GMRE - NYSE

Greetings, and welcome to the Global Medical REIT Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Swett, Investor Relations. Thank you. You may begin.

Thank you. Good morning, everyone, and welcome to Global Medical REIT’s third 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 that 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, future 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 filings with the SEC. Additional information may be found on the Investor Relations page on 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 third quarter 2022 earnings call. Our high quality portfolio of needs based healthcare facilities continues to produce excellent results in the third quarter with 97% occupancy and a stable cash flow. We achieved that 18.1% year-over-year increase in total revenue to $35.4 million, driven primarily by our acquisition activity over the past year, including a $6.8 million gain from the sale of a property. Our net income attributable to common shareholders for the third quarter of 2022 was $8.1 million or $0.12 per share compared to $3.7 million or $0.06 per share in the third quarter of 2021. FFO in the third quarter was $0.23 per share and unit in line with last year and our AFFO per share increased by $0.01 to $0.25 per share and unit compared to the third quarter of 2021. As we have discussed the acquisition environment for our target assets continues to evolve. The Federal Reserve focuses on fighting inflation has led to a material increase in interest rates this year, impacting the marginal cost of capital for buyers. Potential sellers, meanwhile, are adapting more gradually to the new reality, resulting in an acquisition market that has slowed significantly. This is very much in line with what we have seen in the past cycles when the bid-ask spread was widened. We are hopeful to see some soaring in early 2023, but it is difficult to predict. That said in the third quarter, we continue to find attractive acquisitions that meet our quality and yield targets closing 5 acquisitions for $51 million. Our average cap rate for the third quarter acquisitions was 7.1%. But this was impacted by one of our acquisitions, which was only 74% occupied, but has substantial upside. I would also know that the other 2 acquisitions that closed in September had a cap rate high in the 7s and low-8s. These transactions more fully represent negotiations that took place after significant interest rate increase had started. In August, we expanded our credit facility with $150 million term loan and extended the term of our revolver. We also entered into interest rate swaps that fixed the interest rate on our new term loan through its maturity bring our fixed rate debt ratio to approximately 80% of our total debt. Looking forward, we will be seemly selective in pursuing any incremental acquisitions, until cap rates better reflect the higher cost of capital. In the meantime, we are conducting a strategic review to identify properties that we can sell with a focus on properties where we have added value since acquisition by lease extension, leasing up vacancies or upgrading credit, assets that can be considered core properties. We expect to use any proceeds from the sales to reduce our outstanding debt, increasing our dry powder to be in the position to restart [ph] acquisitions, when market conditions improve. We will provide more color on the proceeds we expect to generate and the reduction in leverage we are targeting as we move ahead. But we believe this is a prudent course of action to take admits this highly volatile economic and capital markets environment. Overall, I am pleased with our third quarter results and want to thank the team for their hard work and contributions to our results. 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 is in flux, as higher interest rates are impacting pricing. We have been through cycles such as this before, and know that this transaction market typically takes time to fully reflect the changes. We will continue to source opportunities that make sense that remain disciplined and prudent as the market evolves. During the third quarter and by mid-September, we completed 5 acquisitions, containing just under 250,000 leasable square feet for an aggregate investment of $50.8 million, and a weighted average cap rate of 7.1%. Consistent with the prior quarter, our third quarter acquisitions include some vacancy, where we believe the lease-up potential will benefit us in the long-term. These acquisitions included a 110,800 square foot medical office portfolio in Toledo, Ohio, for a purchase price of $17.2 million with a cap rate of 6.9% at 84% occupancy, which is anchored by University of Toledo physicians and a 12,000 square foot Bon Secours Surgery Center. A 22,600 square foot medical office building in Lake Geneva, Wisconsin, where a purchase price of $6.1 million with a cap rate of 7.8% at 100% occupancy, which is 66% leased to Advocate Aurora Health. A 35,900 square foot medical office and retail center in Glenview, Illinois, for a purchase price of $8.7 million, with a cap rate of 5.8% at 74% occupancy, with a tendency focused on Dental, Optometry and Wellness. A 55,000 square foot medical office portfolio in Canandaigua, New York, for a purchase price of $13.8 million, with a cap rate of 7.6% at 100% occupancy, which is adjacent to the University of Rochester campus, and is anchored by the hospital’s Primary Care Group and by Western New York Medical. A 23,000 square foot medical office building in Hermitage, Pennsylvania, for a purchase price of $5.1 million, with a cap rate of 8.2% at 100% lease to Stewart Health for over 4 years. With nearly $150 million of acquisitions closed so far in 2022. We will remain disciplined as we look at incremental growth for the balance of 2022 and into 2023. While we continually assess potential acquisition opportunities, based on current market conditions, we don’t have any acquisitions under contract and currently don’t expect to close on any additional acquisitions for the remainder of 2022. With regards to dispositions, in the third quarter, we sold our medical office building in Germantown, Tennessee, receiving gross proceeds of $17.9 million, resulting in a gain on sale of $6.8 million. I’d like now 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 third quarter 2022, our portfolio consists of gross investments in real estate of $1.5 billion and included 4.9 million of total leasable square feet, 96.8% occupancy, 6.4 years of weighted average lease term, 4.7 times rent coverage, and 2.1% weighted average contractual rent escalations. In the third quarter, we achieved an 18.1% year-over-year increase in total revenue to $35.4 million, driven primarily by our acquisition activity over the past year. On a same-store basis, excluding cash basis leases, our third quarter revenues were up $344,000 or 1.4%, compared to the third quarter of 2021. Our total expenses for the third quarter of 2022 were $32.1 million, compared to $24.6 million in the prior year quarter. The increase was primarily due to higher operating and depreciation and amortization expenses due to our larger portfolio, the multitenant nature of the majority of our acquisitions of the past year, and higher interest expense. G&A expenses for the third quarter of 2022 were $4 million, compared to $3.9 million in the third quarter of 2021. Within our current quarter G&A expenses, note that our stock compensation costs in the quarter were just over $1 million and our cash G&A costs were $2.9 million. Looking ahead, we expect our Q4 G&A expenses to be between $4 million and $4.2 million. Our operating expenses for the third quarter were $6.7 million, compared to $4 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 third quarter 2022 expenses, $5 million related to net leases, where the company recognized the comparable amount of expense recovery revenue, and $1.4 million related to gross leases. Our interest expense in the third quarter was $7 million, compared to $4.8 million in the comparable quarter of last year, reflecting both higher debt balances and increased interest rates. Including a $6.8 million gain from the sale of property, net income attributable to common stockholders for the third quarter of 2022 was $8.1 million, or $0.12 per share, compared to $3.7 million or $0.06 per share in the third quarter of 2021. FFO in the third quarter was $16.2 million, or $0.23 per share and unit, compared to $15.8 million or $0.23 per share and unit in the third quarter of 2021. AFFO in the third quarter was $17.1 million, or $0.25 per share and unit, compared to $16.4 million or $0.24 per share and unit in the third quarter of 2021. Moving on to the balance sheet. As of September 30, 2022, our gross investment in real estate was approximately $1.5 billion, which is up $171 million from a year earlier. We did not issue any shares of common stock under our ATM in the quarter. Regarding our debt, in August, we amended our credit facility to add a new $150 million term loan component with maturity of February 1, 2028; extend the maturity date of the revolver component to August 2026 with two 6-month company-controlled extension options; and lastly, convert all LIBOR-based loans under the facility to SOFR-based loans. Immediately following the amendment, we entered into $150 million of forward starting interest rate swaps that commenced in October 2022 and mature in January 2028, that fix the SOFR component on the new term loan through its maturity at 2.54%. At our current leverage, and including the 10 basis point spread adjustments that’s associated with our conversion to SOFR-based loans, our interest rate on the new term loan is 4.15%. At September 30, 2022, we had approximately $703 million of gross debt. Our leverage ratio was 47.6%. And our weighted average interest rate was 3.9%. The current unutilized borrowing capacity under the credit facility was $244 million. Additionally, as of quarter end, the weighted average term of our debt was 4.2 years, up from 3.8 years at June 30. Relative to our leasing activities, with a modest increase in occupancy this quarter, our asset management team continues to make progress in our vacancies and upcoming lease expirations. As we look ahead to 2023 lease expirations, note that more than half of this ABR related to 2 single tenant facilities that are progressing well towards renewals. Additionally behind these two large expirations currently there are no individually material leases that we don’t expect to renew. Overall, despite challenging market conditions, we continue to believe we are well positioned to execute on our business strategy, and look forward to sharing our progress with you through the balance of this year and into 2023. This concludes our prepared remarks. Operator, please open the call for questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Austin Wurschmidt with KeyBanc. Please proceed with your question.

Hey, good morning, everyone. Jeff, I know you’re still going through the strategic review process for potential asset sales. But as we think about the range of proceeds, I mean, is your long-term debt target of 40% to 45% that the gross assets are reasonable range to assume you could reach within kind of these plan sales? And, I’m also curious, how you’re thinking about the cap rate range on future sales.

Okay. The cap rate ranges, there’s a big differential between what so many people want to buy in what they call the core assets and our secondary market and that. So we’re looking at possibly $50 million plus sale to, hopefully, be in the low-6s. These are the properties we may have been able to sell on the mid-5s, a little while ago. But our target still is to start moving towards that 40% to 45%. We went up above that target, at the time that we could have sold stock in the market, and then there was a change in the stock price, and we’re not selling stock at this time, we think the stock is way too low. So the target is still 40% to 45%, with sometimes the jump above just to do acquisitions. But it’s interesting, we have been able to take properties and buy shorter term leases, extend them to longer term leases, higher credits then come into these properties, and suddenly we’re at a whole different level, and they’re very attractive into the market. So we can’t guarantee, we’re going to sell, but we’re looking into the market of selling some properties to reduce. Then, right now, we have somewhat of a pause on buying, because if we buy now, we’re probably not going to get the best rates. We see realization coming into the market in our type of markets and our type of properties, which is secondary markets and suburbs of primary markets of places that make money. But we see that coming back, and there’s reasons people have mortgages coming up, they have – retirements, the same reason they always sell, is the same reason they’re talking to us. But we see the market coming back up. And in our valuation of those, we have to be accretive at the time and we have to be able to take that down. So there’s a possibility of selling something. And then later on buying with may be a 200 point basis gain. But in the meantime, to be conservative during this difficult time, it’d be nice to lower our debt ratio. And that would also even though our float is at the target that we went to at 20%, that would also lower the float at the time.

Yeah, that makes sense. And your reference kind of sales in the $50 million plus range moving roughly 75 basis points. I’m curious, is that fair across the broader portfolio? Or have you seen a disproportionate move on deals inside $50 million or due to other characteristics, whether it’d be lease term, et cetera?

I’ll let Alfonzo into that. He’s been in the market. Alfonzo?

Yes. So if I – that sounds to me more like a question of market. Is that like you’re just trying to get a sense of what we see in the market?

Yeah, just in terms of moves in cap rates, as Jeff alluded to, what was sort of a mid-5% cap rate deal is now trading in the low-6s. And I’m just curious, how – why – if that is a fair move across the board, or if deals inside $50 million plus have moved even wider than that? Thanks.

Sure. Yeah. So at this point, it’s pretty clear that the market has moved up at least 75 to 100 basis points across the board, regardless of quality location. And in some instances, it’s moved up higher than that.

Got it. That’s helpful. And then just one last one for me. I was curious if you could provide any update on sort of pipeline health systems. And what sort of the latest there and whether or not they remain current on their rent? Thank you.

Sure, Austin. So, in terms of pipeline, I think that a couple things to note, I mean, they’re going through the bankruptcy process, and they still have some time to decide if they’re going to accept or reject our lease or waiting for that decision. Although at this time, we don’t believe that there’s – that our lease will be rejected, it’s a below market rental rate for this type of property. And in terms of payment, while they’re going through the bankruptcy process, the timing on payment is more determined by the bankruptcy rules than anything else. So we’ll know more once they’ve decided to accept or reject our lease. But at this time, again, we don’t believe the lease is going to be rejected. And we expect once those mechanisms take place that everything would, again, continue to get paid as normal.

Great. Thanks for the time.

Thank you.

Our next question comes from the line of Rob Stevenson with Janney. Please proceed with your question.

Good morning, guys. How are you guys – obviously, paying down debt, is it – is a good thing and a good use of proceeds, et cetera. But how are you guys viewing the preferred at 7.5%, one could argue that that’s your most expensive debt and that a lot of times you’re not getting credit for that as equity. How are you viewing that piece in the capital stack? If you do have disposition proceeds to deploy?

So, Rob, I think, we certainly consider it in terms of potential, we now have the ability to repay it. But from a leverage perspective in the credit facility, it does count as capital. And so, when we think about our pricing grid and the impact on our pricing grid, we have to be cognizant of not moving in the pricing grid above that 50% level, if we take out the preferred. So, I think, we have to, again, be thoughtful around that in terms of how we would use proceeds from any sales. So it’s on the table, because optionality moves to us. But, I think, again, just balancing out the impact that it might have on our pricing grid in the credit facility.

Okay. And then…

Rob, it sort of – let me just add something, it was sort of funny, because about a year ago, we couldn’t wait till we could take down the preferred based upon our equity. We were planning on using equities to take down the preferred, lower our debt level, get to the preferred, make money on that, but the circumstances have changed. We’re probably – we always consider taking down the preferred at some time.

Okay. I mean, I guess, then that leads into another question. I mean, the stock is bounced off the $7 low, but still trades at incredibly high implied cap rate on the existing portfolio of assets. How narrow do you have to be between buying your own portfolio versus buying an external asset to make that math work? I mean, if you’re trading it, call it, a 10 or 12 implied cap rate, and you could buy stuff in the marketplace within 8. Is that good enough? Given the additional source of revenue and dropping down to the bottom line to make that work? Or do you really need to be in a much narrower band from your own sort of stock price and the implied value of your own assets to make external acquisitions work for you?

Yeah, that’s a very good question. And that’s something we will get all the time. We feel our stock is too low, right now, I guess others do also. But, we think, it got extremely low. For the dividend, we given the good balance sheet, we have to pay our dividend and continue to pay our dividend that we’re not worried about it. Then going back and growing again, we need to find assets that we feel our accretive. How much accretive? I’m not sure at this time. I mean, we used to be able to do 2, 3 points in accretive, and I think we’ll get back to that. But we need to buy assets that are accretive, and includes the interest rate that we have to pay on taking down this money and includes the cost of capital. So it’s going to – there may be a little bit of pause in this until the market sort of catches up with this and others. But on the other hand, we’ve seen some pretty desperate sellers, who have mortgages that they’re going out there, and they don’t want to – they have to pay their mortgages or refinance them, and other things. And, there may be some opportunities out there to be accretive. I think we need to have a pause and let the market go up a bit also.

Okay. And then last one for me. What’s the plan for that? I think you said it was 74% occupied asset that you acquired. And what’s the timing on that?

Yeah, I got to tell you. The greatest thing that has happened to our organization is we built up a very strong asset management department. So, therefore, not only have we been able to re-lease properties, because we bought some with shorter leases, then we turn around and make a much longer leases. But we then went into the business like in Fairfax, Virginia, we bought it basically 80% occupied, and then we went in, and very quickly where we able to lease up. Not a lot of REITs do this, because they don’t want vacancy to show up on their numbers, it’s sort of manufacturing their occupancy. We feel that we have strong occupancy, and we could buy some vacancy and increase it. So we’ve done that with several of our assets, where we’re now buying vacancy getting a really good deal on the property. And when we do it, we gain 1 point to 2 points on that. So that’s the same type of strategy we have on each one of our properties. If there’s vacancy in a property, we have to feel strongly like what happens is, sometimes the owner does not give renovation allowances or anything or they don’t pay broker fees, we found that in Fairfax, that they didn’t like to pay broker fees, we came in, we paid broker fees, we basically filled up the place. It just quirks in some of the ownership, because a lot of them are doctors or medical people who just don’t know how to run property properly. So we found a real niche in that to add value to a property. So, therefore, when you see sometimes you’ll see these occupancies down lower, but we could – we feel strongly before we go in that we could rent these up.

Okay. So this is just use the people – use your internal people to manage this asset better and lease it up rather than going into it knowing that you had a tenant in your back pocket or something like that? Or you were going to do redevelop it or something like that? It’s just a lease up story over the next few quarters?

And sometimes we have a tenant, right? We have a whole bunch of tenants that are national tenants that are looking for space, we contact them before we buy; sometimes we already have somebody interested.

All right.

Yeah. And I would add to like if you look at the completed acquisitions table, and [point of] [ph] Prosperity Plaza in Fairfax, Virginia, and if you compare that with the previous quarter report, I mean, we had that as like a 6 floor, and now it’s just added 3, just pointing to the lease up that’s happened at that property. And just a little bit more color on Glenview, when we bought that we knew that there was going to be roll in the near-term that was part of the opportunity; long-term, it’s a fantastic location. It’s near a retail hub, and then transportation center. And it’s got a really nice mix of tenants that are focused on dental, optometry, and wellness. And in our diligence, we spoke with local leasing experts that confirmed what we believe would be the case that this is a property that we could fill up in a fairly short time. So there was near-term role, and that’s reflected in the occupancy that you’re seeing.

Okay. Thanks, guys. I appreciate the time.

Our next question comes from the line of Bryan Maher with B. Riley Securities. Please proceed with your question.

Good morning. Most of my questions have already been asked, so just kind of some follow-up to those. On the pipeline held asset, if worse comes to worsen, there’s an issue there. It’s my understanding, that’s a pretty good asset. How quickly do you think you could replace the tenant if you had to?

Yeah, it’s a good question. I just give you some of the fundamentals. We got the cost pipeline was operated. We came in and bought this property at a tremendous discount. It’s 14 acres, 5 miles from Downtown Denver in a very active area, where it’s really the only hospital there. Now, it’s going for right now with the lease increases is that $10 a square foot. Typically a hospital at that level and others would be about $30 a square foot per bed. New hospitals are about $1 million buying a hospital could be $500,000 around that. This is $100,000 a bed. That’s very good economics. They were doing fine on this. They were taking fees from here and other things. So we expect that this is an asset, people have asked – systems have asked this questions about this asset in the past, so either they’re going to run it or they could sell it. But we still think this is a pretty good asset, based upon the rent roll and based upon that a lot of money has gone into it by the tenant to upgrade it, and set up the systems and really make it, their business is worth something there. So I don’t think they’re going to walk away from a 15-year below market lease – way below market lease.

Got it. And then maybe for Alfonzo, with interest rates and cap rates moving around quite a bit, what would it take, just in your history in this business, from a cap rate upward spike for you guys to say, hey, look, we’re going to reengage here, because we don’t want to turn down these cap rates? Or is it just simply spread game and cap rates could go up 300 basis points, and you don’t care, because your cost of capital has gone up that much and you’re just going to pass?

Well, so I mean, there’s two questions and two parts of that question, but they’re kind of intermingled. My sense of the market right now is that still in transition. I would say, I would characterize the market started changing slowly. But then in mid-September, it was clearly capitulation. There was a lot of acknowledgment that the pricing for medical office across the board has changed pretty dramatically. And so there’s been a lot of movement in the last couple of months in terms of cap rate, and I’m inclined to think that first the dust hasn’t settled yet. And, my overall sense of it is in 2023, I think, there’s going to be a good opportunity to buy medical office. But given our goals of growing this company and doing it in a way that is accretive, I mean, we’re always mindful of our cost of capital, and we always want to grow accretively. So, we can’t ignore that. So we have to be mindful of where capital markets are and where our stock is trading.

Okay. Thank you.

There are no further questions. I’d like to hand the call back to management for closing remarks.

Thank you, everybody, for joining this call. We feel like we had an excellent quarter going to $0.25 AFFO and thank you for following us. I appreciate it. Have a good day.