Global Medical REIT: Market Dislocation From First To Worst

At the start of the pandemic, we tried to identify which REIT property sectors would best weather COVID. That process evolved to identifying which sectors would perform best in the reopening economy. Now we must assess which sectors will be strongest in the face of high inflation, rising interest rates, and the prospect of a recession.

Medical office was considered a solid choice from the very start and operationally, continues to look good throughout the changing economic landscape. On a fundamental and relative basis, Global Medical REIT (NYSE:GMRE) was the obvious choice. It was cheaper and growing FFO/share faster than its peer set: Healthcare Trust of America (HTA), Healthcare Realty Trust (HR), and Physicians Realty Trust (DOC).

Throughout 2021 we enjoyed a smug satisfaction and superior returns on investment. GMRE produced nearly quadruple the returns of DOC and HR and bested HTA by more than 1600 basis points.

By mid-March however, as fear of rising interest rates became reality, stock and bond prices fell and Global Medical shares collapsed. YTD, GMRE has fallen twice as far as the REIT index and almost 3 times further than HR.

DOC doesn’t even look like it is in the same property sector.

Is it the Market or is it Fundamental?

When a stock goes into freefall, you must first ask, is it just market anxiety? Have perceptions soured on the whole sector? Has something at the company changed operationally?

Global Medical released Q1’22 operating results after market close on May 4th . Despite Funds From Operations rising more than $3MM from the same period last year, FFO/Share was flat at $0.23 due to significant share issuance. Management described accretive acquisition activity completed year-to-date and in the pipeline. In March, the company raised the quarterly dividend by 2.5%, as they had also done the year prior.

In June we got to meet with GMRE management and while they acknowledged existence of the same economic challenges we all face every day, they were optimistic about opportunities in their targeted markets. They were the same competent professionals we met shortly after the company’s IPO.

Sector Metrics

Healthcare Realty and Healthcare Trust of America are in a proposed merger agreement that is expected to complete in the third quarter, so our MOB peer set might soon be reduced from four to three, but in this comparison, we will examine them as the separate companies they are today. As such, the consensus estimates are that all four companies are growing earnings per share and are expected to for at least the next couple of years.

Incorporating results dating back to fiscal 2020, you can understand why we thought GMRE was the best growth candidate in the set. Looking at it from 2022’s consensus estimates going forward, GMRE is anticipated to far exceed the growth of its peers.

On a market price/FFO comparison, the rate of earnings growth extends to an even bigger value disparity.

Acquisition of a faster growing company at a lower Price/FFO is likely to garner higher investment returns. Global Medical is a superior choice by four turns.

Considering intrinsic asset value, all four companies are trading at a discount to NAV. GMRE’s shares are available at a slightly larger discount to those of peers.

The Trade

In answer to our question of whether perceptions have soured on the whole MOB sector, they have not and rightly so. Our aging population is a tailwind for all aspects of healthcare. As such, healthcare has been, and remains, recession resistant. Lifestyle preferences drive demand for local access to health services. That access is what each of these companies aim to provide.

Has something at the company changed operationally? According to reporting and verified by our interview, GMRE management hasn’t broken stride. The outlook is bright. We have held on to our GMRE shares and in these dark days of June 2CHYP sold our merger/arbitrage inspired HTA shares and funneled proceeds into purchase of more Global Medical REIT.

It must be the market.