Global Medical REIT Inc. (NYSE:GMRE) Q4 2022 Earnings Call Transcript March 1, 2023
Operator: Greetings and welcome to the Global Medical Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Swett, Investor Relations. Thank you, sir. You may begin.
Steve Swett: Thank you. Good morning everyone and welcome to Global Medical REIT’s fourth quarter and full year 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 31st, 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 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?
Jeffrey Busch: Thank you, Steve. Good morning and thank you for joining our fourth quarter and full year 2022 earnings call. Our high quality portfolio of needs-based healthcare facilities continues to produce excellent results. At the end of the fourth quarter, portfolio occupancy was 96.5% with a weighted average lease term of 6.2 years and a portfolio average rent coverage of 4.4. Year-over-year, we achieved a 19.6% increase in total revenue, driven primarily by our acquisition activity early in 2022. For the fourth quarter, reflecting the impact of rising interest rate, our net income attributable to common shareholders was $369,000, $0.01 per share compared to $3.8 million or 0.06 per share in the fourth quarter of 2021.
Recall also that the fourth quarter of 2021 number included a gain on sale of $1.1 million. FFO in the fourth quarter was $0.22 per share and unit, down $0.01 from the prior year quarter and our AFFO was $0.24 per share and unit, in line with the fourth quarter of 2021. Looking forward, we have ample liquidity, which allows us to be patient as we look for markets to improve. As we mentioned last quarter, we have been spending time identifying properties that we could sell as a means to reduce our outstanding debt in preparation from when the market conditions improve. We currently are optimistic that we can generate proceeds from the sales of approximately $90 million at a weighted average cap rate of between 6% and 6.5% and are already placed under contract for sale to assets for gross proceeds of $11.6 million.
If we are able to close on $90 million of dispositions, we would reduce our variable debt to approximately 10% of our total debt, while also reducing our leverage to a target range of 40% to 45%. We continue to look for quality properties that meet our investment criteria, although our ability to acquire our Targa property became more difficult as the effects of higher interest rates increased our cost of capital. We remain nimble in our approach to acquisitions. For example, pursuing deals that utilize OP units and based on our pipeline expect to acquire approximately $100 million of assets this year. Overall, I am pleased with the fourth 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 investment activity in more detail.
Alfonzo Leon: Thank you, Jeff. As Jeff mentioned, the transaction market for target medical facilities that meet our investment criteria has slowed significantly as buyers and sellers adapt to changing interest rates for divergent views on cap rates. We continue to see a large number of opportunities in the fourth quarter typical of year end seasonality, but opted to pass as we saw nothing compelling giving our cost of capital. We continue to review potential deals and as of February 28th, had one acquisition under contract for a purchase price of $6.7 million that we will fund primarily with OP units. With respect to the acquisition market, we believe physician groups and some corporate sellers will remain on the sidelines until market conditions improve.
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Some owners could be forced to sell, they are unable to refinance their mortgages. We hope that by the second half of 2023, there will be more predictability with respect to the market interest rates and the acquisition market more broadly. Regarding efforts to reduce our leverage, we have been able to successfully place new properties under contract for sale for proceeds of $11.6 million and are optimistic that we can complete other dispositions that would generate a total of approximately $90 million of proceeds at a cap rate between 6% and 6.5% during the first half of 2023. We have been pleased with the level of investor interest in our assets as we go through this process. With respect to other investment opportunities, we are seeing an increase in inbound calls on development capital funding due to the combination of cost increases and higher cap rates pushing rents significantly higher from new construction and developers having a harder time finding financing for projects.
We are also having discussions on and evaluating other investment options such as joint ventures that could expand our investment opportunities and diversify our revenue stream. We believe the stability of our diversified portfolio of quality medical office in 35 states, lease the leading healthcare providers in each submarket, combined with our available liquidity allows us to be patient as the acquisition market for our asset class finds equilibrium. Smaller owners of medical office are likely going to struggle with refinancing their assets, funding tenant improvement allowances and enduring re-leasing risk. The macro trends for medical office are excellent, but you need a large diversified portfolio to reduce idiosyncratic risk and access the capital to outcompete other buildings in each submarket.
It is also likely that the tourist capital that came into medical office in 2021 and 2022 will exit leaving the market to dedicated funds. Their exit would create opportunities. We have been through cycles such as this before and know that the transaction market takes time to adapt. We will continue to source opportunities that make sense and potentially use some competitive advantages such as scale, access to capital and OP unit deal structures where we can. Given our view of the market, we expect our acquisition activity to pick up in the second half of 2023. And as Jeff mentioned, we are targeting to complete $100 million of accretive acquisitions during 2023. However, market conditions can be unpredictable and there’s no assurance that we won’t be able to meet our acquisition targets.
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 solid results. At the end of the fourth quarter 2022, our portfolio consists of first investments in real estate of $1.5 billion and includes $4.9 million of total leasable square feet, 96.5% occupancy, 6.2 years of weighted average lease term, 4.4 times rent coverage with 2.1% weighted average contractual rent escalation. In the fourth quarter, we achieved a 19.6% year-over-year increase in total revenues of $36.3 million, driven primarily by our acquisition activity over the past year. On a same-store basis, excluding cash basis leases, our fourth quarter revenues were up $495,000 or 2% compared to the fourth quarter of 2021. Our total expenses for the fourth quarter of 2022 were $34.5 million compared to $25.9 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 to our larger portfolio. Our interest expense in the fourth quarter was $8.1 million compared to $4.8 million in the comparable quarter of last year, reflecting both higher average debt balances and increased interest rates. To illustrate the effect the rapid increase in interest rates has had on our interest expense, our weighted average interest rate during the fourth quarter of 2022 was 4.07% and compares to 3.65% during the previous quarter and 2.88% during the fourth quarter of 2021, representing an increase of about 120 basis points in just one year.
The increase in interest expenses occurred despite our having fixed interest rate on approximately 80% of our indebtedness weighted average interest rate of 3.75% as of December 31, 2022. Given the effect interest rate increases have on the cost of our variable debt, as Jeff noted, we plan to use the proceeds from our current and expected dispositions to repay amounts on our revolver and reduce our overall leverage to our target range of between 40% to 45%. G&A expenses for the fourth quarter of 2022 were $4.1 million compared to $3.9 million in the fourth quarter of 20 21. Within our current quarter G&A expenses, note that our stock compensation costs in the quarter were $1.1 million and our cash G&A costs were $3 million. Looking ahead, we expect our G&A expenses in 2023 to increase in range between $4.2 million and $4.6 million on a quarterly basis.
Our operating expenses for the fourth quarter were $7.1 million compared to $4.5 million in the prior year quarter, with the increase in these expenses primarily driven by the growth in our portfolio. Regarding these fourth quarter 2022 expenses, $5.3 million related to leases where the company recognized a comparable amount of expense recovery revenue is $1.5 million related to gross leases. Net income attributable to common stockholders for the fourth quarter of 2022 was $369,000 or $0.01 per share compared to $3.8 million or $0.06 per share in the fourth quarter of 2021. FFO in the fourth quarter was $15.5 million or $0.22 per share in unit compared to $15.6 million or $0.23 per share in unit in the fourth quarter of 2021. AFFO in the fourth quarter was $16.5 million or $0.24 per share in unit compared to $16.4 million and similarly $0.24 per share in unit in the fourth quarter of 2021.
Moving on to the balance sheet. As of December 31st, 2022, our gross investment in real estate was $1.5 billion, which is up $141 million from a year earlier. We did not issue any shares of common stock under our ATM in the fourth quarter or to-date in the first quarter of this year. As of December 31st, 2022, we had $704 million of gross debt, our leverage ratio was 47.6%, and our weighted average interest rate was 4.2%. As of quarter end, the weighted average remaining term of our debt was 3.9 years. The current unutilized borrowing capacity under the credit facility was $245 million. With respect to our investment portfolio and our 2023 lease expirations, we are pleased with our progress on renewals and based on activity to-date, currently are projected to retain between 85% and 90% of the 363,000 square feet that is expiring this year.
Additionally, we are in discussions to lease up approximately 20,000 square feet that is currently vacant and have executed leases of 15,000 square feet of current vacancy with tenants scheduled to take occupancy in 2023. Currently, we are expecting that our occupancy during 2023 will be above 96% throughout the year. Regarding capital expenditures on the portfolio, currently, we are projecting approximately $6 million in capital expenditures and $4 million in tenant improvement, primarily associated with lease renewals and lease-up to be completed during 2023. While market conditions are challenging, we are optimistic that we will be able to reduce our leverage and ramp up our acquisition activities during 2023 and look forward to sharing our progress with you throughout 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: Thank you. We will now be conducting a question-and-answer session. Our first question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.
Austin Wurschmidt: Thanks and good morning everybody. With respect to the $90 million of targeted sales that you highlighted, can you give us some additional detail about how far along you are in the negotiations for that beyond the roughly $12 million you highlighted? And how should we think about the timing of those deals closing? Would you consider these assets reflective of the overall portfolio? Just some additional detail would be helpful.
Alfonzo Leon: Sure. I’ll take that. So, we have two properties under contract, those are the ones that add up to $11 million. One of those actually the diligence period has expired. So, that one we’re looking to close within the next weeks, one, two, three weeks here from today. The other one is still in diligence. And then we have two other assets, one that’s approximately $9 million that is still in the first round of bidding, but we’re getting very strong interest in that property. This is one that’s a cancer center that we bought when it was owned by a group of physicians, but bonds, of course, came in, bought that group and extended the lease. So, we’re getting a lot of interest on that one and we’re expecting pricing to be under a fixed cap.
In that one, we’ve had about 120 interested investors on that one. And there’s another property that’s approximately $68 million and we finished first round of bids and are in the second round of bidding. But that one is going to take some time to get under contract and then the diligence period. So, we’re looking at two to three months before we can get that one closed.
Austin Wurschmidt: That’s helpful. And then just speaking maybe to the investment pipeline, I mean, how big is the investment pipeline today? Are you seeing bid/ask spreads narrow? And what type of cap rate are you targeting on the $100 million of potential acquisitions you discussed for this year?
Alfonzo Leon: Sure. I mean, we’re targeting mid to high sevens and potentially even eight caps. Even though we’ve not been active putting deals under LOI or under contract, we have been very active of trying to track the market, understand where cap rates are and understanding where financing is for assets, what kind of pricing people are getting when they’re trying to buy with mortgages. I would say that most of the movement in cap rates happened last year. So far, the first two months of this year, it’s been a story of just affirming kind of where the year ended. And so basically all the cap rate compression that the market witnessed in 2021 and 2022 has gone. We’re back to call it, 2019 pricing. So, things that used to trade at a 7 are trading at a 7 again and things that used to trade at a low 6 are trading at a low 6 again.
So, in the niche that we’ve targeted historically, we’re not competing with the bulk of the money, we’re not chasing the core assets and the credit deals. We’ve historically always chased position credit and deals that traded 100, 200 basis points of our workforce pricing. And right now, those assets are back to 7 caps. In terms of the bid/ask spread that I think we’ve all been hearing in the market, I mean that is a thing. There is seasonality to transactions. So, even though December was, I would call it, fairly busy in terms of new investment opportunities that were available. January was probably slower than it has been in the past. And February, there was a pickup. It’s hard to gauge exactly how the year is going to shake out. There’s still a good amount of money that wants to invest.
