Global Medical REIT Inc. (GMRE) has grown significantly, leveraging a low-interest-rate environment to expand its total assets at a 40% compound annual growth rate (CAGR). The company’s portfolio primarily consists of medical office buildings in secondary markets, characterized by high occupancy and strong rent coverage from the onset.
Tenant and Market Profile
GMRE’s tenant base, although in secondary markets, has remained robust. The investment thesis hinges on the defensive nature of this asset class, supported by strong demographic trends favoring sustained demand for medical office space despite the rise of telehealth during the COVID-19 pandemic.
Q1-2024 Performance
GMRE’s Q1-2024 results showed a slight decline in revenues compared to Q1-2023, primarily due to the sale of three properties and a slight decrease in occupancy levels.
The key metrics for real estate investment trusts (REITs), funds from operations (FFO), and adjusted FFO (AFFO) remained relatively flat year-over-year. The quarterly distribution of $0.21 per share appeared to be tightly covered by these earnings measures.
Growth Challenges
GMRE’s growth has stagnated since April 2022, with the stock consistently trading below its consensus net asset value (NAV). The company’s NAV has also drifted lower, complicating efforts to issue new stock for growth.
Additionally, GMRE faces significant debt repricing challenges, with $617.8 million in total debt as of March 31, 2024, carrying a weighted average interest rate of 3.85% and an average remaining term of 2.7 years. Repricing this debt at current higher interest rates would significantly impact AFFO, reducing it from $0.84 to approximately $0.70 annually.
Acquisition Strategy
To address these challenges, GMRE has pursued a more creative growth strategy. In May 2024, the company entered a purchase agreement for a 15-property portfolio of outpatient medical real estate, valued at $81.3 million. The acquisition is structured in two tranches, with the first tranche expected to close in Q3 2024 and the second one in Q4 2024. This acquisition aims to improve asset returns through capital recycling.
Market and Financial Outlook
The acquisition cap rate of approximately 8% is slightly higher than GMRE’s NAV-derived cap rate. Despite the disciplined approach of not issuing equity below NAV, these acquisitions are not expected to significantly alter GMRE’s financial position, especially if funded through asset sales.
GMRE’s stock remains modestly undervalued, trading 20% below the consensus NAV. However, growth prospects are constrained by the need to reprice debt and the broader challenges facing the commercial real estate market, including potential office space vacancies and higher cap rates.
Preferred Shares and Conclusion
GMRE’s 7.50% cumulative preferred shares (NYSE.PR.A) offer a yield of 7.61% based on the stripped price. These preferred shares are considered safer due to the substantial common equity buffer. Despite a lower yield compared to common shares, the preferred shares provide a more secure investment option.
GMRE faces significant headwinds, including debt repricing and limited growth prospects without substantial interest rate reductions. The preferred shares offer a much safer alternative to the common shares.
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