Global Medical REIT Inc.

Greetings and welcome to Global Medical REIT Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A 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. I would now like to turn the conference over to your host, Evelyn Inferno. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Global Medical REIT's second quarter earnings conference call. On the call today, we have Jeff Bush, Chief Executive Officer, Bob Kiernan, Chief Financial Officer, and Alfonso Leon, Chief Investment Officer. Please note the use of forward-looking statements by the company on this conference call. The statements made on this call may include statements which are not historical facts and are considered forward-looking, including statements related to the COVID-19 pandemic and its effect in our tenants' businesses. The company intends these forward-looking statements to be covered by safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. and is making the statement for the 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, 2019, and Form 10-Q for the quarter ended June 30, 2020, and its other Securities and Exchange Commission filings. The company assumes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. Additionally, on this conference call, the company may refer to certain non-GAAP financial measures, such as funds from operations and adjusted funds from operations. 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, In its filings at the Securities and Exchange Commission, additional information may be found on the investor relations page of the company's website at www.globalmedicalreit.com. Please keep in mind that we are doing this call remotely and given the circumstances, so bear with us if we have any technical difficulties. I would like to turn the call over to Jeff Bush, Chief Executive Officer of Global Medical REIT.

Thank you, Evelyn. Good morning. Thank you for joining our second quarter earnings conference call today. Joining me on the call today are Bob Kernan, our Chief Financial Officer, and Alfonso Leon, our Chief Investment Officer. We hope that everyone is staying healthy and doing well as we navigate through this unprecedented time. Global Medical had a strong second quarter despite the challenges that the pandemic has introduced to our operations and those of our tenants. All of our facilities affected by the pandemic are open and operating. For the second quarter, we collected 95% of our rent and we saw a significant reduction in tenant rent deferral requests, which now represents 3% of our rents. While of course there are some tenants facing challenges, in the current environment, our properties are 99% occupied and the essential nature of the healthcare services our tenants provide gives us confidence that the portfolio will continue to perform well. As we anticipated, acquisition volume in the second quarter slowed. However, year to date, we have completed 132 million of transactions at an 8.1% weighted average cap rate. Looking ahead, we continue to be measured with respect to our acquisition activity, given the fluid nature of the pandemic. We will prioritize both our team's health and safety, as well as our onsite due diligence process as we pursue acquisitions for the remainder of the year. After quarter ended, Global Medical achieved several important milestones. First, the most significant, we completed our internalization process. I would like to thank the board special committee for all its work on the internalization transaction and for managing through the process during the unprecedented times. I believe that the cost effective internalization transaction that was delivered will provide long-term value to the company's stockholders. Second, our portfolio now exceeds $1 billion and has a weighted average cap rate of 7.9%. I am very proud of our team's work in building this portfolio asset by asset. Over the past five years, and believe that it provides an excellent foundation for the company's continued growth. Lastly, we increased our borrowing capacity by $100 million by upsizing our credit facility to $600 million while expanding our bank participants. We believe that this increased borrowing capacity positions us well ahead heading into the second half of this year in 2021. I will now turn the call over to Bob to discuss our second quarter results.

Thank you, Jeff. Last night after the market closed, GMRE reported financial results for the second quarter ended June 30, 2020 via our press release and posting of our supplemental earnings package to our website. Total revenue for the quarter increased 30.7% year-over-year to $22.1 million due to the continued growth of our investment portfolio through our accretive acquisition strategy as well as same-store contractual rent increases. Regarding rent collections and tenant activity, note that we collected 95% of our second quarter rents and reduced our rent deferral amounts to $1.1 million of total rent, or approximately 3% of our second quarter rent. This deferral number represents rent that would have been collected between April and July, and we expect to collect these deferrals primarily between July and December of 2020. Lastly, in the quarter, we recognize reserves for approximately $1 million of rent, including approximately $400,000 of deferred rent, primarily related to one tenant. Total expenses for the second quarter of 2020 increased 41.4% to $20.4 million year-over-year. Depreciation and amortization expenses and interest expense remain large components of our total expenses for each period as we continue to actively acquire properties. Included in total expenses for the quarter were $920,000 of costs related to the internalization of the manager. G&A expenses for the second quarter of 2020 was $1.6 million, relatively flat compared to the year-ago period. Included in this line is LTIP compensation expense of $897,000 for the three months ended June 30, 2020, as compared to $854,000 for the same period in 2019. Depreciation and interest expense continue to be our two largest expense line items in the second quarter, driven by our acquisition activity. Depreciation expense was $6.6 million in the second quarter of 2020, compared to $4.6 million in the prior year quarter. Interest expense was approximately $4.4 million in the second quarter, up 5.9% from the year-ago period due to higher average borrowings used to finance our acquisitions. Our average borrowing cost for the second quarter of 2020 was 3.38% compared to 3.81% in the prior quarter and 4.27% in the second quarter of 2019. The sequential quarterly and year-over-year decline in our borrowing costs was largely driven by the reduction in LIBOR over the past year. Net income attributable to common stockholders in the second quarter of 2020 was $204,000 compared to net income of $904,000 in the second quarter of 2019. The change was primarily due to the rent reserves and $920,000 in expenses related to the management internalization that I mentioned. Our SFO for the second quarter of 2020 was $0.19 per share and unit, up one penny as compared to the prior year quarter. Our AFFO for the second quarter of 2020 was $0.21 per share and unit, up three pennies as compared to the prior year quarter. Moving on to the balance sheet. As of June 30, 2020, our gross investment in real estate was nearly $997 million, an increase of $91 million, or 10% from year end 2019. Turning to the liability side of our balance sheet, our total debt was $466 million as of the end of the second quarter, up slightly from $464 million at the end of the first quarter and $386 million at the year-end 2019. Activity during the second quarter reflects the previously discussed slower pace of acquisition volume, as well as repayment using proceeds from equity issuances. Specifically, we issued 14 million of our common stock at a weighted average price of $11.44 per share through our ATM sales program. Regarding our liquidity, we finished the quarter with total liquidity, including cash and availability on our credit facility of $89 million. Since quarter end, we've had some significant updates to this, including closing on our internalization, which I will discuss in more detail shortly, closing on 45 million of acquisitions, and expanding our credit facility by 100 million. After considering these events, as of today, our total cash and availability on our credit facility is approximately 130 million. swapped $50 million of our new term debt in the facility at 0.158% LIBOR for the remainder of the term, effectively fixing the LIBOR component of the $350 million term loan at 1.91%. I would now like to discuss the financial details related to the recent management internalization. With the transaction, we internalize the functions performed by our previous manager, Inter-American Management, by acquiring the entity that owned the manager for $18.1 million in cash. All the employees of the manager are now employees of the REIT, ensuring management continuity. The elimination of the manager streamlines our organizational structure and eliminates management fees, including prospective fees on new equity, allowing GMRE to keep more of any future capital-raised proceeds, and importantly, also eliminates future potential incentive fees. Going forward, we're projecting an additional $1.7 million to $1.8 million of quarterly cash G&A associated with internalizing management. This incremental G&A will be offset by eliminating the former management fee, which was running at $2 million per quarter. In future years, we anticipate that the accretive financial benefit of internalization can potentially be more meaningful as we continue to grow and achieve economies of scale in the portfolio. As we shared on our first quarter call, because of the uncertainties of the pandemic, including the lack of clarity in changing regulations at the state and local level, we're unable to give you a specific outlook for the rest of the year. With that noted, we believe that our ongoing engagement with tenants and collection rate we've achieved to date, including collections here in the third quarter that are progressing consistent with the second quarter, position us well to navigate these uncertainties. I will now turn the call over to Alfonso, who will review the investment landscape and our investment activity.

Thank you, Bob. We've completed 132 million of acquisitions for the year thus far at a weighted average cap rate of 8.1%. We had a strong start to 2020 with approximately 68 million of acquisitions comprised of four properties at a weighted average cap rate of 8.6% in the first quarter, followed by an additional acquisition of $19.3 million in Dumfries, Virginia at an 8.8 cap in the second quarter. Since the end of the second quarter, we have closed on three additional properties, including Mercy One Hospital in Centerville, Iowa for $5 million, Spectrum Health in Fairfax, Virginia for approximately $17.6 million, and a multi-tenant MOB anchored by MedStar in Rosedale, Maryland for $22.5 million. Last week, in conjunction with the expansion of our credit facility, we announced that our overall portfolio crossed the $1 billion mark. That was an exciting milestone for us to reach in addition to the many other milestones we have reached this year. As Jeff mentioned earlier, our acquisition pace slowed in the second quarter due to the impact of COVID on the real estate market and our adoption to all COVID-related restrictions. According to a recent CBRE report, Real estate investment sales in the Americas across all asset types were down roughly 70% year over year in the second quarter, mainly due to fewer large portfolio transactions. Within the healthcare real estate sector, as reported by Revista, transaction volumes were down 35% year over year in the first half of the year. Now I'd like to provide you with a more detailed overview of what we have been seeing in the transaction markets over the several months past. Although public REITs pulled back, private equity buyers have stepped in and more than picked up the slack left by public REITs. To a large degree, the private equity buyers kept the market moving forward with little to no disruption to offerings, but resulting in delays and uncertainty in closings, which is impacting reported transaction volumes. The market for healthcare real estate has been very active since mid-May, with offering volumes in our niche tracking the monthly averages since 2018. In July, the transaction market was back to pre-COVID levels, with many operators we are talking to seemingly back to 60% to 80% of historical volumes, and many operators remained open during April and May with little to no deferment in rent. Pricing remained generally consistent. However, with higher quality deals are pricing 10 to 25 basis points tighter while other lower quality properties in particular properties that are having difficulty getting financing are pricing 25 to 35 basis points higher. We are still seeing deal flow and practices are stabilizing. We see more optimism about the second half of 2020 and 2021. and the consensus in the industry seems to be that deal volumes will continue at a healthy pace. It seems like many deals that were put on the sidelines in April and May came back to the market in June and July. So although volumes of deals coming to market quickly recovered, the volumes in June and July may have been higher than they would have been without the delays from April and May. Since deals typically take 90 to 120 days from LOI to closing, we would expect to see a lot of deals closing in a third quarter that were delayed from the second quarter. August is typically a slower month with respect to deals coming to market. So the real test will be the month of September, which is usually one of the busiest months of the year for deals with everyone trying to get their transactions to market with the goal of closing by year end. At this time, we have two properties under contract for 15 million, which if completed, would bring our total for the year at $147 million. As has been our policy to date, we will be carefully evaluating these properties and operators against our investment criteria with no assurance can be made that we will ultimately close on the acquisitions. Thank you for joining us today. We would now like to open the call for questions.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Please limit to two questions. You may press star 2 if you 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 star keys. Our first question comes from Brian Marr with B Reilly. Please go ahead.

Great, and good morning, and congratulations on the internalization. I know that that was a big deal for you guys, so congrats. Thank you, Paul. As it relates to two items I just wanted to touch upon, you know, rent collections, you briefly touched upon that in your prepared comments, but are you getting any body language from your tenants that with some of the stimulus coming to an end at the end of July, that there may be more need in the second half of 2020, or is business recovering to the level where that's probably not going to be a need looking forward?

Hi, Brian. This is Jeff. The answer to that essentially is most of our facilities are non-discretionary services. If you don't do it now, you've got to do it later. So when they... canceled out and had most of our facilities close or only do emergency procedures, there was a backlog of business. We can't predict how much the pandemic will cause a delay. Maybe less people will come at one time. But the business is pretty standard for most of our places. And it came back right away. We had A lot of eye surgery places, they're pretty much closed down, but the cataracts don't go away, the laser surgeries don't go away, and immediately after they opened, it was a nice amount of business. We don't expect these type of business, our tenants are now open, we don't expect them to close again like they closed in the past because the general healthcare community, the government community, and others see that as was a real problem. There were more deaths attributed to closing facilities and lack of procedures than ever been for that type of situation. So with the protective gear, with the abilities they're doing at these facilities, we don't see them to close. They may have dips of business and then it comes back again when the pandemic moves out of their area because people feel like going in now and may delay their procedures. but we see the business is pretty steady.

Great. And then my other question relates to sellers out there and if, you know, and maybe this is for Alfonso, are you seeing any change in the motivation of the sellers? I know you talked about the cap rate expectations for higher quality and lower quality assets, but are the sellers coming to the table because they need cash or is it really the same reasons as they had for selling assets pre COVID?

So I think it's hard to tell. I mean, it's always hard to tell why sellers are selling. I suspect that there is probably a heightened desire for cash, probably a higher desire for diversification. But I mean, thus far, I mean, what I'm sensing and what I'm hearing is not very different from what I was hearing before.

All right, great. That's all for me. Thank you.

Next question comes from Alex Kubicek with Baird. Please go ahead.

Morning, everyone. When you guys think about your cost of capital today, is it fair to say you're a little more comfortable investing at the lower end of your target cap rate range, or are the 7% cap rates we've seen thus far in the third quarter more just a byproduct of the pricing that's coming to market today? Just like you said, high quality gets a little more expensive. Just curious on that front.

Our cost of capital has definitely gone down. but we still have the same targets at about a 7.5, and it's an average rate. So you saw a bunch of projects that we closed on, facilities we closed on around 8. That was just unusual high. And then we tend to buy, you know, different types, sometimes more MOBs that are close to the 7. And we look at it as an average, trying to hit an average of 7.5. And the extra spread that we get, because everything for us is about spread, the extra spread just makes us more accretive to the shareholders. It's not intentionally going lower. It's just what the deals are, what the averages are, what the sides of the deals are.

That makes sense. And then the other question I have, I noticed in the fourth quarter this year, it looks like on your credit facility there's going to be a new covenant. that you have to keep your dividend at 95% of AFFO. Jeff, you know, from your perspective and the board's perspective, would you anticipate keeping a relatively tight payout ratio kind of in that 90% to 95% range, or do you think over time as you grow, you kind of want to build in some sort of cushion for volatility? Just kind of curious on what your thoughts are.

We have two goals, and it's good with the extra, you know, the extra earnings we make from the spread right now, because our stock has gone up because the lower interest rate, we have two goals. One, a very strong goal is to lower our debt percentage to bring down the leverage. The other goal is also at the same time, because we could manage it as we go is to bring up the AFFO. So our coverage ratio is much more above 85% is just, uh, A requirement for the banks, we plan to go higher than that, and at the same time, deleverage at the same time. We're fortunate to be in that position with our just over 2% rent increases a year, and our cost base is flat, and our internalization improves our cost basis. So our spread is tremendous compared to where we were, and it just keeps getting better. So therefore, those are our two goals, and we're going to do both at the same time.

Makes sense. Thanks for taking my questions. Thank you. Thank you.

Our next question comes from Connor Siversky with Barenburg. Please go ahead.

Good morning, everybody. Thank you very much for having me on the call. Just a little bit more on leverage, still somewhat high compared to the rest of the group. Could you maybe provide a little more detail on your financing strategy over the next several years, perhaps offer a little perspective on how you could incrementally bring down leverage or if the strategy in the current environment is to grow EBITDA to hit that certain target?

Bob? Sure. So, yeah, Connor, so we look at this more in the near term and driven by the acquisition pipeline as much as anything. And so for the near term, as Jeff mentioned, our goal is to bring down leverage but to do that gradually and over time and all at the same time of increasing our AFFO and hitting our targets relative to that. That's really our first priority. Again, I think we really need to look into the acquisition pipeline in terms of how that guides us relative to that process. I don't really want to speak to a three-year target, per se, because I think what we're dealing with right now is kind of more of a near-term look at both our leverage and our acquisition pipeline.

Okay, thanks. Appreciate the color there. And then a little bit on collections, 95%, a little better than perhaps what we were all initially anticipating there. Any rhyme or reason to categorize the tenants that haven't paid yet? Is it any specific practices or markets where there may be more impact for COVID in the current timeframe?

No, Connor. I mean, it's, you know, if you think of the 95% of collections, you know, the delta largely there is deferrals that we've entered into. And those deferrals have varied from, you know, there's not a real common denominator among the deferrals, I wouldn't say. And so you're just bridging from that 95 up to 100, and again, primarily deferrals in terms of the difference there. So nothing in particular.

Okay, I appreciate the call. That's all from me.

Thank you. I would like to turn the floor over to Jeff for closing comments.

Well, thank you, everybody, and I hope you are safe and stay safe, you and your family. Thank you.

This concludes today's teleconference. Thank you for your participation.