On Might 4th, 2023, I issued my ninth article on the World Medical REIT (NYSE:GMRE) that marked an finish to my unchanged stance for recommending a purchase all the way in which again since February 2019.
The important thing purpose driving my choice to assign a maintain score was restricted development prospects along side rising curiosity value element.
Whereas the enterprise operations metrics stay strong (e.g., 97% occupancy fee, rising like-for-like NOI, well-laddered lease profile), the monetary capability of GMRE to accommodate additional development by way of acquisitions is tiny. It is because GMRE’s leverage profile is already exhausted within the context of inside monetary coverage that mechanically forces the Administration to give attention to optimizing the steadiness sheet as a substitute of financing exterior development alternatives, which might indicate even greater rate of interest prices.
All in all, this can be a prudent technique contemplating the potential difficulties and volatility in lending markets, particularly in tertiary geographies during which GMRE operates.
But, the optimization of steadiness sheet comes on the expense of additional development in FFO. Should you add the truth that the present weighted common value of debt is at 4.28%, whereas the incremental financing for GMRE is accessible at ~ 6%, the dividend story may not appear that engaging both (particularly within the context of virtually 100% AFFO payout).
So in Might 12th, I went a step additional by issuing an article on the World Medical REIT Inc. 7.50% CUM PFD A (GMRE.PR.A) stating that for yield-seeking traders a place in the popular inventory can be thought-about extra optimum relative to the fairness possibility (i.e., GMRE’s inventory) given the elevated likelihood of GMRE’s dividend minimize and solely 150 foundation of yield unfold between the 2 choices.
Now, again in early August, GMRE circulated its Q2 outcomes, which embody some attention-grabbing dynamics warranting a stable base of details for me to revisit my thesis on GMRE’s dividend.
With this being stated, I need to underscore that I’m not altering my view on GMRE’s score (i.e., sustaining maintain) as there may be nonetheless lack of contemporary information, which might assist a pleasant fairness development story going ahead.
On the identical time, there are actually some stable parts, which point out that the yield-seeking traders can really be comfy with the present dividend of 8.6%.
GMRE has managed to safe favorable financing till 2028 primarily via the rate of interest swap agreements.
In response to Robert Stevenson, CFO of GMRE in Q2, incomes name:
We’ve swaps that exit via the maturity of each of these time period loans. And actually, we’ll begin to see a number of the good thing about ahead beginning swaps that we have placed on previously on the $350 million time period mortgage. In order we prolonged that out in previous years, we put extra swaps on as we add a time period into that $350 million time period mortgage. So I feel the constructive right here is that the ahead beginning swaps are going to — they’re going to begin to kick in right here within the third — one we’ll begin to kick in right here within the third quarter of this yr after which subsequent yr equally within the third quarter, we’ll see precise step down within the fee on that $350 million time period mortgage. However each loans are swapped out until their maturities.
As of Q2, 2023, GMRE had a weighted common value of financing at 4.09% with a weighted common maturity of three.4 years. Majority of the prevailing debt is stipulated at fastened rate of interest phrases, the place solely 12% is attributable to the floating revolver (SOFR + 1.5% unfold).
If we regulate for the prevailing revolver, the weighted common maturity of the entire borrowings exceeds 4 years, offering GMRE with a visibility and stability on the curiosity prices. The belief of decreased excellent borrowings stemming from the floating revolver facility is life like given the latest divestitures and the Administration’s plans to ship.
Furthermore, as a result of latest divestitures (see under), GMRE has managed to shrink its debt publicity and thus triggering an embedded clause within the revolver, which permits for a decreased unfold in case the leverage ratio falls under 45%. From this, GMRE is now in a position to save 10 foundation factors in the price of financing related to the prevailing floating revolver.
All in all, GMRE’s financing construction is secure and helps keep away from affected by greater rate of interest setting till the primary notable majorities, which kick in Might 2026 and February 2028. This clearly helps GMRE’s skill to ship quarterly dividends, because the curiosity prices have solely restricted impact on the AFFO on a go ahead foundation (a minimum of till mid-2026).
GMRE’s latest divestitures have revealed how precious its properties are. In different phrases, GMRE has succeeded with the steadiness sheet optimization course of by monetizing a number of properties at extremely engaging cap charges.
In response to Jeffery Busch, CEO of GMRE in Q2, incomes name:
Through the quarter, we offered a 4-property MOB portfolio in Oklahoma Metropolis, Oklahoma for gross proceeds of $66 million at a 6.5% cap fee, leading to a achieve of $12.8 million. And earlier this week, we closed on the sale of a medical workplace constructing in North Charleston at 5.3% cap fee that generated a further $10.1 million of gross proceeds. These tendencies have enabled us to attain our purpose of lowering our leverage to our goal vary of between 40% and 45% as of June 30.
On account of these transactions, GMRE was in a position to acknowledge revenue since properties had been offered at a big premium to their e-book values acknowledged within the steadiness sheet.
A lot of the captured proceeds went instantly in the direction of lowering the excellent borrowings, particularly concentrating on the floating fee debt to maximise curiosity value financial savings.
A small a part of the inflows was deployed for acquisitions of two medical workplace buildings in Redding, California for $6.7 million with a 7.6% cap fee (albeit, the first funding supply right here was the beforehand issued OP models at $11 per unit).
The underside line
After seeing Q2, 2023 outcomes, there’s a enough base of latest information from which yield-seeking traders can revisit their assumptions pertaining to the sustainability of GMRE’s dividend.
The profitable financing transactions (i.e., swap agreements) with a number of divestitures at very engaging cap charges have allowed GMRE to scale back its leverage, publicity to floating fee debt and lock in ~4% value of debt 4 years sooner or later. On the identical time, the like-for-like NOI efficiency stays sturdy with resilient occupancy ratio and well-laddered lease maturity profile.
On account of this, GMRE is now ready to securely accommodate the prevailing quarterly dividend from its inside money technology.
Going ahead, I count on GMRE to proceed divestitures but in a extra steadiness method as presently the asset rotation goal of $90 million is sort of achieved. There may be some likelihood of GMRE doing extra within the property gross sales, however that may rely on the cap fee setting, which is presently lastly exhibiting some preliminary indicators of convergence in the direction of a extra life like pricing (i.e., greater pricing).
So I don’t count on a big development or extra returns on high of the dividend contemplating the Administration’s purpose to proceed with deleveraging and being very conservative on the acquisitions entrance.