GMRE - Global Medical REIT: Compelling High Yield Opportunity

Summary

• Global Medical REIT has a strong portfolio of mostly net lease healthcare properties.
• Unlike the big healthcare REITs that cut their dividends, GMRE has grown its dividend over the past 2 years.
• At the current valuation, GMRE could deliver respectable long-term returns even in a no-growth scenario.

The market may be a voting machine in the short run but is a weighing machine in the long run, as said by Warren Buffett. That's why I'm more interested in stocks when they are cheaply valued while giving investors a high dividend yield.

Having high-yielding stocks can be especially helpful in covering everyday expenses, or to buffer the effects of a job loss, which unfortunately seems all too common in today's business climate. It's even better when the underlying company owns mission-critical real estate that's essential to society.

This brings me to Global Medical REIT ( GMRE ) which as shown below, currently trades well below its 52-week high of $17. In this article, I highlight what makes GMRE an appealing buy for income investors at current levels.

Why GMRE?

Global Medical REIT is a net-lease healthcare REIT that focuses on sales and leasebacks with leading health systems and physician groups in secondary markets. This results in less competition for deals from institutional buyers, and thereby higher cash yields on its properties. This is reflected by GMRE's weighted average portfolio cap rate of 7.7%, which is higher than the ~5% cap rate for similar properties in Tier 1 markets.

At present, GMRE's portfolio has a gross value of $1.5 billion, spread across 189 properties in 35 states. As shown below, the portfolio is well-diversified by geography, with exposure to nearly all regions of the U.S., including the growing Sunbelt region.

Meanwhile, GMRE's portfolio appears to be overall healthy. This is supported by the fact that 90% of its properties are Health System affiliated. Its properties have a weighted average lease term of 6.4 years and are 97% occupied. Importantly, the tenant base is in good overall financial health with a portfolio rent coverage of 4.7x, implying a low overall likelihood of a lease default.

Moreover, GMRE continues to grow in size, completing 5 acquisitions encompassing 247K square feet for $51 million, at a weighted average cap rate of 7.1% during the third quarter. This was partially funded by a profitable exit on a medical office building in Tennessee, resulting in gross proceeds of $18 million and a gain of $6.8 million. This contributed to total revenue growth of 18% YoY to $35 million.

It's also worth noting that AFFO per share grew by $0.01 YoY to $0.25 per share. This obviously is not at the same top-line growth rate, as GMRE relied in part on equity raises for funding. In addition, GMRE's interest expense also grew to $7 million from $4.8 million in the prior year period, due to higher interest rates, pressuring bottom-line growth.

Nonetheless, GMRE's balance sheet remains in good shape, with a weighted average interest rate of 3.9% and a debt to gross assets ratio of 47.6%. It also maintains a healthy fixed charge coverage ratio of 3.4x, sitting well above the minimum 1.5x required by its debt covenants.

This lends support to GMRE's 7.7% dividend yield, which is covered by an 84% AFFO payout ratio. Notably, GMRE's exposure to mission-critical healthcare properties under net leases enabled it to grow its dividend over the past 3 years, while the "big boy" healthcare REITs such as Ventas ( VTR ) and Welltower ( WELL ) are still paying dividends well below their pre-pandemic rates.

Looking ahead, GMRE should benefit from its expanding platform of properties and should see long-term growth, as it has average lease escalators of 2.1%, which is in line with that of most other net lease REITs. While near-term opportunities are constrained due to higher interest rates and high cost of equity (due to lower stock price), management may be able to unlock value in the existing portfolio, as noted during the last conference call :

We are conducting a strategic review to identify properties that we can sell with a focus on properties where we have added value since acquisition by lease extension, leasing up vacancies or upgrading credit, assets that can be considered core properties. We expect to use any proceeds from the sales to reduce our outstanding debt, increasing our dry powder to be in the position to restart acquisitions, when market conditions improve. We will provide more color on the proceeds we expect to generate and the reduction in leverage we are targeting as we move ahead. But we believe this is a prudent course of action to take admits this highly volatile economic and capital markets environment.

Turning to valuation, GMRE appears to be attractively priced at $10.94 with a forward P/FFO of 11.7, sitting well below its normal P/FFO of 16.1. Even with analysts' conservative price target of $11.71 , GMRE could still see a potential one-year total return in the mid-teens when including the dividends.

Investor Takeaway

Overall, GMRE offers an attractive opportunity to tap into mission-critical healthcare assets that's backed by mostly net leases and strong tenant rent coverage. While near-term external growth opportunities may be limited due to higher interest rates and high cost of equity, investors are paid a handsome 7.7% dividend yield to hold onto the stock.

Even if GMRE were to never grow its asset base, the 2.1% annual lease escalator combined with the dividend could result in long-term annual returns around 10%. This is in line with that of the S&P 500's ( SPY ) long-term growth rate, with most of it being in the form of immediate income rather than unrealized capital gains.

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