Global Medical REIT Inc (GMRE) 2024 Q3 法說會逐字稿

Greetings and welcome to the Global Medical REIT Third Quarter 2024 Earnings Conference call.

[Operator instructions].

It is now my pleasure to introduce your host, Stephen Swett, Investor Relations. Thank you, sir. You may begin.

Thank you. Good morning, everyone and welcome to Global Medical REIT Third Quarter 2024 Earnings Conference call. On the call today are Jeffrey Busch, Chief Executive Officer, Alfonzo Leon, Chief Investment Officer, and Robert 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, forward-looking statements contained in the private security litigation form Act in 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, 2024, and its other SEC filings.

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, EBITDAre, and adjusted EBITDAre.

You can find a tabular reconciliation of these non-GAAP financial measures and the most currently comparable GAAP numbers in the company's earnings release and in filings with the SEC. Additional information will 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 Jeffrey Busch, Chief Executive Officer of Global Medical REIT. Jeff.

Thank you, Steve.

Good morning and thank you for joining our Third Quarter 2024 Earnings call.

Our high-quality diversified portfolio continues to produce strong results at the end of the portfolio. occupancy was 96.1% with a weighted average lease term of 5.6 years. Portfolio average rent coverage ratio of 4.6 times for the Third Quarter. Net income attributable to common shareholders was $1.8 million or $0.3 per share, compared to $3.1 million or $0.5 per share in the Third Quarter of 2023. Attributable to common shareholders and non-controlling interest in the Third Quarter was $0.19 per share, down $0.3 from the prior quarter.

Attributable to common shareholders and non-controlling interest was $0.22 per share, down 1% from the prior year quarter. The decrease is due primarily to the impact of cash basis tenants including Steward at our Beaumont facility.

Regarding our acquisition activity early this year, we announced that we had entered into a purchase agreement to acquire a 15-property portfolio of outpatient medical real estate properties for an aggregate purchase price of $80.3 million.

These properties are fully leased on the Triple Net or absolute Triple Net leases with a cap rate of 8%. During the Third, we closed on the first tranche of this acquisition, consisting of five properties for $30.8 million, and a subsequent to quarter end in October, we completed the acquisition of the remaining 10 properties. Looking ahead, we currently have five property portfolio of medical outpatient facilities under contract to purchase for just under $70 million.

These properties are 94% leased to high quality tenants and have a 9% cap rate. We remain optimistic about the acquisition market with our asset class are encouraged by our recent successes in adding quality assets to our portfolio.

As we continue to focus on our growth. We remain committed to staying disciplined in maintaining a strong balance sheet. In the Third Quarter, we issued 1.2 million shares of our common stock at an average offering price of $9.95 per share, generating gross proceeds of $12 million.

In addition, asset recycling continues to be a key element in financing our growth initiatives. During the Third Quarter, we closed on the sale of two medical facilities at a cap rate of 7% that generated aggregate gross proceeds of $12million resulting in an aggregate gain of $1.8 million.

We expect to continue to both issue common equity and sell assets as we move forward in order to maintain a strong balance sheet in terms of tenant related items. In September, we announced that we entered into a new 15-year Triple Net lease with an affiliate of CHRISTUS Health (“CHRISTUS”) at our health care facility in Beaumont, Texas replacing Steward Health Care.

We are excited to begin our new relationship with CHRISTUS to lease this property to a high-quality tenant. Achieving a great outcome for shareholders overall. I am pleased with our Third Quarter results and want to thank the entire team for hard work and contributions to our results.

With that I turn the call over to Alfonzo to discuss our investment activity and current market conditions in more detail.

Thank you, Jeff.

The transaction market for medical facilities that aligns with our investment criteria continues to evolve. We remain actively engaged with a diverse range of physician groups, brokers, and corporate sellers to source acquisition opportunities that will help us continue growing our portfolio in anticipation of FED rate cuts. Volume and quality have picked up. However, the increase in mortgage rates has tempered demand in the past month.

As Jeff mentioned, in July, we closed on the first tranche of our 15-property portfolio of outpatient medical real estate, acquiring five properties, encompassing approximately 95,000 leasable square feet. In early October, we completed the acquisition of the remaining 10 properties, encompassing approximately 160,000 leasable square feet in total, the 15-property portfolio at an aggregate purchase price of $80.3 million with an aggregate of approximately 254,000 leasable square feet, an aggregate annualized base rent of $6.4 million, equating to a cap rate of 9.0%.

We view this transaction as reflective of current market trends where sellers are increasingly accepting higher cap rate deals in response to ongoing challenges in the refinancing market and pressure on real estate funds to sell.

Looking ahead on acquisitions, as Jeff previously stated, we have a $70 million portfolio of five medical outpatient facilities under contract to purchase at a 9% cap rate, similar to our 2024 acquisitions. We have anticipated closing on this acquisition in two tranches in the first half of 2025.

These five properties are located in three states, are 94% occupied, have an aggregate of approximately 487,000 leasable square feet and an aggregate in place, approximately $6.3 million. We are purchasing these properties at $143 per square feet below replacement cost. Most tenants in these buildings have invested significant capital in their own suite, resulting in rents averaging $14 to $15 per square foot triple net.

These properties have been very well-maintained and are critical assets to the corresponding health systems. Tenancy in these buildings includes a comprehensive mix of providers offering primary care and urgent care, specialists like neuro, cardio, ortho, and cancer, as well as diagnostics, radiology, and lab.

In addition, all of these properties are subject to ground leases with an average remaining term of 60 years and approximately 2/3 of the property square footage is on campus. Approximately 60% and 82% of the on and off campus properties, respectively are at least investment-grade tenants.

Note that our obligation to close this acquisition is subject to certain customary terms and conditions, including due diligence reviews and tenant interviews accordingly.

There is no assurance that we will close this acquisition on a timely basis or at all on the dispositions front. Pursuant to our normal capital recycling process, during the quarter, we closed on the sale of a medical facility in Panama City, Florida receiving gross proceeds of $11 million resulting in a gain of $1.7 million. Later in the quarter, we also sold another medical facility located in Panama City Beach, Florida, receiving gross proceeds of $1.1 million, resulting in a gain of $0.1 million in total. The cap rate on these dispositions was 7%.

As always, we remain committed to a disciplined approach to investments that align with our strategy and disciplined underwriting standards by leveraging our competitive advantages, our scale access to capital and the potential use of okay unit deal structures. We intend to unlock opportunities and drive value.

I'd now like to turn the call over to Bob to discuss our financial results.

Thank you, Alfonso.

At the end of the Third Quarter, 2024 our portfolio consisted of gross investments in real estate of $1.4 billion and included 4.8 million of total leasable square feet, 96.1% occupancy 5.6 years of weighted average lease term, 4.6 times rent coverage with 2.2% weighted average contractual rent escalations.

In the Third Quarter of 2024, our total revenues decreased by approximately 3.5% compared to the prior year quarter to $34.2 million, due primarily to changes in our portfolio including lower occupancy in 2024, compared to 2023, and the impact of tenants being placed on cash basis.

Total expenses for the Third Quarter of 2024 were $32.7 million compared to $33 million in the prior year quarter. The decrease is due to reduced depreciation and amortization expenses, primarily related to disposition transactions that were completed during 2024, partially offset by increased operating expenses and interest expense.

Our operating expenses for the Third Quarter of 2024 were $7.4 million, compared to $7.2 million in the prior year quarter. Regarding the Third Quarter 2024 expenses, $4.8 million related to net leases where the company recognized a comparable amount of expense recovery revenue and $1.6 million related to gross leases.

Relative to the increase in expense in 2024. This reflects increased costs from properties acquired in 2024 as well as the impact of tenants placed on cash basis. Accounting subsequent to the end of the Third Quarter of 2023 partially offset by a net reduction in cost at other properties.

G&A expenses were $4.4 million in the Third Quarter of 2024. We continue to expect our quarterly G&A expenses to be in the range of $4.4 million and $4.6 million.

In the Third Quarter of 2024, we completed two dispositions that generate aggregate gross proceeds of $12.1 million, resulting in an aggregate gain of $1.8 million.

In the Third Quarter of 2023, we completed one disposition receiving gross proceeds of $10.1 million, resulting in a gain of $2.3 million net income. Attributable to common stockholders for the Third Quarter of 2024 was $1.8 million or $0.3 per share compared to $3.1 million or $0.5 per share in the Third Quarter of 2023. Attributable to common stockholders and non-controlling interest in the Third Quarter of 2024 was $13.7 million or $0.19 per share, compared to $15.3 million or $0.22 per share in the Third Quarter of 2023. Attributable to common stockholders and non-controlling interest in the Third Quarter 2024 was $15.3 million or $0.22 per share in unit compared to $16.5 million or $0.23 per share in the Third Quarter of 2023. Moving on to the Balance Sheet. As of September 30, 2024, our gross investment in real estate was $1.4 billion. We had $634 million of total Gross Debt with a weighted average remaining term of 2.2 years. At quarter end, 81% of our total debt was fixed-rate debt. Our leverage ratio was 44.1% and our weighted average interest rate was 3.79%.

Lastly, as of today, the current unutilized borrowing capacity under the credit facility is $221 million.

Relative to equity in the Third Quarter, we generated gross proceeds of $12 million through ATM issuances of 1.2 million shares of common stock at an average price of $9.95 per share.

As we consider funding options for the acquisitions that we have closed or are expected to close next year, we will continue to be disciplined and consider both potential asset dispositions and equity issuances as we seek to maintain leverage in our target range of 40% to 45% with respect to our investment portfolio and our 2024 lease expirations.

We are pleased with our progress on renewals and based on activity to date, we are currently trending towards an 85% retention rate on this year's expiring leasable square feet regarding capital expenditures on the portfolio. During the Third Quarter, our cash spend was approximately $4.8 million year-to-date through September 30.

Our cash outflows for capital expenditures were approximately $10 million with approximately 42% of that related to tenant improvements for the full year 2024. We're projecting total capital expenditures of $12 million to $14 million.

As previously mentioned, earlier in the year, we discussed Steward Health Care (“Steward”) 's bankruptcy announcement and their exposure in the company's portfolio.

At the time of the bankruptcy announcement, Steward represented 2.8% or $3.1 million of the company's annualized base rent of which 86% related to our facility located in Beaumont, Texas. Post bankruptcy, the company received base rent payments on its lease at the Beaumont facility for the month of June, July and August during the quarter, Stuart rejected our lease at the Beaumont facility,

And we entered into a new 15-year Triple Net lease with an affiliate of CHRISTUS Health at this property. We are pleased to have secured a long-term lease with CHRISTUS, affirming the quality of this property and we expect rent to commence on this lease in March or April 2025.

In conclusion, we continue to believe that we are well positioned to execute on our acquisition and overall business strategy and look forward to sharing our progress in the quarters to come.

This concludes our prepared remarks. Operator, please open the call for questions.

Thank you. We will now be conducting a question-and-answer session.

[Operator instructions].

Austin Wurschmidt with KeyBanc.

Great. Thank you and good morning, Jeff and Bob.

You both referenced that you're committed to maintaining a strong balance sheet. I guess when you look at the options available, you mentioned equity and dispositions, which do you view as more attractive source today? Can you just remind us how much you have left the fund to sustain your leverage target?

Yes, thanks, Austin. Good morning.

So right now, we ended the quarter at leverage of 44%. If we don't sell any assets or raise equity in the 4th Quarter, we would end the year at 46%. So, we would be just outside the range that we've talked about, and we're not uncomfortable going above the range. Ideally, we want to stay in our range from the 46%, coming back down into the target range doesn't require a lot of asset sales to bring it down.

So, we have potential sales opportunities, but again, there's time that's involved in sales. So, we're always looking at the portfolio and considering potential capital, recycling disposition activity. So, those are the things we look at. Again, if equity markets are there, we would tap into those as well, but we're not far outside our range. It would be the main point I make.

Are there any assets you're marketing today? I guess with the higher and long-term interest rates, has there been any change in levels of interest from buyers or the cap rates that are being negotiated versus years ago.

There's always. There're assets that we're considering, and you can speak to the pressure on pricing. Yes, there's definitely. The market is evolving, always evolving.

I'd say in expectation of the rate cut that was increased optimism in the market and the pricing that was beginning to increase, and cap is beginning to decrease. In the last month, in October with, debt-rate-on -mortgages going up that has subdued the interest.

So, there's mixed messages right now and it's not settled. Previously, I thought that maybe you ended the pretty meaningful pickup in volume as a result of the FED rate cuts. I'm beginning to think/question (if) how much that's going to materialize.

So, I guess given your optimistic about the acquisition market today, but still have some funding to do, I guess. How comfortable are you moving forward with any additional deals prior to funding? What you've announced here for?

We take it step by step. So we're focused on this next acquisition and are routinely observing where we are and looking at our portfolio, as Bob said, for things that we can sell in the market and looking for assets that either we think can achieve optimal pricing in the current market, or just assets that we feel long term are not ones we want to continue owning, and want to just recycle capital, but it's something that we evaluate almost on a weekly basis.

Thank you. Appreciate the time.

Bryan Maher with B. Riley.

Thank you and good morning. Thanks for all colors on the new set of assets that you're acquiring. I don't think that you gave us the states though. Can you give us where in the country you're buying these?

So, given the fact that we just put these under contract and we're working due diligence, we've opted to not mention the states. Really for confidentiality purposes as we move forward. Yes, of course, we're going to provide more colors and more details on the transaction, but at this point, we wanted to be more confidential.

Okay, maybe following on Austin's questioning on equity. You've talked about this in the past. A little bit about the ability to do a creative transaction even with your stock here. Should we think about it that you're going to issue high on these new deals or at what level is it a creative to do this second forthcoming to raise equity?

-- depending on where the debt side of the forward curve is, and the side of the cost of capital. Look at --when you look at those purchases.

Okay. Then, on the disposition side. The selectivity of the assets that you sell. Is it just they're slower growers? Are there known vacates coming? What's driving that side of the equation?

It's a variety of things. The ones you mentioned, also properties that we feel can get optimal pricing. So, it covers the full spectrum.

Yes, properties that are just given our current company and where we want to go forward. Properties that are just too small, or locations that are just not ideal, but also properties that we feel have renewals that are not as high as we would want. So, we're getting ahead of those expirations. I'm trying to sell these things with a term on them.

Okay. Then, just one last for me, and correct me if I'm wrong. You talked a little bit about Steward in Beaumont and that you had collected rent for, I guess, August or July, August or September. Did you? I somehow feel like you didn't collect March, April, and May. Am I thinking about that right? Has that since changed you?

You got that right. That's right, Brian. We did not collect for March, April, and up to that point in bankruptcy. So, we did collect the months subsequent to bankruptcy, but we still have a claim and it in pursuant to the bankruptcy.

We would have a claim in bankruptcy court to collect any rent and other expenses that are due during the period post-bankruptcy up until the point where they know rejected the lease. So that's something that we're actively working on and would be pursuing with the court.

Okay. Thank you. That's all for me.

Rob Stevenson with Janney.

Good morning, guys. Can you talk about where the CHRISTUS rent is versus Steward? Do you have CHRISTUS elsewhere in the portfolio today?

The annual rent for the new lease is $2.9 million and it's slightly above the previous rent that Steward was paying. They were right around $2.8 million.

Okay. is this, is this going to be your only location at present with them when this is when this, when this lease starts?

Yes, I'm pretty sure, there, there might be a small lease but, but to my knowledge, nothing material, this would be a new, new relationship.

Okay.

So, your exposure that will be less than 3% in terms of, of tenant as percentage of a BR then I guess do you have any CapEx on this asset prior to them moving in that you'll have to complete?

Yes. So part of the process of, of, of just getting the asset in the, in the condition for Christmas and getting it all situated, it involved a fair amount of CapEx we've been spending upwards of probably before it's all said and done close to $900,000 in CapEx, specific to the property, a lot of that, it will be cost that we will claim in the bankruptcy core as a claim against Steward for things that should have been or been maintained as part of the lease.

So, these are mainly infrastructure type items and some of them have lead times in terms of getting the equipment, installing the equipment, things of that nature. So, it, it, it's there's definitely a process involved in in, in, in just delivering that asset.

Okay. then on the $70 million portfolio acquisition, is there a specific reason why the closing is further out? in two tranches is that just to allow you guys to finance it? Is it something on the seller's part? Is there something that needs to happen before you can close. Can you just talk about that?

So, a variety of things but preliminarily it's just flexibility. and actually, with our experience on the most recent transaction, when we stated, when we did it in a couple of tranches, it resulted in, in some efficiencies as well. So, if we can do it again, it's something that we want to do on this transaction as well.

It's flexibility that can go either way and if we changed our minds later on and we want to do it all at once, that's something that we consider. having said that, there's also diligence items that we have to dig into, and it just made more sense to spread it out over a couple of tranches.

Okay. is there any significant tenant concentration in that portfolio that's going to push into your TOP10 post deal?

Yes. Yes, there is. So, the biggest change would be Trinity. So that one would, would bump up from number 10 and potentially number three.

Okay. That's helpful. Thanks guys. Appreciate the time this morning.

Thank you.

Our next question comes from the line of Alex -- with Baird.

Hi, thanks for taking my question. First one is what is the plan to fund the portfolio? Deal and future acquisition opportunities. Is it just the dispositions and equity or are you going to potentially raise debt as well?

Right now, the plan to do dispositions and equity, we raised a little bit of equity, $12 million in the last quarter and we do have some sales already in process. So, we're, we're realigning our acquisitions. We're taking a look at some of our assets that, that are not performing as well and we've been able to sell them at a pretty attractive prices. So we're looking more towards equity and dispositions than, than debt, but we may go, it may go slightly and temporarily above on the debt that we target.

how much more runway does GM re have with its asset recycling program? Is this something you can do for quarters on end years?

It, it's probably not going to be a permanent solution. The market tends to adjust. So, for instance arket tends to adjust. We've been buying, as you notice, our, our average buying is somewhere in the mid eight right now. So for instance, if the rates do not come down, the market always adjust because groups have to sell. So, we will be buying higher cap rates. which means that we could go to equity also.

Are you planning to issue a term loan to reduce the line balance anytime soon?

Not currently? That the that, that's something we'll look at probably in the, in the first half of next year.

Thanks guys. That's it for me.

Thank you.

Our next question comes from Juan with BMO Capital Markets. Please proceed with your question.

Good morning. This is Robin. I'm sitting in for Juan.

Not sure if this was touched on already but on how much, if any did rents decline on the be month assets under the transition? Should we model any other modest sequential declines in the non be month assets opposed to Steward bankruptcy.

The rent of the Beaumont facility? Go ahead.

, the rent at the, at the Beaumont facility is, is, is just marginally higher than the than the previous steward, the previous Steward rents of 2.9 million of annual rent. talked about that cash rent starting in March or April of next year is our current outlook. So, that that asset again is, is net net above the the other Steward leases have with would have not been rejected with the exception of one very small lease in the multi tenant building that we have in in highly of Florida. This, that the least was project in at the end of October. , and it's a very, again, it's a very small lease. It's under 4,000 square feet of space. So not anything noteworthy from a from an overall perspective.

Okay. Your dividend-payout-ratio inclusive of CapEx is not of 100%. How does the Board and management think about dividend sustainability in particular with leverage generally elevated?

We right now could maintain our dividends and looking in the future, we can maintain our dividends. We do see deals coming through, so we get the rent increases regularly. We had a very big two years of re-leasing. It's an unusual amount of re-leasing in the last two years which causes a bit more capital. So, we do see that -- capital starting to reduce given proportionally. We don't have so many releases coming up. So, we do look like we maintain our dividends.

Okay. This has been over quite a bit, but is there a dollar-size of the pool of assets that are targeted for future disposition?

Is there?

It's not a targeted number. It's something we look at all the time and assessing the potential sales opportunities, and sometimes there're inbound inquiries about assets that people want to purchase. That's we are dealing with as well. So, it's not a set number.

No, that we've had a few. That has come in on assets that were attractively priced, which forced us to reconsider whether we wanted to sell it or not, and a couple of those we move forward on.

Got, it. Makes sense. Just curious on your lease expiration for 2025. It just increased a little bit. Could you maybe just elaborate on that?

It could be from assets that we've acquired that would have impacted the number, but from an outlook on our 2025 expirations, we're again looking at this very similar to how our experience was in calendar year 2024 relative to releasing. So, I think we're optimistic about our occupancy and leasing activity looking ahead into 2025.

Okay. Last one for me, the pipeline, how big is it today? What assets are you looking at, and what types of deals should investors expect? Is this 9% a good run rate going forward?

The market is continually evolving and what we're focused on primarily is medical office and that's typically where the bulk of the volume is in the market anyways. Cap rates that in the market for the type of assets that we're looking at, they're more in the high-seven-to-mid-eight range, depending also on whether it's single tenant or multi-tenant. So, there are not that many opportunities that are nine and above, but we are always looking for unique situations. They do occur, and there's a couple of opportunities that I've heard of that might be coming down the road where you are getting into that high eight -low seven range, but the bulk of the market in the high-seven-to-mid-eight.

Thank you.

Our next question comes from Gaurav Mehta with Alliance Global Partners. Please proceed with your question.

Thank you. Good morning. I wanted to ask you on the portfolio acquisition that you have in the contract, and in your comments about the market-cap rate in high-seven-to-mid-eight. What was specific about this portfolio that drove the cap rate to 9%, which is higher than where the market is?

A variety of factors. One of the things that drives cap rate, a big one is properties that are attractive to funds that have short life spans five-year hold period, you know what they are looking for are properties that are ideal for flipping for putting within a portfolio and getting a premium on the exit. given the fact that these properties are on campus and just given the profile of the properties and its location, it's not ideal for that a strategy. So, you are getting extra yield for that reason.

But the other one to is this was a relationship deal, one that es involved, we have connections with that, that spend many, many years. there was a process that, that, that they employed to find somebody to partner with for this. I think that contributed as well to some of the yield.

Okay. Thank you. That's all I have.

Thank you. We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

Thank you, everybody. I think we had a good quarter. We've acquired a nice properties with good rates and we have good contracts on future properties. thank you very much for attending.

Ladies and gentlemen, this does conclude today's teleconference. [Operator instructions].