Global Medical REIT Inc. (NYSE:GMRE) Q3 2023 Earnings Call Transcript

Global Medical REIT Inc. (NYSE:GMRE) Q3 2023 Earnings Call Transcript November 7, 2023

Operator: Greetings, and welcome to the Global Medical REIT Third 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, Investor Relations. Thank you, sir. You may begin.

Stephen Swett: Thank you. Good morning, everyone, and welcome to Global Medical REIT’s Third 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 the statement for purpose of complying with those safe harbor provisions.

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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 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 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?

Jeffery Busch: Thank you, Steve. Good morning, and thank you for joining our third quarter 2023 earnings call. Our high-quality portfolio continues to produce strong and consistent results with portfolio occupancy at the end of the quarter of 96.7% and a weighted average lease term of 5.7 years. During the quarter, we sold a medical office building located in North Charleston, South Carolina at a 5.3% cap rate, receiving gross proceeds of $10.1 million and resulting in a gain of $2.3 million. Year-to-date, we have generated more than $80 million of gross proceeds from 3 dispositions using the net proceeds to pay down our variable rate debt resulting in a leverage ratio at the quarter end of 44.2% and reducing our ratio of variable rate debt to just under 11% and of our total indebtedness, including the $2.3 million gain from the sale of the North Charleston property, our net income attributable to common shareholders for the third quarter of 2023 was $3.1 million or $0.05 per share compared to $8.1 million which included $6.8 million gain from the sale of a property or $0.12 per share in the third quarter of 2022.

FFO in the third quarter was $0.22 per share and unit, down $0.01 from the third quarter of last year. And AFFO was $0.23 per share and unit down $0.02 from the third quarter of last year. The primary reason for the decline in both FFO and AFFO was an increase in interest cost in the current quarter due to the elevated interest rate environment. During the quarter, although we had no acquisition, we continue to dedicate time and resources to identifying properties that align with our investment criteria and prudent underwriting standards. As we start to see more attractive pricing in the market, we will remain disciplined in our approach, focusing on high-quality assets that would be accretive to our earnings. Overall, I am pleased with our third quarter results and want to thank the entire team for their hard work and contributions to our results.

With that, I turn the call over to Alfonzo to discuss our disposition activity and our current acquisition market conditions in more detail.

Alfonzo Leon: Thank you, Jeff. The transaction market for our target assets continues to be restricted with a number of higher interest rates and a wide bid-ask spread. We continue to see a number of opportunities, but we are disciplined about our investment process. Although we did not complete any acquisitions in this quarter, we continue to actively engage with a wide range of physician groups, brokers and corporate sellers. We are ready to seize potential opportunities particularly as some owners may consider selling if they face challenges when refinancing their mortgages. The market continues to evolve, and we are tracking it closely. As Jeff mentioned, in the third quarter, we sold a medical office building located in North Charleston, South Carolina at a cap rate of 5.3%, receiving gross proceeds of $10.1 million.

With this sale, we have now completed 3 dispositions for a total of 6 properties that have generated $80.5 million in aggregate gross proceeds at a weighted average cap rate of 6.3%, resulting in an aggregate gain of $15.6 million. We were very pleased with the level of investor interest that we experienced in executing these dispositions. Given the continued uncertainty with the equity markets, and their influence on current equity valuations and our cost of capital, we are faced with challenges in predicting when our acquisition activity will resume. Nevertheless, we are actively involved in the market and are prepared to ramp up our acquisition efforts once markets normalize and cap rates generally provide an attractive spread relative to our cost of capital.

During this time, we have the benefit of staying patient due to the stability of our diversified portfolio of high-quality medical office properties, along with our ample liquidity. As always, we will continue to seek opportunities that align with our investment strategy and capital structure and will leverage our competitive advantages, such as scale, access to capital and the potential use of OP unit deal structures when applicable. With this approach, we remain confident in our capacity to navigate current market challenges and to capitalize on opportunities as they arise. The investment landscape has improved significantly in 2023 shifting from a seller’s market to a buyer’s market, and we expect leverage to continue improving for buyers with access to capital.

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 produce consistent and solid results, demonstrating its resilient foundation. At the end of the third quarter, our portfolio consisted of gross investments in real estate of $1.4 billion and included $4.7 million of total leasable square feet, 96.7% occupancy 5.7 years of weighted average lease term, 4.2x rent coverage with 2.1% weighted average contractual rent escalations. In the third quarter, our total revenues increased slightly compared to last year to $35.5 million, driven primarily by the timing of our 2022 acquisitions and the performance of our portfolio, partially offset by the impact of property dispositions. On a same-store basis, excluding cash-based leases, our third quarter revenues were up $900,000 or 3.4% compared to the third quarter of 2022, driven by our rent estimators as well as new leases.

Our total expenses for the third quarter were $33 million compared to $32.1 million in the prior year quarter. This increase was primarily due to increased operating expenses and G&A expenses. Our interest expense in the third quarter was $7.2 million compared to $7 million in the comparable quarter of last year as the deleveraging we have accomplished so far in 2023 and it’s incorporated into our results despite the continued high interest rate environment. In particular, note that beginning in early August, our credit facility pricing improved by 15 basis points as a result of our reduced leverage. In addition, in early August, certain of our forward starting interest rate swaps became effective, replacing maturity swaps, which reduced the interest cost on our $350 million term loan by 30 basis points compared to prior periods.

G&A expenses in the third quarter of 2023 were $4.4 million compared to $4 million in the third quarter of 2022. Within our current quarter G&A expenses, note that our stock compensation costs of $1.2 million in the quarter and our cash G&A costs were $3.2 million. Currently, we continue to expect our G&A expenses to be in the range of $4.3 million and $4.5 million on a quarterly basis. Our operating expenses for the third quarter were $7.2 million compared to $6.7 million in the prior year quarter, with the increase in these expenses driven by the changes in our portfolio since the comparable prior year period. Note that real estate-related taxes represent the largest component of our operating expenses. Regarding these third quarter expenses, $5.3 million related to net leases where the company recognized a comparable amount of expense recovery revenue and $1.4 million related to gross leases.

Net income attributable to common stockholders for the third quarter was $3.1 million or $0.05 per share compared to $8.1 million or $0.12 per share in the third quarter of 2022. Net income for the current quarter included a gain on sale of the North Charleston medical office building of $2.3 million and in the prior year included a gain on sale of $6.8 million. FFO in the third quarter was $15.3 million or $0.22 per share and unit compared to $16.2 million or $0.23 per share and unit in the third quarter of 2022. AFFO in the third quarter was $16.5 million or $0.23 per share and unit compared to $17.1 million or $0.25 per share and unit in the third quarter of 2022. Moving on to the balance sheet. As of September 30, 2023, our gross investment in real estate was $1.4 billion, which is down about $60 million from the start of the year, reflecting our disposition activity.

As of September 30, 2023, we had $626 million of gross debt with a weighted average remaining term of 3.1 years. At quarter end, 89% of our total debt was fixed rate debt, our leverage ratio was 44.2% and our weighted average interest rate was 3.78%. As I mentioned, with our reduced leverage ratio, during the quarter, we lowered the SOFR margins in our credit facility by 15 basis points with SOFR margin on our revolver now at 1.35%, and our term loan margins are now at 1.30%. Lastly, the current unutilized borrowing capacity under the credit facility is $318 million. We did not issue any shares of common stock under our ATM program during the quarter or subsequent to quarter end. With respect to our lease expirations, based on activity to date currently, we are projecting that we’ll retain 80% of the 363,000 square feet that we’ve noted as expiring this year and 86% of the related expiring ABR.

We expect to end the year with occupancy to approximately 96.5%. Our outlook regarding 2024 lease expirations is very good and in general, consistent with our experience on 2023 lease expirations. Regarding capital expenditures on the portfolio through September 30, our cash spend was approximately $5.8 million. Currently, we’re projecting additional expenditures of approximately $2 million related to building and site improvements and $1 million in tenant improvement primarily associated with lease renewals and lease up, we expect to be completed during the remainder of 2023. In conclusion, as we look to the balance of the year, with our strong portfolio and ample liquidity available to us during these uncertain market conditions, we believe we are well positioned to restart our growth strategy as conditions normalize and look forward to sharing our progress in the quarters to come.

This concludes our prepared remarks. Operator, please open the call for questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from Austin Wurschmidt with KeyBanc Capital Markets.

Austin Wurschmidt: Alfonzo, can you provide some additional detail on just the volume of opportunities or breadth of conversations that you’re having that on deals that kind of meet that underwriting criteria. And you mentioned the bid-ask spread remains wide, but has it narrowed at all from the last 60 to 90 days or so?

Alfonzo Leon: Sure. So we’ve — we see about 30, 40 deals a month, a lot of it doesn’t make sense. The bid-ask spread has improved over the year. It started pretty wide at the beginning of 2023 and has narrowed quite a bit. There’s been capitulation from sellers started the year with a lot of reluctance to accept that there was a pretty significant change in pricing. But there’s increasing acknowledgment that pricing has changed by a pretty meaningful amount. And there’s buyers who are coming — sorry, sellers who are coming to market now are much more realistic. . What’s also happened is what’s coming to market, the quality is — has varied month by month. There was a stretch where there wasn’t that — the quality had been lower than average.

That’s changing as well. I think there’s some of the sellers coming to market have to sell for a variety of reasons. Some of it include financing that’s running out of term. Some of it is just developers who had product that they want to sell despite the increase in pricing. There’s a lot of reasons why people are still coming to market despite the high increase in cap rates. So the bid-ask spread has improved quite a bit. From our vantage point, there hasn’t really been very compelling deals yet for us to move forward. And that’s irregardless of where our stock price is like there just hasn’t really been anything super compelling. It’s getting better. I mean there’s beginning to be opportunities that are catching our eyes that seem pretty interesting.

And so the trend is moving in the right direction. But for the past several months, like what’s — what we’ve seen and what’s been in the market hasn’t been that compelling.

Austin Wurschmidt: So as a follow-up, I guess, as it relates to that wall of — or as you’re saying, sellers are kind of facing upcoming maturities and seem like they’re more willing to negotiate. I mean, is there sort of a period or a wall of maturities that you’re looking towards you think you can see an even greater increase in opportunities? Are you expecting more of a continuous drip of deals into next year?

Alfonzo Leon: Sure. Yes. So definitely, any offering that has a short wall and that depends on location, quality of the building, the rent roll, but anything with, I’d say, less than 3 years of wall, is very hard to finance right now unless it just has a very unique location. And so any offering that has a short walled is not finding many bids and in some cases, no bids. And so there is opportunities to go in there and get properties at a pretty significant discount to where they were a year ago. And so we’ve been looking at a fair number of those opportunities. But to date, there hasn’t really been any offering yet that has the right quality mix that has the right risk profile that has the right rent roll. And for the ones that do have a good profile that do have a good rent roll that are attractive buildings, there’s still a pretty wide bid-ask spread.

And so for 2023, I’d say investors have been rewarded for being on the sidelines. There have been better deals had now than they were at the beginning of the year. And I think there’s acknowledgment by people in the market that you were not rewarded for getting into the market in the first half of the year. I think that’s starting to change. And I think a lot of it has to do — a lot of it is hinged on expectations for what the Fed is going to do and whether or not it’s going to — what’s in store for 2024. But I think we are approaching a point where investors are going to start feeling more comfortable pushing back into the market more meaningfully?

Austin Wurschmidt: Would you be willing to take on some more limited , I guess, for the right discount that leasing risk for the right discount?

Alfonzo Leon: Yes. And a lot of that is hinged on our underwriting of the renewal probability. And so there have been some opportunities that we’ve pursued in the past where that was the case where it was a short walled, but we felt very strongly that the renewal was going to be very, very high, just given the context, given the property, given the tendency. And so yes, if there’s a property that has the right quality mix, the right rent roll and very high renewal probabilities then with a sufficient discount, we would pursue.

Operator: Our next question comes from Juan Sanabria with BMO Capital Markets.

Juan Sanabria: Just curious what’s left on the disposition side that you guys are targeting? I believe you were initially thinking maybe $90 million. So I just wanted to confirm if that is still contemplated as you move into to ’24 or how you’re thinking about disposition/deleveraging?

Jeffery Busch: We’re — the market has changed a bit since we sold. We got really good pricing — so we’re looking around to possibly sell some more, but I’m pretty doubtful that we’ll get the right pricing that we got before. So we’re more likely to stay at $80 million and $90 million.

Juan Sanabria: Okay. And then just curious on the acquisitions where you’re feeling maybe a little bit more comfortable that pricing has adjusted from sellers’ expectations from higher rates, et cetera. What kind of cap rates or yields are you looking to target for acquisitions? And is it more skewed towards multi or single tenant deals. If you could just give us a little color of where you feel most comfortable if and when the acquisition kind of restarts?

Jeffery Busch: Okay. Number one rule before we do anything, it has to be accretive and we have to like the property, and it has to be the same quality of property that’s given us a 97% occupancy in the last periods of time. . So multiple tenants can be very interesting because it’s not that competitive because a lot of groups just don’t have the capability like we do of managing the multiple tenants. Single tenant, it’s more competitive, but I expect — I’m hoping to get in the 8s, maybe in the 9s. It really depends on what the cost of debt is at the time that we do come in, but the #1 criteria we have is it has to be decently accretive to the portfolio. And the second element is we’re in the process of reducing our leverage, so we’d be using basically 60% equity and 40% debt on average. So there’s a process that we’re looking — so there’s several criteria we have to work on, but it definitely has to be accretive.