Q4 2023 Global Medical REIT Inc Earnings Call
Participants
Steve Swett; IR; ICR, LLC
Jeff Busch; Chairman of the Board, President & CEO; Global Medical REIT Inc.
Alfonzo Leon; Chief Investment Officer; Global Medical REIT Inc
Robert Kiernan; CFO & Treasurer; Global Medical REIT Inc.
Austin Wurschmidt; Analyst; KeyBanc Capital Markets Inc.
Robert Stevenson; Analyst; Janney Montgomery Scott LLC
Bryan Maher; Analyst; B. Riley Securities, Inc.
Presentation
Operator
Greetings, and welcome to Global Medical REIT fourth quarter 2023 earnings call. At this time, all participants are in a listen-only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And as a reminder, this conference is being recorded. It is now my pleasure to introduce Steve Swett, Investor Relations.
Thank you.
You may begin.
Steve Swett
Thank you. Good morning, everyone, and welcome to Global Medical REIT Fourth Quarter and Full Year 2023 earnings conference call. On the call today are Jeff Busch, Chief Executive Officer; Alfonzo Leon, Chief Investment Officer, and Bob Kiernan, Chief Financial Officer. Please note these forward-looking statements by the company on this conference call. Statements made on this call may include statements that 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 31st, 2022, 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, EBITDA three and adjusted EBITDA RE. 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 for additional information may be found on the Investor Relations page of the Company's website at w. w. w. dot global medical retail accounts I would now like to turn the call over to Jeff Busch, Chief Executive Officer of Global Medical REIT.
Jeff?
Jeff Busch
Thank you, Steve. Good morning, and thank you for joining our fourth quarter and full year 2023 earnings call. Our high-quality medical real estate portfolio continues to produce steady results. At the end of the fourth quarter, portfolio occupancy was 96.5% with a weighted average lease term of 5.8 years. And the portfolio average rent coverage ratio of 4.2 times for the fourth quarter, reflecting impact of a loss on extinguishment of debt. We had a net loss attributable to common shareholders of $840,000 or $0.01 per share compared to net income attributable to common shareholders of $369,000 or $0.01 per share in the fourth quarter of 2022. FFO in the fourth quarter was $0.19 per share and unit down $0.03 from the prior year quarter and our AFFO was $0.23 per share and units down $0.01 from the prior year quarter. In 2023. We patiently manage through continual difficult market conditions for acquisitions, and we look to opportunistically dispose of assets to reduce our leverage and variable rate debt. We are pleased with the results of our dispositions activity in 2023 as we completed three dispositions at a weighted average cap rate of 6.3%, that generated $80.5 million of gross proceeds. We used the net proceeds from the dispositions to pay down our variable rate debt, resulting in a leverage ratio at the end of the year of [43.6%] to position the Company for growth as accretive acquisition opportunities arise. I'm proud of our team for efficiently executing these dispositions during the year.
Looking ahead to 2024. I'm excited to see the market for our target acquisitions has improved meaningfully compared to 2023 significantly. We have a near term acquisition pipeline of between 95 million and 110 million of medical properties that meet our investment criteria.
As we look ahead, we continued our accretive growth strategy while maintaining or lowering our portfolio leverage we believe the strategy of lower leverage growth is prudent in the current environment of sustained higher interest rates and will lead to long-term growth for our stockholders. Overall, I am pleased with the results of 2023 and wanted thank the entire team for their hard work and contributions to our results.
With that, I turn the call over to Alfonzo to discuss our transaction activity and the current acquisition market conditions in more detail.
Alfonzo Leon
Thank you, Jeff.
As Jeff mentioned, we are currently reviewing near term acquisition opportunities ranging from 95 million to 110 million that meet our investment criteria based on a typical time line for our due diligence process. We're targeting the second half of this year for closing these transactions as acquisition cap rates have risen in response to buyers increased cost of capital. We are seeing sellers begin to adjust their expectations, which is leading to more accretive acquisition opportunities. We continue to remain actively involved with various physician groups, brokers and corporate sellers to identify acquisition opportunities. This continued dialogue along with our deleveraging activities in 2023 should allow us to capitalize on potential opportunities, which gives us an advantage over less liquid buyers. Traditionally, an unattractive debt refinancing market could push previously reluctant sellers our way as the sellers run out of refinancing options. We continue to closely monitor the ever-changing market conditions and are excited about what we see for 2024 and beyond. We will continue to leverage our competitive advantage, including scale access to capital and the potential utilization of OP unit deal structures to unlock opportunities.
I would now like to turn the call over to Bob to discuss our financial results.
Bob?
Robert Kiernan
Thank you, Alfonso.
At the end of the fourth quarter 2023, our portfolio consisted of gross investments and real estate of $1.4 billion, including 4.7 million of total leasable square feet, 96.5% occupancy, 5.8 years of weighted average lease term, 4.2 times rent coverage with 2.1% weighted average contractual rent escalations in the fourth quarter, our total revenues decreased compared to last year to $33 million. The reduction in revenue is primarily driven by our property dispositions completed during the first nine months of the year, as well as the recognition of reserves for approximately $1.1 million of rent related to our medical office building tenant any storage in New Jersey, including approximately $0.2 million of deferred rents. Our total expenses for the fourth quarter were $31.5 million compared to $34.5 million in the prior year quarter. The decrease was primarily due to decreased interest expense and operating expenses. Our interest expense in the fourth quarter was $7 million compared to $8.1 million in the comparable quarter of last year, reflecting the impact of lower average borrowings and lower interest rates compared to the prior year period. Note that beginning in early August, our credit facility pricing improved by 15 basis points as a result of our reduced leverage. And in addition, in early August, certain of our forward-starting interest rate swaps became effective for placing maturity swaps, which reduced the interest cost on our $350 million term loan by 30 basis points compared to prior periods.
Our operating expenses for the fourth quarter were $6.1 million compared to $7.1 million in the prior year quarter, with the decrease in these expenses, primarily driven by the changes in our portfolio since the comparable prior year period. Note that real estate related taxes represents the largest component of our operating expenses.
Regarding these fourth quarter expenses, $4 million related to net leases for the Company recognized a comparable amount of expense recovery revenue of $1.4 million related to gross leases. G&a expenses for the fourth quarter of 2023 were $4.2 million compared to $4.1 million in the fourth quarter of 2022. Within our current quarter, G&A expenses noted, our stock compensation costs were $1.2 million in the quarter and our cash G&A costs were $3 million. Looking ahead, we expect our G&A expenses in 2020 for the increase to be in the range of $4.4 million and $4.6 million on a quarterly basis. During the fourth quarter, we completed the defeasance of a CMBS loan by making a total payment of [$31.5 million], including transaction costs. The net carrying value of the loan was $30.6 million on the date of defeasance resulting in a loss on extinguishment of debt of $868,000. In connection with the defeasance, we subsequently received $8.4 million in escrowed funds held by the CMBS servicer and used those funds to reduce our total debt and leverage net loss attributable to common stockholders for the fourth quarter was $840,000 or $0.01 per share compared to net income attributable to common stockholders of $369,000 or $0.01 per share in the fourth quarter of 2022. Ffo in the fourth quarter was $13.3 million, or $0.19 per share and unit compared to $15.5 million or $0.22 per share and unit in the fourth quarter of 2022. Affo in the fourth quarter was $15.9 million or $0.23 per share and unit compared to $16.5 million or $0.24 per share and unit in the fourth quarter of 2022.
Moving on to the balance sheet. As of December 31st, 2023 our gross investment in real estate was $1.4 billion, which is down about $60 million from the start of the year, reflecting our disposition activity at December 31st, 2023, we had $618 million of total gross debt with a weighted average remaining term of 2.9 years. At quarter end, 85% of our total debt was fixed rate debt. Our leverage ratio was 43.6% and our weighted average interest rate was 3.83%. As previously mentioned, with our reduced leverage ratio during the third quarter, we lowered the sulfur margins in our credit facility by 15 basis points. So for margin on our revolver now at 1.35% and our term loan margins are now [1.30%].
Lastly, the current unutilized borrowing capacity under the credit facility is $294 million, and we did not issue any shares of common stock under our ATM program during the quarter or to date in the first quarter of this year.
With respect to our 2023 lease expirations. We ended the year retaining 78% of the full year's 363,000 expiring square feet and 85% of the related expiring ABR our outlook regarding 2024 lease expirations is very good. And in general, consistent with our experience on 2023 lease expirations. Currently, we are expecting that our occupancy during 2024 will range between 95% and 96.5%.
Regarding capital expenditures on the portfolio in 2023, our cash spend was approximately $9.6 million. Currently, we're projecting 2024 capital expenditures of approximately $10 million to $11 million related to building and site improvements and approximately $2 million to $3 million in tenant improvements, primarily associated with lease renewals and lease up to be completed during 2024. As we begin the year, we are confident that our resilient portfolio and ample liquidity available to us and continue to help us navigate these challenging market conditions. We are optimistic about moving forward in our acquisition efforts in 2024 and 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
Thank you.
Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two. If you would like to remove your question from the queue For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key Our first question comes from the line of Austin Wurschmidt with KeyBanc. Please proceed with your question.
Austin Wurschmidt
Hey, good morning, guys. And Jeff, you highlighted accretive investment opportunities in several times throughout your prepared remarks and then kind of hit on the importance of keeping leverage in check in the current environment. I mean, how are you thinking about the economics of these deals and maybe some additional specifics around plans to finance the transaction.
Jeff Busch
Oh, absolutely. We have basically a often Mystic plan, which is basically the Fed lowers on the rates on these or purchase agreements that we don't have to close for quite a while and out there. There's real opportunities for us in the market. So one or two things can happen. One is we get a lowering of the rates where you can always see it's happened three times that when the market felt the rates were lowering, we moved into [$11.50] to $12 type of stock, and that's an opportunistic to use equity and lower it. On the other hand, like we showed last year, we have assets that will sell in the low six cap and the acquisitions we're looking at are around eight caps, triple-net and others. So we basically could do either one or two things trade, our six caps on of other type of facilities on and by these eight caps and sort of bring up or make the spread or my preference would be if the market conditions are right as we go out and we do a combination of equity and debt. And with the equity and debt, our new criteria is to keep lowering and to be accretive, but also to lower our on our debt eventually below 40%. I mean it will take a while, but our goal is to lower before 40.
Austin Wurschmidt
And I think Alfonso, you mentioned OP units and potentially I guess how willing are buyers to take OP units and maybe how much can that limit the equity needs that you'll need to move forward with these with these deals?
Alfonzo Leon
It is, and it's hard to predict. I mean, we are always trying to offer it and discuss and trying to stimulate that interest. But it's some it's very idiosyncratic and really, it's an estate planning decision that the seller has to have and it's a pretty hard to predict. And we know we had one last year and we had done 2018. We had a lot of success with that, but it's it's hard to predict.
Austin Wurschmidt
And then just lastly for me, I guess, who can you provide some additional details or specifics on sort of the types of deals. I mean these are just all straight MOB transactions on anything unique about them. Are they lease up, our opportunities are more stabilized?
Just any detail you can provide would be appreciated.
Alfonzo Leon
Yes, sure. We're our focus is more MOBs and surgery centers, and we're also trying to pursue opportunities that are more single-tenant in nature versus multi-tenant.
Operator
Our next question comes from the line of Rob Stevenson with Janney Montgomery Scott.
Please proceed with your question by.
Robert Stevenson
Good morning, guys. Um, Bob, revenues were down $2.6 million quarter over quarter, operating expenses were down $1.1 million and sort of below where it's been over the last few. Is that due to that reimbursements timing thing that you were talking about or is there something else going on there that we need to be aware?
Robert Kiernan
No that we have run the big driver for the decrease overall was the disposition activity number one.
But then number two unique to the fourth quarter was the fact that we put to put on reserves for $1.1 million. That was a reduction of revenue for the quarter, and that was related to a property we mentioned in the in the in the release in East Orange, New Jersey.
And just some color on that, is that that's a property that we bought in September of 2016. So so we've owned it for a while until this recent event, you hadn't had any significant issues with the property but the tenant there is Prospect Medical. And while we were working closely with them and keeping keeping us informed of their cash flow issues that they were facing, we concluded that that was the most appropriate accounting. So that's the reduction. That's that's that's in the in the fourth quarter. But with that said, relative to this dislocation than this tenant, we think that in the longer term that we'll work through the issues with the property, both in terms of payments from from prospect and relative to our establishing the new tenants at the at the facility.
Robert Stevenson
Okay. And then I guess on that, I mean, how it beyond that tenant, how extensive is the watch list? And is anybody else on cash accruals at this point versus accruals at this point?
Robert Kiernan
No announced at this point.
Robert Stevenson
Okay.
That's helpful. And then, Alfonso, how are you looking at the these assets, the two, you know that you're focused on acquiring under purchase agreements as well as everything else that's out there today. I mean, is there much availability of debt financing? How broad is the market for these assets?
I mean are you guys one of the only players in town or is the US are local guys able to get financing to be competitive on these type of transactions?
Alfonzo Leon
Yeah, no, so that's what we're at we're doing is really trying to take advantage. And we always tried to position ourselves to play to our strengths and find opportunities that leverage the resources we have. And so right now, our credit facility is a competitive advantage. And so the opportunities that we're looking at is ones where we can use the and the efficiency and the certainty of close of our on our balance sheet and trying to get deals that makes sense for us that are accretive. And so it's and these cases is unique, but we are trying to position ourselves to use the advantages that we have to get deals that are attractive to us.
Robert Stevenson
Okay. That's helpful, guys.
Thank you for that.
Operator
Our next question comes from the line of Bryan Maher with B. Riley. Please proceed with your question.
Bryan Maher
Thank you, and good morning.
Maybe for Bob.
Robert Kiernan
Good morning.
Bryan Maher
Give us a little bit more color on this the seasons that you referred to a couple of times, you have kind of how that played out in layman's terms?
Robert Kiernan
Oh, sure, sure. Bryan.
So the CMBS is a $30 million CMBS, roughly that we have put on in 2016 and so kind of pre predates the IPO of the company, but it had been causing us a lot of cash management issues as well as administrative issues. And as more and more cash was getting tied up with the servicer, we saw an opportunity to extinguish the debt and free up in and free up the cash that was being held by the servicer. And so we're able to eliminate both the administrative burden and reduce reduce that kind of current and prospective kind of cash management issue that we were dealing with there to free up the arm to free up that cash. And so ultimately, we will the fees, the $31 million CMBS, but end up was [$7-ish million] back that we can reduce our overall debt. So through the transaction, we're able to reduce our overall debt and leverage. So that was really the kind of the element of it that was kind of the successful element of it to reduce debt and leverage from an overall perspective.
Bryan Maher
Right. But were there any properties involved here? I mean, did you just basically buy out a property that had CMBS against it with your credit facility or something?
Robert Kiernan
Right?
We refinanced it through the credit facility and so again, this debt, we had probably had five six of our kind of original properties from 2016 vintage in the in the facility. And so those those assets were attributable to the CMBS. And again, what the CMBS does that limit your ability relative to those assets, even as simple things such as maintenance can be burdensome with that with the CMBS or things you want to change at the property, it can be burdensome with the CMBS. And so the idea was to and then also again, let alone the cash element of the amount of cash that was being held by the servicer. So refinancing it through the revolver, then frees us up with we have the ability to to to have again more flexibility relative to those properties.
Bryan Maher
Got it. That's super helpful. On the CapEx side, you said $10 million to $11 million for 2024, and then you made a comment about $2 million to $3 million in tenant improvements is the $2 million to $3 million in the $10 million to $11 million or is in addition to the $10 million to $11 million.
Robert Kiernan
It's in addition, but it's harder to predict the timing. So I think that's that's kind of why it bucketed them differently because it it can be harder to predict the timing and and how that will flow and often we'll see again, it will it can it can be delayed. It may not fall in the same exact timeframe that you're looking at. So I just wanted to break that second piece out.
Bryan Maher
Okay, that's helpful. And maybe just last for Alfonso. I think in your prepared comments, you talked about a back half loaded for acquisitions. So to be clear, you're not expecting anything really in 1Q and 2Q? And can you give us maybe some range of level of magnitude of what you think might happen second half?
Alfonzo Leon
Yes.
So correct, nothing in 1Q and nothing in 2Q. And that what we provided is a range. And what we're trying to do is have that be more towards the end of the year than in Q3. So we're trying to weight that more in Q4.
Bryan Maher
Okay.
Thank you.
Operator
Our next question comes from the line of Alex Fagan with Robert W. Baird.
Please proceed with your question.
Hey, good morning, guys.
First morning is on the investment is on the investment pipeline.
What are the yields that Jean-Marie is securing and is the pipeline made up of any portfolios today.
Is that all single assets?
Robert Kiernan
Yes.
So we're targeting yields that are approximately 8% and yet, yes, these we're targeting that portfolios that right now are on difficult to finance and trying to take advantage of the fact that we have our credit facility to complete the transactions.
That's helpful. Second is, could you speak on the efforts for leasing the space that is expiring this year, kind of what's been the historic retention rate and for the portfolio and for any tenants who may have already notified you, but they're not refining. How is the demand then for that current space?
Robert Kiernan
Yes.
So for our 2024 expirations, we mentioned on the call that we did we did in the script that we from a retention last year, we were just under 80% and on a per square feet basis in the mid 80s on an ABR basis. And right now, I think we're largely tracking in that in that same vicinity, so called use 80% as a maybe as a proxy on both on both numbers is how we're looking at it here in late February.
Okay, thank you.
And on the demand for the space that you already know, that's not going to be re-signed, how's that looking like.
Robert Kiernan
And we I mean, it's like anything we're actively working at to trying to, again keep our occupancy as high as we can and just incentive ourselves to move as the spaces are fully occupied and leased up as possible. So it's a very active process to the whole team is engaged in.
Got it.
Thank you. That's all for me.
Operator
There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.
Jeff Busch
I'd like to thank everybody for attending our meeting and have a good year Thank you.
Operator
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
