TROW - Global Medical REIT: A Small Cap REIT To Own For 2023

Summary

• Shares of GMRE have had a rough 2022 and are down almost 50% YTD.
• Growth has remained solid, but debt has increased this year along with a rise in their weighted interest rates.
• Shares are cheap with a price/FFO just over 10x, well below the average multiple.
• The dividend yield now sits at 9%, and the dividend has started to grow in the last couple years.
• I plan to add to my position in the next month as some cash frees up in my Roth IRA.

Over the last couple days, I have been working through a couple picks that are on my watchlist going into 2023, including T. Rowe Price ( TROW ), Altria ( MO ), and Prologis ( PLD ). Those are all large, mature businesses, but today’s article will be focused on a small cap REIT, Global Medical REIT ( GMRE ). My last article on GMRE was in May, and I figured it was time for an update heading into the new year. It’s certainly not one of my better performing picks, but I plan to add to my position in my Roth IRA when I have some cash to put to work.

Investment Thesis

GMRE is down almost 50% in 2022, a selloff that is overdone in my opinion. Medical REITs have struggled this year, but I think GMRE’s portfolio that primarily consists of medical office buildings should hold up just fine over the next couple years. There are a couple nuances to be aware of with GMRE, but I think the risk/reward is skewed to the upside for 2023. Shares trade at a price/FFO just over 10x with a yield of 9% that has started to grow in recent years. Add in a long runway for growth with their $630M market cap, and GMRE could provide impressive returns for investors for years to come.

Q3 Update

The REIT has continued to grow in 2022, with 14 acquisitions in the first nine months of the year. The company’s portfolio is about two thirds office building, with the remainder made up of inpatient rehab facilities, surgical hospital, and other properties. Revenues have continued their double-digit growth so far this year, but that wasn’t the thing that stood out the most from skimming the 10-Q for Q3. One of the things that could scare off potential investors is the debt on the balance sheet. Many REITs carry significant debt loads, but GMRE has had a large increase in net debt in the first nine months of the year.

It increased from $571M at the end of 2021 to $693M at the end of Q3. More debt isn’t an issue on its own, especially if it is being put to good use by management. The thing that popped off the page was how fast the company’s weighted average interest rate increased. It went from 2.87% at year end to 3.9%. I’m fine with those interest rates, but the rate of increase surprised me, despite rising interest rates this year. Approximately 80% of their debt is fixed. The REIT is expecting their interest rate to come down over the next couple years.

Due to the Company’s forward swap structures, the weighted average interest rate on fixed debt will improve over the next few years. Weighted average interest rates on the Company’s fixed debt are expected to decrease to approximately 3.67% in 2023, 3.50% in 2024, and 3.43% in 2025, based on the Company’s current leverage.

- from the Q3 10-Q , sec.gov

The last thing worth mentioning from the 10-Q is their equity issuances in 2022. With the declining share price, it certainly wasn’t an ideal time to issue share to fund acquisitions. There were no equity issuances in Q3, and only 0.6M shares all year (average price of $17.15), so management hasn’t been diluting shareholders into the declining share price this year. This gets me to one of the main reasons I’m bullish on GMRE, which is the cheap valuation.

Valuation

I thought GMRE was cheap in my last article, and the total return since then is down about 25% including dividends. Shares are even cheaper today with a price/FFO of 10.1x. Over the last five years, the average FFO multiple has been 17.5x, so shares are trading at a steep discount today. I think we will see some multiple expansion if market conditions improve, and a return to a 15x multiple would likely lead to attractive returns for investors in the next couple years.

I’m curious to see how the FFO/share will do over the next couple years. The growth estimates aren’t that impressive at 5% and 3% for the next couple years, but I’m optimistic that they will be able to beat or exceed expectations. If GMRE can continue to make acquisitions with cap rates near 8%, I think we should see solid FFO/share growth. The other piece that should drive returns for investors is GMRE’s 9% yield.

High Yield With A Side Of Dividend Growth

One of the first things investors will notice about GMRE is the 9% yield. High yield typically means higher risk, but I think GMRE will be able maintain its current dividend and continue its recent history of dividend hikes. The quarterly dividend was flat for years at $0.20, but that changed in 2021. We got a 2.5% hike to $0.205, and in 2022, we got a 2.4% hike to $0.21. I’m not in the habit of making exact predictions on what future dividends will be, but if the pattern continues, we will see the quarterly payout raised another 2.4% to $0.215 in 2023. If that happens, GMRE provides an interesting combination of high current yield with a side of dividend growth, and the potential for long term growth due to its $630M market cap.

Conclusion

GMRE is a small position in my Roth IRA, but I’m planning to add shares in the next couple months as some cash frees up in the account. The company has continued to grow at a solid pace, but debt also increased significantly in the first nine months of the year. They also saw their average interest rate increase over 100 basis points in that time. They are expecting that to come down over the next couple years, and management showed restraint with equity issuances this year, something that I appreciate even though I’m a small shareholder.

The valuation is very cheap today with a price/FFO just over 10x. It’s well below the average multiple and could provide impressive returns for investors if we get multiple expansion. You also throw in a 9% dividend that has started to grow in recent years, and I think double digit returns is a pretty low bar to clear for investors buying shares at the current price. With shares down almost 50% in 2022, I think it provides a buying opportunity, and I think returns will probably be much better in 2023.

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