GMRE - NYSE

Good day, and welcome to Global Medical REIT First Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note, this event is being recorded. I'd now like to turn the conference over to Steve Swett with Investor Relations. Please go ahead, Sir. Mr. Swett, your line is now live.

Thank you. Good morning, everyone, and welcome to Global Medical REIT's first quarter 2022 earnings conference call. On the call today are Jeff Busch, Chief Executive Officer; Alfonzo Leon, Chief Investment Officer; and Bob Kiernan, Chief Financial Officer. Please note the use of forward-looking statements by the Company on this conference call. Statements made on this call may include statements which are not historical facts and are considered forward-looking. The Company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is making this statement for purpose of complying with those safe harbor provisions. Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond the Company's control, including without limitation, those contained in the Company's 10-K for the year ended December 31, 2021, and its other SEC filings. The Company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, forward events or otherwise. Additionally, on this call, the Company may refer to certain non-GAAP financial measures, such as funds from operations, adjusted funds from operations, EBITDAre and adjusted EBITDAre. You can find a tabular reconciliation of these non-GAAP financial measures to the most currently comparable GAAP numbers in the Company's earnings release and in filings with the SEC. Additional information may be found on the Investor Relations page of the Company's website at www.globalmedicalreit.com. I would now like to turn the call over to Jeff Busch, Chief Executive Officer of Global Medical REIT. Jeff?

Thank you, Steve. Good morning, and thank you for joining our first quarter 2022 earnings call. Coming off of a very strong year in 2021, during which we grew our portfolio by almost 18%, while also strengthening our balance sheet. We were well positioned entering 2022 and are having a strong start to the year. With respect to earnings in the quarter, we increased our total revenue by 16.5% compared to the first quarter of last year to $32 million, and our net income attributable to common shareholders was $2.7 million or $0.04 per share. Our FFO was $0.23 per share and unit on our AFFO was $0.24 per share and unit, both of which were unchanged compared to the prior year quarter, reflecting consistent performance despite operating at 43% average leverage in the first quarter versus 50% average level in the prior year's first quarter due to the impact of additional equity issuance that enhanced our liquidity and strengthen our balance sheet. As we've discussed recently, the acquisition environment for our target asset remains very competitive, but we continue to effectively source new opportunities. We closed $24 million of acquisitions in the first quarter and have closed another $30 million so far in the second quarter with an additional $53 million of deals under contract. Based on this activity and the types of opportunities that we are seeing, we feel very good about our full year pace for acquisitions. In addition, going forward, we expect cap rates on the target assets to rise as the effects of rising interest rates makes its way into the acquisition market. I am pleased with our first quarter results and want to thank the team for their hard work and contributions to our performance. With that, I'd like to turn the call over to Alfonzo to discuss our investment activity in more detail.

Thank you, Jeff. As Jeff mentioned, the market for medical facilities remains very competitive. But through our diligent sourcing efforts, we continue to successfully source and close high-quality properties. During the first quarter, we closed on four acquisitions containing 80,781 leasable square feet for an aggregate investment of $24 million at a weighted average cap rate of 7.2%. These acquisition included a 17,700 square foot MOB in Gainesville, Georgia for a purchase price of $5.1 million with a cap rate of 6.4%, a 26,700 square foot MOB in Grand Rapids, Michigan, for a purchase price of $6.8 million with a cap rate of 7.7%, a 12,800 square foot Arthritis Center in Sarasota, Florida for a purchase price of $6 million. with a cap rate of 7.1% and a 23,600 square foot Rehabilitation Center in Greenwood, Indiana for a purchase price of $6.1 million, with a cap rate of 7.5%. Additionally, as Jeff mentioned, so far in the second quarter, we have acquired two properties for an aggregate purchase price of almost $30 million, including a 4,200 square foot surgery center in Fairbank, Alaska for a purchase price of $22.3 million, with a cap rate of 6.4%, a 30,200 square-foot medical office building portfolio in Rocky Point, North Carolina for a purchase price of $7.6 million with a cap rate of 6.6%. We currently have another four properties under contract, for an aggregate purchase price of $52.6 million. These properties are currently in the due diligence period and subject to customary closing conditions. With over $100 million of acquisitions closed or under contract so far in 2022, we remain comfortable with our target to close between $180 million and $220 million of acquisitions, for the full year at an average cap rate of 7%. I'd now like to turn the call over to Bob, to discuss our financial results. Bob?

Thank you, Alfonzo. GMRE continues to benefit from strong relationships with our tenants and solid portfolio performance. At the end of the first quarter 2022, our portfolio included $4.4 million of total leasable square feet, 97% occupancy, 6.9 years of weighted average lease term, five times rent coverage with 2% weighted average contractual rent escalations. In the first quarter, we achieved 16.5% year-over-year increase in total revenues to $31.9 million, driven primarily by our acquisition activity over the past year. Our total expenses for the first quarter of 2022 were $27.6 million, compared to $24 million in the prior year quarter. The increase was primarily due to higher operating and depreciation and amortization expenses due to our larger portfolio, partially offset by lower G&A and interest expense. G&A expenses for the first quarter of 2022 were $4.2 million compared to $4.4 million in the prior year quarter and in line with our expectations. The decrease in G&A was primarily due to a reduction in non-cash stock compensation expense. Within our current quarter G&A expenses, note that our stock compensation costs in the quarter were $1.3 million, and our cash G&A costs were $2.9 million. Looking ahead, we continue to expect our G&A expenses to be between $4.2 million and $4.4 million on a quarterly basis during the remainder of 2022, even as we continue to increase the size of our portfolio. Of these estimated total G&A costs, note that we're forecasting the stock compensation component to average between $1.2 million and $1.3 million per quarter. Our operating expenses for the first quarter were $5.4 million compared to $3.7 million in the prior year quarter, with the increase in these expenses being driven by the growth in our portfolio and to a lesser degree, the impact of gross leases. Regarding these first quarter 2022 expenses, $4 million relates to net leases where the company recognized a comparable amount of expense recovery revenue, the $800,000 relates to gross leases. The majority of the remainder of these expenses relates to vacancies and properties that we account for on a cash basis. Net income attributable to common stockholders for the first quarter of 2022 was $2.6 million or $0.04 per share, compared to $1.8 million or $0.03 per share in the first quarter of 2021. FFO in the first quarter was up 26% to $15 million, and our AFFO was up 24% to $16.8 million compared to the first quarter of 2021. Reflecting the impact of our equity issuances, our FFO was $0.23 per share in the first quarter, unchanged from the first quarter of 2021 and AFFO was $0.24 per share in unit, which is also unchanged from the prior year first quarter. As Jeff mentioned, the growing portfolio delivered consistent performance, despite our reduction of average leverage by 7 percentage points from the prior year quarter. Moving on to the balance sheet. As of March 31, 2022, gross investment in real estate was approximately $1.4 billion, which is up nearly $200 million from a year earlier. Relative to equity, in the first quarter we generated gross proceeds of $8.3 million through ATM issuances of 480,000 shares of our common stock at an average price of $17.38 per share. At March 31, 2022, we had approximately $594 million of gross debt and our leverage ratio was 43.7%, up slightly from year-end 2021. Our weighted average interest rate during the quarter was 2.87% and our current unutilized borrowing capacity under the revolver is $171 million. Overall, we continue to believe we're well positioned to execute on our acquisition and overall business strategy and look forward to sharing our progress with you throughout the year. This concludes our prepared remarks. Operator, please open the call for questions.

[Operator Instructions] Our first question comes from Bryan Maher, B. Riley FBR. Please go ahead.

Good morning.

Good morning.

A couple of questions. You noted in your press release and then this morning again about the more competitive market out there for assets and the higher uncertainty and higher interest rates and global issues. Are you seeing less opportunity, or are the opportunities that are being shown to you, coming at terms that maybe you don't mind as acceptable as performed?

Give you -- I'll just give you a little bit. We're probably in a transition period where cap rates are going up right now. So, we're being careful on how we buy. Historically, and like in the past, we did very, very well historically with higher cost of capital relative to others because of our spread, as you can see in our $1.4 billion with an average cap rate of 7.8% that we have. So, we're seeing it starting to loosen up. It's been a tough market. We did very well. We have a high performance right now and we're looking to do our year’s total. But given that we did well in the past, we're starting to look and see, maybe we should wait and see a little bit on some more deals and let it go get the cap rates going. So, we have a good pipeline, our pipeline is quite strong. We expect to do what we traditionally do at least this year. So that's not an issue. But the cap rates are starting to go higher and there are deals out there, but we're waiting somewhat on some of these deals for the cap rates to keep going up.

So, you've done really well over the past couple of years, utilizing your ATM to raise capital, to fund acquisitions with where the share prices have trended down to, should we expect a little less of that, or is it really going to be on an acquisition-by-acquisition basis, determining if you should hit the ATM market to complete something, or should the market be prepared for you to kind of slow down acquisitions in general if the share price ends out around 14, 15?

No, we could still acquire. It's all about spread for us. We have a good spread that happened. So you could see some of our bigger deals that we took an opportunity to buy some bigger chunks of deals with an average of 7. But with the cap rates going up and the ATM between where it is with the stock price and even debt going up, we could continue to buy given that we keep buying better cap rates. It's all about spread. It's not where -- what the capital is. It's all about what spread. And in our niche in the world that I tell everybody, it's not so competitive because not everybody wants to do the work of running through these small communities and go through those deep due diligence even for a $5 million deal. We're willing to do that work. So therefore, we could get the extra spread like we did a couple of years ago. And historically, we used to not have as -- we used to be doing this at $12 a share and $10 a share, so -- and with higher interest rates. So we could still make a spread, so we could be accretive going forward and keep growing.

And just lastly, last quarter, I think you talked about looking more at some multi-tenant properties that might have lower occupancy that you would hope to lease up to capture that higher cap rate. Is that still the case as we think about the rest of 2022? And that's all for me.

I'll let Alfonzo to deal with this one.

Sure. Yeah. No, we're absolutely looking at multi-tenant as well. I mean there's good opportunities across the country and ones where there's very good potential to lease up the properties. So yes, definitely looking at multi-tenant.

Thank you.

Our next question comes from Austin Wurschmidt of KeyBanc Capital Markets. Please go ahead.

Yeah. Good morning and thank you. So Jeff, I'm just curious, if you've seen any less competition on the deals you're underwriting, fewer bidders involved in the transactions. And as you have these discussions with sellers around some movement potentially in cap rates, has there been any pushback at this point on seller expectations, or could we see sort of the transaction market slow until that spread narrows?

I'll give you -- and I'll let Alfonzo explain. It usually takes one to two quarters for the adjust. You're sort of getting your mind, sellers get in their mind or number, and then they got to see the reality later. So they'll float out a number. By our volume, and we've had a very good volume for the beginning of this year, very good volume. I can tell that there's less people bidding in our categories as we picked up in our contracts and in our sales deals in the $20 million range. That's how I tell. When we can only get 7s and 8s and 10s, which is really we own that territory, and we can't get any 15s, 20s and plus, you could tell that there's too many bidders out there. My sign right now is we're picking up some pretty larger assets and very good quality large of assets, too, that normally would have gone out to our competitors. I'll let Alfonzo explain with our -- with the sellers out there, because usually, they're pretty resistant to drop their prices, but they do over time. Go ahead, Alfonzo.

Yes, sure. And so, to add to that, I mean, the market is not uniform across the entire spectrum. I mean, you've got different types of buyers, different types of assets. So for example, larger portfolios, I'm not expecting that there's going to be a meaningful price difference or change in cap rates anytime soon. And actually, it's interesting to point out that large portfolios have traded sort of in this low 5 cap and maybe high 4 cap range for a while now. And that's really not moved in tandem with where cap rates have traded for, for example, the single tenant net lease buildings. That has moved more and locks up with interest rates for debt. And so, look, I think the net lease market, there will be more movement in cap rate in that segment of the market versus portfolios. Also, depending on the sellers, investors who own medical office are going to be more pragmatic about buying and selling versus physicians who own their real estate, who are more emotionally attached to their building. So it's not going to be uniform, but the increase in interest rate cost is definitely beginning to change the cap rates across the market, but it's going to take a quarter or two, and it's going to depend on the type of seller, the type of assets.

No, that's really helpful color. And do you feel like the deals you're closing or have under contract, that those aren't at risk with you stepping in at the sort of average seven yields you're targeting, that 6 to 12 months down the road, those could be in the low to mid-7% range.

So, I mean, fundamentally, what we're trying to do is build the portfolio, build our FFO and not necessarily trying to time the market. So we're trying to build a portfolio of quality assets with quality tenants. I mean that -- we're not -- in a sense, we're trying to dollar cost average our investments and not be worried about fluctuations in interest rates.

Okay. That's fair. And then just last one for me. We saw the asset that's held for sale in Ohio, again, sort of pushed back the earliest timing on when that's closing. Can you just provide some additional detail around what's pushing that back? And are you still comfortable with the price that you expect that to trade at, given some of your earlier comments?

Yes. Hi. This -- from a sale timing perspective, the timing is really dependent on just timing matters related to the buyer's financing. We don't have any concerns with that time or how it's moved. It's not an issue for us either way. We -- at this point, I think where our expectation is, just for a third quarter sale. And again, don't have any concerns either way relative to that. It's a math we're comfortable owning and have earned a nice return on it. But from a sale perspective, that's where we are and that's our expectation.

I appreciate the update and thanks for the time.

Our next question comes from Connor Siversky of Berenberg. Please, go ahead.

Good morning, out there. Thanks for having me on the call.

Good morning.

Working back to Jeff's comments earlier, and maybe this is a question for Alfonzo, but in terms of your target assets, whether it's MOBs, IRFs or surgical hospitals, where are you seeing the most severe shift in cap rates at the moment?

Between those three asset types, that's making me think here. I would say, the IRFs trade infrequently, and that might actually be an asset class that might not change as much. It used to be that IRFs traded in the 7 cap range and dipped into the 6 cap rate range. But I think given the investor demand and the types of investors we now like to buy IRFs, I think that might not change very much. Given that it's -- you're talking about sort of mid-6 cap range and high 6 cap range. Surgical hospitals are also -- it's going to really depend on what type of like who the operator is, who the surgeons are, location for the better surgical hospitals, I also don't think there's going to be a meaningful change in cap rates, and those have gotten pretty competitive. And surgical hospitals are different than surgery centers, of course. And those have started trading in the sub-6 cap range, but have stayed sort of in the high 5 cap range, and maybe that creates up to 6, Hard to tell. But MOBs, as I was alluding to before, it depends on many factors, but I do think like the net lease MOBs are going to move up quicker than the rest of the MOBs space.

Okay. Understood. So if I'm reading this correctly, then the net lease MOBs, maybe the risk premium for investors still shifts accordingly. I'm trying to get the sense here that maybe because of the stability of these assets, the risk premium would be slower to move, right, if it -- you’re looking a layer of safety.

It’s also -- I want to comment on this. It's also a competition level. We sort of arbitrage the market. It's not a risk thing, because you see our coverage rates are often -- if we buy a $5 million or $7 million property, the coverage ratios of their earnings over their rent tends to be much higher than maybe a $20 million property. So it's not really the risk factor. It's the ability to move money, which many of the funds drive up the price. It's not necessarily that there's a risk, and therefore, the price is lower, it's that capital needs to move in large amounts, and we tend to do it in volume of closing 18 to 20 deals a year. Therefore, we hit our $200 plus million. So a lot of these assets that we get, the competition will be private equity that's seeing the cost and looking at some of the smaller deals, and they're not going to be there. So we'll have less competition, and that's where I expect the rates will move up given that the others when they did, they're going to look at their debt. A lot of them were putting 80% debt on these deals. Now they're going to be not getting that type of thing from the bank and plus paying a lot more money. So that's definitely going to move up our traditional what we do. us stepping into some of the larger deals, I think it's going to take a little longer to move up. But our bread and butter that we did a few years ago where we were getting 8, then there was a lot of groups that entered the market because the real cheap and easy money when the cheap and easy money starts disappearing, we end up by ourselves a little bit, and that's where we have an advantage going forward.

Got it. That’s helpful color. Thanks everyone.

Our next question comes from Rob Stevenson of Janney. Please go ahead.

Hi Rob.

Hi, good morning guys. Most of my questions have been answered. But Bob, you guys still have a lot of capacity on the line, I think it was something like $170 million or so when -- at 3/31. Is there going to be any need to access any type of debt other than the line in the near-term given the disruption in that market? How are you thinking about financing over the next quarter or so, especially, if things keep being choppy here on the debt side?

Yes. We are looking at different alternatives on the debt. We feel like we've got great capacity on the revolver and having a year ago now that we had just redone the revolver and the term loan facility. And so we've got 171 of capacity today. So that gives us a lot of flexibility. And then as we look ahead, I think we look to diversify -- we look at opportunities to diversify. But as you pointed out, it is -- with a choppy market, we want to be careful and thoughtful about how we do that. But it is -- we've got good flexibility for today, and I think we again look at our options and assess different approaches as we go ahead to just maintain that -- continue to have flexibility.

Okay. And then Bob or Jeff, I mean, how are you guys thinking about the -- you have almost $80 million of preferred that's redeemable in September. I mean, obviously, if the 10-year goes to 7% or something crazy that dramatically changes things. But assuming that things stay relatively similar to where they are now in terms of your equity and debt cost, is there any reason why you would keep a 7.5% preferred outstanding?

Bob?

Yes, I'll start. And yes -- I mean, the preferred is really great capital in the sense of it being permanent capital, and you don't have to -- you don't have to do anything with it. But having you come to the redemption period or having that have coming up on that in September, it gives us some opportunities. And I think in a scenario where our cost of capital can be lower, there's no reason for us not to pursue an approach that over the -- for the balance sheet as a whole, reduces our overall cost of capital. At 7.5%, we're certainly with respect to common equity and debt today would see an advantage of those opportunities away from the preferred. But yes, it's something that we're looking at and evaluating and considering our options on as these we get closer.

Okay. Thanks guys. Appreciate the time.

Thank you.

[Operator Instructions] Our next question comes from Juan Sanabria of BMO Capital Markets. Please go ahead.

Hi, this is Valeria on for Juan. Just a quick question. Can you remind us of your leverage target going back to the debt topic?

Sure. So, we've talked about keeping our leverage at 45% debt to assets and below. But I think we have -- we're flexible in terms of that. It could go -- it could shift above that, it could be below the 45%. But that's our general target in that range.

Got you. Thank you. And shifting over to rent coverage, so long-term acute care hospitals, rent coverage went down significantly since last quarter. What drove that? And what's the estimated EBITDAre coverage?

Yeah. So keep in mind that this is -- from an overall perspective, this is not a huge -- 2.3% of our total rent is relative to the overall. But there's a couple properties that underlie that data point, and it's a matter of just again, the timing of getting those financials in the financial, just the flow of those amounts. So there really wasn't anything in particular. I mean, we're very comfortable with a 2.4 times rent coverage for the LTACH. There is a seasonal element to the financials as well. That could drive that up or down. But at 2.4 times coverage, while it is down comparatively, it's still a healthy rent coverage.

Right.

It was a little bit of LTACH, we're still a little bit hit by COVID, and that caused that. I mean less beds were filled during that period of time. We expect the business to do quite well going forward, because it's a needed type of medical facility, and it performs very well. But like other medical facilities, you had some up and down periods during the COVID time. But they showed strength. All of them paid their rent when we had that total downturn on coal that had closed down. So we're quite comfortable with those assets.

Okay. So kind of back to your earlier comments that it's maybe a little bit more property operator specific rather than a larger shift in the fundamentals. Am I reading that right?

Yeah. I mean if you want to look at it, the acute hospitals are having more of labor shortages, not being able to take as much business, adjusting to that COVID a bit as people can't come in if they test, that type of stuff. So they had to adjust their business. Business is going to get back to normal, and there is a bit of need for this, an aging population, there is a need under the rehabs and all that type of business that we're in. We're really not much on the LTAC business. It's just not something that we're interested in, even though historically, we bought a couple of good ones that are paying. And our acute hospitals are doing fine. And they're a very small piece of our business. We really focus mostly on the MOBs going forward, and we've been buying those consistently with multiple tenants added to our diversification.

Okay. Thank you so much. That makes sense. That’s all for me.

This concludes our question-and-answer session. At this time, I would now like to turn the conference back over to management for any closing remarks.

Well, thank you, everybody, so much, and appreciate your time. Have a good week.