Global Medical REIT Inc (GMRE) 2021 Q3 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Global Medical REIT's Third Quarter 2021 Earnings Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Steve Swett with ICR. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to Global Medical REIT's Third Quarter Earnings Conference Call. On the call today, we have Jeff Busch, Chief Executive Officer; Alfonzo 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 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, 2020, and its under 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, EBITDA REIT and adjusted EBITDA REIT. 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 Busch, Chief Executive Officer of Global Medical REIT. Jeff?

Thank you, Steve. Good morning, and thank you for joining our Third Quarter 2021 Earnings Conference Call. Joining me today are Alfonzo Leon, our Chief Investment Officer; and Bob Kiernan, our Chief Financial Officer.

During the third quarter, we produced strong and steady results, which again demonstrates the importance of our strategic focus as well as our team's ability to consistently execute at a high level.

With respect to earnings in the third quarter, net income attributable to common shareholders was $0.06 per share, and our FFO was $0.23 per share and unit. We grew our AFFO per share and unit to $0.24 in the third quarter and year-to-date, our AFFO at $0.71 per share and unit is up 9.2% compared to last year.

At the fortifying on balance sheet and liquidity in the second quarter, we continue to identify and close target acquisitions that meet our quality standards and return hurdles. In the third quarter, we acquired 5 properties for $49 million, bringing our year-to-date acquisition volume to $163 million at 7.5% cap rate. Alfonzo will provide more details later on this call, but I want to note that our portfolio is now over $1.3 billion in total assets, and we now surpassed $100 million in total annualized base rent for our properties. I'm proud of these accomplishments and believe we have a meaningful opportunity to grow accretively into the future.

With that, I'd like to turn the call over to Alfonzo to discuss our acquisition activity in more detail.

Thanks, Jeff. Due in part to the outperformance of medical facilities during a pandemic, and optimism in the long-term fundamentals of health care, the market for medical facilities has been competitive this year. Despite increased competition, we continue to successfully source attractive properties within our target cap rate range, to build a diversified portfolio leased to strong health care operators, providing needed care to their communities.

During the third quarter, we closed on 5 acquisitions, totaling $49.3 million at a weighted average cap rate of 7.6%, including an outpatient clinic and imaging center located in Forsyth, Illinois for $19.2 million with approximately 10 years of remaining lease term.

Decatur Memorial Hospital, now part of the A1-rated Memorial Health Systems, accounts for 95% of the property revenue. A cancer infusion and imaging center in North Charleston, South Carolina for $7 million, entering into a new 15-year lease for 100% of the property with Charleston Oncology. The tenant is the largest independent oncology group in the area with 11 oncologies. 91% of an MOB condominium in Munster, Indiana, for $6.6 million. Upon closing, we assumed 5 leases and executed 3 new leases with existing tenants with a weighted average remaining lease term of approximately 7 years.

A property, which is anchored by Midwest Pain with 41% of the total is located across the street from a 458-bed regional hospital owned by CHS. A multi-tenant MOB in Hialeah, Florida, and the seller's interest in an existing ground lease for a total purchase price of $11.3 million. The MOB is on campus, and attached to the 378-bed Hialeah hospital, which is now part of Steward Health Care.

And lastly, an MOB in Athens, Georgia for $5.3 million, the property is 100% occupied by Piedmont Athens Regional Medical Center, were used by their pediatric specialists. At acquisition, the in-place lease had a remaining lease term of approximately 3 years.

Year-to-date, we have closed 16 acquisitions for $163 million at a weighted average cap rate of 7.5%. And at September 30, 2021, we had a $1.3 billion portfolio with properties in 33 states. Our focus on acquiring individual assets has benefited us tremendously, as most other investors focus on acquiring large portfolios.

As we continue to grow, we will leverage our relationships and network, to continue to source and secure deals. To that end, we maintain an active pipeline of potential opportunities in different stages of discussions, and currently have 3 properties with an aggregate purchase price of approximately $24 million under contract. These properties are currently in due diligence, and subject to customary closing conditions.

Looking ahead to the remainder of the year, we believe that we may close on $15 million to $30 million of acquisitions by year-end. Since quarter end, we sold 1 property for gross proceeds of $5.5 million, resulting in a gain of approximately $1.1 million, and have entered into a contract to sell another property in Belpre, Ohio for gross proceeds of approximately $44.6 million. The Belpre transaction is subject to the due diligence, and customary closing conditions, and is expected to close no earlier than March 2022. Although we don't actively look to sell our properties, based on market conditions, we may sell properties for various strategic or opportunistic reasons.

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

Thank you, Alfonzo. GMRE continues to benefit from a stable platform and from the strong and reliable relationships, that we have built with our tenant. This quarter, our portfolio produced strong results, and we are confident that we can continue to produce strong results through year-end. With respect to key performance metrics, we ended the quarter with $4.2 million of lease of total leasable square feet, portfolio occupancy of 98.9%, a weighted average lease term of 7.3 years, and a rent coverage ratio of 4.6x to 2.1% weighted average contractual rent escalations.

In the third quarter, we achieved a 19.6% year-over-year increase in rental revenues to $30 million, driven primarily by our acquisition activity over the past year as well as rent escalations. Rent collections remained strong. Overall, we collected over 99% of Q3 rent, including the impact of 2 tenants that we account for on a cash basis.

Our total expenses for the third quarter of 2021 were $24.6 million compared to $34.7 million in the third quarter of 2020. Net of the impact of $12.6 million of expenses related to the management internalization transaction, that we incurred in the third quarter of 2020, expenses were up 11.4%, primarily due to increased depreciation and amortization expense, driven by acquisitions completed over the past 12 months.

G&A expenses for the third quarter of 2021 were $3.9 million compared to $4 million for the third quarter of 2020. Within our G&A expenses, note that our stock compensation costs in the quarter were $1.2 million, and our [cash] G&A costs were $2.6 million. Looking ahead, we expect our G&A modestly above this level at range between $4 million and $4.3 million on a quarterly basis, even as we increase the size of our portfolio.

Net income attributable to common stockholders for the third quarter of 2021 was $3.7 million, or $0.06 per share, as compared to a loss of $10.3 million, or $0.22 per share in the third quarter of 2020. FFO in the third quarter was $0.23 per share and unit compared to negative $0.03 per share and unit in the third quarter of 2020. AFFO for the third quarter was $0.24 per share and unit, up from $0.23 per share and unit in the prior year quarter. In analyzing these year-over-year comparisons, please remember that our net income attributable to common stockholders and our [AFFO] for the third quarter of 2020, reflect the effects of our management internalization transaction.

Moving on to the balance sheet. As of September 30, 2021, our gross investment in real estate was approximately $1.3 billion, which is up $169 million or 15% from the start of the year. At September 30, 2021, we had just under $555 million of net debt, and our leverage ratio was 43%, up slightly from the prior quarter, but down meaningfully from 52% at year-end 2020.

Our weighted average interest rate during the quarter was 3.04%, and our current annualized borrowing capacity on the revolver is approximately $240 million. Overall, we continue to believe we are well positioned to execute on our acquisition and overall business strategy, and look forward to sharing our progress with you when we report full year results.

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

(Operator Instructions) Our first question is from Barry Oxford with Colliers.

You guys mentioned that you're seeing increased competition for assets. Is it more of the same types of investors? Or are you seeing new investors sort of come into the market creating, even more competition than there has been, like, let's say, at the beginning of the year?

Sure. So there is increased competition, and there are more investments that have come in. I think most notably has been the entry into the space by large institutional capital like (inaudible) and others that have really found medical office reps to be something that they want to invest in a meaningful way. So yes, there's been an increase in the number of investors over the last 18 months.

Perfect, perfect. And then as I'm looking forward, not where cap rates were kind of right now, but looking forward, do you feel that you're going to have some cap rate compressions on acquisitions over the next year as we go into '22.

Sure. So as we've grown our portfolio, and executed on our strategy, our cost of capital has improved. So we always focus on investing our capital accretively, and we've built a pretty strong niche, finding opportunities in secondary and tertiary markets, in the 7% cap range. So our spread allows us to selectively look for opportunities in a self-serving cap range. And our goal is to continue growing our portfolio accretively.

Right. Exactly, exactly. And then last question, kind of on the same lines. When you're looking at acquisitions, and the different property types that you guys like to invest in, is there 1 in particular that has better risk return characteristics right now? Or is it just more kind of look different markets, different runoff opportunities?

So I would say, right now, surgery centers, just given the way health care has evolved, and on the other side of 2020, surgery centers definitely seems to be a good place to allocate capital. And I would -- and 1 of the things that we're looking to do and having discussions is to try to find ways to invest capital in newer surgery centers. So we're talking to tenants and developers, that are looking to build new surgery centers.

Our next question is from Amanda Sweitzer with Baird.

I wanted to start on your announced asset sales. Can you just provide more detail on your thoughts to time, those 2 deals specifically as well as expected pricing?

Okay. Basically, these sales, both of them came to us, but it was like I'll go to Belpre, Belpre was more for, it was a great price that they were paying with a substantial profit for us. 2, it is to reduce the concentration in the top 10 of our facilities.

So basically, Belpre, which is a small place, but really good asset, and we still have asset in Belpre. But we decided to reduce it substantially, to reduce the concentration in a smaller location as an overall portfolio look. And it wasn't bad to take a profit and roll it into other assets that we have at the cap rate.

So we sold at a low cap rate, and we reinvest at a much better cap rate, plus we reduced the concentration map. So we thought it was good. We still are very favorable of Belpre, but we wanted to reduce the concentration in that sort of small metro, not as high in our top 10.

And the Prescott, 1, is essentially a small operator, had somebody buying them out, who wanted to buy the building or they wouldn't buy them out. So if we didn't go along with the deal that made us $1 million, we may have had a difficult time with the tenants going forward. And we weren't, it was a good opportunistic to make basically $1 million on a small property, and move it on to another property.

Going forward with sales, we're always looking. I mean people are offering us out there, and it's a pretty good loss if we sell it right now. So if there are opportunities for us to sell, and bring our portfolio more in the way we would like it, looking at it as a whole portfolio as an individual. So we buy a sort of individually, but we look at it as a whole portfolio at once. And we need to make some corrections on our portfolio or others, we may do that in the future.

Okay. That makes sense. And then as you think about the volume of acquisitions that you could complete next year with the sales in place. Do you expect your acquisition volume to exceed kind of the [$225 million] historical average you've achieved?

It's hard to tell [that it depends on us]. I mean we're starting to look with a different -- we have our strategy of doing the seventh plus, which again, was very successful this year. But since our stock has gone up, our cost of capital substantially has come down, we're starting to look at larger volume, as opposed to just doing these [$5 million, $10 million, $15 million, sometimes to $20 million]. We're starting to look at larger projects and maybe -- but those will be smaller caps, more in that mid-6% range. But since it's so accretive as a opposed to being possibly, it's just very accretive for us.

It also grows our size, it grows. It starts to get us to compress where I think we're undervalued because of size and liquidity in the market, it starts to get us there.

So we are looking at larger projects with less cap rate. You can't find $80 million, $100 million projects in the [7s] that make a lot of sense. Sometimes we do, but we don't get that many.

Yes. That's helpful. And then last 1 for me, you commented on prior calls that you historically see stronger transaction volume between kind of the September to December time period.

Have you not seen that volume come to the market? Or is it more a function of you, being disciplined on pricing to that?

I mean, hard to say. I mean, I would say it -- and big picture, yes, this year-end is going to be very busy. And I think when the data comes in and the deals get closed, I think you're going to see market-wise, number similar to the last several years.

There's been -- this year has been notable with a number of portfolios that have come to market and that are getting closed. And so I don't think this year-end is going to be different than others. It's going to be pretty busy.

Our next question is from Jordan Sadler with KeyBanc Capital Markets.

Just wanted to -- I wanted to just touch base on the acquisition guidance for the full year. I think Alfonzo, you mentioned another $15 million to $30 million by year-end. And if so, does that sort of -- is it the $15 million to $30 million plus the $163 million year-to-date? Has that put us kind of in the lower half of the original range for full year guidance in the $175 million to $200 million range? Is that the right way to think about it?

Yes. I mean that's how we framed it. Correct. Yes.

Okay. And you had said and commented, I think on the last call, and more recently that just volumes, the market is sort of moving at a dramatic pace. I think you look about volumes being at 50%, 60%, 70% in terms of transactions.

So just sort of clarifying it, the competition, is there sort of increased competition around those assets as well? There's a lot coming to market, but the a lot more competition for these assets, or is it harder to close? Or is it just not the stuff that you guys are looking for?

Historically, the bulk of the market is -- has traded at a cap rate that's lower than what makes sense for us. So it hasn't -- like in 2021, that has gotten more competitive for us slightly. But I mean, historically, it's always -- the bulk of the market has always traded at a lower cap rate.

What I would say has happened this year is, yes, there's been more investors that have come in, not just large investors but also smaller ones as well. A lot of funds that have been started and has really made the segment of the market that is looking for, call it, low to mid-5 caps very, very competitive.

And when I talk to people, I mean it definitely -- it's become a very, very -- that part of the market has become very competitive. And -- but what that's done, is it's really added competition across the, call it, the cap rate yield curve.

So in our segment as well, it's gotten more competitive, but we've built a very good track record and have continued finding deals. And we're leveraging the fact that we've got a very good process, and a very good team to get these deals done, efficiently, and in the most frictionless way possible.

But what we've always had a focus on is investing our capital as accretively as we can. And we're always looking to balance opportunities in the market, with what we're trying to do as a company, and trying to grow this company as prudently as we can.

But in short, I'd say, look, it's only got in competitive -- But our company has gotten bigger, cost of capital has gone down, and we have more resources, and we've got a good track record. So we have more range of motion. And we're still finding good investment opportunities.

We're having a lot of conversations with our relationships, our tenant base we have a pretty good pipeline of activity, and we'll continue doing what we have in the past, which is continuing to grow our portfolio in the best way we can.

That's helpful. And then I just wanted to circle back to Belpre. I think I got the gist of how that came about. But could you guys mention pricing or valuation, may be sort of the expected IRR?

Bob, do you want to get the...

Yes. Sure. So I think it's...

(inaudible) cap rate.

Sorry, I got broken up.

No, I was just saying maybe the exit cap rate if you don't have the IRR here?

Ye. Yes, 6.2%, I think, is the exit cap rate. And it compares to -- we said our basis, and the properties just under -- in this 1 building is just under $30 million. So call it, $15 million gain against that.

Okay. Sounds like a good return. And then lastly...

I just wanted to just say, the return was important to us. We calculated out the reinvestment of the money was good for us, all those types of things. But it also to move, sort of an off, not big market or is really smaller market that is doing really well. The [main center] for a while, and we still have an asset there. but not have so much concentration in there was attractive to us. That was actually probably the #1 reason.

Okay. And then the progress on Marina Towers, any update there or maybe even the other couple of assets that you're working towards back (inaudible)?

Bob?

Yes. Sure, Jordan, yes. So again, we're continuing to work with the tenant as they progress through the bankruptcy. It's a slower process as they work through their own issues. The update from a financial perspective is that we did receive -- the Q3 numbers include about $400,000 from the tenant, and we've received about $80,000 or so this -- so far in the fourth quarter.

But there's just uncertainties related to how they're emerging from bankruptcy, and it's -- there's a lot of back and forth that can go on, and that's going to (inaudible) in that process. It's difficult to say specifically how we are going to perform. I think what we're doing from a strategy perspective, is we're reclaiming the building portions as we can, and are looking at actively, working with prospective tenants to fill that space, and have gotten strong interest in the space as well.

So I think in the part of the process as we kind of, are here in Q4 into Q1 to work with them as they emerge, and try to monetize the most that we can out of it, and at the same time, look to add new tenants into the facility. And that's going well. I mean, I think that where we're long-term optimistic about how we add those tenants into the space.

So just to clarify, they affirm the original lease? Or are they downsizing?

Yes, they're downsizing from where they were. And while they did affirm the original lease, where we talked about previously that they weren't really -- they weren't performing under that affirmation. And so is that process continued evolved. And so we're looking to an additional arrangement that maintains our rights as well as our ability to collect, on the lease that exists, but they -- and then also to bring in the new tenants to the building, they've altered their strategy from their bankruptcy.

Our next question is from Juan Sanabria with BMO Capital Markets.

I was just hoping you could maybe talk a little bit more about the acquisition volumes and strategies. You kind of seem to be shifting here. The volumes may be felt short of expectations for some of the smaller higher-yielding assets, but you seem to be kind of hinting, that you're moving kind of up the quality curve towards bigger assets with lower cap rates.

But I would think that those are even more competitive and harder to find. So just a little confused as to the transitions going on.

Let me talk about it a little bit. Good to talk to you. We have a solid business. It's more competitive than it used to be in the secondary markets. But we do find our niche, and we do find our niche. And in this type of market, we think we really did quite well, getting it a 7.5% cap rate, and we've been very sort of strict on where we are.

There are opportunities we find in our niche of the market that could be bigger, that are not necessarily attracting the quick money or the big money. And so we're opening up our look. So our main look right now, and this has all to do with the cost of capital coming down substantially.

So at 1 point, our cost of capital really was like almost 1.5 points, 150 basis points above where we are now, and we were buying in the mid-7s.

And now where it is right now, we are taking a look at larger assets that are in still the secondary markets or the suburbs of the primary markets, that don't attract the necessarily attention of the big guys, but are some possibly, because we have not bought those, but are possibly lower caps in the mid-6s or so, but we're still looking to average into the 7s. So I look at it as more of an average, but it could add to our volume.

A year ago, we made -- and 2 years ago, we made some choices to try to move up our volume by going into the multiple tenant area, and the multiple tenant area has really been a godsend this year because we're finding more of those. It is a much more competitive market right now. There is a lot more money out there. So we are just managing where we are right now in reality is you get more. We do have project assets that we look at, that used to be 100% ours that somebody else bids.

Some people bid without even visiting or looking at it, in this sort of I consider it a bubble when they start to buy things without really even caring what it is, or spending any due diligence time. So we're going to work through that market. But I have in mind right now.

I also want to go for some size because we get some advantages on our cost of debt and also compressing the price of the stock, giving you more volume than others, but we get some advantages with size, and we're very accretive, also in the mid-6s if we could pick up, I'll just give an example, a $100 million project, with multiple buildings or something in our type of market in the mid-6s, where the people are not doing in the 7s or anything.

So we are looking at that. I'm not saying we're going to following that out there, but we're actually trying to find other ways to increase the amount. It is much more competitive than it was a year or 2 years ago.

Okay. That's helpful. And then just following up on, I guess, the prior questions. Is the I guess, shortfall, I'm not sure if that's the word to use relative to...

It's not, not until...

Is it just a timing issue, though? Are you -- because you seem to be talking about a good pipeline. Are you -- should we expect more deals in the second -- or first half of '22, that may be spilled over from the first year that could see a good start to '22? Or is that not necessarily the case.

Well, I mean, every quarter. yes. No, every quarter, the volume -- yes, every quarter, you're going to see a lot of volatility in terms of volume. And I mean it's not the first time you've had large quarters followed by quarters that are more quiet.

So I would say, in general, yes, I mean, it's hard to have a consistent number every quarter. I guess, I said it in another way, like some quarters are less, and some quarters are more.

It's unpredictable. And there's -- we try to have a larger pipeline as we can at all times, and we always have a lot of conversations. And sometimes, some things work on, and some things don't. And it's not in our control. And part of what we have to do is stay disciplined and have kind of firm convictions around valuations.

And what that means sometimes is we don't get the deal that we're chasing. And sometimes we do. So it's inherently unpredictable. And some quarters are more than others, and that's just the way the market works.

Understood. And just for last 1 for me. Should we think of any other markets out there, that you may want to exit or prune as it relates to some of the dispositions, that you noted in the press release?

I'm not sure we have anything -- oh, go ahead, go ahead.

Yes. No, I think -- I mean, part of what -- how we tried to frame it in the prepared remarks is we're -- the sales that we've done thus far have been opportunistic. And it's been case by case, and there's been compelling reasons to sell. So that continues to be how we're looking at dispositions is, we choose very selectively or strategically, and case by case.

(Operator Instructions) Our next question is from Bryan Maher with B. Riley Securities.

Most of my questions have been asked and answered. But 2 that I have here left, 1 kind of housekeeping and 1 bigger picture.

On the housekeeping front, I noticed you guys didn't use the ATM in the third quarter. I just want to make sure that, that's still in place and what the availability is there?

Yes, Bryan. it's still in place, and there's $23 million that's still left on the current ATM.

Okay. Great. And then kind of a big picture question. Bloomberg ran an article, I think it was on Tuesday about Fresenius Medical Care, planning to cut 5,000 employees, basically based upon patient deaths, related to COVID impact on dialysis basis. Are you seeing anything out in the marketplace that gives you cause as it relates to COVID's impact on this industry, a kind of aside from what we saw last year with a kind of tenant stress?

We have not -- 1 of the ways of being in this business for a long time collecting rents, you start seeing it in the delay of rents and other things. That has not happened to us in the industry. Our niche in the industry seems to not be that affected. Also, the main strategy we have, which is a coverage ratio, that they have to be making a good amount of money, and not buying those that are just 2:1 or 2.5:1, but trying to stay at an average 4 to 5 coverage ratios.

So they're all profitable, is very important in a general strategy, for if they have tough times, they're not ready to cut so much.

We don't see that happening in our portfolio. I could see that happening in certain types of portfolios out there, but not really what we bought.

Okay. And then a kind of drawing on some of the questions earlier, and your answers related to kind of going bigger asset, may down cap rate a little bit versus going higher cap rate down market, more secondary, more tertiary, a kind of like Community Healthcare Trust. It seems like the competitive nature of the lower cap rate, buyers out there and what we saw with Community Healthcare Trust, their acquisition pays really kind of slowing.

Does that, Alfonzo, maybe lead you to reassess your ability to make acquisitions in size [a note] of $200 million or $300 million in a year? Because a kind of pressure on both ends?

Or do you remain confident you can kind of do maybe $200 million plus in 2022, 2023?

So yes, our -- what we've always tried to do is a couple of hundred million, $200 million per year. And that's the target that we've been striving for. And continue to strive for.

So we've done a very good job of balancing capital markets with the real estate market. I always keep in mind that quarter-to-quarter, it's hard to -- the market evolves quarter-by-quarter. And there are seasonality to it. And so it's hard to really have -- it's really hard to kind of predict kind of where things are going to be in a year or 2.

And -- but I would say that we're -- we've done a very good job of leveraging our resources and our -- basically yes, managing our resources, and finding opportunities, and leveraging our relationships, to continue to find [dealers] going forward. I mean that continues to be our target and 1 that we feel pretty good about reaching.

This concludes the question-and-answer session. I would like to turn the conference back over to Jeff Busch for any closing remarks.

Well, I'd like to thank everybody. We had a great quarter. We expect to have a great year in 2022, and thank you very much.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.