Global Medical REIT - Q1 2024

Transcript

Operator (participant)

Good day and welcome to the Global Medical REIT First Quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one, on your touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Steve Swett with Investor Relations. Please go ahead.

Steve Swett (Head of Investor Relations)

Thank you. Good morning, everyone, and welcome to Global Medical REIT's First Quarter 2024 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 31st, 2023, 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 from the company's earnings release and filings with the SEC. Additionally, 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?

Jeff Busch (CEO)

Thank you, Steve. Good morning, and thank you for joining our First Quarter 2024 Earnings Call. At the end of the first quarter, portfolio occupancy was 96.4% with a weighted average lease term of 5.8 years and a portfolio average rent coverage ratio of 4.8x. For the first quarter, our net income attributable to common shareholders was $794,000, or $0.01 per share compared to $673,000, or $0.01 per share in the first quarter of 2023. FFO in the first quarter was $0.21 per share and unit, down $0.01 from the prior year quarter. Our AFFO was $0.23 per share and unit, unchanged from the prior year quarter. With regard to acquisitions, we are actively looking for properties that meet our investment criteria and underwriting standards.

I am pleased to announce that subsequent to the quarter end, we entered into a purchase agreement for a 15-property portfolio of outpatient medical real estate for an aggregate purchase price of $81.3 million. These properties are fully occupied and are leased under triple net or absolute triple net leases. This acquisition is subject to customary terms and conditions, including due diligence reviews, and we expect to close in two tranches, one tranche during each of the third and fourth quarter of 2024. This two-tranche closing structure provides us with flexibility as we consider our options regarding the allocation of capital to fund this acquisition. For example, depending on market conditions, we may utilize net proceeds from strategic property dispositions or traditional equity and debt financing.

As always, we are mindful of our long-term leverage targets, and we expect any potential leverage increase resulting from this transaction would be short-term in nature. We remain committed to our accretive growth strategy while balancing the need to maintain prudent leverage. As we look to the balance of the year, we look forward to updating you on our progress. In terms of tenant-related items, on May 6, 2024, one of our tenants, Steward Health Care, announced that it filed for Chapter 11 bankruptcy reorganization. As of March 31st, Steward represented 2.8% of the company's annualized base rent, primarily in one facility that is located in Beaumont, Texas. The company was actively pursuing releasing opportunities at this facility prior to the Steward bankruptcy announcement, and we are optimistic about our long-term prospects at this location. Bob will provide more details regarding the financial aspects of our Steward relationship in his remarks.

We are closely monitoring this situation and will update the market for any material events as this situation progresses. Overall, I am pleased with our first 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 and the current acquisition market conditions in more detail.

Alfonzo Leon (CIO)

Thank you, Jeff. The transaction market for our target medical facilities, which align with our quality and return criteria, has made promising progress. We continue to actively engage with a wide range of physician groups, brokers, and corporate sellers to identify acquisition opportunities. Our readiness to capitalize on existing opportunities, coupled with our strong capital position and platform, sets us apart from less liquid buyers in the market. Furthermore, the unattractive debt refinancing market can work to our advantage, compelling reluctant sellers to consider us as they navigate a difficult refinance market. To that end, as Jeff mentioned, in May, we entered into a purchase agreement to acquire a 15-property portfolio of outpatient medical real estate for an aggregate purchase price of $81.3 million. These properties fit squarely within our investment criteria and are fully occupied and leased under triple net or absolute triple net leases.

As Jeff explained, we expect to close this transaction in two tranches, with the first tranche closing during the third quarter of 2024 and the second tranche closing during the fourth quarter of 2024, which will provide us with flexibility for prudent capital allocation. As a reminder, this deal is currently under contract and subject to customary terms and conditions, including due diligence review. Accordingly, there is no assurance that the company will close this acquisition on a timely basis or at all. We believe this transaction is an example of where the acquisition market is trending, with sellers accepting higher cap rate deals as the refinance market continues to struggle and real estate funds are forced to sell. As always, we will continue to seek opportunities that meet our investment strategy and underwriting standards.

We have the ability to unlock opportunities using the tools at our disposal, including our scale, access to capital, and the potential use of OP unit deal structures. I'd now like to turn the call over to Bob to discuss our financial results. Bob?

Bob Kiernan (CFO)

Thank you, Alfonzo. At the end of the first quarter 2024, our portfolio consisted of gross investments in real estate of $1.4 billion and included 4.8 million sq ft of total leasable square feet, 96.4% occupancy, 5.8 years of weighted average lease term, 4.8x rent coverage with 2.2% weighted average contractual rent escalations. In the first quarter, our total revenues decreased by 3% compared to last year to $35.1 million due to the impact of dispositions. Total expenses for the first quarter of 2024 were $32.8 million compared to $34.5 million in the prior year quarter. The decrease was primarily due to disposition transactions that were completed during 2023 and lower interest expense.

Our interest expense in the first quarter was $6.9 million compared to $8.3 million in the comparable quarter of last year, reflecting lower borrowing rates due to lower leverage and the impact of our interest rate swaps and lower average borrowings compared to the prior year period. Our operating expenses for the first quarter of 2024 were $7.4 million compared to $7.5 million in the prior year quarter, with the decrease due primarily to dispositions during 2023. Regarding these first quarter expenses, $5 million related to net leases where the company recognized the comparable amount of expense recovery revenue and $1.5 million related to gross leases. G&A expenses for the first quarter of 2024 were $4.4 million compared to $3.8 million in the first quarter of 2023.

The increase primarily resulted from an increase in non-cash LTIP compensation expense, which was $1.2 million for the first quarter of 2024 compared to $700,000 for the same period in 2023. As mentioned last call, we expect our G&A expenses throughout 2024 to be in the range of $4.4 million-$4.6 million on a quarterly basis. Net income attributable to common stockholders for the first quarter of 2024 was $794,000 or $0.01 per share compared to $673,000 or $0.01 per share in the first quarter of 2023. FFO in the first quarter of 2024 was $14.9 million or $0.21 per share and unit compared to $15.1 million or $0.22 per share and unit in the first quarter of 2023.

AFFO in the first quarter of 2024 was $16.5 million or $0.23 per share and unit compared to $16 million or $0.23 per share and unit in the first quarter of 2023. Moving on to the balance sheet, as of March 31st, 2024, our gross investment in real estate was $1.4 billion. At March 31st, 2024, we had $624 million of total gross debt with a weighted average remaining term of 2.7 years. At quarter end, 84% of our total debt was fixed rate debt. Our leverage ratio was 44.0%, and our weighted average interest rate was 3.85%. Lastly, the current unutilized borrowing capacity under the credit facility is $290 million. We did not issue any common stock under our ATM program during the first quarter or to date. With respect to our investment portfolio and 2024 lease expirations, we are pleased with our progress on renewals.

Based on activity to date, we are currently trending towards a retention rate of 76% on this year's expiring lease of both square feet. Regarding capital expenditures on the portfolio, during the first quarter, our cash spend was approximately $2 million. Consistent with my remarks during our last call, we continue to project $10 million-$11 million related to building and site improvements and approximately $2 million-$3 million for tenant improvements, primarily associated with new leases and renewals and lease-up to be completed this year. Regarding the company's financial exposure to Steward Health Care, as Jeff mentioned, as of March 31st, Steward represented 2.8% or $3.1 million of the company's annualized base rent, of which 86% related to our facility located in Beaumont, Texas. Additionally, as of March 31st, the company's receivables from Steward totaled approximately $500,000, including $200,000 of deferred rent receivables.

To conclude, we are encouraged by our acquisition opportunities and believe that our portfolio and ample liquidity will enable us to navigate the current market conditions over the long term. We look forward to sharing our progress with you throughout the year. This concludes our prepared remarks. Operator, please open the call for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question will be from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.

Austin Wurschmidt (Director and Equity Research Analyst)

Hi. Good morning, everybody. Just want to hit on the acquisitions. So you've lined up the acquisitions at this point and are now contemplating funding plans. But I guess how willing are you to wait and sort of speculate on the capital markets and the transaction market, just given the volatility that we've seen?

Jeff Busch (CEO)

You're absolutely right. Right now, we're really pleased with these acquisitions. These fit exactly what we like in our portfolio: triple net, absolute net, MOB-style acquisitions. We're going to be patient. We could sell assets. I wouldn't do it today. I think we need to see a stabilization. We're not doing any fire sale of assets. We could sell assets and be accretive. We're going to see where the equity markets as in the past, where you got really where at least the last few rounds, we thought we had good Fed direction of three cuts. I'm not relying upon any of that. So if the Fed doesn't cut for a while, we have other opportunities to do that: short-term debt increase. We do have something. But this portfolio was too good to pass up, and we felt we needed to continue our business progressing and getting good assets.

We'll probably wean some assets that are not strategic also.

Austin Wurschmidt (Director and Equity Research Analyst)

So as of now, just to understand, would you just put these on your line and fund it that way, and then sort of when these close, decide kind of what the ultimate funding plans is? Just trying to understand sort of the timeline of the acquisitions versus when you intend on funding.

Jeff Busch (CEO)

The acquisitions, it could go on our credit line temporarily, but we do have things that we've put up for sale which should match some of this, at least the earlier ones. So it's a combination. You're absolutely right. It's a combination of sale and a combination of possibly increasing unless the equity markets improve substantially. But we're just not counting.

Austin Wurschmidt (Director and Equity Research Analyst)

Okay. No, that's really helpful. And then can you just share a little bit of detail about the portfolio? You had talked about single tenant assets. I mean, does it fit that profile? What's sort of the WALT here for the portfolio? And then can you just share some of the economics of the deal, cap rate, and so forth?

Jeff Busch (CEO)

Alfonzo?

Alfonzo Leon (CIO)

Sure. Yeah, sure. So the WALT, it's a 6.1-year WALT with no rollover until 2016. It's composed of 12 MOBs and 3 behavioral facilities. Most of these properties, 12 of them are located in the Sun Belt states, with 3 properties located in states in the northern part of the country. And one quarter is investment grade. About 60% is physician credit with good rent coverage. And the balance is BB rated. And the price per sq ft is about 320 per sq ft.

Austin Wurschmidt (Director and Equity Research Analyst)

What's the cap rate on the deal?

Alfonzo Leon (CIO)

It's approximately 8%. This is a portfolio that we sourced off-market.

Austin Wurschmidt (Director and Equity Research Analyst)

That's great. Very helpful. I'll hop back in the queue. Thank you.

Operator (participant)

The next question will be from Rob Stevenson from Janney. Please go ahead.

Rob Stevenson (Managing Director and Senior Research Analyst)

Good morning, guys. Just to follow up on the acquisition, are any of the tenants existing tenants, or are these going to wind up being new tenants for the firm?

Jeff Busch (CEO)

It's a mix, but it's a mix. Yeah, it's a mix of existing and new.

Rob Stevenson (Managing Director and Senior Research Analyst)

Anybody that's going to be pushed up dramatically in the percentage of into the top five or those in the top five that would be increased substantially at this point?

Jeff Busch (CEO)

No. No, no meaningful change.

Rob Stevenson (Managing Director and Senior Research Analyst)

Okay. And then I think, Bob, you said that 86% of the Steward rents were in the Beaumont asset. How many other assets are there in the portfolio, and what are those relative to the Beaumont asset?

Bob Kiernan (CFO)

Sure, Rob. There's 5 other leases. There's 6 leases in total. The total square feet on the non-Beaumont is right around 36,000 sq ft. The monthly rent on those other assets is around $69,000-$70,000 of monthly rent from those assets.

Rob Stevenson (Managing Director and Senior Research Analyst)

Okay. And I guess then in aggregate, $3.1 million, roughly $775,000 a quarter. How much of that was in first quarter results? Did you basically have all of the $775,000 in first quarter results? Just trying to figure out as we go forward here.

Alfonzo Leon (CIO)

We did.

Rob Stevenson (Managing Director and Senior Research Analyst)

Okay. And then the sense of at this point, are they going to try to basically just give back the Beaumont property, or is that a situation where there's going to be some sort of negotiations when they come out of Chapter 11? How are you guys strategically looking at that? Is that something that you guys are going to have to release, or probably just something that winds up getting a reduction in rent when all is said and done?

Jeff Busch (CEO)

We're in the process, Rob. We're in the process of releasing it, the facility. Actually, we've got ahead of it. We don't believe Steward's going to accept this facility. I mean, they have a longer-term lease, but they moved out of the facility. And I don't think they're going to accept it. But months ago, we started a process. And interesting enough, a lot of demand on this facility. We're feeling really good about releasing it at good numbers. And the way the market works there is there's two hospitals, main hospitals both with Steward. We believe this is the much better hospital. When we underwrote it, it's much better and everything. And the physicians like to do it's a surgical hospital, and physicians like to do surgery in there. So there's a lot of demand on that, and we do expect to release it.

We're very optimistic on that.

Rob Stevenson (Managing Director and Senior Research Analyst)

Okay. I guess then just from a financial standpoint, at this point, we should be planning on that being non-revenue producing for some period of time until between Beaumont and when you're able to release it to somebody else?

Jeff Busch (CEO)

I think that's fair at this point.

Rob Stevenson (Managing Director and Senior Research Analyst)

Okay. All right. I appreciate the time this morning, guys.

Jeff Busch (CEO)

Thank you.

Alfonzo Leon (CIO)

Thanks.

Operator (participant)

The next question will be from Bryan Maher from B. Riley FBR. Please go ahead.

Bryan Maher (Managing Director)

Thanks. Most of my questions have been asked and answered. But just sticking with Steward for one second, I would say if they've moved out already, they're probably not going to re-up. On the 15 property acquisition, can you talk about what the seller motivation was there?

Alfonzo Leon (CIO)

It was strategic. These are assets that it's not a sector that they want to continue investing in.

Bryan Maher (Managing Director)

Okay. And maybe sticking with Alfonzo for a minute, when you're looking at your pipeline after announcing this deal, how deep would you say it is realistically, maybe in a dollar number? And are you seeing any meaningful narrowing of the bid-ask spread?

Alfonzo Leon (CIO)

Yeah. So two parts of that question. I mean, so the first part is I mean, the market has continued moving towards higher yields. And it's interesting to look at the market from two ways. One is single tenant sorry, single asset sales and portfolio sales. And what's been interesting is there've been actually more interesting opportunities in portfolios. There's been fewer opportunities than there were a few years ago. But the ones that are available are interesting situations where you're actually getting pretty attractive pricing, and you get the efficiency of being able to transact a lot of properties at once, which is always great. And historically, that's not been the case. You always have to pay a premium. So we're taking advantage of that situation in the current market.

In terms of the bid-ask spread, at the beginning of the year, my sense was that we started narrowing that bid-ask spread. I think part of what has evolved is that a lot of the owners of medical office properties were hoping for Fed rate cuts towards the end of the year and were hoping for stronger pricing at the end of the year. Had you asked me the question a month ago, it would have been different. I feel today, the bid-ask spread is, at a minimum, not decreasing and maybe in some instances, widening as a result of no Fed rate cuts in the second half of the year. Having said that, though, I think there's a lot of owners of medical office that have been, in a sense, kind of holding their breath and hoping for better pricing.

What I'm expecting and what I'm seeing is that a lot of these owners are increasingly more amenable to taking pricing that has not been available for buyers for a long time. So at this point, a lot of the stuff that is trading is in the low- to mid-7 caps, and there's increasing numbers of opportunities in the high 7s. I'm beginning to see opportunities also in the low 8s. I expect that to continue to improve. I expect increased opportunities for us going forward, just given where things are trending.

Bryan Maher (Managing Director)

How deep would you say your acquisition pipeline is? $50 million, $100 million, $200 million?

Alfonzo Leon (CIO)

Hard to gauge, again, because some of these are portfolio opportunities. And so I've seen opportunities in the $10 million-$20 million range, and I've seen some in the $50 million range. But I'd say going into 2025, I think $50 million-$100 million in potential acquisition is a reasonable number.

Bryan Maher (Managing Director)

That's helpful. Maybe just last from me for Bob, your weighted average maturity on your debt is kind of like, I think you said, 2.7 years. What are your thoughts on terming that out? I suspect your answer might be you want to wait a little while to see what happens with interest rates. But can you give us a little color there? That's all from me.

Bob Kiernan (CFO)

Thanks, Bryan. Yeah, that is really the short answer. It's just kind of letting some of the volatility in the market subside. And we do still have that kind of 2.7 years to work with and to work with that time and, again, being in a consistent contact and discussions with our banks relative to opportunities, but to be patient on that front.

Bryan Maher (Managing Director)

Thank you.

Operator (participant)

Again, if you would like to ask a question, please press star, then one. The next question will be from Wes Golladay from Baird. Please go ahead.

Wes Golladay (Senior Research Analyst)

Hey, good morning, guys. You mentioned potentially selling some assets to fund the acquisitions. What type of a cap rate are you looking at for the disposition?

Alfonzo Leon (CIO)

We traditionally. [crosstalk]

Jeff Busch (CEO)

Oh, Alfonzo, you go ahead.

Alfonzo Leon (CIO)

Yeah. Yeah. So we're looking to try to get the best pricing we can. And so we're looking for things in the low sevens.

Wes Golladay (Senior Research Analyst)

Okay. Fantastic. And then you did mention you're looking to release the Steward asset. Based on the demand, it looks like you had pretty good demand there. How quickly could you turn the asset? And what type of carry cost will you have in the meantime?

Alfonzo Leon (CIO)

Let me try to understand that question. You want to understand how quickly we could release it?

Wes Golladay (Senior Research Analyst)

Yeah. It sounds like you have demand. So assuming they say they reject the lease in a few months, do you have a tenant close to signing a deal upon a rejection of a lease? And then you build out the space for a few months or just trying to get a sense of how long you can based on the demand that you're seeing for the space, how quickly you can release the space. And in the meantime, I think you'd be picking up a little bit of the OpEx cost over the near term for a few months.

Alfonzo Leon (CIO)

Sure. Yeah. And so it's always hard to predict. But I mean, the interest was quick. So shortly after the announcement was made that the facility was available, we got interest from a number of parties that expressed strong interest. And the conversations went pretty quickly as well. But it's hard to gauge. I mean, it could be very soon that we are finding ourselves negotiating a lease, or it could take a few months for us to be in that position. Hard to say. But the interest seems sincere, and the conversations have been very positive. I'd say on the other end of having a deal signed with a prospective tenant, again, not clear exactly how long it would take for them to occupy the space.

I mean, one of the things that we're discussing is how exactly are they planning on using the space and what exactly changes need to happen at the facility for that to happen. So on that second part of the question, a little harder to gauge. I will say, though, that the facility is a premier surgical facility in Beaumont. I mean, it's really arguably probably one of the best ones in town. And despite its age, I mean, when you walk it, it feels brand new. I mean, it was a really nicely done project. So not clear exactly what changes would need to be made, but that's something that we're in the process of trying to evaluate.

Wes Golladay (Senior Research Analyst)

Okay. And then maybe one for Bob. Looking at the sequential change in revenue, there was a $2 million uptick. Was this largely due to variable rent?

Bob Kiernan (CFO)

The sequential increase in rent, yeah, it would have been probably expense-related versus anything from a base rent perspective. There really wasn't any material change relative to base rent quarter-over-quarter.

Wes Golladay (Senior Research Analyst)

Okay. Thanks for the time, guys.

Operator (participant)

Ladies and gentlemen, this concludes today's question and answer session and thus concludes today's call. We thank you for joining Global Medical REIT's first quarter 2024 earnings conference call. You may now disconnect. Take care.