Global Medical REIT Inc. (NYSE:GMRE) Q2 2023 Earnings Call Transcript August 3, 2023
Operator: Greetings, and welcome to the Global Medical REIT Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Swett with Investor Relations. Thank you, sir. You may begin.
Stephen Swett: Thank you. Good morning, everyone, and welcome to Global Medical REIT’s Second Quarter 2023 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 the 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, 2022, and its other SEC filings. The company assumes no obligation to update publicly any forward-looking statement, 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 current comparable GAAP numbers in the company’s earnings release and 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?
Jeffery Busch: Thank you, Steve. Good morning, and thank you for joining our second quarter 2023 earnings call. Our portfolio continues to produce excellent results with portfolio occupancy at the end of the quarter of 97%, unchanged from the first quarter and a weighted average lease term of 5.8 years. During the quarter, we sold a 4-property MOB portfolio in Oklahoma City, Oklahoma for gross proceeds of $66 million at a 6.5% cap rate, resulting in a gain of $12.8 million. Importantly, we used the net proceeds from this sale to pay down our variable rate debt, resulting in leverage ratio at the end of the quarter of 44.5% and reducing our ratio of variable rate debt to 12% of our total indebtedness. Including the $12.8 million gain from the sale of Oklahoma City properties for net income attributable to common shareholders for the second quarter of 2023 was $11.8 million or $0.18 per share compared to $2.2 million or $0.03 per share in the second quarter of 2022.
FFO in the second quarter was $0.21 per share and unit, down $0.03 from the prior year quarter, and our AFFO was $0.23 per share and unit down $0.02 from the second quarter of last year. The primary reason for the decline in both the FFO and AFFO was an increase in interest cost due to the elevated interest rate environment. For acquisitions in the quarter, we acquired 2 medical office buildings in Redding, California for $6.7 million with a 7.6% cap rate. This was primarily funded by our issuance of OP units that were priced at $11 per unit, which helps improve our liquidity and provides tax planning flexibility to sellers. Overall, we continue to spend time identifying properties that meet our investment criteria and our underwriting standards as we start to see more attractive pricing in the market and we will remain disciplined in our approach.
Regarding dispositions, we are very pleased with our progress in selling properties to reduce our variable rate debt and leverage. Inclusive of our Oklahoma City sale through June 30, we have generated proceeds of $70.4 million from dispositions. And earlier this week, we closed on the sale of a medical office building in North Charleston at 5.3% cap rate that generated an additional $10.1 million of gross proceeds. These dispositions have enabled us to achieve our goal of reducing our leverage to our target range of between 40% and 45% as of June 30. Overall, I am pleased with our second quarter results and want to thank the entire team for their hard work and contributions to the results. With that, I turn the call over to Alfonzo, discuss our investment activity and our current acquisition market conditions in more detail.
Alfonzo Leon: Thank you, Jeff. The transaction market for our target medical facilities, which align with our investment criteria remains constrained due to the impact of higher interest rates and a wide bid-ask spread. Despite a considerable number of opportunities we are reviewing, we are remaining prudent and adhering to our underwriting standards. During the second quarter, we completed 1 acquisition consisting of 2 fully occupied single-tenant medical office buildings in Redding California for a purchase price of $6.7 million, with a cap rate of 7.6% with 12.8 years of term, which was primarily financed by our issuance of OP units at a price per unit of $11 per share. We persist in actively engaging with diverse physician groups and corporate sellers anticipating potential opportunities to emerge especially as certain owners may face the need to sell if they encounter difficulties in refinancing their mortgages.
Furthermore, we are continuously exploring avenues to expand our potential deal volume while achieving strong spreads, including options like development financing and joint venture opportunities. As Jeff mentioned, in the second quarter, we sold a portfolio of 4 medical office buildings located in Oklahoma City, Oklahoma, at a cap rate of 6.5%, receiving gross proceeds of $66 million, resulting in a gain of $12.8 million. With the recently completed sale of our North Charleston facility at a 5.3% cap rate that generated gross proceeds of $10.1 million. We have made a great progress against our target goal of approximately $90 million of dispositions at a cap rate between 6% and 6.5% and have been pleased with the considerable level of interest from investors that we have seen.
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Due to the uncertainty surrounding equity markets and their impact on current equity values and our cost of capital, we find it challenging to forecast when our acquisition activity will resume. With that said, we are actively engaged in the market and ready to resume our acquisition efforts once our cost of capital improves. We are prepared to take advantage of opportunities as they arise and are committed to maintaining our active presence in the market. During this period, the stability of our diversified portfolio consisting of high-quality medical office properties, along with our ample liquidity allow us to be patient. Past cycles have shown us that the transaction markets require time to adjust and we are beginning to see signs that it is adjusting.
Looking ahead, we will continue to seek opportunities to align with our strategic vision and capital structure. Additionally, we may leverage our competitive advantages, such as our scale, access to capital and the potential use of OP unit deal structures whenever feasible and advantageous. With this approach, we remain confident in our ability to navigate through the current market challenges and capitalize on opportunities as they arise and can add value to our business. I’d like now to turn the call over to Bob to discuss our financial results. Bob?
Robert Kiernan: Thank you, Alfonzo. GMRE’s portfolio continues to demonstrate its resilience by consistently generating solid results. At the end of the second quarter, our portfolio consists of gross investments in real estate of $1.4 billion and included 4.8 million of total leasable square feet, 97% occupancy, 5.8 years of weighted average lease term, 4.3x rent coverage with 2.1% weighted average contractual rent escalations. In the quarter, we achieved a 7.9% year-over-year increase in total revenues to $36.4 million driven primarily by the timing of our 2022 acquisitions in our portfolio operations. On a same-store basis, excluding cash basis leases, our second quarter revenues were up $590,000 or 2.2% compared to the second quarter of 2022.
Our total expenses for the second quarter were $35 million, compared to $29.9 million in the prior year quarter. The increase was primarily due to higher interest costs due to increases in both market interest rates and average debt balances along with higher operating depreciation and amortization expenses due primarily to the changes in our portfolio since the comparable prior year period. Our interest expense in the second quarter was $8.5 million compared to $5.4 million in the comparable quarter of last year, reflecting higher average debt balances in 2023 as well as an increase in average borrowing rate from 2.97% in the second quarter of 2022 to 4.39% during the second quarter of 2023. G&A expenses for the second quarter of 2023 were $4.5 million compared to $4.3 million in the second quarter of 2022.
Within our current G&A expenses, note that our stock compensation costs were $1.1 million in the quarter and our cash G&A costs were $3.3 million. As mentioned last quarter, we continue to expect our G&A expenses for the second half of 2023 to range between $4.3 million and $4.5 million on a quarterly basis. Our operating expenses for the second quarter were $7.2 million compared to $6 million in the prior year quarter, with the increase in these expenses primarily driven by the changes in our portfolio since the comparable prior year period. Note that real estate-related taxes represent the single largest component of our operating expenses. Regarding the second quarter expenses, $5 million related to net leases where the company recognized a comparable amount of expense recovery revenue and $1.6 million related to gross leases.
Net income attributable to common stockholders for the second quarter was $11.8 million or $0.18 per share compared to $2.2 million or $0.03 per share in the second quarter of 2022. Net income for the second quarter included the gain on the sale of the Oklahoma City properties of $12.8 million. FFO in the second quarter was $14.7 million or $0.21 per share and unit compared to $16.4 million or $0.24 per share and unit in the second quarter of 2022. AFFO in the second quarter was $15.9 million or $0.23 per share and unit compared to $17.6 million or $0.25 per share and unit in the second quarter of 2022. Moving on to the balance sheet. As of June 30, 2023, our gross investment in real estate was $1.4 billion which is down $13 million from a year earlier, reflecting our disposition activity.
As of June 30, we had $634 million of gross debt, our leverage ratio was 44.5% and our weighted average interest rate was 4.09%. As of quarter end, the weighted after remaining term of our debt was 3.4 years. As a result of our recent disposition activity, approximately 88% of our debt is now fixed rate debt and the current unutilized borrowing capacity under the credit facility is $321 million. With our reduced leverage ratio, we will be able to lower the SOFR margins in our credit facility by 15 basis points starting later this month with the SOFR margin on our revolver decreasing to 1.35% and our term loan margins decreasing to 1.3%. We did not issue any shares of common stock under our ATM during the quarter or to date. With respect to our investment portfolio, in our 2023 lease expirations, we are pleased with the progress on renewals and based on activity to date currently are projecting to retain between 85% and 90% of the 363,000 square feet that we’ve noted as expiring this year.
For the remainder of 2023, we expect our occupancy will continue to stay above 96%. Regarding capital expenditures on the portfolio, June 30 our cash spend was approximately $2.3 million. Currently, we’re projecting additional expenditures of approximately $4 million related to building and site improvements and $3 million relating to tenant improvements, primarily associated with lease renewals and lease up to be completed during the remainder of 2023. Overall, we are pleased to have completed the disposition of the Oklahoma City assets and use those net proceeds to pay down variable debt, reduce our leverage and lower our interest rate margins. We are confident in our portfolio and have ample liquidity to help us manage these uncertain market conditions.
We believe that we are well positioned to execute our growth strategy over time as conditions normalize and look forward to sharing our progress to you through the remainder of the year. This concludes our prepared remarks. Operator, please open the call for questions.
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Q&A Session
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Operator: [Operator Instructions]. Our first question comes from the line of Austin Wurschmidt with KeyBanc.
Austin Wurschmidt: Jeff, you discussed $90 million of potential sales this year and you guys have made considerable progress towards that goal. I mean, is that still the right amount or to the extent that you could sell additional assets in the sub-6% range to redeploy into higher-yielding acquisitions. Would you consider kind of exceeding that $90 million threshold?
Jeffery Busch: This is Jeff. Yes, we would consider it. We do have groups out there interested in our assets. We would consider selling more if the right opportunity came up. We like to reduce our debt. My preference would be for the stock to go up and we use ATM and by assets and reduce our debt that way by more equity than debt in the assets than we did before. But given nobody knows really where the market is going, we would consider that.
Austin Wurschmidt: So with leverage now kind of just inside the higher end of your targeted range, I guess, what are the criteria that you are looking to move forward with new acquisitions at this point to the extent the stock doesn’t I guess, behave so that you’re able to fund with the ATM or what’s sort of the plan, I guess, if that doesn’t materialize and how you’re thinking about funding to keep leverage within that target range?
Jeffery Busch: Yes. I mean it’s a hard decision right now. We feel right now that cap rates are going up. So we want to be patient. There is a lot of money in the market, a lot of new buyers in the market, and they’re willing to pay pretty aggressive prices even still. But we do think for ourselves, the cap rates will go up. So if the cap rates sort of start to match what the cost of capital is, which historically does in real estate, we’ll be back in the market. And when we’re back in the market, I’d rather use more like 60% equity or more in the purchases — in my calculation for the purchases. But for a little while, equity and debt may be almost the same, I’d rather use all equity to keep bringing down debt.
Austin Wurschmidt: That makes sense. And then just last one for me. I guess how big is the acquisition pipeline today or deals that you’re actively underwriting that kind of meet your current underwriting criteria?
Jeffery Busch: It’s — there’s deals out there. I’ll let Alfonzo also, there’s deals out there. But right now, we’re noticing the cap rates are going up. So we — he’s monitoring. I’ll let Alfonzo comment on that.
Alfonzo Leon: Yes. So we’ve — cap rates have continued to drift higher throughout the year, and there’s been another slight increase over the last couple of months, this steps our perspective. And I think cap rates were probably going to continue drifting slightly higher. So if anything, it’s better to wait until there’s better pricing. And so we’re looking a lot of deals. We’re very active in the market, but we’re not pushing forward with anything until we feel that we can buy things accretively.
Operator: Our next question comes from the line of Juan Sanabria, BMO Capital Markets.
Juan Sanabria: Just following up on Austin’s question. Just curious on where cap rates are, I guess, today for the asset types you’re focused on? And where do you need the cap rates to get to on your map to kind of reignite the external acquisition engine?
