As many of my follower have most probability noticed, Global Medical REIT (GMRE) has been my high conviction bet since February, 2019. As a passionate follower of GMRE, in the past couple of weeks I have published two articles “Global Medical REIT: An Unwarranted Divergence From The Peers” and “Global Medical REIT: 3 Things To Consider In Q1, 2020“.
The aim of these two articles was to contextualize GMRE and its future growth prospects against the backdrop of the prevailing pandemonium in the economy as well as to indicate key areas to consider in Q1, 2020 figures to ultimately get a reasonable sense of mid-term fundamentals.
Since the Q1 earning release May 6 (after the bell), GMRE’s share price has moved up by ~6%. Some part of this move can be attributable to the overall (i.e. beta) move of the market. Nevertheless, on May 7 when the market opened, GMRE outperformed the S&P 500 by ~ 200 bps receiving a positive investor reaction.
The Q1, 2020 report has confirmed my thesis that GMRE is well positioned and has a robust portfolio to continue deliver excellent results despite the COVID-19. These results have just strengthened my view on the future alpha performance by GMRE.
The following are the key takeaways from the Q1, 2020 earnings release:
Key takeaway #1 – Superb rent collection with maintained occupancy rates
One of the most important metrics on which almost every REIT analyst focuses now is the the rent correction. Many tenants – beyond retail and lodging sector – are unable to service the stipulated rent payments.
GMRE has, however, done a remarkable job in collecting the expected rent payments. In April, which is commonly deemed as potentially the worst month in the whole COVID-19 period, GMRE was able to collect 96% of the rents.
Moreover, the Management has already indicated that 76% of the May rents were collected as of Q1 earnings date. According to CFO Bob Kiernan, this percentage is more or less in line what the usual results under the comparable period.
There have not been any bankruptcies either as the portfolio was 99.7% occupied as of March 31, 2020.
The total revenues grew by 42.5% on a y-o-y basis that was largely attributable to massive acquisitions during past 12 months. The same store sales growth landed at just above 2% – in line with the embedded rent escalators for the lion’s share of the GMRE’s leases.
The development in Q1 top-line can be considered very strong – perhaps, even excellent. I believe that this was the key reason why GMRE’s share price increased relative to the market. In essence, it would be only logical to expect somewhat lower results because of the social distancing measures imposed on the discretionary health care services and the fact that more than half of the GMRE’s portfolio is exposed to medical office buildings (MOBs).
One other positive thing that was brought up during the earning call, was the future demand for non-urgent health care service. Here is a relevant excerpt from the call; CEO Jeff Busch:
I’ll answer this. We see and the industry is seeing a substantial back up in the procedures that our tenants tend to perform. So when they came out and said you know to stop anything that’s not urgent, our procedures are mostly non-discretionary. So for example, we have eye-centers that people stopped going in for cataracts and other type of surgeries and they were booked out like two to three months in advance, and now in Texas and Oklahoma and Florida where we have a lot of our facilities, they were opened during emergencies, now they are expanding back with the re-opening. So one of the first areas that’s going to see the rebound that’s coming right away is medical and a lot of people even in New York are talking, we got to take care of our patients, because a lot of pent-up demand just came. So that’s one of the things we considered.
Key takeaway #2 – Near-term challenges recognized, but insignificant for the continuous long-term value creation
The Management mentioned some points related to the direct financial consequences of the COVID-19 in the call as well.
The overarching comment here is that the tenants which are seriously affected by the COVID-19 and require rent deferrals constitute a very small share of the total tenant base.
Partially, we can see that in the April’s rent collection – only 4% did not pay timely.
Look at the excerpt from the earning release:
Currently, we estimate that $2 million of rent that ordinarily would have been collected over the months of April through July 2020 will be deferred and is now expected to be collected primarily over the period from July through December 2020.
Going forward, the Management is not expecting to face an increased need for additional rent deferrals. And this makes sense because the economy is already gradually re-opening, which will finally allow the people with non-urgent health issues to visit doctors and get the necessary treatment.
Key takeaway #3 – Accretive acquisition strategy remains in tact
In the latest SEC 10-k filing GMRE disclosed that it has entered a due diligence phase for five properties worth $85 million. This amount corresponded to ca. 10% of the portfolio as of year end 2019.
Now GMRE has reported that it has successfully completed acquisitions of four properties worth $67.6 million at a weighted average cap rate of 8.3%.
There are two important things to conclude from this:
- The Management is so confident about the GMRE’s business and the ability of its tenants to service the rents that no significant liquidity preservation strategy should be introduced (i.e. the acquisitions strategy can continues).
- This is the right moment to be opportunistic, and the Management seems capable of capturing the temporary elevated cap rates. Cap rates of 8% will certainly boost the underlying AFFO due to very favourable spread from the WACC.
April 1, one day after Q1 period, GMRE acquired one more MOB at $19.3 million, cap rate of 8.8%. Furthermore, it was reported that GMRE has already found three additional properties worth $45.1 million which are currently under due diligence phase.
The long-term growth prospects seem to be very appelaning. Once the economy gets back to a state of normalcy, and the market starts it aggressive search for income again, GMRE will surely benefit.
Key takeaway #4 – The beginning of the management internalization
In the earning call, CEO Jeff Busch said:
The special committee met with the Board on March 3 and recommended that the company pursue an internalization transaction with our advisor. The board agreed with the recommendation and since then the special committee has been negotiating terms with the advisor.
Many analysts and investors have been waiting for this step for a long time. Finally, GMRE has decided to make some material progress here to reduce the opex going forward as well as to strengthen the principal-agent interests.
The key reason why only now such steps are taken is the size hurdle. GMRE has gradually (due to many acquisitions) grown into a higher capitalized REIT (e.g., inclusion in the broader REIT indices). You have to reach a certain size where the initially increased costs attributable to largely fixed management costs are well covered and do not put the dividend or future growth at risk.
Currently, it is, though, hard to tell when a complete internalization will take place. See a relevant excerpt from the earnings release:
The global effects of the COVID-19 pandemic have adversely impacted many international communications and transactions, including the timeline within which the Special Committee and the manager have been able to conduct the negotiation of the Internalization Transaction.
However, on this is sure – GMRE has become larger and more dominant REIT, where the internalization of management is finally a viable step that will boost value in the mid- / long-term.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.