Aging Population And Outpatient Shift Will Boost Medical Office Demand

Key Takeaways

• Strategic property acquisitions and strong tenant retention position the company for sustained rent and revenue growth well above current market expectations.
  
• Dividend redeployment and alternative funding avenues enhance earnings growth, acquisition capacity, and margin expansion without diluting shareholders.
  
• Rising refinancing risk, tenant instability, and shifting healthcare demand threaten revenue, margins, and cash flow, forcing dividend cuts and constraining long-term growth prospects.

Catalysts

Global medical REIT inc. (GMRE) is a net-lease medical real estate investment trust (REIT) that acquires healthcare facilities and leases those facilities to physician groups and regional and national healthcare systems.

• While analyst consensus expects significant rent growth as leases reset to market, the scale of mark-to-market opportunity is likely underestimated, as the company is acquiring properties with in-place rents more than 30 percent below market and faces a historic flood of distressed asset sales, setting up for potential double-digit annual rent and revenue growth as leases reprice over the next several years.
  
• Analysts broadly agree that demand drivers like aging population and outpatient care trends will sustain high occupancy, but with supply of new medical office product severely limited and Global Medical REIT's demonstrated ability to secure long-term tenants, occupancy could remain not just stable but consistently above 95 percent, translating into lower vacancy costs and stronger net operating income than currently projected.
  
• The company's judicious reduction of its dividend and redeployment of approximately $17 million per year into accretive acquisitions and balance sheet optimization provides an unrecognized engine for long-term earnings growth and margin expansion, as internally generated capital is reallocated to high-yield opportunities without shareholder dilution.
  
• Growth in alternative funding channels, including joint ventures with institutional capital partners and engagements with longer-duration debt providers like insurance companies, is set to materially reduce cost of capital, expand acquisition capacity, and compound per-share FFO through both increased scale and improved interest expense management.
  
• The ongoing shift in healthcare delivery from inpatient to outpatient settings, plus the rising healthcare consumption of the growing over-65 population, positions Global Medical REIT as one of the few platforms ideally structured to capitalize on this decades-long demand surge, creating structural tailwinds for durable rental rate growth and outsized long-term asset appreciation that are not yet reflected in today's stock price.

Global Medical REIT Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Global Medical REIT compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Global Medical REIT's revenue will grow by 8.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.1% today to 6.1% in 3 years time.
• The bullish analysts expect earnings to reach $11.0 million (and earnings per share of $0.08) by about September 2028, up from $4.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 94.4x on those 2028 earnings, down from 110.2x today. This future PE is greater than the current PE for the US Health Care REITs industry at 34.4x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.39%, as per the Simply Wall St company report.

Global Medical REIT Future Earnings Per Share Growth

Risks

• The company faces significant refinancing risk, as a large portion of its credit facility, including a $350 million term loan, matures in 2026 and renewal is not guaranteed, potentially leading to higher interest expenses and negatively impacting net margins and future earnings.
  
• Downward pressure on occupancy and rental revenue may persist, as ongoing secular shifts toward telemedicine, outpatient care, and changing healthcare space utilization have already resulted in property vacancies and lease expirations, evident in their recent loss of tenants at Aurora and East Orange, which reduce overall revenue and profit growth.
  
• Global Medical REIT is exposed to tenant concentration and financial health risks, as seen in the financial distress and bankruptcy of tenants like Steward Health Care and Prospect Medical, which can lead to lease defaults and uneven cash flows, increasing earnings volatility and depressing net income.
  
• The company's relatively small size and geographic concentration can limit its access to capital at favorable rates, reduce efficiency compared to larger peers, and increase vulnerability to local market downturns or regulatory changes, ultimately suppressing revenue growth and shrinking operating margins.
  
• Dividend coverage has weakened, prompting a reduction in the company's dividend payout, which signals possible weakness in free cash flow after capital expenditures and commissions, and may constrain future cash available for reinvestment, thereby reducing funds available to drive long-term earnings growth.

Valuation

• The assumed bullish price target for Global Medical REIT is $11.52, which represents two standard deviations above the consensus price target of $8.97. This valuation is based on what can be assumed as the expectations of Global Medical REIT's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $11.75, and the most bearish reporting a price target of just $7.5.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $180.6 million, earnings will come to $11.0 million, and it would be trading on a PE ratio of 94.4x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of $7.36, the bullish analyst price target of $11.52 is 36.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.