Global Medical REIT Inc.

Greetings and welcome to the Global Medical Week third 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 an 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, Evelyn Inferno. Thank you. You may begin.

Thank you, Operator. Good morning, everyone, and welcome to Global Medical REIT third quarter earnings conference call. On the call today, we have Jeff Bush, Chief Executive Officer, Alfonso Leone, Chief Investment Officer, and Bob Kiernan, Chief Financial Officer. Please note the use of 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, including statements related to the COVID-19 pandemic and its effect on our tenants' business. 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 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 September 30, 2020, and its other Security 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 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 most currently comparable GAAP numbers and the company's earnings reliefs and its filings with the Securities 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, so given the circumstances, if we have any technical difficulties, just please stand by. I'd like to turn the call over to Jeff Bush, Chief Executive Officer of Global Medical REIT.

Thank you, Evelyn. Good morning, and thank you for joining our third quarter earnings conference call today. Joining me on the call are Alfonso Leon, our chief investment officer, and Bob Kiernan, our chief financial officer. We hope that everyone continues to stay healthy and is doing well. The pandemic continues to test the economy and our industry in a variety of ways. Even in this challenging environment, I am pleased to share that Global Medical continues to perform extremely well. In the third quarter, our AFFO per share and our unit grew 21% compared to last year. And aside from agreed upon deferrals, we collected all our base rent and collected over half the 1.1 million of rent deferrals we extended to our tenants. We continued to find success on the acquisitions front, closing on $171 million of properties year-to-date at an 8% weighted average cap rate. In addition to delivering strong operating results in the third quarter, we reached $1 billion of real estate investment increased our credit facility borrowing capacity by $100 million to $600 million, and completed our management internalization transaction. I am pleased with our accomplishments in such a challenging year. Most importantly, we delivered on our primary business objective in the face of a global health crisis. This reinforces the resilience and reliability of our investment strategy, and we remain diligent and disciplined in our pursuits. Our strategy is aligned with the evolution of the healthcare delivery, and we are excited about the road ahead. With that, I'd like to turn the call over to Alfonso to discuss our acquisition activity.

Thanks, Jeff. The interest and activity level in the medical real estate market has greatly improved over the last several months, and we believe that the opportunities we are seeing are incrementally more attractive and appropriate for our strategy. We have been extremely active evaluating and closing transactions. In the third quarter, we closed on five properties for approximately $60 million, and through November 4th, we closed on two additional properties for approximately $24 million. The acquisitions in the third quarter were purchased at a weighted average cap rate of 7%, and year-to-date, our weighted average cap rate for the $171 million of completed acquisitions is 80%. I'd now like to share some details on selected properties we've purchased in the quarter. Among the larger acquisitions in the quarter were Franklin Square Center in Rosedale, Maryland, and Wake Forest Baptist Health in Winston-Salem, North Carolina. Franklin Square Center is a two-property multi-tenant MLB where we purchased an 83.4% condominium interest. The property is currently 89% leased and is anchored by MedStar Health, the largest healthcare provider in Maryland and the District of Columbia. The property is located less than one mile away from the 347-bed MedStar Franklin Square Medical Center. Moving on to Wake Forest Baptist Health, this is a 45,500-square-foot single-tenant MLB located in an infill market in a dominant medical corridor proximate to two major area hospitals. Wake Forest Baptist Health recently completed a merger with Atrium Health, one of the largest health systems in the country. This was our second transaction with Wake Forest Baptist Health, and they are now one of our top ten tenants. In addition to what we closed in the third quarter and to date, we have an additional eight properties with an aggregate value of approximately $72 million under contract. As has been our policy to date, we are carefully evaluating the properties to make sure that the properties and their operators meet our investment criteria, and we can offer no assurance that we will ultimately close on these acquisitions. We are optimistic about the quality of opportunities we are seeing. GeoFlow is approaching, if not exceeding, pre-COVID levels. Our disciplined and methodical approach to this asset class, as well as our ability to close, affords us a key advantage over other market participants in the space. With that said, we are diligent about the accretive nature of all potential assets, and we value the specific potential of each rather than buying for the gross sake. Given the challenges that were introduced by COVID, we believe that our process has become even more stringent. We are pursuing acquisitions that we believe will endure over the long term, and our consistent approach should provide our shareholders with an attractive risk-adjusted return. I would now like to turn the call over to Bob to discuss our results in more detail. Bob?

Thank you, Alphonta. I would like to echo Jeff's remarks in noting that we had a very strong quarter operationally. The continued growth of our investment portfolio over the last 12 months and our same store rental increases resulted in a 38% year-over-year increase to our revenues to $25 million. As I go through our financial results, it's important to note that our management internalization transactions had a significant impact on our third quarter expenses and ultimately our results. In particular, a portion of the consideration that we paid in the transaction was recognized as a one-time expense. We also incurred additional professional fees in connection with the transaction, and our G&A expenses now include payroll and other administrative costs previously borne by a former manager. Our total expenses for the third quarter of 2020 increased to $34.7 million. Note that this total includes a one-time expense of $12.1 million that represents the portion of the consideration paid for internalization that was attributed to the settlement of our contractual relationship, that is, settlement of our previous management agreement. In addition, we recognize half a million dollars of transaction-related costs in the quarter related to internalization, primarily professional fees. Apart from cost specific to internalization, our expenses were driven by our acquisition activity with depreciation and interest expense remaining our two largest expense items in the third quarter. Depreciation expense was $7 million in the third quarter of 2020 compared to $5 million in the prior year quarter. Interest expense was $4.9 million in the third quarter, up 6.9% from the year-ago period due to higher average borrowings used to finance our acquisitions partially offset by lower interest rates. Reflecting the impact of our internalization, G&A expense for the third quarter of 2020 was $4 million compared to $1.7 million in the prior year quarter. The incremental increase in cash G&A in the third quarter due to internalization was slightly less than $1.7 million and in line with our expectations. This incremental increase in cash G&A was more than offset by the elimination of the former management fee, which was $2 million in each of the first two quarters this year. We expect to continue to see a creative benefit of the internalization in the years ahead as we continue to grow and scale the portfolio. Also included in GNA is non-cash LTIP compensation expense of $1.6 million for the three months ended September 30, 2020, compared to approximately $900,000 in the prior quarter and $868,000 for the same period in 2019. The increase in our LTIP compensation expenses reflects the impact of LTIP grants that were made this quarter in connection with internalization, which events over the next four years. Our weighted average interest rate for the third quarter of 2020 was 3.3% compared to 4.2% in the third quarter of 2019. The year-over-year decline was largely driven by the reduction in LIBOR over the past year. Net loss attributable to common stockholders for the third quarter of 2020 was 10.3 million compared to net income of 770,000 in the third quarter of 2019. The change was primarily due to the one-time $12.1 million management internalization expense previously discussed. Our FFO for the third quarter of 2020 was negative 3 cents per share and unit as compared to 19 cents per share and unit in the third quarter of last year. The change was, again, primarily due to the one-time $12.1 million management internalization expense, which is not considered an adjustment to FFO. Our AFFO for the third quarter of 2020, which does adjust for the one-time management internalization expense, was $0.23 per share and unit, up $0.04 or 21% compared to the prior year quarter. Moving on to the balance sheet, as of September 30, 2020, Our growth investment at real estate was nearly $1.1 billion, an increase of $156 million, or 17.2% from year-end 2019. Turning to the liability side of our balance sheet, our total net debt was $519 million at the end of the quarter, up from $386 million at year-end 2019, reflecting our acquisition activity. With respect to equity issuances, during the third quarter, we issued 1.9 million shares through our ATM program at an average price of $12.98 per share, generating gross proceeds of $25.1 million. Year-to-date, through September 30th, we generated gross proceeds of $39.2 million through our ATM program. Touching on our liquidity, during the third quarter, we increased our total credit facility capacity to $600 million, and added approximately $15 million in mortgage debt to partially fund one of our acquisitions. We finished the quarter with total liquidity, including cash and availability on our credit facility, of $144 million. And as of today, our total cash and availability on our credit facility is approximately $110 million. Though Jeff touched on collections earlier, I would like to provide a bit more detail. The impact of the COVID pandemic on our financial performance continues to wane, and aside from previously agreed upon rent deferrals, we collected 100% of our base rent due to the third quarter. We did not enter into new rent deferral agreements in the third quarter, and in fact, more than half of the 1.1 million of deferred rents we discussed on our last call were repaid during the quarter. As of September 30th, 464,000 remained outstanding, on our rent deferral program, the majority of which we expect to collect over the next three months. While we are optimistic about how 2020 will conclude and how we are positioned for 2021, recent reports indicate a spike in new COVID-19 cases in the U.S. and globally. This resurgence of the virus and any resulting regulatory decisions at state and local levels could potentially impact our operations. With that said, we are hopeful that given the nature of our tenant's businesses and our experience so far this year, that our investment portfolio can continue to perform well in this environment. This concludes our prepared remarks. We'd 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 one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 the star keys. One moment, please, while we poll for questions. Our first question is from Brian Maher with B. Riley Securities.

Please proceed with your question. Good morning, guys, and pretty nice quarter there. Maybe for Alfonso, can you give us a little color on the Fairfax property you bought Spectrum? I appreciate the comments on Wake Forest and Franklin, but maybe a little bit more color on that property since it was a pretty big one for the quarter. Sure.

So... The 17.6 million, 74,000 square foot medical center in Fairfax, that's 100% leased to Spectrum Healthcare Resources, which is a military healthcare division of Teen Health. So Spectrum signed a 10-year lease after they secured $242 million of federal contracts from the Defense Health Agency. So what they're, in essence, doing is they're providing... It's a multi-specialty clinic that serves the defense health agencies. There's a few military bases in the area, and they're serving the service members and the families that are in these bases. And really what they're doing is giving these military bases an attractive health care option at a lower cost than the local hospitals. So it's a contract that was competed. They beat out a couple other groups, and we did a lot of research into Spectrum and the nature of these contracts and felt very, very good that, you know, they're going to be in there for the 10 years.

And then on the acquisitions you've made so far in 4Q, I noticed more dialysis in there. How far down that road do you want to go, and do you think that there's anything out there, I would suspect not, that could threaten that business over the long haul?

Yeah, so the analysis is something that we've looked at over the years. In the past, a lot of what we've seen in the analysis space has traded in the low to mid six cap, and it hasn't been that compelling yet. Recently, we've been able to find deals, and we do have a few dialysis tenants in our portfolio already. So on occasion, we do find deals where the pricing is attractive, the context is attractive. We have spent a lot of time internally talking about the industry and try to think of how it's going to evolve in the future and, you know, what impact, you know, to what extent is home care going to really influence the nature of dialysis. The properties we actually bought recently were – the seller is actually a group that has a ton of experience in dialysis, and so we've – It's been a process of learning about the industry and getting our heads wrapped around it. We feel pretty good about where the industry sits. We like the facilities that we're buying. We think there's good local trends and fundamentals that support each facility. And we are liking the price point that we're finding them.

Great. And then just last for me, and given the resilience of you know, healthcare assets, particularly OBs and some of the other subclasses, you know, in 2020, even with COVID, are you seeing anything different in the expectations of the sellers since the sector's held up, you know, I would say better than many of the real estate asset classes, or is it more of the same?

I think it really depends. I think, just to start somewhere, the facilities that are right down the fairway for a lot of investors, the ones that are anchored by big health systems, newer facilities, the inventory that's trading at the five cap, I do sense that they do feel, and rightfully so, that there is you know, meaningfully increased interest for that asset type. And I think they are, you know, they're being more aggressive with their ask. I think they're also being more thoughtful about selling. In the niche that we're targeting, you know, I think I've seen actually a variety of reactions. I have... Um, there, there were a group of sellers that, um, were in a, uh, were of the mindset of selling their assets, diversifying. There was a group, um, that I would say during the summer, um, had much more aggressive, um, stance on selling their buildings or more aggressive ask, but it softened as we started, uh, coming towards the end of the year. Uh, not clear exactly why, but, um, You know, I do sense that. I think if I had to summarize it, like I do feel like in the niche that we're in, there's a realization that, you know, there is a very healthy liquid market for these assets. There is a lot of buyers. But I think there's also an acknowledgement, and I think for each seller, there's a learning process. You know, I think each seller, every seller thinks their building is a six cap when in reality it's probably a seven. And so I think there is a learning process that happens with a lot of these sellers, and it takes a lot for them to realize that, okay, I'm not going to get the pricing I was hoping to get. My expectations were unrealistic. But I do sense as we started towards the end of the year that there was, for some sellers, a strong interest in selling assets this year, and there was some reference to – concerns about increased taxes. But I think broadly speaking, I think it really kind of depends. I mean, I've seen a little bit of everything.

Thank you.

Our next question is from Amanda. Please proceed with your question.

Thanks. Good morning. It looks like your occupancy fell about 80 basis points during the quarter. Can you just break out what portion of that was maybe due to acquiring properties that weren't fully leased, like it sounds like Franklin Square Center, and then how much of any is due to kind of leasing dynamics within your portfolio?

Sure. So you're right. When we acquired the Rosal asset, there was about 11,000 square feet that was vacant. There's about another 5,000 square feet in Bannockburn, and we're in discussions with a group to take the majority of that space. There's about 1,300 square feet in Grand Rapids. That is leased, but the lease doesn't commence until 2021. We have some small vacancies in Livonia, and we have a vacancy in Las Cruces. We have a lot of prospects on that building. And, you know, so cumulatively, that's how you get to the increase in vacancy.

Okay, that's helpful. And then what are you seeing in terms of dynamics? Have you guys gotten more inquiries for your vacant space? Any color you could provide there would be helpful.

Sure. So I would say any space that we have that is either has a lease expiration coming or is vacant, we have – you know, our team is actively pursuing leasing those spaces up or, you know, talking with the tenants to renew or, you know, giving – looking for alternative tenants if the tenant has expressed, you know, for negotiations reasons, wanting to move somewhere else. So I would say, you know, the team is getting ahead of these vacancies. There is a lot of discussion. I think we feel pretty good about the level of interest and activity. And, you know, I think that, you know, I'd say the team is on it and there is a lot of activity.

That's helpful. And then apologies if I've missed it, but can you provide the estimated cap rate for the $72 million of acquisitions you currently have under contract?

Sure. So it ranges from low to low sevens to low eights, and on average, it's about mid-sevens.

That's helpful. Thank you.

Our next question is with Connor Seversky with Berenberg. Please proceed with your question.

Hey, everybody. Thanks for having me on the call today. First question on rent coverage looking stable across the entire portfolio. And I forgot if you had mentioned this last quarter, but for the acute care hospital property, I think there's only one within that portfolio. Does this metric include any contribution from the CARES Act or any other form of government support? And then if not, you know, what's your strategy with that particular asset looking forward?

Alfonso? We're going to have to probably get back to you on that one. I'd have to consult with the group that prepares those numbers. But, you know, my knee-jerk reaction is probably depends on the tenant. I mean, if it's the inpatient, I think there might be some money in there, but So I'd say for the physicians, they pay probably a lot less, but I'd have to get back to you on that one.

Okay, fair enough. And then looking at some of the information put out from the MOB peers this week, and with some of the larger names eyeing the space for potential investment opportunities, maybe moving away from senior housing or what have you, I mean, how do you look at the long-term opportunities as you're looking at the MOB markets? I mean, I would imagine that within some of the top MSAs, pricing will become a little tight. So, you know, if you could just provide color about how you would look to invest in MOBs going forward, whether it be in secondary markets or if you would move down another avenue in the future to grow the portfolio where pricing might be more favorable.

So our fantasy has been to pursue secondary and tertiary markets, right? And, you know, historically, we've not been very active in the primary markets. So, you know, and I think in the primary markets and the fact that there is more interest in MOBs and there's a shift away from other asset types like senior housing, I think that is going to put more pressure on pricing in these primary markets where, in particular, a lot of the new money in medical office wants to put their – make their investments. as in these bigger markets. In our niche, our strategy has always been to try to be as nimble as we can and try to pursue as many opportunities as we can and try to use speed to our advantage. We built a very good track record of execution that is really helping us get deals. Very often, we're getting calls on deals that fall out of contract. that's becoming, for whatever reason, in this year, that's become pretty common. And, you know, I suspect that that might have to do with some 1031 buyers that are not completing their transactions or financing that wasn't as attractive as initially underwritten. So we've, you know, going forward, our strategy is to continue doing what we've been doing. You know, and I don't think there's, as I said today, I don't see, you know, any meaningful change to the market that I need to react to. I think our strategy is working and we'll continue to pursue this strategy.

Okay, fair enough. And then last quick one for me. Within those secondary, tertiary markets, then, do you have a, you know, maybe addressable market size or estimate for MOB assets or understand if you don't?

Sure. And actually, I just got a note on the CARES Money Act. So the numbers do not include the CARES Money Act. But back to the other question, I mean, the size of the MLB market, I don't have the figure in front of me, but, you know, it's hundreds of billions off the top of my memory. Just looking at what I've seen over the years from research agencies like Revista or some of the bigger brokerage houses like CBRE or JLL. It's hundreds of billions. How that fragments into how much of it is owned by the health systems, how much of it is already owned by the REITs, how much of it is getting developed, how much of it is in the hands of physicians, and how much of it is in the hands of private investors, that I don't have, but, you know, it's the aggregate size and, again, working off memory is, you know, hundreds of billions.

All right. Thanks for that. That's all from me.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question is from Gaurav Mithap with National Securities. Please proceed with your question.

Yeah, thanks. Good morning. So, I guess, you know, as you think about impact of COVID on your acquisitions, I was wondering, you know, if you have changed how you're underwriting these assets as compared to what you were doing pre-COVID in terms of return hurdles or growth expectations?

Let me, I'll answer that. Essentially, we're probably doing more due diligence than we did before. One of the key elements of our organization has always been deep due diligence. So therefore, unless we could visit properties, we're sort of kick the tires type of people. Unless we could visit properties, we won't be closing on them. We may have them under contract, but the due diligence has to be finished. Right now, there are issues. We've gone out and required a tenant to put up a year worth of rent in escrow for this period. They had a strong group. We are looking at covert, and any possible risk that can come from covert has been added to our due diligence, but we're not doing less due diligence because of the pandemic situation. We sometimes have delays and slowness to close, but the due diligence has to stay at the same standard because that's sort of our key to us finding gems in secondary markets and having very high returns risk adjusted. So, therefore, we're looking for low risk, but part of that low risk is a deep due diligence dive.

Okay, great. Thank you. That's all I had.

Thank you. Appreciate it.

We have reached. It appears that there are no further questions at this time. I would like to turn the floor back over to Jeff Bush for concluding comments.

Thank you for everybody attending this year's earnings, this quarter's earnings, and please be safe and healthy and careful in the coming six months. Thank you.

This concludes today's conference thank you for your participation you may disconnect your lines at any time.