This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Greetings and welcome to the Global Medical REIT fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Steve Sweat, Investor Relations. Thank you, sir. You may begin your presentation.
Steve Sweat
Thank you. Good morning, everyone, and welcome to Global Medical REIT's fourth quarter and year-end 2021 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. The company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is making this statement for 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, 2020, and its other SEC filings. The company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Additionally, on this call, the company may refer to certain non-GAAP financial measures, such as funds from operations, adjusted funds from operations, EBITRE, and adjusted EBITRE. You can find a tabular reconciliation of these non-GAAP financial measures to the most currently comparable GAAP numbers in the company's earnings release and in filings with the SEC. Additional information may be found on the investor relations page of the company's website at www.globalmedicalreit.com. I would now like to turn the call over to Jeff Bush, Chief Executive Officer of Global Medical Reit. Jeff?
Jeff Bush
Thank you, Steve. Good morning, and thank you for joining our fourth quarter and year-end 2021 earnings conference call. Joining me today are Alfonso Leon, our Chief Investment Officer, and Bob Kieran, our Chief Financial Officer. GMRE was founded with a vision to create a resilient, high-quality portfolio of medical facilities aligned with strong operators and healthcare systems in their local markets. We expect to generate stable revenues in return for our investors through these properties and are pleased to deliver to you another solid quarter and full year of growth and performance. Looking at the full year, primarily driven by our acquisition activity, we increased our total annual revenue approximately 24% year-over-year to $115.9 million. With respect to earnings, we reported net income attributable to common stockholders of $11.8 million, or $0.19 per share. FFO of $0.90 per share and unit and AFFO of 95 cents per share and unit. After fortifying our balance sheet and liquidity early in the year and reducing our leverage below 45%, we remained disciplined in our approach to identifying acquisition opportunities that met our investment criteria and targeted return requirements. In the fourth quarter, we completed four acquisitions for $25.9 million, bringing our full year acquisition volume to $189 million at a 7.5% weighted average cap rate. In the fourth quarter, we funded a $6.8 million expansion of our Mercy Rehabilitation Hospital property in Oklahoma City that is expected to generate a return of 11.8%. In total, we invested $196 million in revenue generating real estate investments during 2021 at a weighted average cap rate of 7.6%. Alfonso will provide details in a moment, but I want to note that our portfolio exceeds $1.3 billion in total assets and produces over $103 million in total annualized base rent at an average cap rate of approximately 7.8%. In addition to these achievements, we recently issued our first corporate social responsibility report, which details our ESG philosophy and accomplishments. and we look forward to continuing and expanding our ESG efforts in the future. I am proud of the team's dedication and accomplishments during 2021 and would like to thank them for their unwavering efforts throughout the year. I am excited at what lies ahead in 2022 as we focus on the opportunities in front of us to continue our accretive growth into the future. With that, I'd like to turn the call over to Alfonso to discuss our investment activity in more detail. Alfonso?
Steve
Due in part to the outperformance of medical facilities compared to other real estate assets during the pandemic, and optimism in the long-term fundamentals of healthcare, the market for medical facility remains competitive. However, through our diligent and developed sourcing contacts, we continue to successfully locate and acquire high quality properties within our target cap rate range. As Jeff mentioned, during the first quarter, we closed on four acquisitions totaling $25.9 million at a weighted average cap rate of 7.5%. In addition to these closings, we funded a 10,447 square foot, 6.8 million expansion at our Mercy Rehabilitation Hospital in Oklahoma City, Oklahoma. that is expected to generate a 11.8% cash return. For the full year 2021, we closed on 20 acquisitions for $189 million at a weighted average cap rate of 7.5%, bringing our total portfolio size to $1.3 billion with properties in 33 states. Our focus on acquiring individual assets has benefited us tremendously as most other investors focus on acquiring large portfolios. As we continue to grow, we will leverage our relationships and network to continue to source and secure deals. In the quarter, we sold one property for gross proceeds of $5.5 million, resulting in a gain of $1.1 million. Also, the expected closing date of our previously announced contract to sell one of our four medical office buildings located in Belpre, Ohio, has been moved back from March, and we currently anticipate that this sale will close no earlier than June of this year. Although we don't actively look to sell our properties, we may sell properties for very strategic or opportunistic reasons based on market conditions. Regarding our activity so far this year, we completed one acquisition, a 17,713 square foot medical office building in Gainesville, Georgia for $5.1 million at a cap rate of 7.1%. It's important to note that we continue to maintain an active pipeline of potential opportunities in different stages of discussions and currently have seven properties with an aggregate purchase price of approximately $72 million under contract. These properties are currently in due diligence and subject to customary closing conditions. For 2022, while the market remains very competitive, we're currently targeting to complete between $180 million and $220 million of acquisitions at an average cap rate of 7%. I'd like to now turn the call over to Bob to discuss our financial results.
Jeff
Thank you, Alfonso. GMRE continues to benefit from strong relationships with our tenants and solid portfolio performance. We ended 2021 with 4.3 million of total leasable square feet, 97.5% occupancy, 7.1 years of weighted average lease term, 5.1 times rent coverage with 2.1% weighted average contractual rent escalations. In the fourth quarter, We achieved a 21.7% year-over-year increase in total revenues to $30.3 million, driven primarily by our acquisition activity over the past year. Note that our revenues in the fourth quarter include the impact of approximately $300,000 in reserves related to a tenant that we moved to the cash basis of accounting in the period. Note also that we recognized approximately $100,000 in revenue from other cash-based tenants in the fourth quarter. Our total expenses in the fourth quarter of 2021 were $25.9 million compared to $22.3 million in the prior year quarter. The increase was primarily due to higher operating and depreciation and amortization expenses due to our larger portfolio, partially offset by lower G&A and interest expense. G&A expenses for the fourth quarter of 2021 were $3.9 million compared to 4.4 million in the prior year quarter, with a decrease primarily due to a reduction in non-cash stock compensation expense. Within our G&A expenses, note that our stock compensation costs in the quarter were 1.2 million and our cash G&A costs were 2.7 million. Looking ahead, we expect our G&A expenses to be modestly above this level and average between 4.2 and 4.4 million on a quarterly basis in 2022, even as we continue to increase the size of our portfolio. Of these estimated G&A costs, note that we're forecasting the stock compensation component to average between $1.2 and $1.3 million per quarter. Our operating expenses for the fourth quarter were $4.5 million compared to $2.6 million in the prior year quarter, with the increase in these expenses being driven by the growth in our portfolio and to a lesser degree the impact of gross leases. Net income attributable to common stockholders for the fourth quarter of 2021 was $3.8 million, or $0.06 per share, compared to $1.1 million, or $0.02 per share in the fourth quarter of 2020. For the full year 2021, net income attributable to common stockholders was $11.8 million, or $0.19 per share, compared to a loss of $7.7 million, or $0.17 per share in 2020. As discussed previously, this full year 2020 loss includes $14 million of one-time expenses related to management internalization. FFO in the fourth quarter was 23 cents per share and unit compared to 22 cents per share and unit in the fourth quarter of 2020. AFFO in the fourth quarter was 24 cents per share and unit, which is flat compared to the prior year quarter. For the full year 2020, our FFO was $0.90 per share and unit compared to $0.56 per share and unit in 2020. And our AFFO 2021 was $0.95 per share and unit, up 8% compared to $0.88 per share and unit in 2020. Moving on to the balance sheet. As of December 31, 2021, gross investment in real estate was approximately $1.3 billion, which is up $200 million or 18% from the start of the year. Relative to equity, in the fourth quarter, we generated gross proceeds of 11.3 million through ATM issuances of 665,000 shares of our common stock at an average price of $17.02 per share. And for the full year, 2021, we issued 15.3 million shares of common stock, generating gross proceeds of approximately 213 million, including approximately 98 million through ATM issuances. Reflecting the impact of our equity issuances, at December 31, 2021, we had approximately $580 million of gross debt, and our leverage ratio is 43%, down meaningfully from 52% at year-end 2020. Our weighted average interest rate during the fourth quarter was 2.88%, and our current unutilized borrowing capacity under the revolver is $222.5 million. We continue to believe we are well positioned to execute on our acquisition and overall business strategy and look forward to sharing our progress with you throughout the year. This concludes our prepared remarks. Operator, please open the call for questions.
Operator
At this time, we'll 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 symbol indicating your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Barry Oxford with Collier Securities. You may proceed with your question. Barry, you may proceed with your question.
Barry Oxford
Sorry about that. I was on mute, guys. Thanks for taking my question. Alfonso, this one's for you. Hey, how you doing? As far as new – you mentioned further competition for acquisitions. Are you seeing a new type of competitor in the market, or are they kind of the regular types of competitors you're used to seeing?
Alfonso
So in 2021 –
Steve
there was an inflow of capital from institutional investors and private equity funds. So what I would say is a lot of the money that was coming in came in last year. I'm not really hearing of people talking about more funds coming in. And if there are, it's not as prevalent as it was last year. So I would also highlight that a lot of the money that has come in in the last 18 months are funds that have three- to five-year hold periods. And these are funds that want to aggregate portfolios and have distinct exit strategies that they want to do. And so what that means is this money has a very clear – finite period of investment. And the types of properties that they're looking for tend to be larger because they're trying to move the funds that they have quickly, and they're trying to consolidate them in a portfolio. So they tend to be simpler assets, larger assets, and that's where most of the competitive pressures have come in.
Barry Oxford
Okay, great, great. And I guess this one's probably maybe more for Jeff. Jeff, with increasing interest rates out there in the marketplace that we're probably going to be looking at in 22, do you see healthcare cap rates having to back up? Or is the flow of money on the sidelines just so great that, yes, even though interest rates are going to be moving up, it's not going to really put pressure on cap rates?
Jeff Bush
Actually, I see cap rates going up over this next year because a lot of these two things happen with the banks. It's not just the interest rates go up being experienced buyer in the market. Also, I worked on the private equity side. They also require more equity in the deal. So it's like two things happen at the same time when the banks are raising rates and also seeing more risk into the future. So these groups that are borrowing, you know, and leveraging very high and then buying four caps, five caps that, you know, have small amounts of spread are not going to be able to do those small amounts of spreads anymore. So it's going to sort of drive it. So in my opinion and historical seeing three or four of these, you know, bubble, I call bubbles and then drops. I do think the cap rates will go up. I think it takes a little while, but I do think the cap rates will go up. I mean, We seem to be managing because we've moved into a strategy to look for the stuff that they're, which has always been our strategy, is to look for good quality products. That's not what the other guys are looking for. And that had to include not only the REITs, but the private equities and all these funds. But I do believe cap rates will go up to match. It's not a perfect match, you know, but the market sort of adjusts to that. It's not a perfect match and it's not a perfect timing. but over time the cap rates will come back up. I do believe in a year or two, there'll be tremendous opportunities for us to buy and maybe even buy at higher volumes of what we buy and maybe even get back more into the single tenant absolute net leases, which these new guys just love, but they may run out of room because their fund is sort of ending. So we have some real opportunities going forward, but right now, I'm just very proud in a very tough market that our team, our acquisition team and total team was able to keep up around the $200 million rate, which is what we target every year. So I'm very proud of that.
Barry Oxford
Right, right. Thanks for the color there. Great. And then I guess, Bob, one question for you on the ATM usage for 22. I know it's always hard to tell, you know, because I know it's stock price dependent, but Are you planning to use the ATM? Let's assume stock price is kind of within a range that you like. Would you be targeting kind of the same amount of ATM activity in 21 and 22 that you had in 21 or not necessarily?
Jeff
So, you know, I think we'll start with kind of thinking about relative to our leverage and then how we would use it. So we would look to continue to target our leverage in the in the same range we've been talking about last year which was that 40 to 45 range and and you know we would look to the atm as our as our first tool to uh to uh to accomplish that you know at prices that we thought were attractive right okay all right thanks guys thank you barry our next question comes from the line of rob stevenson with jenny you may proceed with your question
Rob
Good morning, guys. Medical office building rent coverage ratio jumped from 5.7% in the third quarter to 7.7 times in the fourth quarter. What's happening there to drive such a big jump in three months?
Jeff
So, you know, on that one, Rob, it was a couple, three new tenants reporting that had excellent, outstanding coverage, and that helps just drive that number up. higher. Uh, and, and so it was really a function of, uh, of, uh, just timing of results as they, as we cycle through reporting from, uh, you know, from, from different, from different tenants and a couple of the tenants in that, in that bucket that I'm describing had coverage of say 11 times. So you've just got some situations where you've got real significant, you know, rent coverage and that's pulling the overall number up.
Rob
Okay. And then any known move-outs or notable downsizing on leases on the roughly 24% of your ABR that you have rolling through 2024 at this point?
Jeff
For 2024, Rob, there's not a lot. I can't really give a lot of color on 2024. Well, I mean, the next three years.
Rob
I mean, 2022, 23, and 24. I mean, it's roughly a quarter of your ABR rolls over that three-year period. And anybody that's downsizing... that you know of or moving out that you know of at this point?
Jeff
You know, not this early in the process. It's really, I mean, from the near term, if I think of 2022, you know, we have, you know, our expectation on the 2022 renewals is upwards of 85% to 90% retention at this point. And if I look even at the detail of the 2022 renewals, almost a quarter of it really doesn't even expire toward the very end of this year. But overall, you know, that near term has got a high retention rate, and then I think we just continue to, you know, to look and work through the next two years. But, you know, nothing kind of sits out there kind of as a kind of dramatic, significant item at this point.
Rob
Okay.
Jeff
And then last one. Sorry, go ahead.
Jeff Bush
Yeah, I mean, you know, if they're moving, you tend to know a bit in advance or they're building or something in the area. But we don't have that right now. We have all that we're looking at tend to be talking to us.
Rob
Okay. And I guess the other part of that question, you know, would wind up being is that, you know, you guys have a little over 100,000. 100,000 square foot of vacancy in the portfolio overall. A lot of that's in little chunks here and there. But where are you in leasing on the few blocks of size of vacancy that you guys have today? Any sort of prospects there that you guys are excited about?
Jeff Bush
Yeah. Melbourne, we finally in Melbourne got out the tenant after the bankruptcy, some payments from them, and we actually got them out in January and and we're working with three tenants about taking, I think it would be about half the building, three different substantial tenants. The thing that we were always excited about Melbourne is the Class A building on the waterfront, really the premier building to be in Melbourne, Florida, and a nice building. I mean, we have to put a little bit of work into it, but we were sort of held up because the tenant was in bankruptcy, had a master lease, and we couldn't go out into leasing. We're excited about that, particularly getting that back. Now, you know, the way the rental markets work right now, you always have to give some type of concessions for long-term leases and stuff. So I really wouldn't expect, you know, that to come on board as a big income thing, like, you know, getting back fully till next year. But we'll slowly get it back this year. on board as an income-producing property. And that will help a lot. Okay.
Rob
All right, guys. Appreciate the time.
spk10
Thank you.
Operator
Our next question comes from the line of Jordan Sadler with KeyBank. You may proceed with your question.
Jordan Sadler
Good morning. Looking to see if there's any additional color you guys could offer on the assets that are under contract. It seems like you've got a fair bit teed up. Maybe, Alphonse, you could offer up some color on the timing or maybe just characterize whether or not there is one or two larger assets or there's a portfolio or one-offs. That'd be great. Thank you.
Steve
Sure. And apologies, the connection was a little choppy. Could you repeat the question?
Jordan Sadler
Yeah, just curious about the assets that are under contract, the $72 million. Okay, sure. Just like timing, are these one-offs or is there a portfolio number of assets? That would be helpful.
Alfonso
Sure. So there's six assets that make up that number.
Steve
And, you know, we're – It's always, you know, we give ourselves 30, 40 days of diligence for all these deals, and these are all at different stages. But, you know, we're expecting maybe a third or a half of them to close in the first quarter and the rest is to follow. So we're, you know, I think maybe Bob might have –
Jeff Bush
better numbers but you know these are six transactions and you know we're we're expecting them to close over the next two to three months they're all just so you know it's not our portfolio it's individual assets and we seem to be it picked up for us flying picked up for us and towards the end of last year. So it was interesting. I call it a little bit of a lull period. Then we suddenly now have a nice under contract and coming down the road asset. So for whatever reason it was, there was a little bit of a lull period in that third quarter range. But now we're actually picking up much more speed on them. And some of them just take longer. And that's part of the reason we had things that we were working on. And now we're doing a little bit more complicated assets to try to get the cap rates that we get. So we're doing more multiple tenant assets than we did before because the really fast new money does not really look to those. And it was an area that we moved into. So you may see that hit our occupancy rate a little bit going towards the future because we're finding assets and saying, boy, we could get a seven cap. I'm just giving a theory. We could get a seven cap and there's potential to make this an eight cap and it's a good rental market and they're not fully rented, but we now are taking those assets and that's going to bring down our occupancy rate somewhat, but it's worth the investment and there's a lot of upsides besides the seven caps or around that.
Jordan Sadler
Okay. And the last quarter we talked about a broader look, I believe you phrased it, in terms of how you were looking at the market and assets you might look at. Would any of these assets fall under that umbrella of your broadened look or view of assets? Because they're multi-tenant essentially or because of pricing? How would you think about it?
Jeff Bush
A little bit of both. A strategy that we've been putting through is we look – just what I mentioned. We look sometimes and say, okay, it's multiple tenants. They're not fully occupied. It's not somebody who runs MOBs very well. The market's a strong market. And we could over time rent up and we still get a decent – you know, cap rate coming in, you know, a very accretive cap rate. We're not buying on accretive. And then our averages will come out around seven. So, you know, I could tell people, you know, we get seven fives and we may get six fives, but we put them all together. So we bought a couple of larger tenants. So when you see it, you could see that there's things more like 20 million, 18 million, and then others. where before we were sort of stuck with the fives and sixes. And we did 20 assets last year. That was a lot of work. And the new strategy actually has to do with, it's the same risk level. We're not buying riskier. You may even consider it more diversified because we're going more into multiple tenants. And it has and may even have a bit more upside because the leases get, you know, quicker renewals, even though you have some more vacancy and you could go up more with like an inflationary situation. So, you know, in all different factors, these are good assets for us to buy. These are assets others in our market don't really want to have because they're sort of smaller and hassle. but we're built to do hard work. I mean, as I tell everybody, our main philosophy is we're making extra spread for our investors by doing much harder work and includes the asset management side of our business.
Jordan Sadler
Okay, that's helpful. And then on the operating side, and this may be a function of some of the assets you purchased in the fourth quarter, but I noticed that occupancy, dipped by about 140 basis points sequentially. Can you speak to that decline?
Jeff
Yeah, sure, Jordan. That's going to be really moving the Melbourne tenant from occupied technically through the master lease. And as we got out from under that and moved the tenant out, as Jeff mentioned, we migrated that into the vacant space as we looked here. to get that mixed up. That was the primary move.
Jordan Sadler
Okay. And then was there anything else in OpEx while I have you? I know that that kind of spiked up sequentially. And I obviously have been buying stuff, but it looked like a bigger number than we've seen yet.
Jeff
Four and a half million. That's a good point. Yeah, so if you just kind of break that down, you know, the overall, you know, OPEX that was in the quarter, you know, you had, say, four and a half in total. You know, we're still kind of, again, largely covering that, you know, through the, you know, just expense recovery revenue. In this case, it was $3.2 million. And then we have, you know, with a couple of the assets we picked up in the third quarter of this year to end up with, A few more gross leases, and so the gross lease component is in there. And so our net exposure kind of after the recoveries and the impact of gross leases that are operating or performing as underwritten, you know, we ended up having a tick up in that net exposure in the fourth quarter, kind of moving from, you know, say 300,000 to 600,000. And it was due in part due to the, again, some of the cash basis tenant that we mentioned on the call. And then, and then also again, expenses on a tenant or a location like Melbourne, where again, we're taking over the building that elevated expenses as we, as we pursue our, our, you know, our rights under the old, under the old lease. And then also, assume and take on more of the building. So that those were kind of the moving parts kind of quarter over quarter in that number as that, uh, our, our net exposure did increase. And, and that, you know, it's again, from a recovery perspective or a net exposure perspective, you know, impacts that, that sequential result.
Jordan Sadler
And the reserve that you took in the quarter, was that related to Melbourne as well?
Jeff
No, that was a, that was a new tenant. That was a tenant, um, in Westland, Michigan, that it's a property that we've owned since 2016 and had been performing fine. There was a change in ownership about halfway through 2021. And subsequent to that, there started to be payment issues and pushback on the lease. And we're trying to resolve the issue, but just based on this tenant's actions and without a clear view ahead, we moved it to the cash basis. of accounting. And that's, you know, again, it was about a, it's not a big tenant for, you know, $4 million asset, but again, it can have an outsized impact on the, on the quarter with that say $300,000 charge kind of being a, another say a $400,000 swing from, from, from Q3 to, to Q4.
Jordan Sadler
So even in the cash and you had no rent in the quarter from that tenant.
spk10
Right. Exactly.
Jordan Sadler
So you, yeah.
spk10
Okay. Thank you.
Operator
Our final question comes from the line of Brian Mayer with B. Reilly Securities. You may proceed with your question.
Brian Mayer
Good morning. Most of my questions have already been asked and answered, but just two follow-ups. On the acquisitions that are pending, what parts of the country are those generally in, if you could share that?
Alfonso
Sure. Let me... that in front of me as well.
Steve
So we're looking at Michigan, North Carolina, Indianapolis, Missouri, Alaska, Florida, and Kentucky.
Brian Mayer
So pretty much all over the place. Yeah, I'm excited about Alaska actually.
Jeff Bush
Good market.
Brian Mayer
There's times to visit that property and times to not. yeah the guys went out there when this is time you know yeah and then the second question i have is on the mercy hospital expansion i think you mentioned an 11.8 return on that can you give us a little color on what exactly you're doing there uh i can start and bob can expand but i mean this is something that when we were buying the property was contemplated that they needed an expansion
Steve
And there's language in the lease that addresses how this has to be done. And there was a process where we had to talk to them and negotiate. The specifics of that mechanics I don't have at the top of my head, but it was driven in part by what was in the lease and what was negotiated eventually between parties.
Brian Mayer
Okay. And I'm sorry if I missed this, but I think that the disposition that was pending got pushed out a little bit. Was there any particular reason for that? And is there any risk of that transaction not closing?
Jeff Bush
They're changing. I'll just say they're changing their finance, what they were looking at. So they asked to push it out. And that was generally fine with us. given that it adds some more revenue until we replace that revenue. So, you know, we have a nice pipeline now to replace that revenue and go up. So it's actually better timing for us to be pushed out. We have no idea about the chance of them not getting financing or not on that side.
spk10
Okay, great. That's all for me. Thanks, Jeff. Thank you.
Operator
Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Jeffrey Bush for closing remarks.
Jeff Bush
Oh, thank you, everybody, for attending this year's. This past year, 2021, was an excellent year for GMRE on many levels, and we expect to have a very good year in 2022. Thank you again. Appreciate it. Goodbye.
Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.
Disclaimer