenever possible. If I decide to trade there using USDs, I will first convert the ordinary share price in the local currency into USDs, using a currency converter and then enter a AON day limit order.
When I bought the shares on 12/16/14, there was a small number of shares traded in the Grey Market with a closing price that day at USD$7.18. NWHUF Historical Prices
I just plugged in my purchase price in Toronto and then converted that number into USDs:
With the shares trading at C$8.3 on 12/16/14, I would not personally want to pay more than USD$7.12 for the shares, and my AON limit order would consequently be $7.12 for an order placed in the Grey Market at that point in time.
Company Description: Northwest Healthcare Properties REIT (NWH.UN:TOR) is a Canadian REIT that is "primarily focused on the medical office building and healthcare real estate sector", and its "portfolio of 74 properties makes it the largest non-government Canadian owner of this property type". The company has approximately 4.6M square feet of leasable space and has approximately 1,500 tenants. Corporate Profile-Northwest Healthcare Properties
In 2011, Northwest sold another 6.4M unit at C$11.75. The underwriters exercised their option to purchase 960,000 units at C$11.75.
Subsequent to that transaction, there have been no further public unit offerings, but Northwest did sell C$40.25M in a 5.25% convertible unsecured and subordinated bond maturing in 2020. The conversion price is C$14.7 per unit.
This REIT is currently paying a monthly distribution of C$.06667 or C$.8 annually. Press Release Assuming a continuation of that rate, the yield would be about 9.64%, assuming a total cost of C$8.3. This distribution rate has been in effect since May 2010.
Link to Press Releases
Pictures of Properties:
The Fidelity Low Price Stock (MUTF:FLPSX) mutual fund is the largest fund owner at 3.24%. The fund last reported owning 1,263,400 units as of 7/31/14 (annual report)
Recent Earnings Report: All amounts are in Canadian dollars.
For the 2014 third quarter, Northwest reported FFO per unit of $.25 and AFFO basic per unit of $.21 ($.01 less diluted). The AFFO payout ratio was uncomfortably high at 97% for the quarter. Debt to gross book value was reported at 55.1%, which is also viewed as high by me.
As with other Canadian REITs, Northwest Healthcare provides a detailed earnings report in addition to a press releases. Unlike other Canadian REITs, the detailed report can not be linked here, but can be accessed in PDF format at Quarterly & Other Reports. Before making an investment decision, I will review the latest quarterly report and the last annual report. The following information is taken from the more detailed quarterly report.
The following calculation shows how this REIT arrives at AFFO, with the most important deduction from FFO being reserves for stabilizing leasing costs, tenant improvements and growth capital expenditures. I would exclude those costs when valuing the company and consequently would use AFFO in my valuation analysis rather than FFO.
A negative is a lack of FFO and AFFO growth quarter-over-quarter and for the nine month period ending 9/30/14 Y-O-Y.
The nine month diluted AFFO per unit is shown at $.61. For the 4th quarter, I am going to assume a consistent AFFO per unit at $.21 which gives me $.82 for 2014. With that assumption, the P/AFFO is 10.1 at a C$8.3 total cost per unit. I view that as an attractive valuation that hopefully will become more attractive with some future growth in AFFO.
Northwest has benefited by a decline in interest rates through lower borrowing costs. During the quarter, the company refinanced a $15M dollar mortgage at 3.22% replacing a previous mortgage of $10.495M with a 5.76% interest rate.
The preceding charts show higher interest rate mortgages coming due in 2015 and 2016 which Northwest may be able to refinance at lower rates.
Northwest made no acquisition during the quarter and sold one non-core property. Three other non-core properties were sold in the first and second quarters (page 17)
Rationale and Risks:
The primary reason for investing in any REIT is to generate income. My general goal is to harvest an annualize total return of 10% before taxes. I view that kind of a result as a victory. Northwest's dividend will provide me with most of that return, provided there shares recover sufficiently to allow for a small percentage profit.
My average cost for the 500 units is C$9.75, so I will need a price recovery above that number. My current yield based on that total cost number is 8.2%. I am content to hold long term.
At a total average cost of C$9.75 per unit, a 2014 AFFO C$.82 per unit would produce a P/AFFO of 11.89. I could reduce that number some by selling my highest cost 200 units.
Price to book is about .7. Morningstar
Physicians Realty Trust (NYSE:DOC) may be the most comparable U.S. REIT to Northwest. Item # 2 Bought 100 DOC at $13.75 (10/11/14 Post) One major difference is that Physicians Realty is a triple net lease REIT (91% of annualized base rent payment were from triple net leases as of 9/30/14, page 22) For that REIT, the nine month "normalized" Funds Available for Distribution was $.46 per share, which is comparable to Northwest's AFFO number. I will assume a $.18 FAD for the 4th quarter bringing the annual total up to $.64. Based on last Friday's closing price of $16.49, the P/FAD ratio would be 25.76 and the current dividend yield at that price is about 5.46%. DOC is expected to grow FFO much faster than Northwest and is an overall smaller REIT with 2.524+M leasable square feet as of 9/30/14, up 46.4% from 6/30/14.
A major risk for a U.S. investor, who converts USDs into CADs to buy this security, or who uses USDs to purchase ordinary shares in the Grey Market, is a decline in the value of the CAD after purchase.
Since the CAD has been declining in value against the USD, the USD priced shares have underperformed the CAD priced ordinary shares traded in Toronto.
The decline in the CADs value against the USD will flow directly into the USD priced ordinary shares. The flip side is also true.
A rise in the CADs value will cause the ordinary shares priced in USDs to outperform the same ordinary shares priced in CADs and traded in Toronto.
The potential exists for both a benefit or a detriment flowing from the currency exchange that will either enhance or detract from returns respectively.
As with all REITs, money is flying out the door in dividends and little is being retained to grow the business. That is the major downside that the investor pays in exchange for the high dividend.
The AFFO payout ratio is high and would not prudently allow for any distribution increase. AFFO per unit growth has recently been disappointing which is a negative. The company did have 4 more properties at the end of 2013 (78), compared to the 74 properties owned as of 9/30/14. Northwest has grown from 11 owned properties in 2004.
There was a $.02 per unit increase in AFFO between 2012 and 2013 which is anemic.
The REIT discusses risks incident to its operation starting at page 38 of the Annual Report (which will not link here)
There is a lot of debt that is in constant of refinancing as shown in a preceding snapshot. While refinancing has benefited this REIT and others as well, the worm will turn.
Closing Price Last Friday 12/19/14: NWH-UN.TO: C$8.82 +0.12 (+1.38%)
Disclosure: The author is long NWHUF, DOC.
Additional disclosure: NWHUF is the symbol for the ordinary shares traded in the U.S. Grey Market priced in U.S. Dollars. I bought the ordinary shares in Toronto priced in CADs. I also own Physicians Realty (DOC) mentioned in this post. Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.