Q3 2024 Global Medical REIT Inc Earnings Call
Greetings and welcome to the global Medical REIT third quarter 2024 earnings Conference call.
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A brief question and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host Steve Swett Investor Relations. Thank you Sir you may begin.
Thank you good morning, everyone and welcome to Global Medical Beach third quarter 2024 earnings Conference call.
On the call today are Jeff Busch, Chief Executive Officer.
I'll find zoning Chief investment Officer, and Bob Kiernan, Chief Financial Officer.
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Assumes no obligation to update publicly any forward looking statements. When he was 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 reach you can find a tabular reconciliation of these non <unk>.
GAAP financial measures and the most currently comparable GAAP numbers in the company's earnings release and filings with the SEC.
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I'd now like to turn the call over to Jeff Busch, Chief Executive Officer of Global Medical REIT, Jeff.
We announced that we had entered into a purchase agreement to acquire a 15-property portfolio of outpatient medical real estate properties for an aggregate purchase price of $80.3 million.
These properties are fully leased under triple net or absolute triple net leases.
with a cap rate of 8 percent.
During the third quarter, we closed on the first tranche of this acquisition consisting of five properties for $30.8 million, and a subsequent two-quarter end in October, we completed the acquisition of the remaining ten properties.
We're happy with your question.
Great, thank you and good morning.
Speaker Change: Jeff or Bob, you both kind of referenced that you're committed to maintaining a strong balance sheet. I guess when you look at the options available, you mentioned equity and dispositions. Which do you view as kind of more attractive source today? And can you just remind us how much you have left to fund to sustain your leverage target?
and many more. Thank you. Thank you.
Speaker Change: If we don't do sell any assets or raise equity in the fourth quarter, we would end the year at 46%, so we would be just outside the
the range that we've talked about. And we're not uncomfortable going above the range. Ideally, we want to stay in our range, but from the 46%...
Speaker Change: I mean, coming back down into the target range doesn't require a lot of asset sales or equity issuances to bring it down. And so we have, you know, potential sales opportunities, but, again, there's lead time that's involved in...
Speaker Change: in sales. And so we, you know, we're always looking at the portfolio and considering potential, you know, just normal copper recycling.
Speaker Change: disposition activity and so those are the things we look at and again, if equity markets are there we would we would tap into those as well. But we're not far outside our range would be that the something point I make
Speaker Change: Are there any assets you're marketing today, and I guess with the move higher in long-term interest rates, has there been any change in sort of level of interest from buyers or the cap rates that are being negotiated versus, you know, a few months ago?
Speaker Change: There's assets that we're considering and there's, you know, Alfonzo, you can speak to the pressure on pricing, but yes, there's definitely been, the market is always evolving.
Speaker Change: Yeah, and I'd say, in expectation of the rate cuts, there was increased optimism in the market.
Speaker Change: pricing that was beginning to increase and cap rates beginning to decrease but in the last month in October with debt rates on
Speaker Change: Mortgages going up that has subdued the interest and so there's mixed messages right now, and it's
Speaker Change: not settled. You know previously I thought that maybe year-end it'd be a pretty meaningful pickup in volume as a result of the Fed rate cuts but I'm beginning to think question is how much that's going to materialize.
Speaker Change: So I guess given kind of your optimistic about the acquisition market today, but still have some funding to do, I guess how comfortable are you moving forward with any additional deals prior to funding, you know, what you've announced here for?
Speaker Change: routinely observing where we are and looking at our portfolio, as Bob said, for things that we can...
Speaker Change: sell in the market and looking for assets that either we think can achieve.
Speaker Change: Optimal pricing in the current market are just assets that we feel, long term, are not ones we want to continue owning and want to just recycle capital. But it's something that we evaluate almost on a weekly basis.
Thank you. Appreciate the time.
Speaker Change: Our next question comes from Brian Mayer with B Reilly. Please proceed with your question.
Brian Mayer: Great. Thank you and good morning. Thanks for all that color on the new set of assets that you're acquiring. I don't think that you gave it to states, though. Can you give us kind of where in the country you're buying these?
Yeah, so...
Speaker Change: You know, given the fact that we just put these under contract and we're working through diligence. I mean we we've opted to not mention the states
Speaker Change: really for confidentiality purposes. But as we move forward, I mean, yes, of course, we're going to provide more color and more detail on the transaction. But at this point, we wanted to be more confidential.
Speaker Change: Should we think about it that you're going to issue high 9s, 10s on these new deals or you know at what level is it accretive to do this second transaction that's forthcoming you know to raise equity?
at 9capassetpurchases.com
Speaker Change: And again, depending on where the debt side of the forward curve is and that side of the cost of capital, you know, when we look at that, you know, we can be accretive, you know, anywhere from, say, 950 and above when you look at those purchases.
Speaker Change: Okay. And then on the disposition side, you know, what's kind of driving the selectivity of the assets that you sell? Is it just, you know, there's slower growers? Are there known vacates coming? I mean, what's driving that side of the equation?
Speaker Change: I mean it's a variety of things. I mean the ones you mentioned. I mean also properties that we feel can get optimal pricing.
Speaker Change: So it kind of covers the full spectrum but yes I mean properties that are you know just given our current company and where we want to what you know where we want to go forward properties that are just too small or locations that are just not ideal
Speaker Change: But also properties that we feel have renewals that are not as high as we would want. And so we're getting ahead of those expirations with trying to sell these things with term on them.
Speaker Change: And then just last from me, and correct me if I'm wrong, you talked a little bit about Stewart and Beaumont and that you had collected rents for, I guess, June, July, August or July, August, September.
Speaker Change: Did you guys, I somehow feel like you didn't collect March, April, May. Am I thinking about that right and has that since changed?
Speaker Change: That's right, Brian. We did not collect for March, April, and up to that point in bankruptcy.
Speaker Change: post-bankruptcy up until the point where they, you know, rejected the lease. So that's something that we're actively working on and would be, you know, pursuing with, you know, with the court.
Okay, thank you. That's all for me.
Speaker Change: Our next question comes from the line of Rob Stevenson with JANI. Please proceed with your question.
Rob Stevenson: Good morning, guys. Can you talk about where the Christos rent is versus Stewart? And do you have Christos elsewhere in the portfolio today?
Speaker Change: The annual rent for the new lease is $2.9 million, and it's slightly above the previous rent that Stewart was paying. They were right around $2.8 million.
Speaker Change: Okay, and is this going to be your only location at present with them when this lease starts?
Speaker Change: Yes, I'm pretty sure. I mean, there might be a small lease, but to my knowledge, I mean, nothing material. This would be a new relationship.
Rob Stevenson: Okay, so your exposure then will be less than 3% in terms of tenant as percentage of AVR.
Thank you.
Speaker Change: And then I guess do you have any CapEx on this asset prior to them moving in that you'll have to complete?
Rob Stevenson: Yes, Rob, so part of the process of just getting the asset
Speaker Change: in the condition for Christos and getting it all situated, it involved a fair amount of CapEx. We've been spending upwards of, probably before it's all said and done, close to $900,000 in CapEx.
specific to
Speaker Change: to the property. A lot of that will be costs that we will claim in the bankruptcy court, you know, as a claim against Stewart for things that
Speaker Change: should have been or, you know, been maintained as part of the lease.
Speaker Change: And so these are mainly infrastructure type items, and some of them have, you know, lead times in terms of getting the equipment, installing the equipment, things of that nature. And so it's, you know, there's definitely a process involved in just delivering that asset.
Okay.
Speaker Change: And then on the $70 million portfolio acquisition, is there a specific reason why the closing is further out and in two tranches? Is that just to allow you guys…
Speaker Change: To finance it, is it something on the seller's part? Is there something that needs to happen before you can close? Can you just talk about that?
Speaker Change: Yeah, so I mean a variety of things, but preliminarily it's just flexibility. You know and actually with our experience on the the most recent transaction when we staged when we did it in a couple tranches it resulted in in some efficiencies as well and so
Rob Stevenson: If we can do it again, it's something that we want to do on this transaction as well. But I mean, it's flexibility that can go either way and, you know, if we change our minds later on and we want to do it all at once, that's...
Rob Stevenson: something that we consider. But having said that, I mean, there's also diligence items that we have to dig into and and it just made more sense to spread it out over a couple of tranches.
Speaker Change: Okay, and is there any significant tenant concentration in that portfolio that's going to push into your top ten?
Yes, there is.
Speaker Change: The biggest change would be Trinity. So that one would bump up from number 10 to potentially number 3.
Speaker Change: Okay, that's helpful. Thanks guys. I appreciate the time this morning.
Thank you.
Speaker Change: Our next question comes from the line of Alec Fagan with Baird. Please proceed with your question.
Alec Fagan: Hi, thanks for taking my question. First one is what is the plan to fund the portfolio deal and future acquisition opportunities? Is it just the dispositions and equity or are you going to potentially raise debt as well?
Right now the plant
Speaker Change: to do dispositions and equity. We raised a little bit of equity, $12 million in the last quarter, and we do have some sales already in process.
Speaker Change: So, we're realigning our acquisitions, we're taking a look at some of our assets that are not performing as well, and we've been able to sell them at pretty attractive prices.
Speaker Change: So, we're looking more towards equity and dispositions than debt, but it may go slightly and temporarily above on the debt.
that we target.
Speaker Change: How much more runway does GMRE have with its asset recycling program? Is this something you can do for quarters on end, years?
Speaker Change: It's probably not going to be a permanent solution. The market tends to adjust.
Speaker Change: So, for instance, you know, the market tends to adjust. We've been buying, as you notice, our average buying is somewhere in the mid-8s right now. So, for instance, if the rates do not come down, the market always adjusts because groups have to sell. So we will be buying higher cap rates.
and which means that we can go to equity also.
Speaker Change: Are you planning to issue a term loan to reduce the line balance anytime soon?
Thank you for watching. Bye-bye.
Speaker Change: Currently, that's something we'll look at probably in the first half of next year.
Thanks guys, that's it for me.
Thank you.
Speaker Change: Our next question comes from the line of Juan Sinabria with BMO Capital Markets. Please proceed with your question.
Speaker Change: Good morning. This is Robin Handel. I'm sitting in for Juan.
Speaker Change: I'm not sure if this was touched on already, but on Christos, how much, if any, did rents decline in the Bumont assets under the transition, and should we model any other modest sequential declines in the non-Bumont assets post the Stewart bankruptcy?
The rent of the Beaumont facility, yes.
Thanks a lot.
Speaker Change: Well, the rent at the Beaumont facility is just marginally higher than the previous steward rent, so it's $2.9 million.
of Annual Rent, and we talked about that cash rent.
Speaker Change: starting in, you know, March or April of next year is our current outlook, and so...
Speaker Change: That asset, again, is kind of net above. The other steward leases.
Speaker Change: have not been rejected, with the exception of one very small lease in a multi-tenant building that we have in Hialeah, Florida. The lease was rejected in...
Speaker Change: At the end of October, and it's a very, again, it's a very small leaf. It's under 4,000 square feet of space, so not anything noteworthy from an overall perspective.
Speaker Change: Okay, and your dividend payout ratio inclusive of CapEx is north of 100% of FAD. How does the board and management think about this dividend sustainability, in particular with leverage generally elevated?
Speaker Change: Yeah, right now we could maintain our dividend and we're looking in the future that we can maintain our dividend. We do see accretive deals coming through.
Speaker Change: So we get, and we get the rent increases regularly. We had a very big two years of releasing. It's an unusual amount of releasing in the last two years, which causes a bit more capital, a bit more TI.
Speaker Change: type of thing. So we do see that PI and capital starting to reduce, given proportionally we don't have so many, you know, releases coming up. So we do look like, you know, to maintain our dividend.
Speaker Change: Okay, and this has been combed over quite a bit, but is there a dollar size of the pool of assets that are targeted for future disposition?
Speaker Change: It's a fluid number. It's not a targeted number. It's something we look at all the time in assessing potential.
Speaker Change: at sales opportunities and sometimes they're inbound inquiries about assets that people want to purchase that we are dealing with as well so it's I think it's not a set number it's a just a I think yeah think of it more as a fluid situation
Speaker Change: LOIs that have come in on assets that were attractively priced, which forced us to reconsider whether we wanted to sell it or not, and a couple of those we've moved forward on.
Speaker Change: Got it. Makes sense. And just curious on your lease expiration exposure for 2025. It just increased a little bit. Could you maybe just elaborate on that?
It could be from assets that we've acquired.
Speaker Change: that would have impacted the number. But from an outlook on our 2025 expirations, I mean, we're, you know, currently, you know, again, looking at this very similar to how our experience was, you know, in this.
Speaker Change: year in calendar 24 relative to releasing. So I think we're optimistic about our occupancy and leasing activity looking ahead into 2025.
Speaker Change: Okay, and last one for me. The pipeline, how big is it today? What assets are you looking at and what types of yields should investors expect? Is this 9% a good run rate going forward?
Yeah, so I mean, the market is continually evolving and
Speaker Change: What we're focused on primarily is medical office and that's typically where the bulk of the volume is in the market anyways. But cap rates that in the market for the type of assets that we're looking at, they're more in the high sevens to mid eights range.
depending also on whether it's single-tenant or multi-tenant.
Speaker Change: And so, there are not that many opportunities that are nine and above.
Speaker Change: But we're always looking for unique situations, and they do occur, and there's a couple of opportunities that I've...
Speaker Change: heard of that might be coming down the road where, you know, you are getting into that.
Speaker Change: you know, high 8s, low 7s range, but the bulk of the market is in the high 7s to mid 8s.
Thank you.
Speaker Change: Our next question comes from the line of Gaurav Mehta with Alliance Global Partners. Please receive with your question.
Speaker Change: Thank you. Good morning. I wanted to ask you on your… Good morning.
Speaker Change: I wanted to ask you on the portfolio acquisition that you have under contract and your comments about market cap rate in high 7 to mid 8. What was specific about this portfolio that drove the cap rate to 9% which is higher than where the market is?
Speaker Change: A variety of factors but I mean one of the things that drives cap rates, a big one, is properties that are
Speaker Change: attractive to funds that have short lifespans, you know, five-year hold periods. You know, what they're looking for are properties that are ideal for flipping, for
Speaker Change: putting within a portfolio and getting a premium on the exit and you know given the fact that these properties are on campus
Speaker Change: And just given the profile of the properties and its location, I mean, it's not ideal for that kind of strategy. And so, you know, you're getting extra yield for that reason. But the other one, too, is this was...
Speaker Change: A relationship deal, one that, you know, the parties involved, we have connections with that span many, many years.
and there was a process that they employed to find somebody to partner with for this and I think that contributed as well to some of the yield.
Okay, thank you. That's all I have.
Speaker Change: Thank you. We have reached the end of the question and answer session. I would now like to turn the floor back over to management for closing comments.
Speaker Change: Thank you everybody. I think we had a good quarter. We've acquired nice properties with good rates and we have good contracts on future properties and thank you very much for attending.
Speaker Change: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
Robert Stevenson, Stephen Swett, Austin Wursch