Q3 2022 Global Medical REIT Inc Earnings Call
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Okay.
Greetings and welcome to the global Medical REIT third quarter 2022 earnings Conference call.
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It is now my pleasure to introduce your host Steve Swett Investor Relations. Thank you you may begin thank.
Thank you good morning, everyone and welcome to global Medical REIT third quarter 2022 earnings conference call on the call today are Jeff Busch, Chief Executive Officer, Alfonzo, Leon Our Chief investment Officer, and Bob Kiernan, Chief Financial Officer. Please.
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.
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 the company assumes no.
<unk> 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 <unk> and adjusted EBITDA you can.
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 of the company's website at Www Dot global medical REIT 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 third quarter 2022 earnings call.
Our high quality portfolio of needs based health care facilities continues to produce excellent results in the third quarter with 97% occupancy and a stable cash flow, we achieved an 18, 1% year over year.
The increase in total revenue to $35 four.
$4 million, driven primarily by our acquisition activity over the past year.
Including a $6 8 million gain from the sale of the property our net income attributable to common shareholders for the third quarter of 2022.
<unk> eight point.
$1 million or 12 cents per share compared to.
$3 $7 million or <unk> <unk> per share in the third quarter of 2021.
<unk> in the third quarter was 23 cents per share and unit in line with last year and our <unk> per share increased by a penny to 25 cents per share and unit compared to the third quarter of 2021.
As we have discussed the acquisition environment for our target assets continues to evolve.
Reserve focuses on fighting inflation has led to a material increase in interest rates this year.
Acting the marginal cost of capital for boys potential sellers. Meanwhile, are adapting more gradually to the new reality.
<unk> an acquisition market that has slowed significantly this is very much in line with what we have seen in the past cycles when the bid ask spread was widened.
We are hopeful to see some flooring in early 2023, but it is difficult to predict that said in the third quarter. We continue to find attractive acquisitions that meet our quality and yield targets closing five acquisitions for $50.
$1 million, our Arab birch cap rate for the third quarter acquisitions was seven 1%, but this was impacted by one of our acquisitions was only 74% occupied but has substantial upside I would also note that the other two.
<unk> that closed in September had a cap rate in the seven and eight.
These transactions more fully represent negotiations that took place after significant interest rate increase had started.
In August we expanded our credit facility with 150 million term loan and extended the term of our revolver. We also entered into interest rate swaps that fixed the interest rate on our new term loan through its maturity, bringing our fixed rate debt ratio to approximately.
80% of our total debt.
Looking forward, we will be keenly selective and pursuing any incremental acquisitions until cap rates better reflects the higher cost of capital in the meantime, we are conducting a strategic review to identify properties that we can sell with a.
Focused on properties, where we have added values since acquisition by lease extension leasing uptake in CS or upgrading Chris.
Assets that can be considered core properties, we expect to use any proceeds from the sales to reduce our outstanding debt, increasing our dry powder.
In the position to restart acquisitions when market conditions improve we will provide more color on the proceeds we expect to generate and the reduction in leverage we are targeting as we move ahead, but we believe this is a prudent course of action to take.
Nick at Mist, this highly volatile economic and capital markets environment.
Overall, I am pleased with our third quarter results and want to thank the team for their hard work and contributions to our results 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 facilities is in flux, that's higher interest rates are impacting pricing.
I have been through cycles, such as this before and know that the transaction market typically it takes time to fully reflect these changes.
We will continue to source opportunities that makes sense.
Remain disciplined and prudent as the market evolves.
During the third quarter and by mid September we completed five acquisitions containing just under 250000 leasable square feet for an aggregate investment of $50 $8 million at a weighted average cap rate of seven 1%.
Consistent with the prior quarter, our third quarter acquisitions included some vacancy where we believe the lease up potential will benefit us in the long term.
These acquisitions included.
A 110800 square foot medical office portfolio in Toledo, Ohio for a purchase price of $17 $2 million with a cap rate of six 9%.
At 84% occupancy, which is anchored by University of Toledo, physicians, and a 12000 square foot Bon Secours surgery Center.
A 22006 hundred 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, which is 66% leased to advocate Aurora health.
35900 square foot medical office, and retail center in Glenview, Illinois for a purchase price of $8 $7 million with a cap rate of five 8% at 74% occupancy with a tendency focused on dental optometry and wellness.
55000 square foot medical office portfolio, and kind of dig in New York for a purchase price of $13 $8 million with a cap rate of seven 6% at 100% occupancy, which is adjacent to the University of Rochester campus and is anchored by the hospital's primary care group and by Western New York Medical.
A 23000 square foot medical office building.
Hermitage, Pennsylvania.
Purchase price of $5 1 million.
With a cap rate of eight 2% and 100% leased of steward health for over four years.
With nearly $150 million of acquisitions closed so far in 2022.
We will remain disciplined as we look at incremental growth for the balance of 2022 and into 2023.
While we continually assess potential acquisition opportunities.
Based on current market conditions, we don't have any acquisitions under contract and currently don't expect to close.
On any additional acquisitions for the remainder of 2022.
With regards to dispositions in the third quarter, we sold our medical office building in Germantown, Tennessee, receiving gross proceeds of $17 $9 million, resulting in a gain on sale of $6 8 million.
I'd like now to turn the call over to Bob to discuss our financial results Bob.
Thank you Zoe GMO REIT continues to benefit from strong relationships with our tenants and solid portfolio performance at the end of the third quarter 2022, our portfolio consisted of gross investments in real estate of $1 5 billion.
We used $4 9 million of total leasable square feet 96, 8% occupancy six four years of weighted average lease term four seven times rent coverage of two 1% weighted average contractual rent escalations.
In the third quarter, we achieved an 18, 1% year over year increase in total revenue to $35 $4 million driven primarily by our acquisition activity over the past year.
On a same store basis, excluding cash basis leases, our third quarter revenues were up $344000 or one 4% compared to the third quarter of 2021.
Our total expenses for the third quarter of 2022 were $32 1 million compared to $24 6 million in the prior year quarter.
The increase was primarily due to higher operating and depreciation and amortization expenses due to our larger portfolio.
Can it nature of the majority of our acquisitions of the past year and higher interest expenses.
G&A expenses for the third quarter of 2022, 4 million compared to $3 $9 million in the third quarter of 2021.
Within our current quarter G&A expenses note that our stock compensation costs in the quarter were just over $1 million and our cash G&A costs were $2 $9 million.
Looking ahead, we expect our Q4 G&A expenses to be between four and $4 $2 million.
Our operating expenses for the third quarter were $6 7 million compared to $4 million in the prior year quarter with the increase in these expenses is being driven by the growth in our portfolio and to a lesser degree the impact of gross leases.
Regarding the third quarter of 2022 expenses $5 million related to net leases, where the company recognized a comparable amount of expense recovery revenue and $1 4 million related to gross leases.
Our interest expense in the third quarter was $7 million compared to $4 $8 million in the comparable quarter of last year, reflecting both higher debt balances and increased interest rates.
Including a $6 $8 million gain from the sale of property debt income attributable to common stockholders for the third quarter of 2022 was $8 1 million or <unk> 12 per share compared to $3 7 million or <unk> <unk> per share in the third quarter of 2021.
<unk> in the third quarter was $16 2 million or 23 per share and unit compared to $15 8 million or 23 per share and unit in the third quarter of 2021.
<unk> in the third quarter to $17 1 million or 25 per share and unit compared to $16 $4 million 24 per share and unit in the third quarter of 2021.
Moving onto the balance sheet.
As of September 32022, our gross investment in real estate was approximately $1 5 billion, which is up $171 million from a year earlier, we did not issue any shares of common stock under our ATM in the quarter.
Regarding our debt in August we amended our credit facility to add a new $150 million term loan component with the maturity of February one 2028.
Extend the maturity date of the revolver component to August 2026, with two six month company controlled extension options.
And lastly, convert all LIBOR based loans under the facility to sofa based loans.
Immediately following the amendment, we entered into a $150 million of forward starting interest rate swaps that commenced in October 2022, and mature in January 2028 that fixed the sofa component on the new term loan through its maturity at 254%.
Current leverage and including the 10 basis point spread adjustment that's associated with our conversion sofa based loans are interest rate on the new term loan is four 5%.
At September 32020, we had approximately $703 million of gross debt our leverage ratio was 47, 6% and a weighted average interest rate was three 9%.
Current unutilized borrowing capacity under the credit facility is $244 million. Additionally.
Additionally, as of quarter end, the weighted average term of our debt was four two years up from three eight years at June 30.
Relative to our leasing activity with a modest increase in occupancy this quarter, our asset management team continues to make progress on our vacancies and upcoming lease expirations. As we look ahead to 2023 lease explorations looked at more than half of this APR Blake. The two single tenant facility they are progressing well towards renewables. Additionally, behind.
These two large explorations currently there are no individually material leases that we don't expect to renew.
Overall, despite challenging market conditions, we continue to believe we are well positioned to execute on our business strategy and look forward to sharing our progress with you through the balance of this year and into 2023. This.
This concludes our prepared remarks, operator, please open the call for questions.
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Our first question comes from the line of Boston, where Smith with Keybanc. Please proceed with your question.
Hey, good morning, everyone. Jeff I know you are still going through the strategic review process for potential asset sales, but as we think about the range of proceeds I mean is your long term.
That target of 40% to 45% debt to gross assets a reasonable range to assume you could reach within kind of these planned sales and I'm also curious.
How youre thinking about the cap rate range.
On future sales.
Okay.
The cap rate ranges is a big differential between what so many people want to buy and what we call the core assets.
And our secondary market and that so we're looking at.
Possibly.
$50 million sale too.
Hopefully be in the low sixes.
Fixes.
These are properties, we may have been able to sell in the mid fives.
A little while ago, but our target still is to start moving towards that 40% to 45.
We went up above that target with the at the time that we could have sold stock in the market and then there was a change in the.
The stock price and we're not selling stock at this time, we think the stock is way too low. So the target is still 40% to 45 with sometimes that jumped above just to do acquisitions, but it's interesting.
We have been able to take properties and by shorter term leases and extend them to longer term leases higher credits then come into these properties and suddenly we're at a whole different level and they are very attractive into the market. So we can't guarantee we're going to sell but were.
Looking into the market of selling some properties to reduce then right now we have somewhat of a pause on buying because if we by now we're probably not going to get the best rates we see.
Realizations coming into the market on in our type of markets on our type of properties, which is secondary markets in suburb.
Free markets places that make money, but we see that coming back and there's reasons people have mortgages coming up.
<unk> the same reason they always sell is the same reason they're talking to us.
But we see the market coming back up our valuation of those we have to be accretive that the time and we have to be able to take.
That down so there was a possibility of selling something and then later on buying with maybe a 200 point.
Basis gain but in the meantime to be conservative during this difficult time, it would be nice to lower our debt ratio and that would also even though our flow is that the target that we went to 20%.
Also what was the flow of that coupon.
Yes that makes sense and you referenced kind of sales in the $50 million plus range moving roughly 75 basis points I'm curious is that fair across.
The broader portfolio or have you seen.
Disproportionate move on deals inside $50 million or due to other characteristics, whether it be lease term et cetera.
I'll, let alfonzo enter that he has been in the market.
Yes, so if I.
That sounds to me more like a question of market is that like you are just trying to get a sense of what we see in the market.
Yes, just in terms of moves in cap rates, Jeff alluded to what was sort of mid.
Mid 5% cap rate deal.
Now trading in the low sixes and I'm just curious how why if that is a fair move across the board or if deals inside $50 million plus have moved even wider wider.
Wider than that.
Sure Yeah. So.
At this point, it's pretty clear that the market has moved up at least 75 to 100 basis points across the board regardless of quality location and in some instances, it's moved up higher than that.
Got it.
That's helpful. And then just one last one for me I was curious if you could provide any update on sort of.
Pipeline health systems.
And.
What's sort of the latest there and whether or not they remain current on their rent.
Yes sure sure so.
In terms of pipeline I think that a couple of things to note there.
Going through the bankruptcy process and they still have some time to decide if theyre going to accept or reject our lease are waiting for that decision. Although at this time, we don't believe that there.
<unk>.
Our lease will be rejected.
It's a below market rental rate for for this type of property.
In terms of payment, while they're going through the bankruptcy process. The timing on payments is is more determined by the by the bankruptcy rules than anything else. So we'll know more once they've decided to to accept or reject our lease but at this time. We don't again, we don't believe that the lease is going to be rejected and we expect.
Once those mechanisms take place that everything.
Again continue to get paid.
Normal.
Great. Thanks for the time.
Thank you.
Our next question comes from the line of Rob Stevenson with Janney. Please proceed with your question.
Hey, good morning, guys.
How are you guys.
Obviously paying down debt as it.
No.
Good thing and a good use of proceeds et cetera, but how are you guys viewing the preferred at seven 5% one could argue that that's your most expensive debt.
A lot of times, you're not getting credit for that as equity how are you viewing that piece in the capital stack.
If you do have.
Disposition proceeds to deploy.
Okay.
So Rob I think.
We would certainly consider it.
In terms of the potential we now have the ability to repay it but from a from a leverage perspective and the credit facility. It does count is.
<unk>.
As capital and so when we think about our pricing grid and the impact on our pricing grid, we have to be cognizant of not moving in the pricing grid.
Above that 50% level.
If we take out the preferred so I think we have to be thoughtful around that in terms of how we would how we would use proceeds for many sales. So it's on the table because of the optionality moves to us, but I think again this balancing out the impact that it might have on our on our on our pricing.
Grid and the credit facility.
Okay, and then Robert let me just add something to sort of finally, because about a year ago. We couldnt wait so we could take down the preferred based upon our equity.
We were planning on using equity to take down the preferred lower our debt level.
Make money on that but the circumstances have changed.
We always consider taking down the preferred at some point.
Okay.
Then that leads into another question I mean.
The stock has bounced off the $7 low, but still trades that are incredibly high implied cap rate on the existing portfolio of assets, how narrow do you have to be between buying.
Your own portfolio versus.
Buying an external asset to make that math work I mean, if you're trading at call. It a <unk>.
10, or 12 implied cap rate and you can buy stuff in the marketplace with an eight is that good enough given the additional sort of revenue and dropping down to the bottom line to make that work or do you really need to be in a much narrower band from your own sort of stock price and the implied value.
Of your own assets to make external acquisitions work for you.
Yes, it does.
Very good question and that's something we've looked at it all the time.
We feel our stock is too low.
Right now I guess, others do also but we think it got extremely low but the dividend. We gave in the balance sheet, we have to pay our dividend and continue to pay our dividend that we're not worried about.
Then going back and growing again.
We need to find assets that we feel are accretive how much accretive I'm not sure at this time I mean, we used to be able to do two three points and accretive and I think we will get back to that but we need to buy assets that are accretive and it includes the interest rate that we have to pay.
Hey on <unk>.
Taking down this money and includes the cost of capital so.
Its going to there may be a little bit of a pause in this until the market sort of catches up with this and others, but on the other hand, we've seen some pretty desperate sellers, who have mortgages, but theyre going out there and they don't want to they have to pay their mortgages or refinance them and us.
Other things and.
There may be some opportunities out there to be accretive.
I think we need to have a pause and let the market go up a bit also.
Okay.
And then last one for me what's the plan for that I think you said it was 74% occupied asset that you acquired.
And what's the timing on that.
Yeah I got to tell you. The greatest thing that has happened to our organization is we built up a very strong asset management department. So therefore, not only have we been able to re lease properties. Because we bought somewhat shorter leases then we turned around and make a much longer leases.
But we've been we then went into the business like in Fairfax, Virginia, We bought it basically 80% occupied and then we went in and very quickly where we able to lease up not a lot of Reits do this because they don't want they can see to show up on that.
Our numbers it sort of manufacturing their occupancy we feel that we have strong occupancy and we could buy some vacancy and increase it. So we've done that with several of our assets, where we're now buying vacancy getting a really good deal on the property and when we do it we gained a point to two.
Two points on that so that's the same type of strategy, we have on each one of our properties as vacancy in a property we have to feel strongly like what happens is sometimes the land the owner does not give allowances.
Renovation allowances or anything or they don't pay broker fees, we found that in Fairfax that they didn't like the pay broker fees. We came in we paid broker fees, we basically filled up the place.
Does this quirks and some of the ownership there's a lot of them are doctors or medical people, who just don't know how to run property properly. So we found a real niche in that to add value to a property. So therefore, when you see sometimes youll see these occupancies down lower but we could.
We feel strongly before we go in that we could rent piece up.
Okay. So this is just.
Usually people use your internal people to manage this asset better and lease it up rather than going into it knowing that you had a tenant in your back pocket or something like that or you were going to do redevelop it or something like that it's just a lease up story over the next few quarters.
And sometimes we have a tenant.
Yes.
We have a whole bunch of tenants that are national tenants that are looking for space, we contact them before we bought it sometimes we already have somebody interested.
Alright.
And I would add to like if you look at the.
Completed acquisitions table.
Point to prosperity Plaza in Fairfax, Virginia, and if you compare that with the previous quarter report I mean, we had like a six four and now it's a set of three.
I'm just pointing to the lease up that's happened at that property and just a little bit more color on glenview.
When we bought that we knew that there was going to be roll in the near term that was part of the opportunity.
Long term, it's a fantastic location.
It's nir.
Retail hub and then transportation center.
And it's got a really nice mix of.
Tenants that are focused on dental.
Optometry wellness.
And our diligence, we spoke with local leasing experts.
Confirmed what we believed would be the case that this is a property that we could fill up.
In a fairly short time, so there is near term roll and Thats reflected in the occupancy, but you are saying.
Thanks, guys I appreciate the time.
Okay.
Our next question comes from the line of Bryan Mayer with <unk> Securities. Please proceed with your question.
Good morning, most of my questions have already been asked so just kind of some follow ups to those.
On the pipeline health asset.
As it comes.
The worse and you know Theres an issue there.
My understanding is that's a pretty good asset how quickly do you think you can replace the tenant if you had to.
Yes. It is.
Good question.
Just give you some of the fundamentals.
Got.
Because pipeline wasn't operated we came in and bought this property at a tremendous discount it's 14 acres five miles from downtown Denver, and a very active area, where it's really the only hospital data now it's going for right now with the lease increases.
At $10 a square foot typically a hospital at that level and others would be about $30 a square foot per bed, new hospitals are about $1 million buying a hospital it could be 500000 or around that this is a $100000 of bed that's very good.
Good economics, they we're doing fine on this they were taking fees from here and other things.
We expect.
You know that this is an asset people have asked.
Systems that have asked us questions about this asset in the past so either they're going to run it or they could sell it.
But we still think this is a pretty good asset.
Upon the rent roll and based upon that a lot of money has gone into it by the tenants to upgrade it and set up the systems and really make it.
Their business is worth something that so I don't think theyre going to walk away from.
15 year below market lease way below market lease.
Got it.
And maybe for Alfonzo.
With interest rates and cap rates moving around.
Quite a bit.
What would it take and you know just in your history in this business.
From a cap rate upward spike for you guys to say, Hey, look we're going to Reengage here, because we don't want to turn down these cap rates or is it just simply a spread game and you know cap rates could go up 300 basis points and you don't care because your cost of capital has gone up that much.
And you just get a pass.
Well I.
I mean, there's two.
Two questions in two parts of that question, but theyre kind of intermingled.
My sense is the market right now is that it's still in transition.
I would say I would characterize the market started changing slowly but then in mid September .
It was clearly capitulation there was a lot of <unk>.
Acknowledgment that that the pricing for medical office across across the board has changed.
Pretty dramatically.
There is.
There's been a lot of movement in the last couple of months in terms of cap rate and I'm I'm inclined to think that the dust has settled yet.
And my overall sense of it is in 2023, I think there's going to be a good opportunity to buy in medical office.
But given given our.
Our.
Goals of growing this company and doing it in a way that is accretive.
We're always.
Mindful of our cost of capital and we always want to grow accretively. So.
If we can't we can't ignore that.
Yes.
We have to.
Be mindful of where capital markets are and where our stock is trading.
Okay. Thank you.
There are no further questions I'd like to hand, the call back to management for closing remarks.
Thank you everybody for joining this call we feel like we had an excellent quarter.
Going to 25, <unk> and thank you for following us.
Good day.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Yeah.