Global Medical REIT Inc.

Greetings. Welcome to the Global Medical REIT fourth 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. Please note this conference is being recorded. I will now turn the conference over to your host, Evelyn Inferna. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Global Medical REIT. fourth quarter and year-end 2020 earnings conference call. On the call today, we have Jeff Bush, Chief Executive Officer, Alfonso Leon, 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, 2020, which will be filed on or about March 8, 2021, 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 in the company's earnings release and its filings with the Securities and Exchange Commission. Additional information may be found on the investor relations page of the company's website at www.globalmedicalread.com. I'd like to turn the call over to Jeff Bush, Chief Executive Officer of Global Medical Read. Go ahead, Jeff.

Thank you, Evelyn. Good morning, and thank you for joining our fourth quarter and year-end 2020 earnings call. Joining me today are Alfonso Leone, our Chief Investment Officer, and Bob Kiernan, our Chief Financial Officer. We hope that everyone continues to stay healthy and is doing well. 2020 was a challenging year in many ways, but our company fared very well. GMRE was founded with a vision to create a resilient, high-quality portfolio of medical facilities aligned with the strongest operators and health care systems in their local markets, with the expectation that these properties would generate stable revenue in return for our investors. The challenge of 2020 tested our investment thesis, and we are pleased that our portfolio delivered another quarter and another full year of solid performance. During the year, we completed our management internalization, 226 million of acquisitions at a 7.8% weighted average cap rate and reached a milestone of over $1 billion in real estate investments. With respect to earnings, year over year, we grew our quarterly AFFO per share by by 14.3% to 24 cents, and our annual AFFO per share by 17% to 88 cents. Finally, based in part on our AFFO growth, yesterday our Board of Directors approved a half-cent increase in our first quarter dividend, which is the first increase in our dividend since our IPO. Overall, we could not be more pleased with the performance of our portfolio and the resiliency of our tenant base and the dedication of the GMRE team. I would like to thank our entire team for their hard work and focus in helping us reach the milestone we did in 2020. We are proud of what we accomplished in a particularly challenging year, and we look forward to the continued success of executing on our growth plan in 2021. With that, I'd like to turn the call over to Alfonso to discuss our acquisition activity.

Thanks, Jeff. We ended 2020 with a highly active quarter, purchasing approximately 80 million of high-quality off-campus medical properties at a 7.3% weighted average cap rate. These properties represented essential medical uses, including cancer treatment centers and dialysis centers, which complement the composition of our existing portfolio. For the year, we completed 226 million of acquisitions, comprising over 915,000 Leasable square feet at 7.8% weighted average cap rate. Through these acquisitions, we expanded relationships with Wake Forest Baptist Health and Spectrum Team Health, which changed the composition of our top 10 tenants. We also broadened relationships with prominent regional operators, which is a key component of our acquisition and platform strategy. As an example of our strategy, in early 2020, we closed on a 25 million MOB in High Point, North Carolina that is 100% leased to Wake Forest Baptist Health on a triple net basis at $19 per square foot. The property was a 2008 Bail to Suit for Cornerstone Healthcare, which has occupied the building since its opening. In 2016, Wake Forest acquired Cornerstone, which at the time was a 275-plus provider multi-specialty group running one of the top performing ACOs. We leveraged our relationships to source this deal and better understand the tenant's long-term plans for the building. In September, we leveraged our new relationship with Wake Forest to underwrite and acquire an 8.5 million MOB in Winston-Salem, North Carolina that is 100% leased to Wake Forest. In October, Wake Forest merged with Atrium Health which is AA3 rated, creating a new system with 42 hospitals. Relative to our recent activity, since the end of 2020, we have closed three acquisitions for $25.4 million with a weighted average 7.7 cap rate. We have an additional six properties with an aggregate purchase price of $76 million under contract. As has been our policy to date, we are carefully evaluating the properties to make sure that they and their operators meet our investment criteria, and we can offer no assurances that we will ultimately close on these acquisitions. Deal flow appears to be back at pre-COVID levels, and as we have shared in the past, we remain highly selective with respect to capital deployment and will not pursue transactions that do not make economic sense. As we look at deal flow and our expectations for 2021, While acquisition closings may not be consistent from quarter to quarter, we anticipate a continuation of our current acquisition pace of between $175 million to $225 million of properties for the year at an average cap rate range between 7% and 8%. I'd like to turn the call over to Bob to discuss our financial results. Bob?

Thank you, Alfonso. I would like to reiterate Jeff's remarks that the portfolio produced strong results despite the conditions brought on by the pandemic throughout 2020. Even with these challenges, our properties performed extremely well. We grew our investment portfolio and increased our ABR by over 16% during 2020. With respect to key performance metrics, we ended the year with portfolio occupancy of 99.1%, total leaseable square feet of 3.7 million, with a weighted average base rent of $23.71 per square foot and 2.1% weighted average contractual rent escalation. Our tenants produced 4.8 times rent coverage in our weighted average lease term, increased to 8.2 years, up from 7.8 years at the end of the third quarter after the renewal of two leases with Encompass Health in our Pennsylvania facilities and a lease renewal with Kindred Healthcare our Mercy Rehabilitation Hospital in Oklahoma City. The performance of our properties and the impact of our acquisitions resulted in a 22% year-over-year improvement to our revenues to $24.9 million in the fourth quarter. This includes collecting 99.5% of monthly base rent for the quarter and reducing outstanding rent deferrals to approximately $100,000. For the year ended December 31, 2020, total revenue grew approximately 33% to 93.7 million. Our total expenses for the fourth quarter of 2020 increased to 22.3 million from 20.5 million in the prior year. For the year, total expenses were 96.2 million as compared to 61.1 million. The year-over-year increase reflects the 14 million recognized in connection with our management internalization as well as increases in depreciation, amortization, and operating expenses due to the growth of our portfolio. Our management and fertilization also impacts changes in our G&A expense. G&A expense for the fourth quarter of 2020 was $4.4 million and compares to $1.6 million in the prior year, as well as $1.7 million of management fees recognized in the prior year. The increase in G&A expenses was primarily due to the recognition of compensation and other administrative expenses that prior to our internalization were the obligation of our former advisor and included in our management fee. The remainder of the increase in G&A is related to LTIP compensation expense, reflecting the impact of the LTIP grants made in connection with internalization to the company's employees. These grants will vest over a four-year period. For the year, G&A expense was $11.9 million as compared to $6.5 million in 2019. The year-over-year change reflects the assumption of compensation costs and other administrative expenses that were formerly the obligation of our advisor. It also reflects the impact of LTIP grants made to the company's employees noted earlier. Moving on to interest expense. For the quarter ended December 31, 2020, interest expense was $5.1 million as compared to $4.8 million in the prior year. For the year, interest expense was $18.7 million as compared to $17.5 million. The increase for the quarter in the year reflects the impact of increased average borrowings due to the growth in our overall real estate portfolio, partially offset by the reduction in LIBOR compared to 2019. Net income attributable to common stockholders for the fourth quarter of 2020 was 1.1 million, or 2 cents per share, as compared to net income of 1.2 million, or 3 cents per share in the fourth quarter of 2019. For the year, reflecting the impact of costs recognized as a result of our internalization, the company had a net loss attributable to common stockholders of 7.7 million, or 17 cents per share, as compared to net income attributable to common stockholders of 3.4 million for 10 cents per share. FFO for the fourth quarter of 2020 was 22 cents per share unit as compared to 21 cents in the fourth quarter of last year. For the year, reflecting the impact of costs related to our internalization, FFO was 56 cents per share unit as compared to 75 cents in 2019. Our AFFO for the fourth quarter of 2020 was 24 cents per share unit up from 21 cents in the prior year quarter. And for the year, AFFO was 88 cents per share in units as compared to 75 cents for the prior year. Moving on to the balance sheet. As of December 31, 2020, our gross investment in real estate was nearly $1.15 billion, an increase of $237 million, or 26.2% from the year 2019. Turning to the liability side of our balance sheet, Our total net debt was 587 million at the end of the year, up from 386 million at year end 2019, reflecting our acquisition activity. Relative to equity issuances, during the fourth quarter of 2020, we issued 1.1 million shares of common stock through our ATM program at a weighted average price of $14.21 per share to generate gross proceeds of 15.3 million. For the full year 2020, We issued 4.2 million shares of common stock through our ATM at a weighted average price of $12.84 per share to generate gross proceeds of $54.5 million. To date, in the first quarter of 2021, the company has issued an additional 2.7 million common shares through our ATM program at an average share price of $13.07, generating gross proceeds of $35.4 million. Touching on our liquidity, we finished the year with total liquidity, including cash and availability in our credit facility of 80 million. As of the end of February, our cash and borrowing capacity in our credit facility was approximately 85 million. As we look to 2021, relative to our G&A expenses, we anticipate that cash G&A for the year should be in the range of 10.8 to 11.4 million, reflecting a full year of being internally managed, and our non-cash stock compensation should be between 6 million and 6.4 million. This concludes our prepared remarks. Operator, please 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 lines in the question queue. 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 the start keys. One moment, please, while we poll for questions. And our first question is from Rob Stevenson with JANI. Please proceed with your questions.

Good morning, guys. Bob, just to follow up on your expense commentary, so just to boil it down, G&A and operating expenses combined were about $7 million in the fourth quarter. What's in that that we shouldn't be rolling forward, or is that $7 million a good run rate to be using as we go throughout 2021?

Sure, Rob. So I try to break it down between the different pieces with the stock compensation number. you know, being, you know, running in that, you know, a little bit higher because of the internalization-related LTIP grant. So that was, you know, a little bit more than $700,000, about $720,000 in the fourth quarter was due to those stock comp grants, and total stock comp was, you know, was running up at 1.9. If you break it down further with the internalization-related cost that came over just kind of on a standalone basis, that was running at about, you know, 1.7 million in the fourth quarter. And then looking out to next year, you know, that's, you know, something that's going to be probably more in the, you know, the 1.85, you know, maybe trending toward 1.9 million, you know, per quarter range. And then our legacy GNA expenses, you know, which had been, you know, for the full year last year were, you know, right around 3.3 million. So as we look at that, that's going to be, again, in that similar range, maybe $3.3 to $3.4 million for the full year 2021. So those are the pieces. And I think as you break it down, it could fluctuate from quarter to quarter, but on a full year basis, that's where the ranges are driven off of.

Okay. And then you guys have a couple of assets. I think it's Marina Towers and Rock Surgery on cash. What's the update there from their standpoint? Are those going to be recovering and sort of move back to a gap basis? Are you guys going to need to re-tenant that? How are you guys thinking about those tenants and those assets right now?

I'll start from an accounting perspective. The Marina Towers, they're currently in bankruptcy, but that is something that is being worked through at this point, and it's something that we are working very closely with the tenant and are collecting and recognizing cash rent as that comes in. But in that type of circumstance, the accounting is going to drive you toward recording that on a cash basis. We are not, you know, we're working actively with the existing tenant to work through that process and, you know, looking to kind of, that will resolve and work through it during the year, you know, 2021 on the Melbourne, Florida asset. For the, go ahead, Jeff. Go ahead.

Okay. On Marina Towers, the tenant went into a bankruptcy and, and actually raise money in the, I mean, all public information of the bankruptcy, but they raised money inside the bankruptcy. Their plan was out there. Their plan is to pay us back. So we're expecting them to come out of this, you know, good, but they overextended the amount of the building they had. And we've been leasing up the rest of the building. It's a really nice piece of property. Even with it's right on the water, it's a beautiful piece of property. And we expect that property to be paying. This is just an issue with the tenant at that time. But the property is very good and could be re-rented if we did have a problem later.

Okay. And then, Bob, you were talking about rock surgery?

Yeah, that's another one that we're working with as well. It's very, you know, the dollars involved there are very small. I mean, the annual rent on that property prior to this, the circumstance is about $260,000 for the year. So it's a very small property in the portfolio. And I'd add, you know, on the Marina Towers, too, that You know, the bankruptcy plan has been approved by the court. And, again, in that type of situation, you know, rent payments and affirmation of lease is things that, you know, are good positives for the company in that situation.

And so I guess the last one for me, I mean, how are you guys thinking about a property like today, you know, like Rock Surgery or the Las Cruces Medical Office building where it's vacant? At that level, is it just easier to sell them and move on given the pipeline that you have and the ability to whatever you get out of those to reinvest those dollars? Or, you know, from your standpoint, is it worth the time and energy to release these assets at this point?

I'll comment on that. Las Cruces – It's a decent market. It's hard to re-rent something during a pandemic. There is an active market in Las Cruces. It's sort of a regional hub in a large region for health care. And so we do expect that to be released. But if somebody wanted to buy it and it made sense, we would do that also. I'm not against selling properties, but we have it basically out there to be released. But that property could possibly be sold, too.

Okay.

Thanks, guys. Appreciate it.

Thank you.

Our next question is from Brian Mayer with BYU Security. Please proceed with your question.

Yeah, good morning. Maybe for Alfonso, you know, dialysis centers, I heard you talking about acquiring some of those. One of the other companies I cover has been pretty big in acquiring dialysis centers. Can you give us an idea of how deep that market is, maybe number of properties in the country and the value and how deep into that market you guys would consider going?

Sure. The dialysis market is very liquid. It's very big. I don't have a stat for how big it is. I see deals constantly increasing. within the dialysis sector. It's an asset that a lot of the 1031 exchange investors really like. So when you have a dialysis center with a really long-term lease in a retail setting, you know, they can go for pretty aggressive cap rates. You know, I've seen them trade in the mid fives, low six. You know, the ones that we've targeted are ones that are not as, they're typically not single tenant. These are buildings that have nephrology tenant that's in the building as well. So, you know, you're looking at a building with two, three leases. And with, you know, so we're picking up extra yield in these assets because it doesn't fit squarely within the 1031 exchange profile. In the past, we've acquired properties at the dialysis center that was on a hospital campus, so it had a ground lease, which is a layer of complexity that a lot of other investors don't like. But the dialysis space is one that I find pretty interesting, and we actually have talked with an investor that focuses on dialysis quite a bit. The two assets we bought from, you know, recently are ones from this group. And, you know, it's an asset type that has great fundamentals. And, you know, you have to look at each location pretty critically and really, during diligence, try to get a good sense for, you know, why that specific location is doing well or why it might not do well and the positions that are aligned with that facility But as a general statement, the dialysis sector is attractive, and we look for deals that fit our portfolio and fit our pricing yield needs.

Okay. And you talked a little bit in your prepared comments about M&A activity, and I think about how maybe it could impact some of your assets, I guess, positively down in North Carolina, Wake Forest, et cetera. Is there any M&A activity out there that you see in this space, which we hear about a lot, that could negatively impact any of the assets that you own?

No, it's hard to predict. The M&A activity that could have a negative impact are ones where the new organization has a different strategic focus than it did in the past, which is why it's really important when we're looking at assets to you know, have that be part of our thought process, you know, why this facility is attractive for the provider, why we think this location specifically is one that regardless is convenient and profitable and is one that has long-term potential. But, you know, we're very aware of of that happening. And it's something that when we go into deals, we think through and get very comfortable that the properties we're buying are not exposed to that risk.

Great. And just last for me, and maybe this is for Bob, but on the ATM issuances, which you guys have done a pretty good job on, how do you think about that? Are you going into the ATM market kind of opportunistically, you know, with where the shares are trading, expecting that Alfonso will fill that need? Or are you using the ATM to kind of, you know, backstop and finance the things that Alfonso is finding and you expect to close over the next quarter or two?

Yeah. Brian, we're trying to be opportunistic, and we're absolutely factoring in both sides of it, you know, both – but primarily a forward look. You know, we're trying to – we're anticipating our needs and what's coming up and trying to be opportunistic as we use the ATM as a source of equity capital and just to kind of increase our flexibility. And so it's really a combination of that and just really trying to be opportunistic.

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

Our next question is from Barry Oxford with DA Davidson. Please proceed with your question.

Great. Thanks, guys. I guess this question is for Bob. On the LOC, you have about $525 million out. I guess that gives you $75 million of capacity. When you think about that, are there opportunities to kind of do some permanent financing on maybe $200 million or $300 million?

Yeah, so at our size right now, Barry, we are open to that idea, but I think we don't have as many options as larger entities do for that debt because we're in a growth mode and we're growing, we're adding debt, we're adding equity, we're putting assets on all at the same time. So in that type of scenario with 1.1 billion of assets, we're kind of evolving into that where we can become a corporate issuer and get some longer-term debt in large chunks out there. But I think it's still something on the radar, but it's not something that I think is happening in the near term here.

Great, great. No, thanks. That makes sense. Alfonso, when you look out here in 21, is there a mix of property type or healthcare property type that you're particularly liking on a risk-adjusted cap rate basis? Or, Barry, it's just still kind of building by building and asset by asset from an opportunistic standpoint?

More of the latter. I mean, it's really, you know, looking at as many opportunities as we can and, you know, talking to as many folks as we can and uh, within opportunities are in front of us really. So being very selective and picking the best ones. Um, and so it's, it's really, um, looking at each, each deal individually, doing a deep dive. Um, and, uh, as I've said in the past, the market, um, is not constant in terms of what comes to market, you know, and, and there's waves of asset types for whatever reason. There's, you know, you'll have waves of MOBs, you know, at times you'll have waves of inpatient rehab hospitals, and at times it feels like every other deal is a surgery center. So it's really being opportunistic and, you know, being very decisive and quick when opportunities present themselves that fit our portfolio and fit what we want to do. And, you know, what that is on a quarter-by-quarter basis, it really varies.

Great. Now, that makes sense. That's kind of what I thought. Appreciate it, guys, and, you know, congrats on crossing over the $1 billion mark. Thanks.

And as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad. Our next question is from Amanda Schweitzer with Baird. Please proceed with your questions.

Thanks. Good morning, guys. On capital allocation, you've got it to a stable range of 2021 acquisitions, and I've really had relatively stable volume over time. But do you see an opportunity to scale that a bit more today, given the recent internalization transaction?

It is possible to scale. What we're doing is we're testing different type of markets to expand types of products that we buy. For instance, a couple of years ago, we bought some multiple tenant MOBs, and we're using the multiple tenants. We're now almost two years into it, and we're seeing that they're meeting their projections that we have. At the time, we only did triple net and absolute net. Now we're looking at some multiple tenants to expand into that area. Sort of the mental health area has some really strong opportunities to expand into. And it's one of our drivers is to see if we could build carefully, buy one, see how we do with it, learn about it more, and then expand more. So basically doing our core work, which seems to be about 200 million a year on average. We've now been out there six years, and we're really tracking very closely to averaging about 200 million and trying to expand it to new product categories. and getting the same cap rates.

Yeah, that's helpful. And then following up on some of Rob's questions, does the 50 basis points of bad debt in the quarter relate to Marina Towers and Rock Surger? Were there other tenants where you had lower collection rates? And then how are you thinking about bad debt this year?

Yeah, it related entirely to Rock Surgery in the fourth quarter. And And I think, you know, it's episodic and it's event-driven in our portfolio, I think is the way I look at it. And I look backwards and think of our collection experience and what we went through in the pandemic and how well we collected and how well our tenants performed. And so I don't have, you know, big concerns about it as I look ahead to 2021. But, again, you know, facts and circumstances can change at tenants and locations. But again, I think our collection rate and the performance of our tenants kind of says a lot about what the future holds for them if they can perform the way they did as we saw in 2020.

I want to add to that. One of our strong growth areas over the last couple of years is building our asset management department. And we became very strong at that And we have turned around. Plano was a property that we turned around where we found a new tenant. It took a little while for the new tenant to get its legs. Now we have that going in good shape. I expect most likely we could turn around a lot, you know, if we have a problem with one or two of these. You're always going to have problems once you get to this type of portfolio. That's the part I always tell everybody. But the real key to it is how you get in there, like with Melbourne, working through the bankruptcy that they went through, making sure we had a lawyer there, we opposed them, making sure at the end of the deal we got paid and we expect to possibly get full payment going through based upon the bankruptcy. So it's really getting in there and being very active in your collections and also working hard on turning around, helping a project turnaround like Plano. So we got one that could have been a very big loss now profitable and moving forward.

That's helpful. Appreciate the time.

Thank you. And we have reached the end of the question and answer session. I will now turn the call over to Jeffrey Bush for closing remarks.

I'd like to thank everybody for joining us on our 2020 call, fourth quarter call. We had a great year in 2020, despite many, many obstacles. I attribute it to the strength of our team on working through that. And now I expect our team to excel this year in 2021. Thank you again.

This concludes today's conference and you may disconnect your line at this time. Thank you for your participation.