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Why Global Medical REIT Inc? - Max Out of Pocket
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Why Global Medical REIT Inc?


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Max has been neglecting coverage of my medical office building portfolio. I haven’t done an update on things since I made a case for diversification back on October 18th. I suppose a two week trip to Ecuador didn’t help my writing productivity.

That’s not to say I haven’t been busy behind the scenes dollar-cost averaging into my new favorite healthcare REIT. Since then, I have purchased over 300 shares of Global Medical REIT Inc. The total value of the Max Out of Pocket REIT portfolio is just over $43,000 and set to pay out over $2,000 in dividends over the next year.

My 12/10/2019 purchase of Global Medical REIT Inc.
Everybody needs a hobby.

Well, there was a pretty significant price run-up on Global Medical REIT Inc. (GMRE) since I made that case for diversification. I paid $11.85 for that initial position and the stock price increased all the way up to $14.13 by market closing 12/10/2019. That is a 20% gain in just over a month. We call that accidental timing. Max is good, but not that good.   

Common Stock Offering – Dilution

That price run-up all ended for GMRE last week when we saw a 7.9% stock price reduction in one day.

Global Medical REIT decided to do an upsized offering of common stock to the tune of 6 million shares at a price of $13 per share. The gross proceeds from this offering were about $78 million. That event diluted my ownership in the company because new shares were issued, reducing the value of the shares I have been accumulating. 

Since this is a long-term investment for the Max Out of Pocket medical office building portfolio, I am really not too concerned with this event. If anything, I am happy with the timing because they were able to raise a decent chunk of capital at elevated stock prices. It also might give me a chance to lock in more shares with a higher yield going forward.

But the real question is do I trust my management team to deploy that $78 million in capital strategically to make me money in the long run. Their relatively short history suggests they will.

a Global Medical REIT Inc building.
Project victory.

Capitalization Rates

Before we dig too much more into GMRE, we get to learn something new today at Max Out of Pocket. Capitalization rates. We can call them “cap rates” for short. The cap rate metric helps us analyze and determine the potential annual rate of return for a particular property in a REIT portfolio. 

So let’s formally define the cap rate. Generally, the cap rate for a property a REIT owns is the net operating income of a particular property divided by the current market value of that property.

CAP Rate = Net Operating Income / Current Market Value

Net operating income (NOI) is a little different than regular income. It is a before-tax figure that excludes interest payments on loans, capital expenditures, depreciation, and amortization. We could spend some time on NOI, but I am going to leave it at that.

The current market value is the amount of money the property might sell for in the open market today.

Divide these two and we have our cap rate.

Global Medical REIT Inc Q3 Conference Call

I listened in on several of GMRE’s conference calls before I officially became an investor with the company. My first earning conference call as an actual investor occurred 11/7/2019 for the quarter ending 9/30/2019.

GMRE is a much smaller company than my portfolio’s core position, Physicians Realty Trust (DOC). But the company has been staying very busy growing. They acquired seven properties in the third quarter of 2019 alone. These properties had an average weighted cap rate of 7.7%. These are higher cap rates than we are seeing over at DOC where they were running between 5-6% on Q3 purchases. The total purchase price for the properties GMRE purchased was about 66.1 million dollars.

Global Medical REIT Inc Q3 purchases.
Q3 2019 Property Purchases – got cap rate?

One of those properties was in Livonia, Michigan and tied into Mission Health. That building cost $10.5 million and has a cap rate of 8.1%. This happens to be a market Max is relatively familiar with. The NOI/base rent is $855,000 per year.

$855,000 (NOI) / $10,500,000 (Market Value) = 8.1% Cap Rate 

Through the Q& A, the management team made it very clear they are aiming to stay in that mid 7% cap range for the foreseeable future. 

In other words, GRME is in a growth phase. With the $78 million stock offering referenced above, they could potentially acquire seven more buildings with similar cap rates. This could continue to grow the income stream and increase funds from operations (FFO). According to the press release mentioned above, the management team plans to use the $78 million in proceeds from the stock offering to repay a portion of outstanding indebtedness, fund acquisitions, and for other general corporate purposes.

GMRE’s Medical Office Building Portfolio

As of 9/30/2019, GMRE has 101 buildings with a total of 84 different tenants. They are one of the few healthcare REITs that are 100% leased. Their asset portfolio has grown from $124.8 million to $830.4 million as of 9/30/2019.

There are several things that make GRME different than DOC, but one of the key differentiators is that medical office buildings only represent 55.4% of their portfolio. Inpatient rehab facilities (IRF) make up 28% of their portfolio and Encompass (who is a decent player in IRF) is their largest tenant making up 10.9% of their annual base rent.

This gets the Max Out of Pocket healthcare REIT portfolio some exposure outside of the highly competitive MOB space.

Here is a look at their asset types:

Global Medical REIT Inc asset mix.
A new mix of asset types for the Max Out of Pocket REIT portfolio

Out of 131 leases, GMRE only has 3 of them expiring in 2020 and only 6 expiring in 2021.  

Sweet Spot

GMRE’s chief investment officer Alfonzo Leon mentioned the (current) sweet spot for their acquisitions is between about $7-14 million. Since they are a smaller REIT, these smaller purchases can still drive some material growth for the company. 

I was also happy to hear Mr. Leon suggest that they were being very selective on inpatient investment opportunities. The traditional Medicare program is driving as much as they can to the outpatient setting. He said the lion’s share of opportunities on the inpatient side are rehab hospitals. Although inpatient rehab hospitals have been targets of some RAC audits (in my experience), the reimbursement model for Medicare is usually pretty favorable and it will be hard to drive patients out of that setting since it is so intensive.

Like I said, Encompass Health happens to be their top tenant (10.9% of the base monthly rent) and is a big player in inpatient rehab hospitals.

Final Thoughts

I am still learning my way around Global Medical REIT Inc, but I am certainly happy with the short-term results and long-term growth opportunity. GMRE is small, but with that comes mobility and the ability to strategically grow. It also brings risk, a risk I am willing to take for the higher short term yield on my investment.

At the time of writing this the dividend yield for GMRE is back over 6% where DOC is closer to 5%. We will eventually do a side-by-side comparison of DOC and GMRE to get a better idea of how these two REITS compare.

Do you own any medical office building REITS?

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