GMRE – Global Medical REIT: 10% Yield With Resilient Fundamentals
On February 16th, 2019, I issued my first buy recommendation for the Global Medical REIT (NYSE:GMRE) and since then I have remained committed to both GMRE’s secular tailwinds and its attractive dividend.
Over the holding period, GMRE has managed to significantly outperform the broader REIT index Vanguard Real Estate ETF (VNQ), reaching the peak of its value in January 2022. Since then, GMRE has sharply lost its previous gains due to the surging interest rates and an increased risk premium for non-core assets. Remember that GMRE invests in healthcare facilities, which typically trade in 6 – 8% cap rate territory and are in secondary markets.
As of today, GMRE provides almost 10% dividend yield at a price level, which is just slightly above the early 2019 level. This creates an attractive entry point to make a sound mean-reversion play, while enjoying relatively protected dividend streams.
Here are the key arguments, which justify my confidence in putting some capital at work via GMRE’s shares.
Resilient cash generation
In the past 5 years, GMRE has achieved CAGR of 4.3% in its AFFOs with $0.98 per share in 2022. In the midst of pandemic and the corresponding consequences on GMRE’s operations (e.g., slightly dropped occupancy rates, lease deferrals) the Company still managed to deliver and even increase its underlying AFFO figure. The main elements explaining the underlying soundness and stability of GMRE’s cash flows are the following:
- 92% of its leases entail minimum cash outflows from the GMRE’s side. In other words, 52% are structures on a triple net basis and 40% on an absolute-net basis transferring the structural building CapEx responsibility to tenants.
- Large and diversified portfolio of 189 buildings and 226 tenants with a 96.5% occupancy level.
- Weighted average lease term of 6.2 years with roughly 7% of leases expiring in 2023.
- Weighted average rent escalations at 2.1%, which is in line with the levels that prime real estate players are charging.
Going into the 2023, GMRE had also some positive tailwinds for slightly growing the AFFO figure. It had made 14 acquisitions in 2022, encompassing an aggregate 583,253 leasable square feet, where the optimal and base scenario occupancy levels were not maximized. Due to several refurbishments and GMRE’s seasoned management team we should expect a slight uptick in the occupancy rate in Q1, 2023 figures. On top of this, GMRE has on average 2% rent escalation factor embedded in its leases, which coupled with renewals of several existing leases could also provide a boost for the top-line figure.
Balanced capital structure
To capitalize on the 10% dividend yield, it is critical to avoid a permanent impairment of the shareholder value. Namely, the balance sheet should be strong enough to weather any storms without issuing additional shares at depressed price levels or even worse – going belly up. The second vital element to consider is the balance sheet’s cushion to service the current 10% dividend level.
As described earlier via GMRE’s historical AFFO growth levels, the Company is not a growth company as most of the AFFO is paid out in dividends. For instance, in 2022 the AFFO pay-out level landed at 96% leaving only $0.04 AFFO per share for further investments. The essence of GMRE’s investment thesis lies in the juicy dividend and GMRE’s ability to maintain it.
First, GMRE’s liquidity profile is strong with $245 million of unutilized borrowing capacity. To put this in the context, the current liquidity level is sufficient to refinance the maturing term loans in 2023 and 2024 and constitutes ~35% of the total gross outstanding gross debt. GMRE has no issues with finding liquidity, which is important, especially considering that it operates in secondary markets with non-core assets.
Second, the weighted average maturity of GMRE’s debt is 3.9 years with 79% of borrowing being linked to a fixed rate. This makes the increase in the cost of debt component sticky with some but not overly aggressive impact on the financing costs in 2023. As of year-end 2022, the weighted average interest rate was 4.07%, while incremental financing for GMRE was available at ~ 6%. In 2021, the weighted average interest rate stood at 2.87% and the total interest cost per share was by $0.01 lower compared to full year 2022. Even if GMRE suffers the same absolute level of increase in the interest cost, it will still be able to service the current dividend in an exchange of no notable investments. Q4, 2022, and the latest conference call already indicated that the GMRE’s investment pipeline is very shallow with no new investments made in the last audited financial quarter. An additional argument, which mitigates the risk of higher interest costs eroding GMRE’s ability to maintain status quo in dividends is the embedded lease escalators coupled with high likelihood of experiencing a slight uptick in the occupancy rates.
Third, GMRE’s current leverage ratio is 47.6%, which is in line with its long-term average and 12.4% below the consolidated unsecured leverage covenant level of 60%. Similarly, while the covenant for fixed charge coverage ratio is 1.5x, the current level of the corresponding ratio is 3.15x. Hence, GMRE has not only a significant liquidity buffer, but also an ample wiggle room to exercise the incremental liquidity to either acquire attractive properties or weather unexpected shocks.
The bottom line
GMRE is a solid choice for investors, who seek an above average dividend that is underpinned by strong capital structure and resilient cash generation.
The likelihood of suffering a dividend cut is low as the underlying future cash flows are expected to be slightly higher and in combination with well-structured debt financing offsets the gradual effects from higher interest costs.
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