- Global Medical REIT has done well in the last 12 months.
- It continues to outperform peers and we look at whether that has made it expensive.
- Key considerations though revolve around the secondary assets.
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The story in healthcare assets is well known. Outside the occasional fringe idea that telemedicine will replace the regular doctor checkups, REITs in this sector have been able to sell the investors on the secular growth. That said, growth in revenues and patients has hardly translated into growth in funds from operations (FFO) per share. We look at what has not worked in this sector and why one REIT continues to defy the norm.
Global Medical REIT Inc. (NYSE:GMRE)
GMRE engages in the acquisition of state-of-the-art medical office buildings and other healthcare facilities and the leasing of these facilities. These are leased out under long-term triple-net leases with built-in rent escalators.
Source: GMRE Q2-2021 Presentation
The REIT focuses mainly on the second tier of medical office buildings. We can see that in the properties it buys which are primarily "off-campus" and also in secondary cities. There is rather large price differential when it comes to these properties versus the one the larger REITs tend to own.
At the end of the second quarter, GMRE provided an update to their acquisition activity. Year to date, it reported purchase of 13 properties totaling about 430,000 square feet for a total price of $140 million. The weighted average capitalization rate was 7.4%. That 7.4% stands out when you run it against any comparable number. For example, we just saw this news cross the wires recently.
Physicians Realty Trust (DOC) has executed a Master Transaction Agreement for the acquisition of 15 Class-A medical office buildings located in eight states, comprising approximately 1,460,000 square feet, for an aggregate purchase price of approximately $764.3 million.
The Pending Acquisitions
The portfolio is approximately 95% leased with a weighted average remaining lease term of approximately 7.4 years. Each of the 15 buildings are either located on a health system campus or are affiliated with a health system, and approximately 74% of aggregate leased space is attributable to investment grade health systems or their subsidiaries. Upon closing, the first year unlevered cash yield of the portfolio is expected to be 4.9%.
Source: Seeking Alpha
Now that is a "cash-yield" and that is usually a bit lower than the GAAP capitalization rate which creates a "straight-line" effect on the rent over 7 years. Nonetheless, the actual GAAP rate would also likely trail the 7.4% by GMRE by about two percentage points. The 7.4% capitalization also continues to be high accretive to GMRE as it is issuing stock at about a 6% cost of equity and its cost of debt continues to be incredibly low.
The weighted average interest rate and term of the Company’s debt was 3.09% and 4.71 years at June 30, 2021, compared to 3.17% and 2.79 years as of December 31, 2020.
Source: GMRE 10-Q
This has created one of the fastest-growing REITs in the healthcare space. FFO is expected to grow at a 10% plus clip for the next two years. In contrast, DOC is still below its 2018 FFO run rate.
Has The Window To Buy Closed?
GMRE is no longer as cheap it once was. The stock outperformance versus its peers has certainly closed the valuation gap to some extent.
Now, at first sight, GMRE's 14.5X multiple continues to look cheaper than the 17X-18X you see for the rest of the group. But that discount is warranted when you account for the secondary cities and relatively lower quality medical office buildings. GMRE also has about a third of non-medical office buildings that tend to attract lower multiples.
Source: GMRE Q2-2021 Presentation
So at present, GMRE is about fairly valued for what you can get.
Growth Story Remains Intact
That said, it remains one of the few places where you can get reasonable growth in this space. GMRE's acquisitions are focused on the medical office space and it is possible that the secondary assets are whittled down over time. The spread between the weighted cost of capital (50% equity - 50% debt) and the cap rate of the properties being acquired is one of the highest we can find today. So GMRE could hit 10% growth rates out for quite a few years. The key question remains whether these assets are unfairly cheap or correctly priced. If down the line lease renewals turn out to be an arduous task, one will know for certain. Our take is that there are certainly some risks here in secondary markets and there is a reason the bigger and better-known REITs are not diving in headfirst. We did put in a bid to purchase this at $12.50 but only because we were getting a fat 18.69% annualized yield to do so.
Source: Author's App March 16, 2021
Those options look set to expire and we will pocket the full income there. We remain on the lookout to write more attractive income setups if we see another pullback.
Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
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This article was written by
Trapping Value is a team of analysts with over 40 years of combined experience generating options income while also focusing on capital preservation. They run the investing group Conservative Income Portfolio in partnership with Preferred Stock Trader. The investing group features two income-generating portfolios and a bond ladder.
Trapping Value provides Covered Calls, and Preferred Stock Trader covers Fixed Income. The Covered Calls Portfolio is designed to provide lower volatility income investing with a focus on capital preservation. The fixed income portfolio focuses on buying securities with high income potential and heavy undervaluation relative to comparatives. Learn more.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of HR, HTA, GMRE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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