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.
spk09: Good day and welcome to the Global Medical REIT First Quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Steve Sweatt with Investor Relations. Please go ahead.
spk03: Thank you. Good morning, everyone, and welcome to Global Medical REIT's First Quarter 2284 earnings conference call. On the call today are Jeff Bush, Chief Executive Officer, Alfonso León, 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 10K for the year ended December 31, 2023, 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, EBIT RE, and adjusted EBIT RE. You can find a tabular reconciliation of these non-GAAP financial measures to the most currently comparable GAAP numbers from the company's earnings release and filings with the SEC. Additionally, information may be found on the Invest Relations page of the company's website at .globalmedicalread.com. I would now like to turn the call over to Jeff Bush, Chief Executive Officer of Global Medical Read. Jeff?
spk05: Thank you, Steve. Good morning, and thank you for joining our first quarter of 2020 for Earnings Call. At the end of the first quarter, portfolio occupancy was 96.4%, with a weighted average lease term of 5.8 years and a portfolio average rent coverage ratio of 4.8 times. For the first quarter, our net income attributable to common shareholders was ,000.01 per share compared to ,000.01 per share in the first quarter of 2023. FFO in the first quarter was $0.21 per share per unit, down $0.01 from the prior year quarter. And our AFFO was $0.23 per share and unit, unchanged from the prior year quarter. With regard to acquisitions, we are actively looking for properties that meet our investment criteria and underwriting standards. I am pleased to announce that subsequent to the quarter end, we entered into a purchase agreement for a 15th property portfolio of outpatient medical real estate for an aggregate purchase price of $81.3 million. These properties are fully occupied and are leased under triple net or absolute triple net leases. This acquisition is subject to customary terms and conditions, including due diligence reviews, and we expect to close in two tranches, one tranche during each of the third and fourth quarter of 2024. This two tranche closing structure provides us with flexibility as we consider our options regarding the allocation of capital to fund this acquisition. For example, depending on market conditions, we may utilize net proceeds from strategic property dispositions or traditional equity and debt financing. As always, we are mindful of our long-term leverage targets and we expect any potential leverage increase resulting from this transaction would be short-term in nature. We remain committed to our accretive growth strategy while balancing the need to maintain prudent leverage. As we look to the balance of the year, we look forward to updating you on our progress. In terms of tenant-related items, on May 6, 2024, one of our tenants, Stuart Healthcare, announced that it filed for Chapter 11 bankruptcy reorganization. As of March 31, Stuart represented .8% of the company's annualized base rent, primarily in one facility that is located in Beaumont, Texas. The company was actively pursuing releasing opportunities at this facility prior to the Stuart bankruptcy announcement and we are optimistic about our long-term prospects at this location. Bob will provide more details regarding the financial aspects of our Stuart relationship in his remarks. We are closely monitoring this situation and will update the market for any material events as this situation progresses. Overall, I am pleased with our first 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 investment activity and the current acquisition market conditions in more detail.
spk08: Thank you, Jeff. The transaction market for our target medical facilities, which align with our quality and return criteria, has made promising progress. We continue to actively engage with a wide range of physician groups, brokers and corporate sellers to identify acquisition opportunities. Our readiness to capitalize on existing opportunities coupled with our strong capital position and platform sets us apart from less liquid buyers in the market. Furthermore, the unattractive debt refinancing market can work to our advantage, compelling reluctant sellers to consider us as they navigate a difficult refinance market. To that end, as Jeff mentioned, in May, we entered into a purchase agreement to acquire a 15-property portfolio of outpatient medical real estate for an aggregate purchase price of $81.3 million. These properties fit squarely within our investment criteria and are fully occupied and leased under triple-net or absolute triple-net leases. As Jeff explained, we expect to close this transaction in two tranches, with the first tranche closing during the third quarter of 2024 and the second tranche closing during the fourth quarter of 2024, which will provide us with flexibility for prudent capital allocation. As a reminder, this deal is currently under contract and subject to customary terms and conditions, including due diligence review. Accordingly, there is no assurance that the company will close this acquisition on a timely basis or at all. We believe this transaction is an example of where the acquisition market is trending, with sellers accepting higher cap rate deals as the refinance market continues to struggle and real estate funds are forced to sell. As always, we will continue to seek opportunities that meet our investment strategy and underwriting standards. We have the ability to unlock opportunities using the tools at our disposal, including our scale, access to capital, and the potential use of OP unit deal structures. I'd now like to turn the call over to Bob to discuss our financial results. Bob?
spk04: Thank you, Alfonso. At the end of the first quarter of 2024, our portfolio consisted of real estate of $1.4 billion and included $4.8 million of total leaseable square feet, .4% occupancy, 5.8 years of weighted average lease term, 4.8 times rent coverage with .2% weighted average contractual rent escalation. In the first quarter, our total revenues decreased by 3% compared to last year to $35.1 million due to the impact of dispositions. Total expenses for the first quarter of 2024 were $32.8 million compared to $34.5 million in the prior year quarter. The decrease was primarily due to disposition transactions that were completed during 2023 and lower interest expense. Our interest expense in the first quarter was $6.9 million compared to $8.3 million in the comparable quarter of last year, reflecting lower borrowing rates due to lower leverage and the impact of our interest rate swaps and lower average borrowings compared to the prior year period. Our operating expenses for the first quarter of 2024 were $7.4 million compared to $7.5 million in the prior year quarter, with the decrease due primarily to dispositions during 2023. Regarding these first quarter expenses, $5 million related to net leases, where the company recognized the comparable amount of expense recovery revenue, and $1.5 million related to gross leases. G&A expenses for the first quarter of 2024 were $4.4 million compared to $3.8 million in the first quarter of 2023. The increase primarily resulted from an increase in non-cash LTIP compensation expense, which was $1.2 million for the first quarter of 2024 compared to $700,000 for the same period in 2023. As mentioned last call, we expect our G&A expenses throughout 2024 to be in the range of $4.4 million to $4.6 million on a quarterly basis. Net income attributable to common stockholders for the first quarter of 2024 was $794,000, or one cent per share, compared to $673,000, or one cent per share in the first quarter of 2023. FFO in the first quarter of 2024 was $14.9 million, or 21 cents per share in unit, compared to $15.1 million, or 22 cents per share in unit in the first quarter of 2023. A FFO in the first quarter of 2024 was $16.5 million, or 23 cents per share in unit, compared to $16 million, or 23 cents per share in unit in the first quarter of 2023. Moving on to the balance sheet, as of March 31, 2024, our gross investment in real estate was $1.4 million. At March 31, 2024, we had $624 million of total gross debt, with a weighted average remaining term of 2.7 years. At quarter end, 84% of our total debt was fixed rate debt. Our leverage ratio was 44.0%, and our weighted average interest rate was 3.85%. Lastly, the current unutilized borrowing capacity under the credit facility is $290 million. We did not issue any common stock under our ATM program during the first quarter or to date. With respect to our investment portfolio in the 2024 lease expiration, we are pleased with our progress on renewals, and based on activities to date, we are currently trending towards a retention rate of 76% on this year's expiring lease of both square feet. Regarding capital expenditures on the portfolio, during the first quarter, our cash spend was approximately $2 million, consistent with my remarks during our last call, we continued to project $10 to $11 million related to building and site improvement, and approximately $2 to $3 million for tenant improvements, primarily associated with new leases and renewals and lease up to be completed this year. Regarding the company's financial exposure to Steward Healthcare, as Jeff mentioned, as of March 31, Steward represented .8% or $3.1 million of the company's annualized base of which 86% related to our facility located in Beaumont, Texas. Additionally, as of March 31, the company's receivables from Steward totaled approximately $500,000, including $200,000 of deferred rent receivables. To conclude, we are encouraged by our acquisition opportunities and believe that our portfolio and ample liquidity will enable us to navigate the current market conditions over the long term. We look forward to sharing our progress with you throughout the year. This concludes our prepared remarks. Operator, please open the call for questions.
spk09: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. And the first question will be from Austin Werschmitt with Key Bank Capital Markets. Please go ahead.
spk06: Hi, good morning, everybody.
spk09: I just want
spk06: to hit on the acquisitions. So you've lined up the acquisitions at this point and are now contemplating funding plans, but I guess how willing are you to speculate on the capital markets and the transaction market, just given the volatility that we've seen?
spk05: You're absolutely right. Right now, we're really pleased with this acquisition. These fit exactly what we like in our portfolio, you know, triple net, absolute net, MOB style acquisitions. We're I wouldn't do it today. I think, you know, we need to see a stabilization. We're not doing any fire sale of assets. We're basically we could sell assets and be a creative. We're going to see where the equity markets as in the past where you got really were at least the last few rounds, we thought we had good Fed direction of three cuts. We I'm not relying upon any of that. So, you know, if the do that short term debt, you know, increase, we do have something but this this portfolio was too good to pass up. And we felt we needed to continue our business progressing and getting good assets. And we'll probably wean some assets that are not strategic also.
spk06: So, so as of now, just to understand, would you just put these on on, you know, your line and fund it that way and then when these close decide, you know, kind of what the ultimate funding plans is, just trying to understand sort of the timeline of, you know, the acquisitions versus, you know, when you intend on funding
spk05: the acquisitions. It could it could go on our credit line temporarily, but we do have things that we've put up for sale, which should match some of this, at least the earlier ones. So, it's a combination. You're absolutely right. There's a combination of sale and a combination of, you know, possibly increasing unless, you know, the equity markets improve substantially, but we're just not counting.
spk06: Okay, no, that's that's really helpful. And then can you just share a little bit of detail about the portfolio or these, you know, you had talked about single tenant assets. I mean, does it fit that profile? What sort of the the wall tier for for the portfolio? And then can you just share some of the economics of the deal cap rate and so forth?
spk08: Well, yeah, sure. So, the wall does it's a 6.1 year wall with no role until 2016. It's composed of 12 MOBs and three behavioral facilities. Most of these properties, 12 of them are located in Sunbelt states with three properties located in states in the northern part of the country. And one quarter is investment grade. About 60% is physician credit with good rent coverage. And the balance is a double B rated. And the price per square foot is about 320 per square foot.
spk06: And what's the cap rate on the deal?
spk08: It's approximately 8%. And, you know, this is a portfolio that we sourced off market.
spk06: So, that's great. Very helpful. I'll hop back in the queue. Thank you.
spk09: And the next question will be from Rob Stevenson from JANI. Please go ahead.
spk01: Good morning, guys. Just to follow up on the acquisition, are any of the tenants existing tenants or are these going to wind up being new tenants for the firm?
spk08: It's a mix, but it's a mix. And yeah, it's a mix of new existing and new.
spk01: And anybody that's going to be pushed up dramatically in the percentage of, you know, into the top five or those in the top five that would be increased substantially at this point?
spk08: No. No, no meaningful change.
spk01: Okay. And then the, I think, Bob, you said that 86% of the Stewart rents were in the Beaumont asset. How many other assets are there in the portfolio and what are those relative to the Beaumont asset?
spk04: Sure, Rob. There's five other leases. There's six leases in total. And the total square feet on the non-Beaumont is right around 36,000 square feet. And the monthly rent on those other assets is around $69,000, $70,000 of monthly rent from those assets.
spk01: Okay. And I guess then, you know, in aggregate, $3.1 million, roughly $775,000 or a quarter, how much of that was in first quarter results? Did you basically have all of the $775,000 in first quarter results just trying to figure out as we go forward here? Okay. And then, you know, the sense of, you know, at this point, are they going to try to, you know, basically just give back the Beaumont property or is that a situation where, you know, there's going to be some sort of negotiations when they come out of Chapter 11? You know, how are you guys strategically looking at that? Is that something that you guys are going to have to release or probably just something that winds up, you know, getting a reduction in rent when all is said and done?
spk05: We're in the process, Rob, we're in the process of releasing it, the facility. Actually, we've got ahead of it. We don't believe Stuart's going to accept this facility. I mean, they have a longer term lease, but they moved out of the facility. And I don't think they're going to accept it. But when we, months ago, we started a process, and interesting enough, a lot of demand on this facility, we're feeling really good about releasing it at good numbers. And the way the market works there is this two hospitals, both main hospitals, well, it was Stuart's, we believe this is the much better hospital when we underwrote it, it's much better and everything and the physicians like to do it's a surgical hospital and physicians like to do surgery in there. So there's a lot of demand on that. And we do expect to release it. And we're very optimistic on that.
spk01: Okay. I guess then the just from a financial standpoint, at this point, we should be planning on that being non revenue producing for some period of time until, you know, between Beaumont and when you're able to release it to somebody else.
spk04: I think that's fair at this point.
spk01: Okay. All right. I appreciate the time this morning,
spk09: guys. Thank you. And the next question will be from Brian Marr from B Riley FBR. Please go ahead.
spk02: Well, thanks. Most of my questions have been asked and answered. But just thinking with Stuart for one second, I would say if they've moved out already, they're probably not going to re up. On the 15 property acquisition, can you talk about what the seller motivation was there? It was strategic.
spk08: You know, these are assets that they're, you know, it's not a sector that they want to
spk02: continue investing in. Okay. And maybe sticking with Alvazza for a minute, when you're looking at your pipeline after announcing this deal, you know, how deep would you say it is realistically maybe in a dollar number? And are you seeing any meaningful narrowing of the bid ask spread?
spk08: Okay. Yeah. So two parts to that question. I mean, the first part is, I mean, the market has continued moving towards higher yields. And it's interesting to look at the market from two ways. One is single tenant, sorry, single asset sales and portfolio sales. And what's been interesting is there have been actually more interesting opportunities in portfolios. There's been fewer opportunities than there were a few years ago. But the ones that are available are interesting situations where, you know, you're actually getting pretty attractive pricing, and you get the efficiency of being able to transact a lot of properties at once, which is always great. And historically, that's not been the case, you always have to pay your premium. So we're taking advantage of that situation in the current market. You know, in terms of the bid ask spread at the beginning of the year, my sense was that we started narrowing that bid ask spread. And I think part of what has evolved is that a lot of the owners of medical office properties were hoping for Fed rate cuts towards the end of the year, and were hoping for stronger pricing at the end of the year. So had you asked me the question a month ago, it would have been different. I feel today, the bid ask spread is at a minimum not decreasing and maybe in some instances, widening as a result of no Fed rate cuts in the second half of the year. Having said that, though, I think there's a lot of owners of medical office that have been, in a sense, kind of holding their breath and hoping for better pricing. And what I'm expecting and what I'm seeing is that a lot of these owners are increasingly more amenable to taking pricing that has not been available for buyers for a long time. So at this point, a lot of the stuff that is trading is in the low to mid seven caps. And there's increasing numbers of opportunities in the high sevens. And I'm beginning to see opportunities also in the low eights. And I expect that to continue to improve. And I expect increased opportunities for us going forward, just given where things are trending.
spk02: And how deep would you say your acquisition pipeline is? 50 million, 100 million, 200 million?
spk08: It's hard to gauge, again, because some of these are portfolio opportunities. And so I've seen opportunities in the 10, 20 million range, and I've seen some in the 50 million range. But I'd say going into 2025, I think 50 to 100 million dollars in potential acquisition is a reasonable number.
spk02: That's helpful. And maybe just last for me, for Bob, your weighted average maturity in your debt is kind of like, I think you said 2.7 years. What are your thoughts on terming that out? I suspect your answer might be you want to wait a little while to see what happens with interest rates. But can you give us a little color there? That's all for me.
spk04: Thanks, Brian. That is really the short answer. It's just kind of letting some of the volatility in the market subside. And we do still have that 2.7 years to work with and to work with that time and being in a consistent contact and discussions with our banks relative to opportunities, but to be patient on that front.
spk02: Thank you.
spk09: Again, if you would like to ask a question, please press star then one. The next question will be from Wes Golliday from Baird. Please go ahead.
spk07: Hey, good morning, guys. You mentioned potentially selling some assets to fund the acquisition. What type of cap rate are you looking at for the disposition?
spk00: We
spk05: traditionally... Oh, Alfonso, you go ahead.
spk08: Yeah. So we're looking to try to get the price as we can. And so we're looking for things in the low sevens.
spk07: Okay, fantastic. And then you did mention you're looking to release the steward asset based on the demand. Looks like you have pretty good demand there. How quickly could you turn the asset and what type of carry costs will you have in the meantime?
spk08: Let me try to understand that question. You want to understand how quickly we could release it?
spk07: Yeah, it sounds like you have demand. So assuming they say they reject the lease, in a few months, do you have a tenant close to signing a deal upon a rejection of a lease, and then you build out the space for a few months, or just trying to get a sense of based on the demand that you're seeing for the space, how quickly you can release the space. And in the meantime, I think you could be picking up a little bit of the OPEX cost over the near term for a few months.
spk08: Sure. Yeah. And so it's always hard to predict, I mean, the interest was quick. So shortly after the announcement was made that the facility was available, we got interest from a number of parties that expressed strong interest. And the conversations went pretty quickly as well. But it's hard to gauge. I mean, it could be very soon that we are finding ourselves negotiating a lease, or it could take a few months for us to be in that position. Hard to say. But the interest seems sincere, and the conversations have been very positive. I'd say on the other end of having a deal signed with a prospective tenant, again, not clear exactly how long it would take for them to occupy the space. I mean, one of the things that we're discussing is how exactly are they planning on using the space, and what exactly the changes need to happen at the facility for that to happen. So on that second part of the question, a little hard to gauge. I will say, though, that the facility is a premier surgical facility in Beaumont. I mean, it's really arguably probably one of the best ones in town. And despite its age, when you walk in, it feels brand new. I mean, it was a really nicely done project. So not clear exactly what changes would need to be made. But that's something that we're in the process of trying to evaluate.
spk07: Okay. And then maybe one for Bob. Looking at the sequential change in revenue, there was a $2 million uptick. Was this largely due to variable rent?
spk04: The sequential increase in rent? That would be like, yeah, it would have been probably expense related versus anything from a base rent perspective. There really wasn't any material change relative to base rent quarter over quarter.
spk07: Okay. Thanks for the time,
spk09: guys. And ladies and gentlemen, this concludes today's question and answer session, and thus concludes today's call. We thank you for joining Global Medical REITs First Quarter 2024 earnings conference call. You may now disconnect. Take care.
Disclaimer