GMRE - Envision's Potential Bankruptcy May Trigger A Sell-Off For Community Healthcare Trust And Global Medical REIT

2023-05-04 14:13:14 ET

Summary

• Envision Healthcare, a significant tenant for both Community Healthcare Trust and Global Medical REIT is on the brink of bankruptcy.
• GensisCare, CHCT’s 3rd largest tenant is also facing severe financial pressures.
• GMRE showed last year the announcement of a tenant bankruptcy can lead to a sharp sell-off for a Healthcare REIT, even if the leases are ultimately assumed in bankruptcy.

In September of last year Moody’s cut Envision’s rating to C. The lowest notch on its scale. They predicted within the next year Envision would need to restructure its debt or file for Chapter 11. It looks as though Moody’s got it right as on April 20 ^th Bloomberg reported that Envision Healthcare Corporation was in negotiations with its lenders and was considering a Chapter 11 filing.

Community Healthcare Trust (CHCT) lists Envision as one of its national tenants in its 10-K.

Additionally, one of CHCT’s board members was the CFO for Envision.

While Envision is not listed as one of CHCT’s top tenants in their Supplemental Disclosure, it should be noted CHCT only lists their top four tenants. Given the disclosure in the 10-K and the relationship via a board member, it is hard to imagine Envision is not one of CHCT’s top tenants.

Global Medical REIT (GMRE) lists both Amsurg, an Envision subsidiary, as well as Envision Health Care as systems they are associated with in their Investing Presentation.

CHCT’s third largest tenant is GensisCare. As shown below, they provide 4.1% of CHCT’s rental income.

GensisCare is also close to bankruptcy. On February 8 ^th , 2023, S&P lowered its long-term issuer credit rating to CCC- indicating it is dependent on favorable conditions to meet its financial obligations and default is a likely outcome.

If either Envision or GensisCare were to file for bankruptcy the initial market reaction would likely be brutal for CHCT and/or GMRE. Last year when GMRE announced that Pipeline Health Systems, which represented 2.3% of annual rents (GMRE Supplemental Disclosure 08/03/22), filed for bankruptcy the stock sold off close to 20% over the course of the next week.

Even though GMRE’s stock rallied when it was able to announce that Pipeline Health Systems was going to be assuming their lease, there was an opportunity for short sellers to make some nice returns in the interim. It is also interesting to note that Pipeline announced their bankruptcy on Monday, October 3 ^rd , 2022, but GMRE’s stock did not move sharply until GMRE announced the bankruptcy before the market opened on October 6 ^th .

Clearly, shorting CHCT and GMRE and waiting for a tenant bankruptcy announcement is a high-risk strategy that I would only recommend for a small speculative portion of one’s portfolio. However, when I look at the overall credit quality of both CHCT’s and GMRE’s tenants, even if the two names mentioned above do not go bankrupt in the near future, there are plenty of other options. Only two of GMRE’s top 10 tenants are investment grade credits (see below) and CHCT does not disclose anything below its top four tenants. Alternatively, given the delay in the market reacting to the bankruptcy announcement, investors could track Envision, GensisCare and GMRE’s other top tenants for bankruptcy announcements and trade on the news in advance of the REIT announcing their tenant has filed for Chapter 11.

Risks to shorting CHCT and GMRE

It is important for readers to understand that despite the problems I believe CHCT and GMRE face this year, the stocks are very volatile. This means any number of things could cause the stock price to spike temporarily. A short seller without sufficient capital could be forced to liquidate their position at a loss in this scenario. It is easy to envision circumstances where these REITs stock prices rise rapidly on perceived good news. For example, either one could report the sale of an asset at a substantial gain, or they could use accelerated rents or termination fees to exceed analysts’ estimates. Alternatively, they could announce dividend increases that drive shares higher. Both REITs pay dividends. Not only does the dividend represent a cost to a short seller, I believe the dividend will put a floor on the stock price for some time as there will always be investors who are seeking yield. In other words, I believe someone shorting GMRE or CHCT needs to have the patience and capital to wait until there is a bankruptcy announcement.

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