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Operator
Greetings and welcome to the Global Medical REIT Third Quarter 2022 Earnings Conference 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 a 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, Steve Sweat, Investor Relations. Thank you. You may begin.
Steve Sweat
Thank you. Good morning, everyone, and welcome to Global Medical REIT's third quarter 2022 earnings conference call. On the call today are 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 that 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 31st, 2021, 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 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 third quarter 2022 earnings call. Our high-quality portfolio of needs-based healthcare facilities continues to produce excellent results in the third quarter with 97 occupancy and a stable cash flow we achieved an 18.1 year-over-year increase in total revenue to 35.4 million dollars driven primarily by our acquisition activity over the past year including a 6.8 million gain from the sale of a property. Our net income attributable to common shareholders for the third quarter of 2022 was $8.1 million or 12 cents per share compared to $3.7 million or 6 cents per share in the third quarter of 2021. FFO in the third quarter was 23 cents per share and unit in line with last year and our AFFO per share increased by a penny to 25 cents per share and unit compared to the third quarter of 2021. As we have discussed, the acquisition environment for our target assets continues to evolve. The Federal Reserve focuses on fighting inflation has led to a material increase in interest rates this year, impacting the marginal cost of capital for buyers. Potential sellers, meanwhile, are adapting more gradually to the new reality, resulting in an acquisition market that has slowed significantly. This is very much in line with what we have seen in the past cycles when the bid-ask spread was widened. We are hopeful to see some thawing in early 2023, but it is difficult to predict. That said, in the third quarter, we continue to find attractive acquisitions that meet our quality and yield targets, closing five acquisitions for $51 million. Our average cap rate for the third quarter acquisitions was 7.1%, but this was impacted by one of our acquisitions, which was only 74% occupied, but has substantial upside. I would also note that the other two acquisitions that closed in September had a cap rate high in the sevens and low eights. These transactions more fully represent negotiations that took place after significant interest rate increase had started. In August, we expanded our credit facility with $150 million term loan and extended the term of our revolver. We also entered into interest rate swaps that fixed the interest rate on our new term loan through its maturity, bringing our fixed rate debt ratio to approximately 80% of our total debt. Looking forward, we will be extremely selective in pursuing any incremental acquisitions until cap rates better reflect the higher cost of capital. In the meantime, we are conducting a strategic review to identify properties that we can sell with a focus on properties where we have added value since acquisition by lease extension, leasing up vacancies, or upgrading credit. Assets that can be considered core properties. We expect to use any proceeds in the sales to reduce our outstanding debt, increasing our dry powder to be in the position to restart acquisitions when market conditions improve. We will provide more color on the proceeds we expect to generate and the reduction in leverage we are targeting as we move ahead. But we believe this is a prudent course of action to take and miss this highly vital economic and capital markets environment. Overall, I am pleased with our third quarter results and want to thank the team for their hard work and contributions to our results. With that, I'd like to turn the call over to Alfonso to discuss our investment activity in more detail.
Steve
Thank you, Jeff. As Jeff mentioned, the market for medical facilities is in flux as higher interest rates are impacting pricing. We have been through cycles such as this before and know that the transaction market typically takes time to fully reflect these changes. We will continue to source opportunities that make sense, but remain disciplined and prudent as the market evolves. During the third quarter and by mid-September, we completed five acquisitions containing just under 250,000 leaseable square feet for an aggregate investment of $50.8 million at a weighted average cap rate of 7.1%. Consistent with the prior quarter, our third quarter acquisitions included some vacancy where we believe the lease-up potential will benefit us in the long term. These acquisitions included a 110,800 square foot medical office portfolio in Toledo, Ohio for a purchase price of $17.2 million with a cap rate of 6.9% at 84% occupancy, which is anchored by University of Toledo Physicians and a 12,000 square foot Bon Secours surgery center. A 22,600 square foot medical office building in Lake Geneva, Wisconsin for a purchase price of $6.1 million with a cap rate of 7.8% at 100% occupancy, which is 66% leased to Advocate Aurora Health. A 35,900 square foot medical office and retail center in Glenview, Illinois for a purchase price of $8.7 million with a cap rate of 5.8% at 74% occupancy, with a tendency focused on dental, optometry, and wellness. A 55,000 square foot medical office portfolio in Canandaigua, New York, for a purchase price of $13.8 million, with a cap rate of 7.6% at 100% occupancy, which is adjacent to the University of Rochester campus and is anchored by the hospital's primary care group and by Western New York Medical. a 23,000 square foot medical office building in Hermitage, Pennsylvania for a purchase price of $5.1 million with a cap rate of 8.2% and 100% lease to Stewart Health for over four years. With nearly $150 million of acquisitions closed so far in 2022, we will remain disciplined as we look at incremental growth for the balance of 2022 and into 2023. While we continually assess potential acquisition opportunities based on current market conditions, we don't have any acquisitions under contract and currently don't expect to close on any additional acquisitions for the remainder of 2022. With regards to dispositions, in the third quarter, we sold our medical office building in Germantown, Tennessee, receiving gross proceeds of $17.9 million, resulting in a gain on sale of $6.8 million. I'd like now to turn the call over to Bob to discuss our financial results.
Jeff
Bob? Thank you, Alfonso. GMRE continues to benefit from strong relationships with our tenants and solid portfolio performance. At the end of the third quarter 2022, our portfolio consisted of gross investments in real estate of $1.5 billion and included $4.9 million of total leaseable square feet, 96.8% occupancy, 6.4 years of weighted average lease term, 4.7 times rent coverage with 2.1% weighted average contractual rent escalations. In the third quarter, we achieved an 18.1% year over year increase in total revenue to $35.4 million, driven primarily by our acquisition activity over the past year. On a same store basis, excluding cash basis leases, our third quarter revenues were up $344,000 or 1.4% compared to the third quarter of 2021. Our total expenses for the third quarter of 2022 were $32.1 million compared to $24.6 million in the prior year quarter. The increase was primarily due to higher operating and depreciation and amortization expenses due to our larger portfolio, the multi-tenant nature of the majority of our acquisitions of the past year, and higher interest expenses. G&A expenses for the third quarter of 2022 were $4 million compared to $3.9 million in the third quarter of 2021. Within our current quarter G&A expenses, note that our stock compensation costs in the quarter were just over $1 million and our cash G&A costs were $2.9 million. Looking ahead, we expect our Q4 G&A expenses to be between $4 and $4.2 million. Our operating expenses for the third quarter were $6.7 million compared to $4 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. Regarding these third quarter 2022 expenses, $5 million related to net leases, where the company recognized a comparable amount of expense recovery revenue, and $1.4 million related to gross leases. Our interest expense in the third quarter was $7 million compared to $4.8 million in the comparable quarter of last year, reflecting both higher debt balances and increased interest rates. Including a $6.8 million gain from the sale of property, debt income attributable to common stockholders for the third quarter of 2022 was $8.1 million or 12 cents per share compared to $3.7 million or 6 cents per share in the third quarter of 2021. FFO in the third quarter was $16.2 million or 23 cents per share and unit compared to $15.8 million or 23 cents per sharing unit in the third quarter of 2021. AFFO in the third quarter was $17.1 million or 25 cents per sharing unit compared to $16.4 million or 24 cents per sharing unit in the third quarter of 2021. Moving on to the balance sheet. As of September 30th, 2022, our gross investment in real estate was approximately 1.5 billion, which is up $171 million from a year earlier. We did not issue any shares of common stock under our ATM in the quarter. Regarding our debt, in August, we amended our credit facility to add a new $150 million term loan component with maturity of February 1st, 2028, extend the maturity date of the revolver component to August 2026 with two six-month company-controlled extension options, and lastly, convert all LIBOR-based loans under the facility to SOFR-based loans. Immediately following the amendment, we entered into $150 million of forward-starting interest rate swaps that commenced in October 2022 and mature in January 2028 that fixed the SOFR component on the new term loan through its maturity at 2.54%. At our current leverage and including the 10 basis point spread adjustment that's associated with our conversion to SOFR-based loans, our interest rate on the new term loan is 4.15%. At September 30th, 2022, we had approximately $703 million of gross debt. Our leverage ratio was 47.6%, and our weighted average interest rate was 3.9%. The current unutilized borrowing capacity under the credit facility is $244 million. Additionally, as of quarter end, the weighted average term of our debt was 4.2 years, up from 3.8 years at June 30th. Relative to our leasing activities, with a modest increase in occupancy this quarter, our asset management team continues to make progress in our vacancies and upcoming lease expirations. As we look ahead to 2023 lease expirations, note that more than half of this ABR relates to two single-tenant facilities that are progressing well towards renewals. Additionally, behind these two large expirations currently, there are no individually material leases that we don't expect to renew. Overall, despite challenging market conditions, we continue to believe we are well positioned to execute on our business strategy and look forward to sharing our progress with you through the balance of this year and into 2023. This concludes our prepared remarks. Operator, please open the call for questions.
Operator
Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask your question, you may press star 1 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 key. Our first question comes from the line of Austin Werschmitt with KeyBank. Please proceed with your question.
Austin Werschmitt
Hey, good morning, everyone. Jeff, I know you're still going through the strategic review process for potential asset sales, As we think about the range of proceeds, I mean, is your long-term debt target of 40% to 45% debt to gross assets a reasonable range to assume you could reach within kind of these planned sales? And I'm also curious how you're thinking about the cap rate range on future sales.
Jeff Bush
Okay. The cap rate range is a big differential between – what so many people want to buy and what they call the core assets and our secondary market and that so we're looking at you know possibly you know 50 plus million dollar sale to um you know hopefully be in the low sixes um you know these were properties we may have been able to sell in the mid fives you know a little while ago but Our target still is to start moving towards that 40 to 45. We went up above that target at the time that we could have sold stock in the market, and then there was a change in the stock price, and we're not selling stock at this time. We think the stock is way too low. So the target is still 40 to 45, with sometimes a jump above just to do acquisitions, but it's interesting uh we have been able to take properties and buy shorter term leases extend them to longer term leases higher credits then come into these properties and suddenly we're at a whole different level and they're very attractive into the market so we can't guarantee we're going to sell but we're looking into the market of selling some properties to reduce then right now we have somewhat of a pause on buying because if we buy now, we're probably not going to get the best rates. We see realization coming into the market on in our type of markets and our type of properties, which is secondary markets and suburb primary markets of places that make money. But we see that coming back and there's reasons people have mortgages coming up. They have, you know, retirements, the same reason they always sell is the same reason they're talking to us still. But we see the market coming back up and in our valuation of those, we have to be accretive at the time and we have to be able to take that down. So there's a possibility of selling something and then later on buying with maybe a 200 point basis gain. But in the meantime, to be conservative during this difficult time, it'd be nice to lower our debt ratio. And that would also, even though our float is at the target that we went to at 20%, that would also lower the float at the time.
Austin Werschmitt
Yeah, that makes sense. And you reference kind of, you know, sales in the 50 million plus range, moving roughly 75 basis points. I'm curious, you know, is that fair across, you know, the broader portfolio? Or have you seen a disproportionate move on deals inside, you know, 50 million, or, you know, due to other characteristics, whether it be lease term, etc?
Jeff Bush
I'll let Alfonso answer that he's been in the market.
Steve
Yes. So, um, if I, um, that sounds to me more like a question of market. Is that like, you're just trying to get a sense of what we see in the market?
Austin Werschmitt
Yeah, just in terms of moves in cap rates, Jeff alluded to, you know, what was sort of a mid 5% cap rate deal, you know, is now trading in the low sixes. And I'm just curious how, you know, why, if that is a fair move across the board or if deals inside, you know, 50 million plus have moved even wider than that. Thanks.
Steve
Sure. Yeah. So at this point, it's pretty clear that the market has moved up. at least 75 to 100 basis points across the board, regardless of quality, location, and in some instances, it's moved up higher than that.
Austin Werschmitt
Got it. That's helpful. And then just one last one for me. I was curious if you could provide any update on sort of pipeline health systems and what's sort of the latest there and whether or not they remain current on their rent. Thank you.
Jeff
Sure, Austin. So in terms of pipeline, I think a couple things to note. I mean, they're going through the bankruptcy process. and they still have some time to decide if they're going to accept or reject our lease. So we're waiting for that decision, although at this time we don't believe that our lease will be rejected. It's a below market rental rate for this type of property. And in terms of payment, while they're going through the bankruptcy process, the timing on payment is more determined by the bankruptcy rules than anything else. So we'll know more once they've decided to, uh, to accept or reject our lease. But at this time, we don't, again, we don't believe that the lease is going to be rejected. And we expect once those mechanisms take place that, you know, everything would, would, would, uh, again, continue to get paid as, uh, as normal.
Austin Werschmitt
Great. Thanks for the talk. Thank you.
Operator
Our next question comes from the line of Rob Stevenson with Jenny. Please proceed with your question.
Rob Stevenson
Good morning, guys. How are you guys... Obviously, paying down debt is a good thing and a good use of proceeds, etc. But how are you guys viewing the preferred? At 7.5%, one could argue that that's your most expensive debt and that a lot of times you're not getting credit for that as equity. How are you viewing that piece in the capital stack if you do have... disposition proceeds to deploy?
Jeff
So, Rob, I think we certainly consider it in terms of potential. We now have the ability to repay it. But from a leverage perspective in the credit facility, it does count as capital. And so when we think about our pricing grid and the impact on our pricing grid, we have to be cognizant of of not moving in the pricing grid above that 50% level if we take out the preferred. So I think we have to, again, be thoughtful around that in terms of how we would use proceeds for many sales. So it's on the table because our optionality moves to us, but I think, again, just balancing out the impact that it might have on our pricing grid in the credit facility. Okay.
Jeff Bush
And then, Rob, let me just add something. It was sort of funny because about a year ago, we couldn't wait until we could take down the preferred based upon our equity. We were planning on using equity to take down the preferred, lower our debt level, get rid of the preferred, make money on that. But, you know, the circumstances have changed. We always considered taking down the preferred at some point.
Rob Stevenson
Okay. I mean, I guess then that leads into another question. I mean, you know, the stock has bounced off the $7 low, but still trades at an incredibly high implied cap rate on the existing portfolio of assets. How narrow do you have to be between buying, you know, your own portfolio versus buying an external asset to make that math work? I mean, if you're trading at a, call it a 10 or 12 implied cap rate, and, you know, you can buy stuff in the marketplace with an eight, is that good enough, you know, given the additional sort of revenue and dropping down to the bottom line to make that work? Or do you really need to be in a much narrower band from your own sort of stock pricing, the implied value of your own assets to make external acquisitions work for you?
Jeff Bush
Yeah, that's a very good question, and that's something we look at all the time. We feel our stock is too low right now. I guess others do also, but we think it got extremely low for the dividend we give and the good balance sheet we have to pay our dividend and continue to pay our dividend. That we're not worried about. Then going back and growing again, we need to find assets that we feel are accretive. How much accretive? I'm not sure at this time. I mean, we used to be able to do two, three points in accretive, and I think we'll get back to that. But we need to buy assets that are accretive. And it includes the interest rate that we have to pay on, you know, taking down this money and includes the cost of capital. So it's going to, there may be a little bit of pause in this until the market sort of catches up with this and others. But on the other hand, we've seen some pretty desperate sellers who have mortgages that they're going out there and they don't want to, they have to pay their mortgages or refinance them and other things. And you know, there may be some opportunities out there to be a creative. Um, I think we need to have a pause and let the market go up a bit also.
Rob Stevenson
Okay. And then last one for me, what's the plan for that? I think you said it was 74% occupied asset that you acquired. And what's the timing on that?
Jeff Bush
Yeah, I got to tell you, the greatest thing that has happened to our organization is we built up a very strong asset management department. So therefore, not only have we been able to release properties because we bought some with shorter leases, Then we turn around and make them much longer leases. But we then went into the business, like in Fairfax, Virginia, we bought it basically 80% occupied. And then we went in and very quickly were we able to lease up. Not a lot of REITs do this because they don't want vacancy to show up on their numbers. It's sort of manufacturing their occupancy. We feel that we have strong occupancy. and we could buy some vacancy and increase it. So we've done that with several of our assets where we're now buying vacancy, getting a really good deal on the property. And when we do it, we gain a point to two points on that. So that's the same type of strategy we have on each one of our properties. If there's vacancy in a property, we have to feel strongly. Like what happens is sometimes the owner does not give allowances, you know, renovation allowances or anything, or they don't pay broker fees. We found that in Fairfax, that they didn't like to pay broker fees. We came in, we paid broker fees. We basically filled up the place. There's just quirks in some of the ownership. There's a lot of them are doctors or medical people who just don't know how to run property properly. So we found a real niche in that to add value to a property. So therefore when you see sometimes, you know, you'll see these occupancies down lower, but we, we could, you know, we feel strongly before we go in that we could rent these up.
Rob Stevenson
Okay. So this is just, uh, use the people, use your internal people to, to manage this asset better and lease it up rather than going into it, knowing that you had a tenant in your back pocket or something like that, or you were going to do redevelop it or something like that. It's just a lease up story over the next few quarters.
Jeff Bush
And sometimes we have a tenant. You know, we have a whole bunch of tenants that are national tenants that are looking for space. We contact them before we buy. Sometimes we already have somebody interested.
Rob Stevenson
All right.
Steve
Yeah, and I would add, too, like if you look at the completed acquisitions table, and I'll point to Prosperity Plaza in Fairfax, Virginia. And if you compare that with the previous quarter report, I mean, we had that at like a six, four, and now it's a seven, three, uh, just pointing to the lease up that's happened at that property and just a little bit more color in Glenview. When we bought that, we knew that there was going to be role in a near term. Uh, that was part of the opportunity, uh, long-term it's a fantastic location. Uh, it's, it's near a, um, uh, you know, retail hub and a transportation center. And it's got a really nice mix of tenants that are focused on dental, optometry, wellness. And, you know, in our diligence, we spoke with local leasing experts that confirmed what we believe would be the case, that this is a property that we could fill up in a fairly short time. So there's a near-term role, and that's reflected in the occupancy that you're seeing.
Rob Stevenson
Okay. Thanks, guys. Appreciate the time.
Operator
Our next question comes from the line of Brian Mayer with B. Riley Securities. Please proceed with your question.
Brian Mayer
Good morning. Most of my questions have already been asked, so just kind of some follow-ups to those. On the pipeline help asset, you know, if worse comes to worse and, you know, there's an issue there, it's my understanding that's a pretty good asset. How quickly do you think you could replace the tenant if you had to?
Jeff Bush
Yeah, it's a good question. I'll just give you some of the fundamentals. We got, because Pipeline was operated, we came in and bought this property at a tremendous discount. It's 14 acres, five miles from downtown Denver in a very active area where it's really the only hospital there. Now it's going for, right now with the lease increases, it's at $10 a square foot. Typically, a hospital at that level and others would be about $30 a square foot. Per bed, new hospitals are about a million dollars. Buying a hospital could be $500,000 around that. This is $100,000 a bed. That's very good economics. They were doing fine on this. They were taking fees from here and other things. So we expect... you know, that this is an asset people have asked, systems have asked us questions about this asset in the past. So either they're going to run it or they could sell it. But we still think this is a pretty good asset based upon the rent roll and based upon that a lot of money has gone into it by the tenant to upgrade it and set up the systems and really make it a Their business is worth something there. So I don't think they're going to walk away from, you know, a 15-year below market lease, way below market lease.
Brian Mayer
Got it. And maybe for Alfonso, you know, with interest rates and cap rates moving around, you know, quite a bit, what would it take? And, you know, just in your history in this business, you know, from a cap rate, you know, upward spike for you guys to say, hey, look, we're going to reengage here because we don't want to turn down, you know, these cap rates? Or is it just simply a spread game and, you know, cap rates could go up 300 basis points and you don't care because your cost of capital has gone up that much and you're just going to pass?
Steve
Well, so, I mean, there's two questions and two parts of that question, but they're kind of intermingled. Um, I mean, I, my sense of the market right now is that it's still in transition. Uh, I would say I would characterize the market, uh, started changing slowly, but then in mid September, it was clearly capitulation. There was a lot of, uh, acknowledgement that, uh, that the pricing for, for a medical office across, across the board had changed, uh, pretty dramatically. Uh, and so there's, um, there's been a lot of movement in the last couple months in terms of cap rate. And I'm inclined to think that the dust hasn't settled yet. And, you know, my overall sense of it is in 2023, I think there's going to be a good opportunity to buy a medical office. But, you know, given our, you know, our goals of growing this company and doing it in a way that is accretive, I mean, we're always mindful of our cost of capital, and we always want to grow accretively. So, you know, we can't ignore that. So, you know, we have to be mindful of where capital markets are and where our stock is trading.
Brian Mayer
Okay, thank you.
Operator
If there are no further questions, I'd like to hand the call back to management for closing remarks.
Jeff Bush
thank you uh everybody for joining this call we feel like we had an excellent quarter uh going to 25 cents affo and thank you for following us appreciate it have a good day ladies and gentlemen this does include today's teleconference thank you for your participation you may disconnect your lines at this time and have a wonderful day
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