Q1 2024 Global Medical REIT Inc Earnings Call

Participants

Stephen LLC; IR; ICR LLC

Jeffrey Busch; Chairman, President, CEO; Global Medical REIT Inc

Alfonzo Leon; Chief Investment Officer; Global Medical REIT Inc

Robert Kiernan; Chief Financial Officer, Treasurer; Global Medical REIT Inc

Austin Wurschmidt; Analyst; KeyBanc Capital Markets Inc

Rob Stevenson; Analyst; Janney Montgomery Scott LLC

Bryan Maher; Analyst; B Riley Securities Inc

Wes Golladay; Analyst; Robert W. Baird & Co Inc

Presentation

Operator

Good day and welcome to the Global Medical REIT first quarter 2024 earnings conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Steve Swett with Investor Relations. Please go ahead.

Stephen LLC

Thank you. Good morning, everyone, and welcome to Global Medical reach First Quarter 2021 Earnings Conference Call. On the call today are Jeff Busch, Chief Executive Officer; Alfonzo Leon, Chief Investment Officer; and Rob 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 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 purposes 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, 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, EBITDA rate and adjusted EBITDA. 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 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.

Jeffrey Busch

Thank you, Steve. Good morning, and thank you for joining our first quarter 2024 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 our portfolio average rent coverage ratio of 4.8 times for the first quarter, our net income attributable to common shareholders was $794,000, or $0.01 per share compared to $673,000 or $0.01 per share in the first quarter of 2023.
FFO in the first quarter was $0.21 per share and 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 15 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 crunch 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, Steward Health Care announced that it filed for Chapter 11 bankruptcy reorganization. As of March 31, stood represented 2.8% of the Company's annualized base rent, primarily in one facility that is located in Beaumont, Texas.
The company was actively pursuing re-leasing opportunities at this facility prior to the Stewart bankruptcy announcement, and we are optimistic about our long-term prospects at this location. Rob will provide more details regarding the financial aspects of our store relationship in his remarks, we are closely monitoring the situation and will update the market for any material events as the 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 Alfonzo discussed our investment activity and the current acquisition market conditions in more detail.

Alfonzo Leon

Thank you, Jeff. And 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. Rob?

Robert Kiernan

Thank you, Alfonzo. At the end of the first quarter of 2024, our portfolio consisted of gross investments in real estate of $1.4 billion and included 4.8 million of total leasable square feet, 96.4% occupancy, 5.8 years of weighted average lease term 4.8 times rent coverage with 2.2% weighted average contractual rent escalations.
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 due to decreases 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 this 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 are $4.4 million compared to $3.8 million in the first quarter of 2023 The increase primarily resulted from an increase in noncash 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 $0.01 per share compared to $673,000 or $0.01 per share in the first quarter of 2023.
FFO in the first quarter of 2024 was $14.9 million or $0.21 per share and unit compared to $15.1 million or $0.22 per share and unit in the first quarter of 2023. Affo in the first quarter of 2024 was $16.5 million or $0.23 per share and unit compared to $16 million or $0.23 per share and 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 billion. 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 and in 2020 for lease expiration, we are pleased with our progress on renewals and based on activity to date, we are currently trending towards a retention rate of 76% on this year's expiring leasable 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 continue to project $10 million to $11 million related to building and site improvements and approximately $2 million 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 Health Care, as Jeff mentioned, as of March 31, 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. 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.

Question and Answer Session

Operator

(Operator Instructions) Austin Wurschmidt, KeyBanc Capital Markets.

Austin Wurschmidt

Good morning, everybody or Tom, just wondering wanted to hit on the 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 wait and sort of speculate on the capital markets and the transaction market just given the volatility that we've seen?

Jeffrey Busch

You're absolutely right up right now, we're really pleased with this acquisitions. These fit exactly what we like in our portfolio, our triple-net absolute net MOB style acquisitions. We're going to be patient on. We do we could sell assets. I wouldn't do it today. I think we need to see a stabilization. We're not doing any fire sale of assets, and we're basically we could sell assets and be accretive.
We're going to see whether 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 are not relying upon any of that. So if the Fed doesn't cut for a while, we have other opportunities to do that short term debt increase, we do have something that this portfolio was too good to pass up and we felt we needed to continue our business, it progressing and getting good assets, and we'll probably win some assets that are not strategical.

Austin Wurschmidt

So as of now just I understand, would you just put these on your line and funded that way? And then sort of when these close decide kind of what the ultimate funding plans is just trying to understand sort of the time line of some of the acquisitions versus, you know, when you intend on funding?

Jeffrey Busch

The acquisitions 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 actually right is a combination of sale and a combination of on possibly increasing, unless you know, the equity markets improve substantially, but we're just not.

Austin Wurschmidt

Okay. No, that's really helpful. And then can you just share a little bit of detail about the portfolio. Are these you had talked about single-tenant assets. I mean, does it fit that profile? What's sort of the WALT here for the portfolio? And then can you just share some of the economics, so the deal cap rate and so forth?

Jeffrey Busch

Alfanzo?

Alfonzo Leon

Yes, sure. And so the world is a 6.1 year world with no roll until 2016. It's composed of 12 MOBs and three behavioral facilities. Most of these properties, 12 of them are located in the southern Sunbelt states with three properties located in states in the north northern part of the country and one quarter is investment grade. About 60% is physician credit with good rent coverage and the balances are double B rated and the price per square foot is about $320 per square foot.

Austin Wurschmidt

And what's the cap rate on that deal?

Alfonzo Leon

It's approximately 8% and this is a portfolio that we source off market.

Austin Wurschmidt

That's great. Very helpful. I'll hop back in the queue. Thank you.

Operator

Rob Stevenson, Janney.

Rob Stevenson

Good morning, guys. Just to follow up on the acquisition or any of the tenants existing tenants, or are these going to wind up being new tenants for the firm?

Alfonzo Leon

It's a mix, but it's a mix. And but yes, it's a mix of new existing and new fit.

Rob Stevenson

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?

Alfonzo Leon

No, no, no, no meaningful change.

Rob Stevenson

Okay. And then the I think, Rob, you said that 86% of the Stuart rents were in the Beaumont asset. How many other assets are there in the portfolio and what are those relative to the Bulmahn assets?

Robert Kiernan

Sure, Rob, there there's five other leases. There's six leases in total and the total square feet on the non-Wal-Mart Is 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.

Rob Stevenson

Okay. And I guess the then, you know, in aggregate $3.1 million, roughly $70,000-$75,000 per quarter. How much of that was in first quarter results was or did you basically have all of the $70,000-$75,000in first quarter results. Just trying to figure out as we go forward here.

Jeffrey Busch

We did.

Rob Stevenson

You're okay. And then, Tom, you know, the sense of you know, it at this point is are they going to trade, 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. How are you guys strategically looking at that? Is that something that you guys are going to have to re-lease or probably just something that winds up getting a reduction in rent when all is said and done?

Jeffrey Busch

We're in the process, Rob, we're in the process of re-leasing on the facility. Actually, we've got ahead of that. If 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 were months ago, we started a process and interesting enough, a lot of demand on this facility.
We're feeling really good about releasing it on at good numbers and the way the market works. There is two hospitals, both main hospitals, wealth was stewards. We believe this is the much better hospital when we underwrote it, it's much better and everything and the physicians like to do as a surgical hospital physicians like to do surgery. And that's so there's a lot of demand on that. And we do expect to release it and we're very optimistic on.

Rob Stevenson

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 re-lease it to somebody else?

Robert Kiernan

I think that's fair at this point.

Rob Stevenson

Okay. All right. I appreciate the time this morning, guys.

Robert Kiernan

Thank you.

Operator

Bryan Maher, B. Riley FBR.

Bryan Maher

Thanks. Most of my questions have been asked and answered, but just sticking with steward for second. I would say if they've moved down already, they're probably not going to re-up.
And on the 15 property acquisition, can you talk about what the seller motivation was there?

Alfonzo Leon

It was strategic and these are assets that they are not it's not a sector that they want to continue investing in.

Bryan Maher

And maybe sticking with Avanza for a minute. When you're looking at your pipeline after announcing this deal, how deep would you say it is realistically maybe a dollar number? And are you seeing any meaningful, a narrowing of the bid-ask spread?

Alfonzo Leon

Yes, so two parts of that question. I mean, the first part is I mean that the market has continued moving towards higher yields. And it's interesting to look at the market from two ways. One is single tenant SRE, 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 they were as a few years ago. But the ones that are available are interesting situations where 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 had to pay a premium. So we're taking advantage of that situation in the current market.
And in terms of the bid-ask spread at the beginning of the year, my sense was that we started and narrowing that bid-ask spread. And I think part of what has evolved is that a lot of the owners of medical office properties, we're hoping for a Fed rate cuts towards the end of the year, and we're hoping for a 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 is what has not been available for buyers for a long time. So at this point, yes, 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 then 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.

Bryan Maher

And how deep would you say your acquisition pipeline is $50 million, $100 million, $200 million?

Alfonzo Leon

Hard to gauge again because some of these are up a portfolio of opportunities.
And so I see have seen opportunities in the $10 million to $20 million range and have seen some in the $50 million range. But I'd say, you know, going into 2025, I think $50 million to $100 million in potential acquisition is a reasonable number.

Bryan Maher

That's helpful. And maybe just last for me for Bob, you know, your weighted average maturity of your debt is kind of I think you said 2.7 years. You know, what are your thoughts on terming that out back 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? And that's all for me.

Robert Kiernan

Thanks, Bryan. Yes, that is really the short answer is just kind of letting some of the volatility in the market subside. And we do still have that kind of 2.7 years to work with them to work with that time and again, being consistent contact and discussions with our banks relative to opportunities, but to be patient on that front.

Bryan Maher

Thank you.

Operator

Wes Golladay, Baird.

Wes Golladay

Good morning, Guy, you mentioned potentially selling some assets to fund the acquisition. What type of cap rate are you looking at for the disposition?

Alfonzo Leon

So we're looking at them. We're trying to get the best pricing we can. And so we're looking for things in the low sevens.

Wes Golladay

Okay, fantastic. And then you did mention you're looking to re-lease the Steward asset. Based on the demand looks like you had pretty good demand there. How quickly could you turn the asset and what type of carry cost we have in the meantime?

Robert Kiernan

Just to make sure I understand the question. You understand how quickly we could re-lease it?

Wes Golladay

It sounds like you have demand. So assuming they say they reject the lease in a few months yet you have a tenant close to signing a deal upon a rejection of the lease and then you build out the space for a few months? Or just trying to get a sense of how long you can based on the demand that you're seeing for the space, how long can you help how quickly you can re-lease the space. And in the meantime, yes, it could be taken up a little bit of the OpEx costs over the near term for a few months?

Alfonzo Leon

Short again. And so it's always hard to predict, but I mean, the interest was quick. And so as you know, shortly after the announcement was made that the facility was available we got interest from a number of parties that expressed strong interest and see you in the conversations went up pretty quickly as well on it.
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. It's hard to say, but the interest seems sincere, and the conversations have been very positive.
When I 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 what how exactly are they planning on using the space and what exactly they are, what changes need to happen at the facility for that to happen.
So on that second part of the question, a little harder to gauge. I will say, though, that the facility is a premier surgical facility in Beaumont. I mean, it's really I'm arguably probably one of the best one in town. And despite its age, I mean when you walk in, it feels brand-new. I mean, it's a really nicely done project.
And so I'm not clear exactly what changes would need to be made. But that's something that we're in the process of trying to evaluate.

Wes Golladay

Okay. And then maybe one for Rob. There's a look at the sequential change in revenue. There was a $2 million uptick. Was this largely due to variable rent, the sequential increase in rents?

Robert Kiernan

That would be I'd like, yes, it would have been probably expense related versus anything from a from a base rent perspective, there really wasn't any material change relative to up to base rent quarter over quarter.

Wes Golladay

Okay. Thanks for the time, guys.

Operator

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 REIT first quarter 2024 earnings conference call. You may now disconnect. Take care.