Healthco Healthcare and Wellness REIT (ASX: HCW) is a real estate investment trust (REIT) which largely specialises in a particular area of the commercial property market: healthcare. The ASX dividend stock is down around 40% since September 2021 and it's down 22% in the past year.
When a share price falls, it increases the prospective dividend yield, assuming the payout isn't cut. For example, if a business has a 5% distribution yield and it falls 10% then the yield becomes 5.5%, a 20% fall would turn the yield into 6%.
The Healthco Healthcare and Wellness REIT owns properties across hospitals, aged care, childcare, government, life sciences and research, primary care and wellness, and other healthcare areas.
Let's have a quick look at what's happening to the sector where this ASX dividend stock comes from.
What's happening to the sector?
Higher interest rates are painful for REITs in two different ways.
First, the higher interest rates push down on asset prices, particularly commercial property because of how simple it is to discount the cash flows they produce. A lot of REITs are reporting lower underlying property valuations, and higher capitalisation rates (which is essentially the yield of the net rent compared to the property value).
Second, REITs carry a lot of debt – like a lot of property investors do. The higher interest rates mean that debt is becoming more expensive to service than before. Rent that's linked to inflation has seen stronger increases over the last couple of years.
Investors are certainly able to buy some of these REITs at a much cheaper price.
Why like this ASX dividend stock?
The business describes its appealing features as the following:
Diversified portfolio underpinned by attractive megatrends, targeting stable and growing distributions, long-term capital growth and positive environmental and social impact.
Those trends it is referring to include an ageing population who need more healthcare, growing government spending on health and social services, technological advances, and increasing health knowledge and a bigger focus on health services by the overall population.
It's paying a distribution to investors every three months, which can provide attractive cash flow.
The business actually reported an increase in its property portfolio values, which shows the strength of the underlying portfolio.
The ASX dividend stock is expected to pay a total distribution per unit of 8 cents in FY24, which translates into a distribution yield of 5.9%.
Interest rates seem to be at the peak, or close to the peak, so that headwind may be limited. If interest rates start falling it could turn into a tailwind for the underlying valuations.
