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spk00: Greetings and welcome to the Global Medical REIT third quarter 2023 earnings conference call. 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 Sweet, Investor Relations. Thank you, sir. You may begin.
spk11: Thank you. Good morning, everyone, and welcome to Global Medical REIT's third quarter 2023 earnings conference call. On the call today are Jeff Bush, Chief Executive Officer, Alfonso Leone, Chief Investment Officer, and Bob Kiernan, Chief Financial Officer. Please note the use of forward-looking statements by the company on this conference call. Statements made on this call may include statements which are not historical facts and are considered forward-looking. 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, 2022, 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?
spk07: Thank you, Steve. Good morning, and thank you for joining our third quarter 2023 earnings call. Our high-quality portfolio continues to produce strong and consistent results. with portfolio occupancy at the end of the quarter of 96.7% and a weighted average lease term of 5.7 years. During the quarter, we sold a medical office building located in North Charleston, South Carolina, at a 5.3% cap rate, receiving gross proceeds of $10.1 million. and resulting in a gain of $2.3 million. Year-to-date, we have generated more than $80 million of gross proceeds from three dispositions using the net proceeds to pay down our variable rate debt, resulting in a leverage ratio at the quarter end of 44.2% and reducing our ratio of variable rate debt just under 11% of our total in-depthness, including the $2.3 million gain from the sale of the North Charleston property. Our net income, attributable to common shareholders for the third quarter of 2023, was $3.1 million, or five cents per share compared to $8.1 million, which included $6.8 million gain from the sale of a property, or 12 cents per share, in the third quarter of 2022. FFO in the third quarter was 22 cents per share and unit, down 1 cent from the third quarter of last year. And AFFO was 23 cents per share and unit, down 2 cents from the third quarter of last year. The primary reason for the decline in both FFO and AFFO was an increase in interest costs in the current quarter due to the elevated interest rate environment. During the quarter, although we had no acquisition, we continued to dedicate time and resources to identifying properties that aligned with our investment criteria and prudent underwriting standards. As we start to see more attractive pricing in the market, we will remain disciplined in our approach, focusing on high-quality assets that would be accretive to our earnings. Overall, I am pleased with our third quarter results and want to thank the entire team for their hard work and contributions to our results. With that, I turn the call over to Alfonso to discuss our disposition activity and our current acquisition market conditions in more detail.
spk08: Thank you, Jeff.
spk05: The transaction market for our target assets continues to be constricted with a number of higher interest rates and a wide bid-ask spread. We continue to see a number of opportunities, but we are disciplined about our investment process. Although we did not complete any acquisitions in this quarter, we continue to actively engage with a wide range of physician groups, brokers, and corporate sellers. We are ready to seize potential opportunities, particularly as some owners may consider selling if they face challenges when refinancing their mortgages. The market continues to evolve, and we are tracking it closely. As Jeff mentioned, in the third quarter, we sold a medical office building located in North Charleston, South Carolina, at a cap rate of 5.3%, receiving gross proceeds of $10.1 million. With this sale, we have now completed three dispositions for a total of six properties that have generated $80.5 million in aggregate gross proceeds at a weighted average cap rate of 6.3%, resulting in an aggregate gain of $15.6 million. We were very pleased with the level of investor interest that we experienced in executing these dispositions. Given the continued uncertainty with the equity markets and their influence on current equity valuations and our cost of capital, we are faced with challenges in predicting when our acquisition activity will resume. Nevertheless, we are actively involved in the market and are prepared to ramp up our acquisition efforts once markets normalize and cap rates generally provide an attractive spread relative to our cost of capital. During this time, we have the benefit of staying patient due to the stability of our diversified portfolio of high-quality medical office properties along with our ample liquidity. As always, we will continue to seek opportunities that align with our investment strategy and capital structure and will leverage our competitive advantages, such as scale, access to capital, and the potential use of OP unit deal structures when applicable. With this approach, we remain confident in our capacity to navigate current market challenges and to capitalize on opportunities as they arise. The investment landscape has improved significantly in 2023, shifting from a seller's market to a buyer's market, and we expect leverage to continue improving for buyers with access to capital.
spk08: I'd like now to turn the call over to Bob to discuss our financial results. Bob? Thank you, Alfonso.
spk10: GMRE's portfolio continues to produce consistent and solid results, demonstrating its resilient foundations. At the end of the third quarter, our portfolio consisted of gross investments in real estate of $1.4 billion and included 4.7 million of total leaseable square feet, 96.7% occupancy, 5.7 years of weighted average lease term, 4.2 times rent coverage with 2.1% weighted average contractual rent escalations. In the third quarter, Our total revenues increased slightly compared to last year to $35.5 million, driven primarily by the timing of our 2022 acquisitions and the performance of our portfolio, partially offset by the impact of property dispositions. On the same store basis, excluding cash-based leases, our third quarter revenues were up $900,000, 3.4% compared to the third quarter of 2022, driven by our rent escalators as well as new leases. Our total expenses for the third quarter were $33 million compared to $32.1 million in the prior year quarter. This increase was primarily due to increased operating expenses and G&A expenses. Our interest expense in the third quarter was $7.2 million compared to $7 million in the comparable quarter of last year. As the deleveraging we have accomplished so far in 2023, gets incorporated into our results despite the continued high interest rate environment. In particular, note that beginning in early August, our credit facility pricing improved by 15 basis points as a result of our reduced leverage. In addition, in early August, certain of our forward-starting interest rate swaps became effective, replacing maturing swaps, which reduced the interest cost on our $350 million term loan by 30 basis points compared to prior periods. G&A expenses in the third quarter of 2023 were $4.4 million compared to $4 million in the third quarter of 2022. Within our current quarter, G&A expenses note that our stock compensation costs of $1.2 million in the quarter and our cash G&A costs were $3.2 million. Currently, we continue to expect our G&A expenses to be in the range of $4.3 million and $4.5 million on a quarterly basis. Our operating expenses for the third quarter were $7.2 million compared to $6.7 million in the prior year quarter with the increase in these expenses driven by the changes in our portfolio since the comparable prior year period. Note that real estate related taxes represent the largest component of our operating expenses. Regarding these third quarter expenses, $5.3 million related to net leases where the company recognized a comparable amount of expense recovery revenue and $1.4 million related to gross leases. Net income attributable to common stockholders for the third quarter was $3.1 million, or 5 cents per share, compared to $8.1 million, or 12 cents per share, in the third quarter of 2022. Net income for the current quarter included a gain on sale of the North Charleston Medical Office Building of $2.3 million, and then the prior year included a gain on sale of $6.8 million. FFO in the third quarter was $15.3 million, or 22 cents per share and unit, compared to $16.2 million, or 23 cents per share and unit, in the third quarter of 2022. AFFO in the third quarter was $16.5 million, or 23 cents per share and unit, compared to $17.1 million, or 25 cents per share and unit, in the third quarter of 2022. Moving on to the balance sheet, as of September 30th, 2023, our gross investment in real estate was $1.4 billion, which is down about $60 million from the start of the year, reflecting our disposition activity. As of September 30th, 2023, we had $626 million of gross debt with a weighted average remaining term of 3.1 years. At quarter end, 89% of our total debt was fixed rate debt. Our leverage ratio is 44.2%. and our weighted average interest rate was 3.78%. As I mentioned, with our reduced leverage ratio, during the quarter we lowered the SOFR margins in our credit facility by 15 basis points, with the SOFR margin on our revolver now at 1.35%, and our term loan margins now at 1.30%. Lastly, the current unutilized borrowing capacity under the credit facility is $318 million. We did not issue any shares of common stock under our ATM program during the quarter or subsequent to quarter end. With respect to our lease expirations, based on activity to date currently, we're projecting that we will retain 80% of the 363,000 square feet that we've noted as expiring this year and 86% of the related expiring ABR. We expect to end the year with occupancy at approximately 96.5%. Our outlook regarding 2024 lease expirations is very good and, in general, consistent with our experience on 2023 lease expirations. Regarding capital expenditures on the portfolio, through September 30th, our cash spend was approximately $5.8 million. Currently, we're projecting additional expenditures of approximately $2 million related to building and site improvements and $1 million in tenant improvements, primarily associated with lease renewals and lease-ups we expect to be completed during the remainder of 2023. In conclusion, as we look to the balance of the year with our strong portfolio and ample liquidity available to us during these uncertain market conditions, we believe we are well positioned to restart our growth strategy as conditions normalize and look forward to sharing our progress in the quarters to come. This concludes our prepared remarks.
spk08: Operator, please open the call for questions.
spk00: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that 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. One moment, please, while we poll for questions. Our first question comes from Austin Orschmidt with KeyBank Capital Markets. Please proceed with your question.
spk04: Hi, good morning. Alfonso, can you provide some additional detail on just the volume of opportunities or breadth of conversations that you're having on deals that kind of meet that underwriting criteria? And you mentioned the bid-ask spread remains wide, but has it narrowed at all from the last 60 to 90 days or so?
spk05: Sure. So we've We see about 30, 40 deals a month. A lot of it doesn't make sense. The bid-ask spread has improved over the year. It started pretty wide at the beginning of 2023 and has narrowed quite a bit. There's been capitulation from sellers, started the year with a lot of reluctance to accept that there was a pretty significant change in pricing. But there's increasing acknowledgement that pricing has changed by a pretty meaningful amount. And there's buyers who are coming, sorry, sellers who are coming to market now are much more realistic. What's also happened is what's coming to market, the quality has varied month by month. There was a stretch where there wasn't, the quality had been lower than average That's changing as well. I think there's some of the sellers coming to market have to sell for a variety of reasons. Some of it include financing that's running out of term. Some of it is just developers who had products that they want to sell despite the increase in pricing. There's a lot of reasons why people are still coming to market despite the high increase in cap rates. So the bid-ask spread has improved quite a bit. From our vantage point, there hasn't really been very compelling deals yet for us to move forward. And that's irregardless of where our stock price is. There just hasn't really been anything super compelling. It's getting better. I mean, there's beginning to be opportunities that are catching our eyes that seem pretty interesting. And so the trend is moving in the right direction. But for the past several months, what we've seen and what's been in the market hasn't been that compelling.
spk04: So as a follow-up, I guess, as it relates to that wall of, or as you're saying, sellers are kind of facing upcoming maturities and seem like they're more willing to negotiate. I mean, is there sort of a period or wall of maturities that you're looking towards where you think you can see an even greater increase in opportunities? Are you expecting more of a continuous drip of deals in the next year?
spk05: Sure. Yeah. So definitely any offering that has a short walled and that depends on location, quality of the building, the rent roll. But anything with, I'd say, less than three years of walled is very hard to finance right now unless it just has a very unique location. And so any offering that has a short walled is not finding many bids and in some cases no bids. And so there is opportunities to go in there and get properties at a pretty significant discount to where they were a year ago. And so we've been looking at a fair number of those opportunities, but to date there hasn't really been any offering yet that that has the right quality mix, that has the right risk profile, that has the right rent role. And for the ones that do have a good profile, that do have a good rent role, that are attractive buildings, there's still a pretty wide bid-ask spread. And so for 2023, I'd say investors have been rewarded for being on the sidelines. You know, there have been better deals had now than they were at the beginning of the year. And I think there's acknowledgement by people in the market that you were not rewarded for getting into the market in the first half of the year. I think that's starting to change. And I think a lot of it has to do, a lot of it is hinged on, you know, expectations for what the Fed's going to do and whether or not it's going to, you know, what's in store for 2024. But I think we are approaching a point where investors are going to start feeling more comfortable pushing back into the market more meaningfully.
spk04: Would you be willing to take on some more limited, you know, Walt, I guess, for the right discount, you know, that leasing risk for the right discount? And that's it for me.
spk05: Yeah, and, you know, a lot of that is hinged on our underwriting of the renewal probability. And so there's been some opportunities that we've pursued in the past where that was the case, where it was a short-walled, but, you know, we felt very strongly that the renewal was going to be, you know, very, very high, just given the context, given the property, given the tenancy. And so, yes, if there's a property that has the right quality mix, the right rent roll, and very high renewal probabilities, then with a sufficient discount, we would pursue.
spk08: Thank you.
spk00: Our next question comes from Juan Sanbria with BMO Capital Markets. Please proceed with your question.
spk02: Hi. Thanks for the time. Just curious what's left on the disposition side that you guys are targeting. I believe you were initially thinking maybe 90 million. So just wanted to confirm if that is still contemplated as you move into 24 or how you're thinking about disposition slash still leveraging.
spk07: The market has changed a bit since we sold. We got really good pricing. So we're looking around to possibly sell some more. but I'm pretty doubtful that we'll get the right pricing that we got before. So we're more likely to stay at 80 million and 90 million.
spk09: Okay.
spk02: And then just curious on the acquisitions where you're feeling maybe a little bit more comfortable that pricing has adjusted from a seller's expectations from higher rates, et cetera. What kind of cap rates or yields are you looking to target? for acquisitions and is it more skewed towards multi or single tenant deals? If you can just give us a little color of where you feel most comfortable if and when the acquisition kind of restarts.
spk07: Okay, number one rule before we do anything, it has to be accretive and we have to like the property and it has to be the same quality of property that's given us a 97% occupancy in the last periods of time. So multiple tenant can be very interesting because it's not that competitive because a lot of groups just don't have the capability like we do of managing the multiple tenant. Single tenant, it's more competitive, but I expect, I'm hoping to get in the eights, maybe in the nines. It really depends on what the cost of debt is. at the time that we do come in. But the number one criteria we have is it has to be decently accretive to the portfolio. And the second element is we're in the process of reducing our leverage. So we'd be using basically 60% equity and 40% debt on average. So there's a process that we're looking. So there's several criteria we have to work on, but it definitely has to be accretive.
spk09: Great. Thank you. And then Bobby gave some general parameters, I think, about 24.
spk02: So how should we think about occupancy over the next kind of five quarters or so? I think you had to expect maybe some non-renewals in the fourth quarter, if you can correct me if I'm wrong there, and just expectations into 24 for upcoming maturities and leases.
spk10: Yeah, Juan. So, yeah, we expect our fourth quarter occupancy to be right around 96.5, right in that ballpark. And then as we look ahead to 2024, you know, we're looking at our renewals to be really tracking, you know, very similarly to how we did this year, you know, somewhere in that, you know, 80 to 85%, you know, type range on both square feet. and, you know, and on ABR as we look at 2024 right now. And so what that would be from an overall occupancy, you know, it would be in this, you know, if it ticked down, it depends on absorption, you know, maybe as a floor, you know, think of, you know, 96%, a high 95% as maybe where it could trend on the low side. But I think we feel very confident in... in how we are trending for 2024.
spk09: Okay, thank you very much.
spk00: Our next question comes from Rob Stevenson with . Please proceed with your question.
spk01: Good morning, guys. Just to follow up on that last question, can you talk about how much demand you're seeing for incremental space today? I mean, relative to the last few years, is it harder, easier, about the same in terms of backfilling vacancy and the demand for expansions from tenants?
spk07: Yeah, I would say we keep backfilling vacancy. It may even be a little bit better than last year. We're finding tenants We fill in some challenging ones. You know, you always have some small ones that have been challenging that have been sitting for a couple years. We solved that this year. I'm encouraged that medical office is growing. I mean, we're not doing much with the expansion. I think it's because cost of capital right now. But we are seeing that a lot of our You know, long term, you know, they were small, but longer term, we've been finding that we're leasing them up. So I'm very encouraged about the leasing. And going forward, the same thing. You know, we hear of somebody who is moving out, and then we hear, you know, relatively quickly a replacement. So the market seems to be okay in that terms. If we do in 2024 lose some tenants, I expect that we'll fill them up relatively quickly.
spk01: Okay, that's helpful. And I think you might have a small Genesis Care asset. Has that been resolved as of yet, or is that process still ongoing?
spk10: We really didn't have any significant exposure, Rob, to Genesis. I mean, whatever we did have, I think, was something that was moving out in the fourth quarter. And so there's really nothing material from an impact perspective on our portfolio.
spk01: Okay. And I guess, Bob, that leads me to, other than the impact of any acquisitions, dispositions, and higher rates, is there anything else that's either carrying over from the third quarter positively or negatively earnings-wise or alternatively going away that we should be thinking about when factoring into our models?
spk10: No, nothing significant, really, if I bridge the third to the fourth quarter. The third quarter was very consistent. If you kind of think back from a trend perspective after the dispositions, it flowed, I think, very predictably. And I don't think there's anything really too unusual. I mentioned the occupancy expectations for the end of the year. But otherwise, the trends relative to our – to where we are going from a rent perspective, from a, from a interest perspective is, is teed up. And I think really nothing unusual expected.
spk01: Okay. And when, during the quarter, did the, the sale happen? How much of the, the NOI off of that, did you wind up recognizing in the third quarter?
spk10: Just one month of it.
spk08: It was early August. Okay. Perfect. Thanks guys. Appreciate the time.
spk00: Our next question comes from Alex Pagin with Baird. Please proceed with your question.
spk06: Hello. Thanks for taking the time today. The first one is relating to that 90 basis points of expiring leases. You mentioned that 80% of the space will be renewed and 86% of the ABR. Curious to know what kind of lease escalators you're able to get with those tenants today.
spk07: We've been averaging 2.5% on our portfolio with lease escalators. And remember, most of our properties are triple net, absolute net. Most of our properties are triple net, absolute net. So they're really paying the expenses of the inflationary expenses. So we get 2.5 beyond that. Has that 2.5 changed at all from the beginning of the year to now? Yeah, actually, it's been going up. I mean, our overall portfolio, you know, was running around 2.1%, and we're seeing now about 2.5% in the renewal type of piece.
spk06: Okay. Thank you. Second question is, how are your tenants performing? Are there any change to the watch list?
spk10: No, there's been no significant changes relative to tenant performance. We've had a real solid tenant performance over the last year, so nothing notable.
spk06: Good to hear. Last one for me is how much of the investment pipeline comes from the relationships versus existing ones?
spk05: I don't have a precise stat on that. I mean, it's pretty varied. And, you know, we cast a pretty wide net. But I'd say, on average, about a third of what we see is from new sources.
spk06: Okay. Thanks, guys.
spk08: Have a good day. Thank you.
spk00: Our next question comes from Brian Merr with B Reilly Securities. Please proceed with your question.
spk03: Thank you, and good morning. Just two quick ones for me, maybe for Jeff or Bob. On the dividend, you know, and I asked this before prior quarters, just want to throw it out there again. You know, with the elevated payout ratio, you know, relative to FFO or FAD, you know, we know it improves organically in 2024 and 2025, and I suspect that if you make accretive acquisitions that That only gets better, but not worse. But we get a lot of questions from shareholders and advisors that that dividend is safe at current levels. Is it your thought that the board holds the line that the 21-cent dividend?
spk07: Yes, this is Jeff, and I'm also on the board. So I'm in that discussion. Yes, the board does not want to change the dividend. I wouldn't expect it going up either. But... for the immediate future. We feel safe with the dividend. We think we sort of hit a bottom here. You know, we sold out a bunch of properties, brought down our variables and debt. We still get, you know, our increases every year and our increases every year are now exceeding what, you know, the additional debt costs could possibly be unless something goes too wild. But, we think we're okay with the dividend. And I totally expect so. There's no mood to do anything with it.
spk03: Right. And just one more for me, maybe for Alfonso. When you're talking to potential sellers, do they seem to, you know, continue to be somewhat receptive to taking OP units? You know, has that tone changed at all? You know, what's going on in that regard? Thank you.
spk05: Sure. With the OPs, it's always been curious to me. It really is hard to predict. Like, I find it curious that we've had success in California with OPs. I think that's, you know, there's a specific state context that might be a reason for that. It also is highly dependent on the specific like estate planning of the physicians. And for some physicians, by the time we were talking to them, they were already thinking about it and had done a lot of homework about OP unit shares, up reads, down reads. And so we were, you know, we didn't, there wasn't much that we had to explain or walk through. I mean, they pretty much knew what they wanted. And so it's really hard to predict. And we make a point of mentioning it whenever we think it makes sense. But it's not a product that a lot of people are familiar with, are comfortable with, and want to move forward with and exchange for their properties.
spk08: Okay, thank you. That's all for me.
spk00: We have reached the end of our question and answer session. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.
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