Passive income: This leading REIT earns 6%

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Ideally, when we’re looking for passive income ideas, we want them to be a safe. We want to be able to count on them. It is not always an easy task. Essentially, the higher you go on the return ladder, the more risk you take on. Northwest Healthcare Properties REIT (TSX:NWH.un) is a real estate investment trust (REIT) that owns and operates a lucrative portfolio of global healthcare real estate assets. It seems and is a safe bet, but there are headwinds approaching.

We all want yield, but even a top REIT like Northwest Healthcare Properties faces tough new risks ahead. Let’s look at these risks and how the North West fares.

Passive income protected from rising inflation

Northwest Healthcare REIT has many factors that insulate it from inflation risk. The most important factor is the fact that its income is linked to inflation. Essentially, its assets (properties) are leased long-term and indexed to inflation. This is a very important feature. And that’s particularly attractive in this environment of rapidly rising inflation.

Northwest had revenue of $96.4 million. This represents a growth rate of 4% compared to last year. 2021 annual revenue was approximately $375 million, flat from 2020 and up 19% from five years ago. So what we can see here is a steady increase in revenue. Going forward, increases in inflation are a real risk that we need to take into account. We don’t want inflation to eat away at our investments and for Northwest that risk is largely mitigated. This is partly because the vast majority of its revenue is funded by the government.

A REIT sheltered from economic shocks

In fact, the majority of Northwest’s revenues are funded directly or indirectly by the government. And that’s healthcare real estate we’re talking about. Demand is not affected by fads or the economy. This is the real estate that will be needed in every situation imaginable. It’s in place for the long term, and it’s a priority. I mean, if we don’t take care of the health of a society, there’s not much else that matters.

So we can clearly see that the Northwest is largely immune to economic shocks. Today, its occupancy rate is 97%. This is a clear indication of the extent to which its business (the health care business) is defensive and indifferent to economic hardship. Obviously, we can rely on it for our passive income and it is one of the best ideas. Unfortunately, if we look at the inflation figures, we see that the risks for the economy are very present. Fortunately, Northwest offers a high dividend yield without too much risk.

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Rising interest rates

Rising interest rates are another headwind we must contend with. On that front, Northwest doesn’t fare as well. However, it has taken concrete steps to prepare for the rising cost of capital. Historically, Northwest has been very heavily indebted. It was the only way for the REIT to fund its global expansion and with low interest rates it worked extremely well.

During the last quarter, Northwest took steps to reduce its indebtedness. In fact, it reduced its leverage by 840 basis points in its most recent quarter. In addition, the REIT plans to take further steps to further reduce its indebtedness. This will help mitigate the real risk that rising interest rates pose to all businesses, but especially REITs.

Motley Fool: The Bottom Line

Northwest Healthcare REIT is truly a gem among REITs, in my opinion. In fact, this is one of the best passive income ideas I have. It’s sheltered from many of the headwinds that are blowing our way, but it still offers investors a very generous dividend yield of 5.9%.

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