5.9% Yielding Global Medical REIT Is An Under-The-Radar Buy
- GMRE is executing well in the current environment, demonstrating both top- and bottom-line growth.
- Its secondary market focus results in less competition, and it's set to grow with the trend of increasing off-campus healthcare delivery.
- It also internalized its management last year, resulting in better alignment of interest with shareholders.
Healthcare REITs come in all shapes, sizes, and forms. While the "big boy" REITs like Welltower (WELL) and Ventas (VTR) get most of the attention, I see value in smaller, more nimble REITs, such as Global Medical REIT (NYSE:GMRE) that fall under the radar.
GMRE's share price has been relatively flat over the past 6 months, rising by just 4%, while the bigger healthcare REITs have rallied. I evaluate what makes GMRE a good buy at present, so let's get started.
(Source: Company website)
Why GMRE Is A Buy
Global Medical REIT is a net-lease healthcare REIT that focuses on sales and leasebacks with leading health systems and physicians groups in secondary markets. Its property types include MOBs (medical office buildings), inpatient rehab facilities, surgical hospitals, and acute care hospitals that are under long-term triple-net leases.
GMRE currently owns 139 properties that are leased to 115 tenants, with a gross real estate asset value of $1.14B. It also has a long weighted average lease term of 8.2 years with an average 2.1% annual rent escalations. As seen below, GMRE's properties are well-diversified geographically, with exposure to nearly all regions of the U.S.
(Source: January Investor Presentation)
GMRE demonstrated that it can continue profitable growth in the current environment, with Q4'20 FFO/share growing by 5% YoY, to $0.22, and AFFO/share growing by 15% YoY, to $0.24. I'm also encouraged by the 7.1% YoY increase in ABR (annual base rent) on renewed leases during the quarter, as this speaks to the continued desirability of its properties and locations.
I see GMRE's strategic focus on secondary markets as being a favorable one, as it is one of the few institutional players to do so. Community Healthcare Trust (CHCT) comes to mind as another such REIT with a similar focus. This results in far less competition for deals, as many of GMRE's deals are pre-arranged, without it having to go through a competitive bidding process, thereby resulting in higher cap rates.
Looking forward, I see this strategy paying off, as GMRE executed a notable amount of acquisitions during the fourth quarter, buying approximately $80M of high-quality off-campus medical properties at a 7.3% weighted average cap rate. The properties represent essential medical functions, including cancer treatment and dialysis centers, thereby complementing GMRE's existing assets.
Plus, GMRE has continued its strong acquisition activity this year, closing on 3 acquisitions for $25.4M, with a weighted average 7.7% cap rate, and has an additional 6 properties with an aggregate purchase price of $76M under contract.
Long-term, I see GMRE benefiting from the trend of healthcare facilities moving off-campus, due to technological advances and reduced regulations. This trend is supported by analysis from real estate services firm Cushman & Wakefield (CWK), which noted the following:
"Although the highest rents are found at these new and often higher-end off-campus locations, the cost savings in terms of regulatory compliance, patient-monitoring, and facility overhead realized by moving off-campus more than justifies the rent, while also providing a premier services environment."
Last but not least, I'm encouraged by GMRE internalizing its management last year, which has long been the expectation once it reached adequate size (it now has over $1B in gross real estate value). While this did come with $14M of one-time charges, I see this as being a long-term win for shareholders, as internalizations result in better alignment of interest between management and the investor base.
Risks to Consider
It's worth noting that GMRE has a somewhat leveraged balance sheet, with total debt plus the preferred shares representing 49.9% of GMRE's total market capitalization, sitting right at the 50% or below mark that I prefer to see.
GMRE does, however, have adequate liquidity for a company its size at $80M. GMRE's weighted average interest rate of 3.2% is rather low, but the weighted average debt term is just 2.8 years, thereby making GMRE more susceptible to rising rates. As such, I'd like to see leverage trend down over time.
Global Medical REIT is executing well in this environment, growing both externally and internally, all while demonstrating bottom line FFO/share growth. Its secondary market strategy results in less competition, and GMRE is set to grow with the trend of healthcare providers moving their functions to an off-campus setting.
Meanwhile, I find GMRE to be attractively valued, at the current price of $13.99 with a P/FFO of 14.1. It also pays a relatively high 5.9% dividend yield that's covered at an 83% payout ratio. 8 Analysts currently have a Strong Buy rating (score of 5 out of 5) with an average price target of $15.69. GMRE is a Buy.
This article was written by
I'm a U.S. based financial writer with an MBA in Finance. I have over 14 years of investment experience, and generally focus on stocks that are more defensive in nature, with a medium to long-term horizon. My goal is to share useful and insightful knowledge and analysis with readers. Contributing author for Hoya Capital Income Builder.
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