Q2 2022 Global Medical REIT Inc Earnings Call

Greetings and welcome to the global Medical REIT second quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is.

Being recorded it is now my pleasure to introduce your host Steve Swett Investor Relations. Thank you. Mr. Swett you may begin.

Thank you good morning, everyone and welcome to global Medical REIT second quarter 2022 earnings conference call on the call today are Jeff Busch, Chief Executive Officer, Alfonzo, Leon our Chief investment Officer.

Bob Kiernan Chief Financial Officer.

Please note the use of forward looking statements by the company on this conference call.

<unk> 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 31, 2021, and its other SEC filings.

Company assumes no obligation to update publicly any forward looking statements, whether as a result of new information future events or otherwise.

<unk> on this call the company may refer to certain non-GAAP financial measures such as funds from operations adjusted funds from operations EBITDA and adjusted EBITDA you.

You can find a tabular reconciliation of these non-GAAP financial measures.

Currently comparable GAAP numbers in the company's earnings release and in filings with the SEC additional.

Additional information may be found on the Investor Relations page of the company's website at Www Dot global clinical wheat dot 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 second quarter 2022 earnings call. After a strong start to the year.

Here, we can see to produce excellent results in the second cohort.

Growing our portfolio further with more than $74 million of acquisition in the quarter.

With respect to earnings we increased our total revenue by 19, 2% compared to the second quarter of last year.

$33 7 million and our net income.

Ill to common shareholders was $2 2 million or three cents per share.

Our <unk> was.

94 cents per share and unit and <unk> 25 per share and unit.

Of which were up two cents compared to the prior year quarter, reflecting the continued growth of our portfolio.

As we discussed recently the acquisition environment for our target assets remains very competitive.

We continue to effectively source new opportunities, we closed five acquisitions were $74 million in the second quarter and have closed another two acquisitions were $23 million so far in the third quarter with an additional $50 million.

Yields under contract and in due diligence. In addition, we're starting to see the effect of rising interest rates in the acquisition market as the weighted average cap rate on the acquisitions that we call self on the third quarter has risen to seven 3% with an estimated weighted.

The average cap rate on our $50 million of properties under contract is seven 4% based on this activity and the type of opportunities that we're seeing we feel very strong about our full year pace of acquisitions and our ability to be selective and continue to grow accretive.

Okay.

In order to accommodate this growth on August 1st we expanded our credit facility with a $150 million delayed draw term loan. We also entered into swap agreements, which provides stability in our interest costs as we plan for the future.

Bob will provide additional color on our debt activities later.

I'm pleased with our second quarter results and want to thank the team for their hard work and contributions to our performance 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 facility remains very competitive, but through our diligence sourcing and underwriting efforts. We continue to successfully acquired high quality properties.

During the second quarter, we completed five acquisitions containing just over 255000 leasable square feet for an aggregate investment of $74 $1 million.

At a weighted average cap rate of six 9% and an average 88% occupancy.

I will discuss four of the five properties have 30000 square feet of cumulative lease up potential.

These acquisitions included.

If 40200 square foot surgery center in Fairbanks, Alaska for a purchase price of $22 $3 million with a cap rate of six 4% at 96% occupancy.

33200 square foot medical office building portfolio leased to know about health and Rocky point North Carolina for.

For a purchase price of $7 $6 million with a cap rate of six 6% at 91% occupancy.

296100 square foot medical office building in Fairfax, Virginia for a purchase price of $21 million with a cap rate of six 3% at 82% occupancy.

This property is within the fair facts medical district anchored by the 910 bed I know by campus.

Part of the acquisition, we budgeted to renovate the lobby and building facade. We are currently in discussions to lease up approximately 60%.

Of the 19000 square foot vacancy to health systems and prominent physician groups.

Yeah.

And 18400 square foot surgery Center and lease summit, Missouri for a purchase price of $6 $6 million with a cap rate of seven 5% at 100% occupancy.

And.

A four property cancer center portfolio, Lexington, Kentucky area containing an aggregate 67300 square foot for a purchase price of $16 $6 million with a cap rate of eight 3% at 91% occupancy.

Additionally, as Jeff mentioned, so far in the third quarter, we have acquired two properties for an aggregate purchase price of $23 $3 million, including.

A 110800 square foot medical office building portfolio in Toledo, Ohio for a purchase price of $17 $2 million with a cap rate of seven 1% at 84% occupancy and a 22600, a square foot medical office building and Lake Geneva, Wisconsin.

For a purchase price of $6 $1 million with a cap rate of seven 8% at 100% occupancy.

We currently have four properties under contract for an aggregate purchase price of $49 $8 million and an estimated weighted average cap rate of 7.4%. These.

These properties are currently in the due diligence period and <unk>.

Subject to customary closing conditions.

With over $171 million of acquisitions closed or under contract so far in 2022.

Remain comfortable with our target to close between $180 million and $220 million of acquisitions for the full year.

With regards to the dispositions in the second quarter the.

The potential purchaser of a medical office building in Bell three Ohio terminated the contract due to financing market conditions.

We remain very upbeat and confident in this property and our tenant and this building is strategic to the attendants plans regarding this campus.

Subsequent to the quarter end in July we sold our medical office building in Germantown, Tennessee, receiving gross proceeds of $17 $9 million, resulting in an estimated gain on sale of $6 8 million.

I'd like to now turn the call over to Bob to discuss our financial results Bob.

Thank you I'll find out GMO REIT continues to benefit from strong relationships with our tenants and solid portfolio performance at the end of the second quarter 2022, our portfolio included $4 7 million of total leasable square feet 96, 5% occupancy six seven years of weighted average lease term.

Five times rent coverage was two 1% weighted average contractual rent escalations and.

In the second quarter, we achieved 19, 2% year over year increase in total revenues to $33 $7 million driven primarily by our acquisition activity over the past year on a same store basis, our second quarter revenues were up $361000 for one 6% compared to the second quarter of 2021.

Our total expenses for the second quarter of 2022, with $29 9 million compared to $24 1 million in the prior year quarter. The increase was primarily due to higher operating and depreciation and amortization expenses due to our larger portfolio.

G&A expenses for the second quarter of 2022 were $4 3 billion in line with both the prior year quarter and with our expectations within our current quarter G&A expenses note that our stock compensation cost in the quarter were $1 $3 million and our cash G&A costs were $3 million looking.

Looking ahead, we continue to expect our G&A expenses to be between $4 2 million or $4 $4 million on a quarterly basis. During the remainder of 2022, even as we continued to increase the size of our portfolio.

Our operating expenses for the second quarter were $6 million compared to $3 $3 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 course leases regarding the second quarter 2022 expenses $4 $4 million relates to net leases.

Where the company recognized a comparable amount of expense recovery revenue and $1 1 million relates to gross leases.

We have the remainder of these expenses relates to vacancies and property is accounted for on a cash basis.

Our interest expense in the second quarter of $5 4 million reflects a weighted average borrowing cost of $2, 97% up only slightly from $2 eight 7% in the first quarter of this year looking ahead to the third quarter based on recent increases the rates, we're forecasting our weighted average borrowing cost increased to be between $3.

5% to three 7%.

Net income attributable to common stockholders for the second quarter of 2022 was $2 2 million or <unk> <unk> per share compared to $2 $6 million or <unk> <unk> per share in the second quarter of 2021.

<unk> in the second quarter was up 16% to $16 $4 million and our <unk> was up 17% to $17 $6 million compared to the second quarter of 2021 on a per share basis. Our <unk> was 24 cents per share and unit for the second quarter compared to <unk> 22 cents per share and unit to the second quarter of <unk>.

21, and <unk> was <unk> 25 per share in unit up from 20 <unk> per share and unit in the prior year second quarter.

Moving onto the balance sheet as of June 32022, our gross investment in real estate was approximately $1 4 billion, which is up $184 million from a year earlier relative to equity in the second quarter, we generated gross proceeds of $1 $9 million through ATM issuances at an average price of $16.

24 per share.

As Jeff mentioned on Monday, we amended our credit facility to add a new $150 million delayed draw term loan component with the maturity of February one 2028 extend the maturity of the revolver component to August of 2026 with two six month company controlled extension options.

And lastly, convert all LIBOR based loans under the facility to silver base loans. This amendment enhances our liquidity and financial flexibility and I'd like to thank our bank group for their continued support.

Okay.

In connection with this amendment on Tuesday, we entered into a $150 million of forward starting interest rate swaps that commenced in October 2022, and mature in January 2028 that will fix the sulfur component on the new term loan through January 2028 at 254%.

At our current leverage and including the 10 basis point spread adjustment that's associated with our conversion to soaker based loans are interest rate on the new term loan will be $4 one 3%.

At June 32022, we have approximately $660 million of gross debt our leverage ratio was 46, 2% and a weighted average interest rate was $3 one 4%.

The current unutilized borrowing capacity under the credit facility is $273 million consisting.

Consisting of $123 million revolver capacity, and the new $150 million delayed draw term loan.

Additionally, the pro forma weighted average remaining term of our debt assuming the new term loan has drawn is now for three years overall.

Overall, we continue to believe we are well positioned to execute on our acquisition and overall business strategy and look forward to sharing our progress with you through the balance of the year.

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

Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is another question in queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Our first question comes from the line of Austin <unk> with Keybanc. Please proceed with your question.

Thanks, and good morning, everyone.

Jeff Good morning Rajeev.

You and the team seem fairly confident in your ability to hit the acquisition goals for the year, but presumably that the leverage ratio is going to migrate towards sort of that upper threshold of your targets. So I guess I'm. Just curious how willing are you to primarily debt fund future acquisitions and push up on that high end of the leverage range.

Bob.

Yeah I'll start this Austin so we.

And we still have a target leverage of 40% to 45%, but with the market conditions that we're in now we're comfortable kind of kind of moving above that above that target or being above that target.

And just being patient and opportunistic about our are our acquisitions and we're largely in the same place we've been for the last few months in this.

In this type of market.

In evaluating our options for moving forward, we can temporarily run leverage a little bit higher.

The ability to two.

Sell assets to the extent, we see really good opportunities on the acquisition side too to to make changes in the portfolio.

And in just really take things as opportunities present themselves. So we're comfortable kind of in this type of an environment being a little bit higher, but but but longer term certainly we are we're looking to be at at lower leverage points.

Understood and are you guys currently marketing any assets today to sort of manage.

The.

Be able to match fund I guess any future potential activities as if the capital markets environment sort of.

We remain less favorable.

Yeah.

Always have.

Groups wanting to buy some of our assets and it's been an interesting point I guess, we have a lot of assets now and we always have groups that are interested in our assets.

And.

Some assets if were not as favorable as we were in the future. There's other groups that may want to buy it. So we do look at that we do look at that we sold one last quarter.

But partly that reasons.

Are you currently kind of remarketing, the belfry, Ohio asset that was terminated.

No no that's a great asset.

We only did it as sort of a favorite to them, we love the cap rate that we have right now.

Cap rate is.

Our return is tremendous on that and it's very strategic for them.

I actually personally I expect them to come back at some point because that is part of their cancer Center and they wanted to do more things with that building and it's easier for them to own. So I do expect them to come back but.

Really we did it as a favorite to them more than as a profit.

Understood. Thanks for the time.

Thank you. Our next question comes from the line of Conor.

So firstly with bearing Baird. Please proceed with your question.

Good morning out there. Thank you for having me on the call.

Good morning.

And in a similar line of questioning.

And just asked so I'm curious on these interest rate swaps that only applies to the term loan portion of the debt stack correct.

Okay.

Yes kind of so so.

If you think about where we were at kind of a June 30, if we talk about our capacity today. If you look at kind of on a pro forma basis.

Would have about a little bit more than 80% of our debt would be fixed and the remainder would be would be on the revolver and floating.

Okay, and just so we're clear on on future acquisitions, you can use the delay draw portion of this fixed term loan to finance these acquisitions right.

Right of course, we would plan to.

To draw on the term loan at some point in the third quarter and then we'll be again with those forward starting swaps.

We'll be fixed on that element of our of our debt from there through its.

Through its maturity.

And to your end of January or February one 2028.

Okay, and then in terms of the revolver balance I mean, I think it's sitting at about $260 million and then in consideration of the forward rate curve. I mean is there anything you seek to do here to bring that balance down.

Yeah.

Well I mean, so the term loan will bring it down so that so the term loan will bring that down straight away and.

That's the primary thing so the other lever that you have is raising raising more equity, but again from a debt perspective, we will be at.

A little bit more than 80% fixed.

At the current currently.

Okay, Okay, alright, and just needed to put those pieces together. Thank you for the time.

Thank you as a reminder, ladies and gentlemen, if you would like to ask a question its star one on your telephone keypad.

Our next question comes from the line of Aaron Hecht with JMP Securities. Please proceed with your question.

Hey, guys. Thanks for having me.

Uh huh.

Alright.

Uh huh.

Piggybacking on on the new delayed draw term loan questions.

Is there are there any covenants related with that that are restrictive as you get towards certain levers shuffled.

No Eric.

The.

The delayed draw term loan was just done right as an amendment to our existing credit facility.

Changes to really any significant covenant changes to the to the credit facility in connection with this there are no changes to our two our credit spreads in connection with this so it was really just a again an add on and just in the expansion of the of the credit facility.

And it sounds like Youre going to move.

A full balance over to the term loan.

$150 million, you just take that off the.

Credit facility of the revolver and put it on the term loan and that creates more capacity on the facility is that how that will work.

Exactly.

Okay.

In terms of the M O B that you guys sold in Tennessee, what was the cap rate you got on that.

Okay.

Okay.

I'll start here did you ever Midtown sale was was driven primarily but this is a.

A tenant in the facility.

Lease was expiring in 2024 and the.

<unk>.

Great. Thank you for your time.

Uh huh.

Thank you. Our next question is a follow up question from the line of Conor.

Please proceed with your question.

Thanks for having me back.

Page six of the of the presentation, considering the different portfolio segments I'm curious like.

Are you seeing a different.

Degree of cap rate movement for any particular asset class, whether it's M O visa IRS.

Okay.

Yes.

So.

Specifically between Mlps and IRS.

There's been more price discoveries on Mlps and there has been an curse.

I would guess I would I would say I would expect there to be a similar change.

But I mean, they're just hasn't really been too much that's been tested in the market thus far.

If you think about it it's only been since may that the market really started changing.

And.

Rehab hospitals.

Don't don't come to market very frequently and they usually come in waves.

There will be periods, where there really isn't.

A lot of any rehab hospitals took to look at for potentially even much. So theres been a couple, but it's more on the development side, which.

Instead of that I've seen.

Not not existing.

Up and running rehab hospitals, thus far.

And pricing on development is going to be driven by different different factors.

So.

As of yet.

As of right now.

Hard to say.

Okay, and then I apologize if I missed this earlier, but some.

Some value add opportunities we mentioned are these.

Are these opportunities something that <unk> would look to fund and maybe maybe walk in the yield on the development portion of the equation.

That's possible.

That's possible.

We are looking for higher yield and keeping a low risk profile and.

So therefore, we do look at things like that.

The value adds are very interesting to us when you want to do a few make sure they work as opposed to do a lot.

And maybe have difficulty I mean, we're pretty confident we're feeling good about the aircrafts.

The activity right away came in and but.

I'm being very cautious with this also on the value.

Got it understood and then last one for me I promise just considering no problem.

Census, NAV estimates right around $15 a share.

Where the share prices right now I mean is it.

Is it a buyback under consideration.

Assuming that you could sell off maybe noncore assets to fund it and operating leverage up but just wondering what the thought is there.

It's not really because it goes totally against our strategy.

Need to grow.

So we need to grow for two different reasons, one the biggest size we get.

We get an advantage in multiple or multiples sort of compresses to what other multiples are especially when we can get sort of historically when when when over $1 billion and then we saw when we went under $1 billion. Some could hold us and some can hold us at that level. So we need to keep growing we need first of all.

It was to get back over $1 billion.

The other goal is.

To get into the bond market.

And we're not.

Terribly far away.

No.

<unk> continued to do our.

Growth of $200 million, a year that will be nice so it doesn't really look like we're going to do a buyback.

Okay understood. That's all for me. Thank you for the time.

Thank you. Our next question is another follow up question from the line of Austin, where Schmidt. Please proceed with your question.

Great. Thanks, guys I was just curious if you could speak to sort of the leasing backlog as it relates to more of the same store assets and specifically the three Melbourne, I think Westland and Derby, where you talked about potentially re leasing those later this year early next.

Yes sure sure so.

With respect to Melbourne, there has been.

Some reasonable progress there, where we've got it's about it.

70000 square foot building, and there's 58000 square feet of occupancy there and we've got good visibility into.

And to give.

That up towards 40%, 40% to 50% occupancy.

Now in.

But some of those won't really come into the fourth quarter of this year and into early into early next year, but we've had.

There is good visibility into the into the into the property and.

Expect to get more traction as the year progresses.

With the idea that it would become much more stabilized in in 2000.

In 2023.

With respect to that.

Our b assets.

But again, it's still a work in progress there is nothing new to report on.

On that and with respect to Westland.

As much of a tenant dispute as it is.

Anything else and we're really just working through the court system.

That and really it's a $4 million building with.

Again, the annual rent there is in that.

$400000 annual range and it's just been a.

It's been a dispute with the tenants that we're working through the courts on and.

Nothing new to report at this point I think we're kind of we're making progress, but as with a lot of things when you are dealing with.

The legal side of it it can be picking we're slowly.

And then just one clarification on the Toledo deal does the seven 1% cap rate does that include the lease up to stabilization and what's sort of the timeline you expect to achieve that stabilized yield.

Well I'll start I mean, the cap rates that there is what's in place today.

Yeah.

In terms of the lease up I mean, it's it's.

Finding are properties that are that are not owned by institutional investors that are where they are having.

The constrained in terms of how much ti as they're able to get tenants and that's the case in Toledo.

Now we are.

We're pretty optimistic that with coming in with an institutional owner mindset and capital for Ti improvements that the property will lease up.

In line with where it should be given the quality of the assets.

Got it and then just last one Bob could you give us the latest thoughts on the preferreds that are redeemable here later this quarter.

Yes. So currently there is no plans to redeem the preferred I mean, we are.

It's the Optionality moves to us starting next month, which is which is a positive but with the current environment.

Sure.

That's not a.

It's something that we're thinking about here in the near term.

Thanks, I appreciate the time.

Thank you.

Thank you there are no further questions at this time I'd like to turn the floor back over to management for closing comments.

Yes, I'd like to thank everybody and look forward to talking to you at the end of the next quarter.

Have a good summer.

This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

Okay.

Yeah.

Yeah.

Yes.

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