Q3 2023 Global Medical REIT Inc Earnings Call
Greetings and welcome to the global Medical REIT third quarter 2023 earnings Conference call. 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 <unk>.
Investor Relations. Thank you Sir you may begin. Thank you good morning, everyone and welcome to global Medical REIT third quarter 2023 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 note. These 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 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 is making this statement for purpose of complying with those safe Harbor.
Furthermore, actual results may differ materially from those described in the forward looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including without limitation those contained in the company's 10-K for the year ended December 31 2022.
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 company may refer to certain non-GAAP financial measures such as funds from operations adjusted funds from operations <unk> and adjusted EBITDA.
You can find a tabular reconciliation of these non-GAAP financial measures to the most currently comparable GAAP numbers in the company's earnings release and in filings with the SEC.
Additional information may be found on the Investor Relations page of the company's website at Www Dot global medical REIT dotcom.
Now I'd like to turn the call over to Jeff Busch, Chief Executive Officer of Global Medical REIT, Jeff.
Thank you Steve.
Morning, and thank you for joining our third quarter 2023 earnings call.
Our high quality portfolio continues to produce strong and consistent results.
With portfolio occupancy at the end of the quarter of 96, 7% and a weighted average lease term of five seven years.
During the quarter, we sold a medical office building located in North Charleston, South Carolina at eight 5.3% cap rate receiving gross proceeds of pinpoint 1 million and resulting in a gain of $2.3 million year to date.
We have generated more than $80 million of gross proceeds from recent.
His position using the net proceeds to pay down our variable rate debt, resulting in a leverage ratio at quarter end of 44, 2% and reducing our ratio of variable rate debt at just under 11% of our total indebtedness.
Including the $2.3 million gain from the sale of the North Charleston property.
Our net income attributable to common shareholders for the third quarter 2023 was $3 1 million or five cents per share compared to $8 $1 million, which included $6 $8 million gain from the sale of a property or two.
The cents per share in the third quarter of 2022.
F F O in the third quarter was 22 cents per share and unit down one cent from the third quarter of last year and after that though with 23 cents per share and unit down two cents from the third quarter of last year. The primary reason for the decline in both.
S F O N E F. F O was an increase in interest costs in the current quarter due to the elevated interest rate environment.
During the quarter, although we had no acquisition.
We continue to dedicate time and resources.
Densify properties that align with our investment criteria and prudent underwriting standards.
As we start to see more attractive pricing in the market, we will remain disciplined in our approach.
Good thing on high quality assets that would be our credo.
Ernie.
Overall I am pleased with our third quarter results I want to thank the entire team for their hard work and contributions to our result with that I turn the call over to our funds, though to discuss our disposition activity and our current acquisition market conditions in more detail.
Thank you Jeff.
Transaction market for our target assets continues to be conflicted with the number of higher interest rates and a wide bid ask spread.
We continue to see a number of opportunities, but we are disciplined about our investment process.
Although we did not complete any acquisitions in this quarter.
We continue to actively engage with a wide range of physician groups brokers and corporate sellers.
We are ready to seize potential opportunities, particularly as some owners may consider selling if they face challenges and refinancing their mortgages.
The market continues to evolve and we are tracking it closely.
As Jeff mentioned in the third quarter, we sold a medical office building located in North Charleston, South Carolina at a cap rate of five 3% excuse me gross proceeds of $10 $1 million.
This sale, we have now completed three dispositions for a total of six properties.
Generated $80 5 million in aggregate gross proceeds.
A weighted average cap rate of six 3%.
Thing in an aggregate gain of $15 6 million.
We were very pleased with the level of investor interest that we experience in executing these dispositions.
Given the continued uncertainty with the equity markets and their influence on current equity valuations in our cost of capital. We are faced with challenges in predicting when our acquisition activity will resume.
Nevertheless, we are actively involved in the market and are prepared to ramp up our acquisition efforts once markets normalize and cap rates generally provide an attractive spreads relative to our cost of capital.
During this time, we have the benefit of staying patient due to the stability of our diversified portfolio of high quality medical office properties, along with our ample liquidity.
As always we will continue to seek opportunities that align with our investment strategy and capital structure and will leverage our competitive advantages such as scale access to capital and the potential use of op unit deal structures when applicable.
With this approach we remain confident in our capacity to navigate current market challenges and capitalize on opportunities as they arise.
The investment landscape has improved significantly in 2023 this thing from a sellers market to a buyers market and we expect leverage to continue improving for buyers with access to capital.
I'd like now to turn the call over to Bob to discuss our financial results.
Bob.
Thank you all found though.
Our portfolio continues to produce consistent and solid results demonstrating its resilient foundation.
At the end of the third quarter, our portfolio consisted of gross investments in real estate of $1 $4 billion.
$4 7 million of total leasable square feet 96, 7% occupancy five seven years of weighted average lease term 4.2 times rent coverage with two 1% weighted average contractual rent escalations.
In the third quarter, our total revenues increased slightly compared to last year to $35 $5 million driven primarily by the timing of our 2022 acquisitions and the performance of our portfolio.
Actually offset by the impact of property dispositions.
On a same store basis, excluding cash base leases, our third quarter revenues were up $900000 with three 4% compared to the third quarter of 2022, driven by our rent escalators as well as new leases.
Our total expenses for the third quarter were $33 million compared to $32 $1 billion in the prior year quarter. This increase was primarily due to increased operating expenses and G&A.
Our interest expense in the third quarter with $7 $2 million compared to $7 million in the comparable quarter of last year at the deleveraging we have accomplished so far in 2023.
Incorporated into our results. Despite the continued high interest rate environment.
In particular note the beginning in early August our credit facility pricing improved by 15 basis points as a result of our reduced leverage. In addition in early August certain of our forward starting interest rate swaps became effective replacing maturing swaps, which reduced the interest cost on our $350 million term.
Don.
By 30 basis points compared to prior periods.
G&A expenses in the third quarter of 2023 were $4 $4 million compared to $4 million in the third quarter of 2022.
In our current quarter G&A expenses noted our stock compensation costs of $1 $2 million in the quarter and our cash G&A costs were $3 $2 million.
Currently we continue to expect our G&A expenses to be in the range of $4 $3 million and $4 $5 million on a quarterly basis.
Our operating expenses for the third quarter were $7 $2 million compared to $6 $7 million in the prior year quarter with the increase in these expenses driven by the changes in our portfolio since the comparable prior year period note that real estate related taxes represent the largest component of our operating expenses.
Regarding these third quarter expenses $5 $3 million related to net leases, where the company recognized a comparable amount of expense recovery revenue and $1.4 million related to gross leases.
Net income attributable to common stockholders for the third quarter was $3 $1 billion or five cents per share compared to $8 $1 million or 12 cents per share in the third quarter of 2022.
Net income for the current quarter included a gain on sale of the North Charleston Medical office building $2.3 million in the prior year included a gain on sale of $6 $8 million.
<unk> in the third quarter was $15 $3 million or 22 per share and unit compared to $16.2 million or 23 per share and unit in the third quarter of 2022.
So in the third quarter was $16 $5 million or 23 per share and unit compared to $17 $1 million or 25 cents per share and unit in the third quarter 2022.
Moving onto the balance sheet as of September 30th 2023 our gross investment in real estate was one $4 billion, which is down about $60 million from the start of the year, reflecting our disposition activity.
As of September 30th 2023, we had $626 million of gross debt with a weighted average remaining term of three one years.
At quarter end, 89% of our total debt was fixed rate debt, our leverage ratio was 44, 2% and a weighted average interest rate was 378%.
As I mentioned with our reduced leverage ratios during the quarter, we lowered the sofa margins in our credit facility by 15 basis points.
So for margin on our revolver now at 135% and our term loan margins are now at 1.30 per cent.
Lastly, the current Unutilized borrowing capacity under the credit facility was $318 million we.
We did not issue any shares of common stock under our ATM program during the quarter or subsequent to quarter end.
With respect to our lease exploration based on activity to date currently we're projecting that we'll retain 80% of the 363000 square feet that we've noted is expiring this year and 86% of the related expiring a b R E.
We expect to end the year with occupancy of approximately 96, 5%.
Our outlook regarding 'twenty 'twenty four lease expirations is very good and in general consistent with our experience on 2020 threes lease explorations.
Capital expenditures on the portfolio through September 30th our cash spend was approximately $5 $8 million.
We're projecting additional expenditures of approximately $2 million related to building and site improvement and $1 billion and tenant improvement primarily associated with lease renewals and lease up we expect to be completed during the remainder of 2023.
In conclusion, as we look through the balance of the year with our strong portfolio and ample liquidity available to us. During these uncertain market conditions. We believe we are well positioned to restart our growth strategy as conditions normalize and look forward to sharing our progress in it.
Orders to come.
This concludes our prepared remarks, operator, please open the call for questions.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Our first question comes from Austin, <unk> with Keybanc capital markets. Please proceed with your question.
Hi, good morning.
Can you provide some additional detail on just the volume of opportunities or breadth of conversations that you're having it on deals that kind of meet that underwriting criteria and you mentioned the bid ask spread remains wide, but it has it narrowed at all from the last 60 to 90 days or so.
Sure. So we've we see about 30 or 40 deals a month.
A lot of it doesn't make sense are the bid ask spread has improved over the year.
It started pretty wide at the beginning of 'twenty 23, and.
Has narrowed quite a bit there's been kept its relation from from sellers are started the year with a lot of reluctance to accept that there was a pretty significant change in pricing.
But there's increasing acknowledgment that pricing has changed.
By a pretty meaningful amount and there's buyers who are coming sorry, sellers, who are coming to market now are much more realistic. What's also happened is what's coming to market are the quality is has has varied a month by month.
There was a stretch where there wasn't a quality had been lower than average that's changing as well I think there's a some of the sellers coming to market.
You now have to sell for a variety of reasons some of it include.
<unk> financing, that's that's a running out of term some of it is just a developers who had product that they they want to sell despite the increase in pricing.
There's a there's a lot of reasons why people are still coming to market. Despite the high.
A increase in cap rates. So the bid ask spread has improved quite a bit you know from from my vantage point, there hasn't really been.
A very compelling deals are yet for us to move forward and that's irregardless of where our stock prices like that Theres, just hasn't really been anything super compelling, it's getting better I mean, there's there's beginning to be opportunities that are catching your eye is that seem pretty interesting and so the.
Trend is moving in the right direction, but for the past several months, our like what's what's our what we've seen in what's been in the market Hasnt.
It hasnt been that compelling.
So as a follow up I guess as it relates to that wall of or as you're saying sellers are kind of facing upcoming maturities and seem like they're more willing to negotiate I mean is there sort of a period or a wall of maturities that you're looking towards.
You can see an even greater increase in opportunities or are you expecting more of a continuous drip of deals into next year.
Sure Yeah, so definitely and any offering that has a short walden and that depends on location quality of the building the rent roll, but you know anything with I'd say less than three years of wall is very hard to finance right now unless it's just has a very a unique location and so.
Any offering that has a short walled them is not finding a mini bids and in some cases no bids and so there is opportunities to go in there and get properties at a pretty significant discount to where they were a year ago and and so we've been looking at a fair number of them.
Those opportunities but to.
To date, there hasn't really been any offering yet that that has the right quality mix that has the right a risk profile that has the right rent roll.
And you know for the ones that do have a good profile that do have a good rent roll that are attractive buildings, there's still a pretty wide bid ask spread and so you know.
For 2023 I'd say.
Investors have been rewarded for being on the sidelines I you know that there've been better deals had now than they were at the beginning of the year and I think there's acknowledgment by by people in the market that.
You were not rewarded for for getting into the market and in the first half of the year.
I think that's starting to change and I think a lot of it has to do a lot of it is hinged on you know expectations for what the fed is going to do and whether or not it's going to you know what's what's in store for 'twenty 'twenty four but I think we are approaching a point where.
Investors are going to start feeling more comfortable pushing back into the market are more meaningfully.
Would you be willing to take on some more limited you know Walt I guess for the right discount you know that that leasing risk for the right discount and that's it for me.
Yeah, and you know.
A lot of that is hinged on.
Our underwriting of the renewal probability and so there've been some opportunities that we've pursued in the past.
Where that was the case, where it was a short Walt but you know we felt very strongly that the renewal was gonna be a you know very very high just given the context, given the property given the tendency and so yes, you know if if there's a property that has the right quality makes the right rent roll.
And very high renewal probabilities, then you know.
With a sufficient discount you we would pursue.
Thank you.
Our next question comes from Juan <unk> with BMO capital markets. Please proceed with your question.
Hi, Thanks for the time I'm just curious what's left on the disposition side that you guys are targeting I believe you were initially thinking maybe 90 million. So just wanted to confirm if that is still contemplated as we move into 224 or how youre thinking about dispositions flash to leveraging.
Where the market has changed a bit since we sold we got really good pricing, so where we're looking around to possibly sell some more but I'm pretty doubtful that we will get the right pricing that we got before so we're more likely to stay at $80 billion and 90 million.
Yes.
Okay, and then just curious on the acquisitions where you're.
Maybe a little bit more comfortable that pricing is adjusted from a seller's expectations from higher rates et cetera, what kind of.
Cap rates or yields or are you looking to target for.
For acquisitions in and is it more skewed towards multi or single tenant deals.
Deals if you can just give us a little color of where you feel most comfortable if and when the acquisition kind of restarts.
Okay number one rule before we do anything it has to be accretive and we have to like the property and it has to be the same quality of property, that's given us a 97% occupancy.
In the last periods of time.
So multiple tenant can be very interesting because it's not that competitive there's a lot of groups just don't have the capability like we do of managing the multiple tension.
Single tenant it's more competitive.
But you know I I expect I'm, hoping to get in the eights, maybe in the nines it really depends on what the cost of debt is.
At the time that we do come in but the number one criteria. We have is it has to be decently accretive to the portfolio and the second element is we're in the process of reducing our leverage so we'd be using basically 60% equity and 40% debt on average so there.
There's a process that we're looking so there are several criteria we have to work on but it definitely has to be accretive.
Great. Thank you and then.
You gave some general parameters I think I'm trying to think about 24, so how should we think about occupancy.
Over the next kind of.
Five quarters or so as I think you had it.
Maybe some non renewals in the fourth quarter. If you can correct me if I'm wrong, there and just expectations into 'twenty four for.
Coming maturities some leases.
Yeah, Yeah. So yeah, we yeah, we expect our fourth quarter.
Occupancy mi to be right around 96, and a half right in that ballpark and then as we look ahead to 2024.
We're looking at a R. R renewals to be really tracking very similarly to how how we did this year you know you know somewhere in that 80% to 85% type range on on boat square feet, and you know and on a B R. As we as we as we look at 'twenty two.
For right now and so with that would be from a an overall occupancy you know it would be in this you know if it ticked down I think it depends on absorption.
Baby as a floor you know think of.
1990, 6% of high 95% as the is maybe where the trend on the on the low side.
But I think we feel very confident and.
How we are trending for for 2024.
Great. Thank you very much.
Our next question comes from Rob Stevenson with Janney. Please proceed with your question.
Good morning, guys just to just to follow up on that last question.
Can you talk about how much demand you're seeing for incremental space today, I mean relative to the last few years is it harder or easier or about the same in terms of back filling vacancy in the demand for expansions from tenants.
Yeah, I would say, we we keep back filling vacancy it may even be a little bit better than last year. We're finding tenants are we fill in some.
Challenging ones.
You know you always have some ones small ones that have been challenging that been sitting for a couple of years. We solve that this year I'm encouraged that medical medical office is is growing I mean, we're not doing much with the expansion I think it's because cost of capital right now.
But we are seeing that a lot of our you know long term you know they were small but longer term. We've been we've been finding that we're leasing them up so I'm very encouraged about the leasing and going forward.
The same thing you know we hear if somebody who is moving out and then we hear you know relatively quickly a replacement so the market seems to be okay.
In that terms are.
If we do in 2024 lose some tenants I expect that we'll sell them up relatively quickly.
Okay. That's helpful and I think you might have a small genesis care house that has that been resolved as of yet or is that process still ongoing.
We really didn't have any significant exposure Rob to Genesis.
We did have I think was something that was moving out in the fourth quarter and and so nothing there's really nothing material from an impact perspective on our portfolio.
Okay, and I guess, Bob that leaves me to other than the impact of any you know acquisitions dispositions and higher rates is there anything else that's either carrying over from the third quarter positively or negatively earnings wise or alternatively going away did we should be thinking about when a factoring.
Factoring in our into our models.
No no no nothing nothing significant really perfect bridge, the third to the fourth quarter to the third quarter was very consistent if you kind of think back from a trend perspective. After after the dispositions. It. So you know I think very predictably and I don't think there's anything really to Oh.
Unusual, but that's I've mentioned the occupancy expectations for the end of the year, but otherwise you know the trends relative to our.
Where we are going from a rent perspective from a from a interest perspective is it's teed up and I think it really nothing unusual expected.
Okay and win during the quarter to the the sale happen how much of the the NOI off of that did you wind up recognizing in the third quarter.
Just one month of it it was okay.
Okay perfect. Thanks, guys appreciate the time.
Our next question comes from Alex <unk> with Baird. Please proceed with your question.
Hello, Thanks for taking the time today.
The first one is relating to that 90 basis points of expiring leases you mentioned that 80% of the space will be renewed and 86% of the a b R.
Curious to know what kind of lease escalators, you're able to get with those tenants.
We we've been averaging 2.5% on our portfolio with lease escalators.
And remember that most of them are triple net absolute net most of our properties are triple net absolute net but they're really paying the expenses of the inflationary expenses. So we get 2.5 beyond that.
Is that a 2.5 changed at all from the beginning of the year to now.
Yeah actually it's been going up.
I mean, our overall portfolio you know it was running around two 1% and we're seeing now about 2.5.
Present in the renewables type of piece.
Okay. Thank you.
Yes.
Second question is that how are your tenants performing are there.
Any change to the watch list.
No no no.
Yes, Theres been no yeah, no significant changes relative to tenant performance, we've had no real solid tenant performance over the last year. So nothing nothing notable.
Good to hear them.
Last one for me is how much of the investment pipeline comes from new relationships versus existing ones.
I don't have a precise stat on that I mean, it hits its pretty varied.
And you know, we we cast a pretty wide net but I'd I'd say on average about a third of what we see is from from new sources.
Okay. Thanks, guys have a good day.
Uh huh.
Our next question comes from Brian Meredith B Riley Securities. Please proceed with your question.
Thank you and good morning, just two quick ones for me.
Maybe for.
Jeff or Bob on the dividend you know.
And I asked this before prior quarters that just want to throw it out there again, you know what the elevated payout ratio relative to <unk> or Fad you know, we know what improves organically in 'twenty 'twenty four 'twenty 'twenty five and I suspect that if you make accretive acquisitions that that only gets better but not worse, but we get a lot of questions.
From shareholders and advisers that that dividend is safe at current levels is it your thought that the board holds the line that the 21 cent dividend.
Yes. This is Jeff and I'm also on the board something in that discussion, yes every the board does not want to.
To change the dividend I wouldn't expect it going up either.
But.
For the immediate future, we feel safe with the dividend, we think we sort of hit a bottom here you know we sold out a bunch of properties brought down our variables in that we still get you know our increases every year and our increases every year are now exceeding what you.
You know the additional debt costs could possibly be unless something else too wild, but we think we're okay with the dividend.
I I totally expect so there's no moved to do anything with it.
Great and just one more for me maybe for Alfonzo.
When you're talking to potential sellers do they seem to continue.
Continue to be somewhat receptive to taking op units you know has that tone changed at all you know what's going on in that regard. Thank you.
Sure with the O P. As it's always been curious to me it it it really is hard to predict.
I find it curious that we've had success in California with O piece I think that's you know theres a specific state such a context that might be a reason for that it also is highly.
Dependent on the specific like a state planning of the physicians.
And for some for some physicians are you by the time, we are talking to them. They were already thinking about it and had done a lot of homework about Oh P unit chairs up rates down rates and so when we were you know we didn't there was there wasn't much that we had to explain or walk.
Through I mean, they they pretty much knew what they wanted and so it's it's really hard to predict and we make a point of mentioning it whenever whenever we think it makes sense, but it's not a product that a lot of people are familiar with are comfortable with and one of them move forward with an <unk>.
Change for their properties.
Yeah. Thank you that's all for me.
We have reached the end of our question and answer session. This concludes today's conference. Thank you for your participation you may disconnect your lines at this time.
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