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 second quarter 2023 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 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, Steve Sweat, with the best of relations. Thank you, sir. You may begin.
Steve Sweat
Thank you. Good morning, everyone, and welcome to Global Medical Reads' second quarter 2023 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 which are not historical facts and are considered forward-looking. The company intends these forward-looking statements to be covered by the Safe Harbor Provision's for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is making this statement for the purpose of complying with those safe harbor provisions. Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including, without limitation, those contained in the company's 10-K for the year ended December 31, 2022, and its other SEC filings. The company assumes no obligation to update publicly any forward-looking statement, 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 current 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 second quarter 2023 earnings call. Our portfolio continues to produce excellent results, with portfolio occupancy at the end of the quarter of 97%, unchanged from the first quarter and a weighted average lease term of 5.8 years. During the quarter, we sold a four-property MLB portfolio in Oklahoma City, Oklahoma, for gross proceeds of $66 million at a 6.5 cap rate, resulting in a gain of $12.8 million. Importantly, We use the net proceeds from this sale to pay down our variable rate debt, resulting in leverage ratio at the end of the quarter of 44.5% and reducing our ratio of variable rate debt to 12% of our total indebtedness. Including the $12.8 million gain from the sale of Oklahoma City properties, our net income attributable to common shareholders for the second quarter of 2023 was $11.8 million, or 18 cents per share, compared to $2.2 million, or 3 cents per share, in the second quarter of 2022. FFOs. in the second quarter was 21 cents per share and unit, down 3 cents from the prior year quarter. And our AFFO was 23 cents per share and unit, down 2 cents from the second quarter of last year. The primary reason for the decline in both the FFO and AFFO was an increase in interest costs due to the elevated interest rate environment. For acquisitions in the quarter, we acquired two medical office buildings in Redding, California for $6.7 million with a 7.6% cap rate. This was primarily funded by our issuance of OP units that were priced at $11 per unit, which helps improve our liquidity and provides tax planning flexibility to sellers. Overall, We continue to spend time identifying properties that meet our investment criteria and our underwriting standards as we start to see more attractive pricing in the market, and we will remain disciplined in our approach. Regarding dispositions, we are very pleased with our progress in selling properties to reduce our variable rate debt and leverage. Inclusive of our Oklahoma City sale through June 30th, we have generated proceeds of $74 million from dispositions. And earlier this week, we closed on a sale of a medical office building in North Charleston at 5.3 cap rate that generated an additional $10.1 million of gross proceeds. These dispositions have enabled us to achieve our goal of reducing our leverage to our target range of between 40 and 45% as of June 30th. Overall, I am pleased with our second quarter results and want to thank the entire team for their hard work and contributions to the results. With that, I turn the call over to Alfonso to discuss our investment activity and our current acquisition market conditions in more detail.
Steve
Thank you, Jeff. The transaction market for our target medical facilities which align with our investment criteria remains constrained due to the impact of higher interest rates and a wide bid-ask spread. Despite a considerable number of opportunities we are reviewing, we are remaining prudent in adhering to our underwriting standards. During the second quarter, we completed one acquisition consisting of two fully occupied single-tenant medical office buildings in Redding, California for a purchase price of $6.7 million with a cap rate of 7.6% with 12.8 years of term, which was primarily financed by our issuance of OP units at a price per unit of $11 per share. We persist in actively engaging with diverse physician groups and corporate sellers, anticipating potential opportunities to emerge, especially as certain owners may face the need to sell if they encounter difficulties in refinancing their mortgages. Furthermore, we are continuously exploring avenues to expand our potential deal volume while achieving strong spreads, including options like development financing and joint venture opportunities. As Jeff mentioned, in the second quarter, we sold a portfolio of four medical office buildings located in Oklahoma City, Oklahoma, at a cap rate of 6.5%, receiving gross proceeds of $66 million, resulting in a gain of $12.8 million. With the recently completed sale of our North Charleston facility at a 5.3 cap rate that generated gross proceeds of $10.1 million, we have made a great progress against our target goal of approximately $90 million of dispositions at a cap rate between 6% and 6.5%, and have been pleased with the considerable level of interest from investors that we have seen. Due to the uncertainty surrounding equity markets and their impact on current equity values and our cost of capital, we find it challenging to forecast when our acquisition activity will resume. With that said, we are actively engaged in the market and ready to resume our acquisition efforts once our cost of capital improves. We are prepared to take advantage of opportunities as they arise and are committed to maintaining our active presence in the market. During this period, the stability of our diversified portfolio consisting of high quality medical office properties along with our ample liquidity allow us to be patient. Past cycles have shown us that the transaction markets require time to adjust and we are beginning to see signs that it is adjusting. Looking ahead, we will continue to seek opportunities to align with our strategic vision and capital structure. we may leverage our competitive advantages such as our scale, access to capital, and the potential use of OP unit deal structures whenever feasible and advantageous. With this approach, we remain confident in our ability to navigate through the current market challenges and capitalize on opportunities as they arise and can add value to our business. I'd like now to turn the call over to Bob to discuss our financial results. Bob? Thank you, Alfonso.
Jeff
GMRE's portfolio continues to demonstrate its resilience by consistently generating solid results. At the end of the second quarter, our portfolio consists of gross investments in real estate of $1.4 billion and included $4.8 million of total leaseable square feet, 97% occupancy, 5.8 years of weighted average lease term, 4.3 times rent coverage, with 2.1% weighted average contractual rent escalations. In the second quarter, we achieved a 7.9% year-over-year increase in total revenues to $36.4 million, driven primarily by the timing of our 2022 acquisitions and our portfolio operations. On a same-store basis, excluding cash basis leases, our second quarter revenues were up $590,000, or 2.2%, compared to the second quarter of 2022. Our total expenses for the second quarter were $35 million compared to $29.9 million in the prior year quarter. The increase was primarily due to higher interest costs due to increases in both market interest rates and average debt balances, along with higher operating depreciation and amortization expenses due primarily to the changes in our portfolio since the comparable prior year period. Our interest expense in the second quarter was $8.5 million compared to $5.4 million in the comparable quarter of last year, reflecting higher average debt balances in 2023, as well as an increase in average borrowing rate from 2.97% in the second quarter of 2022 to 4.39% during the second quarter of 2023. G&A expenses for the second quarter of 2023 were $4.5 million, compared to $4.3 million in the second quarter of 2022. Within our current G&A expenses, note that our stock compensation costs of $1.1 million in the quarter and our cash G&A costs were $3.3 million. As mentioned last quarter, we continue to expect our G&A expenses for the second half of 2023 to range between $4.3 million and $4.5 million on a quarterly basis. Our operating expenses for the second quarter were $7.2 million compared to $6 million in the prior year quarter, with the increase in these expenses primarily driven by the changes in our portfolio since the comparable prior year period. Note that real estate related taxes represent the single largest component of our operating expenses. Regarding these second quarter expenses, $5 million related to net leases, where the company recognized a comparable amount of expense recovery revenue, and $1.6 million related to gross leases. Net income attributable to common stockholders for the second quarter was $11.8 million, or 18 cents per share, compared to $2.2 million, or 3 cents per share in the second quarter of 2022. Net income for the second quarter included the gain on the sale of the Oklahoma City properties of $12.8 million. FFO in the second quarter was $14.7 million, or 21 cents per share and unit, compared to $16.4 million, or 24 cents per share and unit in the second quarter of 2022. AFFO in the second quarter was $15.9 million, or 23 cents per share and unit, compared to $17.6 million, or 25 cents per share and unit in the second quarter of 2022. Moving on to the balance sheet, As of June 30th, 2023, our gross investment in real estate was $1.4 billion, which is down $13 million from a year earlier, reflecting our disposition activity. As of June 30th, we had $634 million gross debt. Our leverage ratio was 44.5% and our weighted average interest rate was 4.09%. As of quarter end, the weighted average remaining term of our debt was 3.4 years. As a result of our recent disposition activity, approximately 88% of our debt is now fixed rate debt, and the current unutilized borrowing capacity on the credit facility is $321 million. With our reduced leverage ratio, we will be able to lower the SOFR margins in our credit facility by 15 basis points starting later this month, with the SOFR margin on our revolver decreasing to 1.35%, and our term loan margins decreasing to 1.3%. We did not issue any shares of common stock under our ATM during the quarter or to date. With respect to our investment portfolio in our 2023 lease expirations, we are pleased with the progress on renewals and based on activity to date, currently are projecting to retain between 85% and 90% of the 363,000 square feet that we've noted as expiring this year. For the remainder of 2023, we expect that our occupancy will continue to stay above 96%. Regarding capital expenditures on the portfolio, through June 30th, our cash spend was approximately $2.3 million. Currently, we're projecting additional expenditures of approximately $4 million related to building and site improvements and $3 million related to tenant improvements, primarily associated with lease renewals and lease-ups, to be completed during the remainder of 2023. Overall, we are pleased to have completed the disposition of the Oklahoma City assets and used those net proceeds to pay down variable debt, reduce our leverage, and lower our interest rate margins. We are confident in our portfolio and have ample liquidity to help us manage these uncertain market conditions. We believe that we are well positioned to execute our growth strategy over time as conditions normalize and look forward to sharing our progress with you through the remainder of the year. This concludes our prepared remarks. Operator, please open the call for questions.
Operator
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is on 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 star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Austin Werschmidt with KeyBank. Please proceed with your question.
Austin Werschmidt
Hey, good morning, everyone. Jeff, you discussed $90 million of potential sales this year, and you guys have made considerable progress towards that goal. I mean, is that still the right amount or to the extent that you could sell additional assets in the sub 6% range to redeploy into higher yielding acquisitions? You know, would you consider kind of exceeding that $90 million threshold?
Jeff Bush
Yeah, this is Jeff. Yes, we would consider it. We do have groups out there interested in our assets. We would consider selling more if the right opportunity came up. We'd like to reduce our debt. My preference would be for the stock to go up and we use ATM and buy assets and reduce our debt that way, buy more equity than debt in the assets than we did before. But given nobody knows really where the market's going, we would consider that.
Austin Werschmidt
So with leverage now kind of just inside the higher end of your targeted range, I guess what are the criteria that you are looking to move forward with? with new acquisitions at this point to the extent the stock doesn't, I guess, behave so that you're able to fund with the ATM? Or what's sort of the plan, I guess, if that doesn't materialize and how you're thinking about funding to keep leverage within that target range?
Jeff Bush
Yeah, I mean, it's a hard decision right now. We feel right now that cap rates are going up. So we want to be patient. You know, there was a lot of money in the market, a lot of new buyers in the market, and they're willing to pay pretty aggressive prices even still. But we do think for ourselves the cap rates will go up. So if the cap rates sort of start to match what the cost of capital is, which historically does in real estate, we'll be back in the market. And when we're back in the market, I'd rather use more like 60% equity or more in the in the purchases in my calculation for the purchases but for a little while equity and debt may be almost the same i'd rather use than all equity to keep bringing down debt that makes sense and then just last one for me i guess how big is the acquisition pipeline today or deals that you're actively underwriting that kind of meet you know your current underwriting criteria it's this
Steve
deals out there i let alfonso also there's deals out there but right now we're noticing the cap rates are going up so you know we're he's monitoring i let alfonso comment on that yeah so uh we've um cap rates have continued to drift higher throughout the year and there's been another uh slight increase over the last couple months just that's our perspective and uh i think uh Cap rates are probably going to continue drifting slightly higher. So if anything, it's better to wait until there's better pricing. And so we're looking at a lot of deals. We're very active in the market, but we're not pushing forward with anything until we feel that we can buy things accretively.
Cap
Understood. Thanks for the time.
Operator
Our next question comes from the line of Juan Sanabria, BMO Capital Markets. Please proceed with your question.
Juan Sanabria
Hi, good morning. Just following up on Austin's questions, just curious on where cap rates are, I guess, today for the asset types you're focused on, and where do you need the cap rates to get to on your map to kind of reignite the external acquisition engine?
Steve
Yeah, so starting with where the market is today. So for the type assets that we like, it's north of mid sevens. There's some assets that we've seen that are trading as like low eights. And, you know, there's, but, you know, I think there's still, the last couple months have made us feel like, look, I think there's good reason to wait to see where cap rates trend over the next few months. and try to get better pricing. With regards to the second part of the question, I mean, we're waiting for our stock price to get to a better range where we can start buying accretively, and right now we're not within range.
Juan Sanabria
Okay. And then just on a second question on the operations, the fundamentals, margins look like they dipped a little bit despite flat occupancy and I recognize there could be some seasonality and timing difference in expenses, but just curious on how we should be thinking about margins going forward. I'm not sure if there's some leakage on the expense side as we've seen some elevated inflation. So just curious if you could make some comments on the margins.
Jeff
The margins did decrease in the quarter and it was driven, I know while vacancy was the the same in both periods. We did see more expenses from vacant properties. It's really been the primary driver for the dip in it. But from a leakage perspective, I think our leakage on net leases has been pretty consistent from quarter to quarter. It's really the vacant space costs that have been ticking up. And also, as we've added on more gross leases, there's been a little bit more exposure from that side as well.
Cap
That's it for me. Thank you.
Operator
Our next question comes from the line of Brian Mayer with B. Reilly. Please proceed with your question.
Brian Mayer
Thank you. Good morning. Maybe for Alfonso, can you give us a little color on how that Oklahoma transaction came about maybe who the buyers are of these assets at these, you know, five-something and six-something cap rates?
Steve
Yeah, so we went through a process at the end of the year to try to identify assets that we felt were liquid in this current environment. And those are typically assets that are simple. So preference for single tenants versus multi-tenants, properties with a clear credit story, and properties with longer lease terms. So OCOM was selected for those reasons. We ran a process and got a lot of interest from private equity buyers. And that was true really with all the properties that we've put in the market, very strong interest from private equity investors. The North Charleston asset, that one went to a 1031 exchange buyer. So, you know, that was very strong pricing, which was, you know, very unique given the circumstances of the buyer. But, you know, very happy with that result. But, yeah, it's been the private buyers that started the year very aggressively. And we ran a process and, you know, focused on executing those transactions the first half of the year.
Brian Mayer
And how much of the $10.1 million from North Charleston was in OP units?
Steve
Wait, so the OP units that we mentioned was for the acquisition in Reading. Is that what you're referring to?
Brian Mayer
Oh, yeah, yeah, exactly. Sorry about that.
Steve
Yeah.
Brian Mayer
90% of the deal was done in OP. And then just last for me, when you – and I think you touched upon this, Alfonso, but maybe a little bit more granularly. Are there any type of common themes among the assets that you're looking to sell, not from the standpoint of kind of single-tenant and clean, but as far as asset type goes? Yeah.
Steve
Somewhat. You know, we did have a preference to sell higher acuity assets to increase our MOP footprint. So the OCOM asset is a surgical hospital. But, you know, really what we were focused on was trying to get really good pricing, and that was our primary focus.
Brian Mayer
Okay. Thank you. That's all for me.
Operator
As a reminder, if you would like to ask a question, press star 1 on your telephone keypad. Our next question comes from the line of Rob Stevenson with Jannie Montgomery Scott. Please proceed with your question.
Rob Stevenson
Good morning, guys. Can you talk a little bit about how extensive your tenant watch list is? And can you remind us, do you have any Genesis exposure at this point?
Cap
Yes, sir. Sure.
Jeff
From, you know, Genesis exposure is extreme. I'll start with the second question. The second part is Genesis exposure is very limited, and there's no, it's one asset or one lease, and it's about 7,500 square feet. And there's been no issues with, you know, with that lease to date, and none are expected. And in terms of a watch list, You know, we, you know, our, our properties are performing, you know, very well. I mean, we go through our, our, our regular quarterly process to, you know, assess the portfolio, uh, and, and, you know, focusing on, on any significant, uh, you know, whenever there's any significant items that are coming up relative to a particular property or lease. And, you know, to this point, our, our, our watch list of tenants is, is, is very limited.
Rob Stevenson
Okay. That's helpful. And next year's a big one for lease expirations. Any known move-outs of consequence? And how are those conversations going with the major tenants? What type of spread over expiring leases are you looking at today?
Jeff Bush
Let me start on this. Yeah, nothing spectacular in terms of move-outs. The big tenants look pretty good, and it's difficult.
spk00
for 24.
Jeff Bush
We are targeting to try to get our leases up 7.5 increases, a little bit of increase more. Now, being triple net, they pay most of the expenses. So, you'll see on, you know, most of our assets are triple or absolute net. So, they're paying most of these expenses. So, to add on To the least, it's more negotiations, but we don't really get a lot of inflation in what we do because they're paying the items that have heavy inflation. So we're trying to get more of an increase as opposed to two points that we're targeting to go to 2.75 or above.
Rob Stevenson
Okay, that's helpful. And then, Bob, the revolver is at, I guess, 665 now, given the drop in the spread, given the lower leverage. Given the volatility of the debt markets, is this your best cost of debt right now?
Cap
Right now?
Jeff
I mean, we've looked at it as our most flexible cost of debt in terms of just being able to – we don't want to increase our debt beyond where it is today. So from a longer-term planning perspective – we're really looking to bring our leverage down, so not necessarily looking to add any more permanent debt or longer-term debt at this point. So I look at the credit facility as our best source in the near term as we, again, look to, again, run at a lower leverage point. Respectively, we would, you know, again, as we – get larger and would lock in debt for longer term, absolutely would look to term out additional debt to not be subject to the spike that we're seeing here in the short term on the near-term rates.
Rob Stevenson
Okay. I know you don't have any material debt maturities until 26, but can you remind us the two big term loans? Do the swaps on those go out to 26 and 28 for the term, or are they shorter term in nature?
Jeff
They do go out. They both go out. We have swaps that go out through the maturity of both of those term loans. And, in fact, we're going to start to see some of the benefits of forward starting swaps that we put on in the past on the $350 million term loan. So as we extended that out in past years, we put additional swaps on as we added term into that $350 million term loan. So I think the positive here is that the forward starting swaps are going to start to kick in here in the third quarter of this year and then the next year Similarly, in the third quarter, we'll see actual step downs in the rate on that $350 million term loan. But both loans are swapped out until their maturities.
Rob Stevenson
All right, that's helpful. And then last one for me, I think earlier in the Q&A to respond to a question, Jeff said that there might be the capability of going above $90 million of dispositions. When you look at it, how much higher could you go than $90 million within the REIT rules before special dividends and other sort of things start having to factor into the decision? Is there much room above $90 million? How should we be thinking about that?
Jeff
From a REIT rule perspective, it would depend on how those transactions were structured relative to how much we could do above the $90 million. But I think In general, there is room. We don't really foresee any issues from a distribution rule perspective. I think there's other more narrow rules that we would have to look at. But in general, there is room above the $90 million that we would be able to manage to the extent that we wanted to.
Jeff Bush
Okay. Thanks, guys. Go ahead. I just want to add to that. My preference is to sell. I like these assets. You know, we do make a nice profit from where we bought them. My preference is to keep assets if we can, and if the market, you know, there's a stop in the Fed rating or there's a timetable where people think it's going to come down, we generally think the stock will go up and we will be able to be buying creatively. And I'd rather be using things like ATM and other, and OP units to buy new assets and grow and bring down debt by leveraging less what I buy in the future. So that's really where I'm looking to go is my preference. But we do have the optionality of selling at a profit.
Rob Stevenson
Okay. Thank you very much, guys, and have a great day. Thank you.
Operator
Thank you. This concludes the question and answer session. And with that, the conclusion of today's call. Ladies and gentlemen, you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
Disclaimer