Global Medical REIT: Attractive Dividend Yield, Underwhelming Growth

Global Medical REIT (GMRE) is a net-lease medical office Real Estate Investment Trust that invests in specialized healthcare properties, which it leases to regional or national healthcare systems and industry-leading physician groups.

Global Medical’s property portfolio comprises gross investments in real estate valued at around $1.4 billion. It includes 171 facilities with an aggregate of 4.4 million leasable square feet (LSF), featuring a total of $105.4 million worth of annualized base rent.

About 65.7% of Global Medical’s LSF is attributed to its Medical Office Buildings (MOB), 18.7% to its Inpatient Rehab Facilities (IRF), and about 6.3% to its surgical facilities. The remaining 9.3% comprises other specialized facilities.

While Global Medical’s financials appear to be rather solid, investor returns could be limited, apart from the stock’s substantial yield, amid soft per-share growth prospects. For this reason, I am neutral on the stock.

Robust Results, Limited Per-Share AFFO Growth

Global Medical has been posting robust results lately, with its rental revenues and funds from operations remaining robust even during the midst of the pandemic. The company’s latest results were no different, with rental revenues growing 16.6% year-over-year to $31.88 million.

Growth in rental revenues was mainly driven by a larger property portfolio, with the company closing 20 acquisitions last year. During the quarter, the company completed four more acquisitions, adding an aggregate of 80,781 LSF to its portfolio, which also boosted top-line growth.

Following cost efficiencies and economies of scale, adjusted funds from operations (AFFO) increased by a much more significant 32.2% to $16.8 million. However, on a per-share basis, AFFO remained fixed year-over-year at $0.24. This was the result of an equally higher number of outstanding shares, which the company issued during this past year to fund the expansion of its property portfolio.

On the one hand, it is quite normal for REITs to grow their asset base through the issuance of additional shares, even if the rate at which these acquisitions are accretive on a per-share basis is softer than the growth in total assets.

For instance, while the company’s gross real estate asset value more than doubled between 2018 and 2021, its AFFO/share grew by 25%, from $0.76 to $0.95 during this period.

On the other hand, recording no AFFO/share despite last year’s acquisition spree and a higher underlying AFFO yielded by operating synergies could imply that the company overpaid for these assets.

Dividend & Valuation 

Global Medical’s dividend per share remained stable between 2017 and 2020 at an annual rate of $0.80. This was due to AFFO/share hardly covering payouts during this period. For instance, AFFO/share came in at $0.76 in 2017, as mentioned earlier. With AFFO/share exceeding the underlying DPS over the past couple of years, the company raised the annual DPS rate by two cents in 2021 and 2022, respectively, thus now amounting to $0.84.

Based on the company’s Q1 results and current portfolio composition, I believe the company’s AFFO/share will not exceed $1.00 in Fiscal 2022. Consensus estimates point towards an FFO/share of $0.99, implying very similar projections. Thus, the payout ratio stands at around 85%. In my view, the company can hardly grow the dividend by more than a couple of cents each year, as its current growth prospects do not seem to allow for greater hikes.

Besides the underwhelming AFFO/share growth in Q1, the company lacks meaningful rent escalation potential. Its portfolio currently features a weighted average annual rent escalation of 2% embedded in its leases, which is rather uninspiring.

While the company’s properties also feature a weighted average lease term of 6.9 years, which should translate to solid rental revenues for quite some time, the growth in the underlying costs associated with the properties could easily surpass 2%, thus resulting in declines in AFFO/share.

Another point worth mentioning is that while the stock’s yield of 6.45% is rather enticing, it could further limit AFFO/share growth. With the company issuing shares at its current price levels to fund its future acquisitions (i.e., at the current yield), the additional dividends to be paid on the newly issued shares could make for a rather expensive cost of capital.

In other words, unless the spread between the company’s investment yield and the dividend yield is substantial enough, its future investments may end up not being that accretive on a per-share basis.

Thus, while the stock’s current price levels may imply a P/AFFO close to 13 (assuming AFFO/share close to $1.00 for Fiscal 2022), which could appear like a cheap multiple, it is entirely justified considering the overall limitations in the company’s per-share metrics.

Wall Street’s Take

Turning to Wall Street, Global Medical REIT has a Strong Buy consensus rating based on five Buys assigned in the past three months. At $17.50, the average Global Medical REIT price target implies 35% upside potential.

Takeaway

Global Medical is a decent REIT, featuring a number of qualities. These include a diversified tenant base, recession-proof properties, and a lengthy weighted average lease term. I believe that the 6.45% yield could service income investors adequately, with payouts being covered, albeit not by a wide margin.

Still, investors who require some noteworthy growth in the mix, whether that is in AFFO/share or dividend per share, may not find it in Global Medical’s shares.

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