Global Medical REIT Inc (GMRE) 2021 Q1 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Global Medical REIT First Quarter 2021 Earnings Call. The conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Evelyn Infurna, Investor Relations. Please go ahead.

Thank you, operator. Good morning everyone, and welcome to Global Medical REIT First Quarter 2021 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, including statements related to the COVID-19 pandemic, and its effect on our tenants' business. 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 it's making the 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, to those contained in the company's 10-K for the year ended December 31, 2020, and its other securities and exchange commission filings. The company assumes no obligation to update publicly or any forward-looking statements, whether as a result of new information, future events or otherwise.

Additionally, on this conference call, the company may refer to certain non-GAAP financial measures, such as funds from operations and adjusted funds from operations. 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 Securities and Exchange Commission. Additional information may be found on the Investor Relations page of the company's website at www.globalmedicalreit.com.

I'd now like to turn the call over to Jeff Busch, Chief Executive Officer of Global Medical REIT. Jeff?

Thank you, Evelyn. Good morning, and thank you for joining our first quarter 2021 earnings conference call. Joining me today are Alfonzo Leon, our Chief Investment Officer; and Bob Kiernan, our Chief Financial Officer. We hope that everyone continues to stay healthy and is doing well.

GMRE was founded with a vision to create a high-quality portfolio of medical facilities aligned with the strongest operators and healthcare systems in their local markets with the expectation that these properties would generate stable revenue and return for our investors. Coming off a strong year in 2020, as vaccinations continued to be administered and we start to see a light at the end of the tunnel, we are well positioned to continue to execute on our strategy 2021.

With respect to earnings in the quarter, we grew our quarterly FFO per share and unit by 21% to $0.23 per share, and our FFO per share and unit by $0.20 cents to $0.24 cents compared to the first quarter of 2020. With a focus on both deleveraging and expanding financial capacity to execute on our growth plan, during the first quarter we raised a total of $150 million from equity issuances, including $35 million from ATM issuances and $115 million from an underwritten equity offering in March. Despite the fact that we're seeing increasing competition for acquisitions in our target market, we were able to put this capital to work by completing $101 million of acquisitions at a 7.4% weighted average cap rate to date in 2021. While we are pleased with this acquisition volume so far in '21, our activity in any quarterly period isn't indicative of our annual expectations.

We currently expect that market patterns will result in the more typical annual acquisition total. After quarter end, we amended and restated our credit facility to increase our borrowing capacity by $150 million to reduce the borrowing costs, convert to an unsecured facility and extended our debt maturity. Our amended credit facility and recent equity raises provided us with the additional financial flexibility as we evaluate new acquisitions to grow our portfolio. We are off to a good start this year and we look forward to continuing our success while executing on our growth plan through the rest of 2021.

Now I will turn over to Alfonzo.

Thanks, Jeff. As Jeff just touched on, the market for medical facilities is becoming increasingly competitive, given their relative outperformance during the pandemic and investors' optimism and the long-term fundamentals of healthcare. We are seeing an increased interest in our target markets from participants that historically were concentrated in other asset classes in urban or high barrier markets. The increased liquidity and flow of capital into medical office is encouraging more sellers and resulting in an increased supply of MOBs coming to market. Despite this increase in competition, we finished 2020 with good momentum and we continue to be successful in finding and acquiring accretive properties within our target cap rate range. In the quarter, we closed on 4 acquisitions, totaling $43 million at a weighted average cap rate of 7.6%.

To date, we completed $101 million of acquisitions at a weighted average cap rate of 7.4%. Additionally, we currently have 3 properties with an aggregate purchase price of $32 million under contract. As has been our policy to date, we are carefully evaluating these properties to make sure that they and their operators meet our investment criteria, and we can offer no assurances that they will ultimately close on these acquisitions. Among our completed acquisitions, there are 2 that we'd like to highlight. In April, we acquired a 6-property portfolio, 82,000 square feet for $31.2 million in the Fort Myers market occupied by a large primary care and women's care practices. All but one of the buildings is located within half mile of a major hospital. The buildings have been occupied by these tenant groups since construction in the early 2000s. All the buildings are triple-net leased, with 2% contractual rent escalations.

In March, we closed on a $17.4 million acquisition of a 34,000 square foot behavioral health facility occupied and guaranteed by Kindred Healthcare. The 46-bed facility is 1 of 2 behavioral hospitals Kindred recently opened in the DFW market and is expandable on an overall 5.5-acre site. At the time of acquisition, the facility reached stabilized occupancy. After factoring in our 2021 acquisitions, we now have a diversified $1.2 billion portfolio. In 32 states, we've averaged 18 closings per year, which ranks us among most active investors in the MOB sector. We have been able to sustain our acquisition pace by primarily buying individual assets, while most MOB investors focus on acquiring large portfolios. As we continue to grow, we are leveraging our network and the track record we've built in our niche to source and secure deals. With that said, while the market is increasingly competitive and we have completed $101 million of acquisitions to date, we are not changing our acquisition guidance of $175 to $225 million at this time.

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

Thank you, Alfonzo. GMRE benefits from a stable business model and from the strength and profitability of our tenants. Once again, the portfolio produced strong results this quarter. We have accomplished a tremendous amount already this year and are excited to see what the remainder of 2021 brings.

With respect to key performance metrics, we ended the quarter with a portfolio occupancy of 99%, total leasable square feet of 3.8 million square feet, with a weighted average base rent of $23.94 per square foot and 2.1% weighted average contractual rent escalations. Our tenants had an average rent coverage ratio of 4.6x, and our weighted average lease term at quarter end was 7.9 years. We achieved a 27% year-over-year increase in our rental revenues to 27.3 million in the first quarter due to the benefit of our acquisition activity and rent escalations. Rent collections remain strong. Overall, we've collected over 98% of our Q1 rent, including the impact of 2 tenants that we account for on a cash basis.

Our total expenses for the first quarter of 2021 increased to $24 million from $18.8 million in the first quarter of 2020. The growth in expenses is largely related to the acquisitions completed over the last 12 months. G&A expense for the first quarter of 2021 was $4.4 million and compares to a pre-internalization combined expense of $3.8 million, including $1.8 million in G&A and $2 million in management fees to our former advisor in the prior year quarter. Within these G&A expenses, our noncash stock compensation costs drove the overall increase with $1.7 million of stock compensation in 2021 compared to $922,000 in the first quarter of 2020.

As discussed last quarter, this increase is the result of the onetime retention grants made at the time of internalization. We anticipate our G&A expense to remain between $4 million and $4.4 million on a quarterly basis in 2021, even as we increase the size of our portfolio. Net income attributable to common stockholders for the first quarter of 2021 was $1.8 million or $0.03 per share as compared to net income of $1.3 million or $0.3 per share in the first quarter of 2020. FFO for the first quarter was $0.23 per share and unit as compared to $0.19 per share and unit in the first quarter of 2020. AFFO for the first quarter was $0.24 per share and unit, up 20% from the prior year quarter.

Moving on to the balance sheet. As of March 31, 2021, our gross investment in real estate was approximately $1.2 billion, an increase of $212 million or 22% from the first quarter of 2020. On March 18, we completed an $8.6 million share equity offering raising approximately $115 million in gross proceeds. When combined with equity issuances on our ATM during the quarter, we raised approximately $115 million in gross proceeds at a weighted average price of $13.25 per share. Proceeds from these issuances were used to support our acquisition activity and to pay down the balance of our revolver. On the liability side of our balance sheet, at March 31, we had $485 million of net debt and our leverage ratio was 41%. Our weighted average interest rate during the quarter was 3.17%.

As Jeff mentioned, and as we noted in our recent press release, on May 3, we amended and restated our credit facility. This transaction is very significant to us on many fronts, as we increased our borrowing capacity by $150 million, reduced borrowing costs across our pricing grid, converted to an unsecured facility and extended our debt maturity to a weighted average of 4.9 years. The facility is now comprised of a $400 million revolver, a $350 million term loan and a $500 million accordion. Note also that subsequent to closing the amended facility, we entered into forward-starting interest rate swaps to hedge the LIBOR component of the interest rate on the term loan.

These new swaps will be effective after our current interest rate swaps begin to mature in August of 2023, and they will run until May of 2026. As of today, our borrowing capacity under the revolvers is approximately $250 million. With the closing of this amended facility, I'd like to thank all of the syndicate lenders led by JPMorgan for their support and vote of confidence in GMRE.

Overall, based on the steps we've taken so far in 2021, we believe that we are well positioned to execute on our acquisition strategy, and are looking forward to sharing our progress with you in the coming quarters.

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

(Operator Instructions) The first question comes from Amanda Sweitzer from Baird.

On your unchanged acquisition guidance, is that being driven more by your desire to delever or is it because of that competition that you talked about, that you're seeing in the market? I guess I'm trying to get a sense for whether that acquisition guidance could increase later this year if you do find more opportunities, or if you expect to maintain it to maintain that leverage.

That's actually a great question. We buy whatever we could buy within the quality that we would buy, and there's more competition on the market. So we're basically there. If we do find product, which may happen, and it fits within that, we will buy. We're still working to -- the guidance on our leverage is really there because we want to absolutely bring down our leverage amount, but we do have the ability to buy and we will buy product. It's more of a realistic situation of the market right now at this point, but it could change later.

Okay. That makes sense. And then, as you think about tax increases or potentially rolling back 1031 exchanges, are there any tools that you could use like OP units or other things that you think could become more attractive to sellers down the line?

Alfonzo?

Sure, yes. I think so. I mean we always introduce the concept of OP units with as many selling parties as we can. I'm of the belief that it'll become more attractive, but it's hard to predict, but we always offer it.

That’s helpful. And then last one for me. Can you just talk more about what you're seeing in terms of leasing activity today? You obviously don't have much vacancy across the portfolio, but do you think we could see an occupancy uptick this year, especially given the low amount of lease maturities you have?

We have one vacant property at this point. So our occupancy is a tick over 99%. And we're actively working to re-lease that facility, but it's a work in progress and we don't have a more detailed update at this point, but it's something that we're actively working on.

The next question comes from Juan Sanabria from BMO Capital Markets.

Maybe a question for Bob. So post the equity raise and the leveraging, what is your new debt target, either leverage or net debt-to-EBITDA terms? And how much balance sheet firepower do you have to debt fund acquisitions?

Sure. So we're now at the end of the quarter. We reported our leverage down in the lower 40s at 41%. And as we talked in the last quarter, our goal was to reduce our leverage and to do that over time and so with our $250 million of borrowing capacity that we have today, our expectation right now is that we would be comfortable increasing our leverage into the mid-40s and to be comfortable at that level. So I could see, from our target, we're not really changing where our target is and where we're comfortable in that mid-40s, and as we get larger and we grow and get more scale over time, we'll bring it down and stay at these lower levels and possibly even lower as we get larger. But right now, we're still comfortable in that mid-40s range.

Great. And then just a second question. It seems like you're doing more dialysis and maybe a bit more behavioral health in the past. Is that a strategic shift away from traditional medical offices, given just the risk/reward and maybe cap rate compression for MOBs? And should we expect more of those to other [food] groups, dialysis and behavioral health?

So we've been -- it's not like we've not been looking for dialysis before. Dialysis -- the bulk of the inventory that becomes available in the market in the dialysis space is a product type that doesn't really fit well with our portfolio. It's typically smaller, typically trading at a pretty low cap rate, and typically it's single tenant, long-term lease, which fits for us, but it makes it a product type that is very attractive for the 1031 exchange market. So if you look at the dialysis that we've acquired over the years and we've -- off the top of my head, I feel like we've acquired dialysis centers starting 3 years ago. But if you look at the ones that we have acquired, they are not -- typically not single tenant. They've got 1 or 2 -- 2 or 3 tenants. We acquired one that had a ground lease. So my point is, it's dialysis centers that are not ideally suited for the 1031 exchange market, and we pick up extra yield because of that extra complexity.

On the behavioral side, similar story. I mean, I've been looking -- we've been looking for years, and a lot of what we've seen over the years hasn't really made a lot of sense for us. A lot of the behavioral product that is in the market is addiction centers. That niche within behavioral is not a niche that I like very much, and there has been, to my sense, a bit of an evolution in the market. When I compare what I was looking at 3 years ago with what I'm looking at today, I am seeing more operators and more business models that make more sense to me. So case in point, the facility we bought in Texas with Kindred makes a ton of sense, starting with the fact that Kindred is a large operator. They know what they're doing. They have a balance sheet, they have resources, and these particular facilities are ideally suited for what they want to do. We spoke with Kindred about their business plans. It makes a ton of sense. So it fits our portfolio. It fits the way we look at deals. It fits our underwriting. So it's not been a shift. It's just that in the past there hasn't really been opportunities that we've liked and this one we like.

And just one quick follow up to that. Where are cap rates across the main food groups, if you look at dialysis, behavioral, and kind of traditional MOBs, and do you value dialysis on a per square foot basis? Or how do you think about that?

Okay, so there was multiple questions there, but starting with the dialysis one, I mean it's the same way we look at all our deals. It's holistic. I mean, it's the rent. It's the term. It's the price per square foot. It's the condition of the building. We talk with the specific group that's within the building, where they're bringing their patients, why it makes sense. We look at the competition. So we look at many things. We obviously also look at the yield. It needs to fit our portfolio. We're not going to chase dialysis centers that are trading at 5 counts, but if there's a dialysis opportunity that is within our price range or yield and makes sense to us, it makes sense that the service that they're offering makes sense, and there's -- we come to the conclusion that there's -- it's a location that has long-term prospects, then yes, we'll buy that dialysis center. So it's not any one metric, is my point, is we look at all of it.

There were more parts to your question. What other questions do you have?

Sorry, just the relative yields for dialysis, MOBs and behavioral health, are they different or kind of all lumped in similar ranges?

For us, within the same bandwidth we're looking for, right, we're looking for cap rates that are in the 7 range. In the market, cap rates vary quite a bit. Again, on the dialysis center, depending on the profile, you'll have a segment of the dialysis market that trades in the 5 in the 6 or the 7s. For MOBs, similar story. You've got a segment of the market that trades in the 5s, another one that trades in the 6, and another one in the 7s. Behavioral, historically, has been higher cap rates, but in the last 12 months, there has been compression in that sector more than other sectors, and I've heard anecdotally that there's a lot more interest in behavioral, a lot more private equity interest in behavioral. So behavioral that I saw trading in the 8s are now trading in the 7s, and there's behaviorals that are trading in the 6, which was rare before. So there's been a shift. But behavioral is definitely an asset type that, historically, has traded at higher yields, but in the last 6 months there's definitely been a shift.

The next question comes from Bryan Maher from B. Riley Securities.

Appreciate all those comments so far. So your comments are interesting, but not surprising on new buyers entering the market. I mean, there's so much capital out there chasing real estate right now. I don't think any of us are really surprised by that, but can you identify for us kind of who the predominant players are chasing the assets that you're looking at? And clearly, this can't be good for cap rates in general, not specific to any one product type. Has there been any type of reset, in your view, as to kind of cap rates down 50 bps, 75 bps, 100 bps from what you were used to before?

Sure. So one big thing to consider when you think about money that's come into the sector, especially in the last 6 to 9 months, it's money that wants to move in big increments. Ideally, they want to move $100 million to $100 million at a time. The money that has come in is less interested in growing their portfolios in $5 million, $10 million, $15 million increments. They would strongly prefer to grow in $25 million, $50 million and $100 million increments. So a lot of the pressure that's been put into the market in the last 6 to 9 months has been most acutely in portfolios or larger assets. So things that are -- any asset over $50 million gets a lot of attention, and there's been -- from my perspective, a lot more compression in that space in particular portfolios.

Interest for portfolios is really strong and a lot of new parties show up, too. So when I hear of a portfolio that is north of $100 million that is coming to market, I'm expecting that to trade 50, 75 basis points to where it probably would have been a year ago. So that's where I see the bulk of the pressure from the new money coming in. In terms of characterizing the money coming in, it's a mix. You have a handful of established private equity funds that have continued raising a lot of money and continue being very active. You also have new funds, new players in the space and == to be determined whether or not they're going to be very active and successful, but they're there and they're competing.

Within our specific niche, we're looking at MOBs in the $5 million to $15 million range. And in-patient facilities still -- it's still a niche that doesn't necessarily attract as much interest. A lot of the money coming in wants to chase what everybody else wants to chase, which is investment grade, health system anchored, larger facilities, 30,000, 40,000 square foot facilities in larger markets. So the competition we're getting is more scattered. And it's -- depending on the location, depending on the building, depending on the profile, it's very different. We're not running into the same people in every deal. It's actually kind of surprising how -- for the deals we chase, the people that we've come across varies a lot. So hopefully that helps paint the picture for your question.

That's great. And maybe just one question for Bob. You talked about G&A and the kind of $4 million to $4.4 million range per quarter, and you don't expect any changes really this year. But the bigger picture as you layer on assets, $50 million, $100 million, $150 million, what's kind of the break point of incremental acquisitions in dollars that would require a new FTE at headquarter or at the management or accounting or whatever? How should we think about that kind of longer term?

Sure. So where we are from a headcount today is, we have 24 people at a total headcount and we are -- as we -- from a staffing perspective, we've -- senior leadership is very well in play. And so the additions that we make at this point are not at that senior management level, as much as it is just adding layers to help as the company grows within either asset management within accounting and things of that nature.

And so from a total cost perspective, as I look at -- and if you think of total G&A and we've talked about the internalization grants and how those are going to start to roll off, those costs are going to decrease. You'll see that decrease over time and any replacement is going to come with additional headcount shouldn't have a significant impact on our total G&A as we scale up into that $1.5 billion and forward-looking into $2 billion of assets type -- so this, call it 17 million-ish run rate of G&A, if you think about it as the scale. It looks -- I'm pretty comfortable with where we are from a total perspective of kind of bringing our total G&A costs as a percentage of our gross assets down and to be more in range with the larger peers. So it's really going to be, again, incremental, but I think we're pretty well staffed today at the -- certainly at the senior management level. And then it'll be more kind of additions at -- to fill in and help to maintain our support for the assets that we have.

(Operator Instructions) There are no further questions in the queue. I would like to turn the conference back over to Jeff Busch for any closing remarks.

Thank you, everybody. We had a great quarter again. And I appreciate your time and questions. Have a good day.

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