Global Medical REIT(GMRE) - 2022 Q4 - Annual Report

PART I Item 1. Business GMRE is an internally managed REIT acquiring and leasing healthcare facilities, with a $1.5 billion portfolio as of December 31, 2022 Organization and Business Strategy GMRE operates as an internally managed UPREIT, investing in healthcare properties, primarily medical office buildings, under triple-net leases - GMRE is an internally managed REIT that acquires and leases healthcare facilities, conducting its business through an UPREIT structure[20][21] - The company's investment strategy targets medical office buildings in secondary markets, facilities serving the aging population, and opportunistic acquisitions such as acute-care hospitals and behavioral health facilities[22][25] - Most properties are leased under single-tenant, triple-net leases, though the portfolio is expanding to include some multi-tenant properties with gross or modified gross lease structures[23] Corporate Responsibility and External Factors The company prioritizes ESG, monitors climate risks, and faces financial impacts from rising interest rates and COVID-19 related labor costs - The Board of Directors leads ESG efforts through a dedicated committee, focusing on strategy, stakeholder communications, and compliance[25] - Rising inflation in 2022 led the Federal Reserve to increase interest rates, causing the one-month term SOFR (the reference rate for the company's credit facility) to rise from near 0% to 4.5%, significantly increasing interest expense[29] - The COVID-19 pandemic has caused labor shortages and increased labor costs for healthcare systems, particularly hospitals, which could impact tenants' financial stability[31] Property Portfolio Overview As of December 31, 2022, GMRE's portfolio comprised 189 buildings with $114.5 million in annualized base rent, primarily medical office buildings Portfolio Summary by Property Type (as of Dec 31, 2022) | Type | Leasable Square Feet (LSF) | % of LSF | Annualized Base Rent (ABR) (in thousands) | % of ABR | | :--- | :--- | :--- | :--- | :--- | | Medical Office Building (MOB) | 3,670,193 | 75.0% | $77,570 | 67.8% | | Inpatient Rehab. Facility (IRF) | 547,007 | 11.2% | $20,083 | 17.5% | | Surgical Hospital | 174,984 | 3.6% | $6,731 | 5.9% | | Other | 503,451 | 10.2% | $10,085 | 8.8% | | Total | 4,895,635 | 100.0% | $114,469 | 100.0% | Geographic Concentration (as of Dec 31, 2022) | State | % of LSF | % of ABR | | :--- | :--- | :--- | | Texas | 14.9% | 17.6% | | Florida | 11.5% | 10.3% | | Ohio | 8.5% | 8.3% | | Oklahoma | 4.0% | 6.4% | | Pennsylvania | 5.8% | 6.2% | | Arizona | 3.8% | 5.7% | | Illinois | 6.3% | 5.7% | | Other (28 states) | 45.2% | 39.8% | Significant Tenants (as of Dec 31, 2022) | Tenant | % of LSF | % of ABR | | :--- | :--- | :--- | | LifePoint Health | 3.2% | 6.6% | | Encompass Health Corporation | 5.2% | 6.4% | Lease Expiration Schedule (% of ABR) | Year | % of ABR | | :--- | :--- | | 2023 | 6.6% | | 2024 | 13.7% | | 2025 | 7.7% | | 2026 | 9.9% | | 2027 | 10.6% | | Thereafter | 41.5% | Recent Developments and Market Opportunity A tenant's bankruptcy was resolved, and the company has pending acquisitions and dispositions, driven by an aging population and healthcare decentralization - Tenant Pipeline Health System, LLC filed for Chapter 11 bankruptcy in October 2022 but assumed its lease at the White Rock Medical Center as part of its reorganization plan, effective February 6, 2023[44] - As of February 24, 2023, the company had one acquisition under contract for ~$6.7 million and two properties under contract for sale for ~$11.6 million[45][46] - Key market drivers for the company's strategy include the aging U.S. population increasing healthcare demand and the decentralization of healthcare services away from large hospitals to smaller, specialized facilities[47][48][49] Competition and Regulatory Environment GMRE faces intense competition for acquisitions and its tenants operate in a heavily regulated healthcare industry with reimbursement pressures - Competition for medical office buildings has increased significantly since the COVID-19 pandemic, as real estate investors seek reliable returns, driving up prices[55] - Tenants' revenues are highly dependent on government programs like Medicare and Medicaid, which are subject to ongoing pressure to reduce reimbursement rates[57][58] - Tenants are subject to complex healthcare regulations, including the Affordable Care Act and fraud and abuse laws like the Anti-Kickback Statute and Stark Law, violations of which can result in severe penalties[59][62][67] Human Capital As of December 31, 2022, GMRE had 29 employees, with 34% women and 31% ethnically diverse individuals - As of December 31, 2022, the company had 29 employees, with a workforce composed of 34% women and 31% ethnically diverse individuals[70][71] Item 1A. Risk Factors The company faces material risks from tenant financial health, rising interest rates, portfolio concentration, and REIT status compliance Risks Related to our Business and Healthcare Facilities The company's revenue depends heavily on tenant financial health, with risks from economic downturns, regulatory changes, and geographic concentration - The company is dependent on its tenants for revenue, and their ability to pay rent is subject to a wide range of business, economic, and regulatory risks[77] - As of December 31, 2022, the top three tenants (LifePoint Health, Encompass, Memorial Health) accounted for approximately 18% of the portfolio's annualized base rent[79] - The company has significant geographic concentration, with approximately 18% of its annualized base rent derived from Texas and 10% from Florida as of year-end 2022[93] - Leases representing 6.6%, 13.7%, and 7.7% of the portfolio's annualized base rent are set to expire in 2023, 2024, and 2025, respectively[91] Risks Related to our Financings The company is exposed to interest rate risk from floating-rate debt and relies on external capital, with debt agreements containing restrictive financial covenants - The company is exposed to interest rate risk from its unhedged floating-rate debt. The rapid increase in inflation during 2022 led to a material increase in borrowing costs as the One-Month Term SOFR rose from just over 0% to 4.32%[107] - Debt agreements require compliance with financial covenants, such as maintaining specific leverage and coverage ratios. Breaches could lead to default and acceleration of debt[108] - The company relies on external capital to fund future needs, as REIT distribution requirements limit the ability to retain cash from operations[112] Risks Related to the Healthcare Industry The healthcare industry faces adverse trends, regulatory uncertainty, and reimbursement pressures, which could negatively impact tenants' profitability and ability to pay rent - Adverse trends in the healthcare industry, such as changes in service delivery, provider competition, and regulatory uncertainty, may negatively affect tenants' businesses[114][115] - Reductions in reimbursement from third-party payors, including Medicare and Medicaid, could hinder tenants' ability to make rent payments[119] - Tenants may be subject to significant legal actions and government investigations, which could expose them to substantial liabilities and affect their ability to pay rent[121][122] Risks Related to the Real Estate Industry The company is subject to real estate market fluctuations, illiquidity, and potential asset impairment charges, which are beyond its control - Real estate investments are subject to risks and cyclical fluctuations in value and demand, influenced by economic conditions and interest rates, which are beyond the company's control[123] - The illiquidity of real estate could limit the company's ability to promptly sell properties in response to changing economic or investment conditions[124] - The company periodically evaluates its assets for impairment, and a determination of impairment would require an adjustment to the net carrying value of the asset, potentially affecting financial results[127] Risks Related to Our Structure GMRE operates through an UPREIT structure with potential conflicts of interest, stock ownership restrictions, and reliance on key personnel - The company conducts all operations through its Operating Partnership and relies on distributions from it to pay dividends and meet obligations[128] - The company's charter restricts any stockholder from owning more than 9.8% of any class of its stock to maintain REIT qualification, which may deter changes of control[137] - The company's success depends significantly on its key personnel, including its CEO, CFO, and CIO, and the failure to retain them could adversely affect the business[151] Risks Related to Our Qualification and Operation as a REIT Failure to maintain REIT qualification would result in corporate taxation, requiring annual distribution of at least 90% of taxable income and adherence to complex asset tests - If the company fails to qualify as a REIT, it would be taxed as a regular corporation, which would substantially reduce funds available for stockholder distributions[152][155] - To maintain REIT status, the company must distribute at least 90% of its REIT taxable income annually; failure to do so would subject it to corporate income tax[157] - Compliance with REIT asset tests (e.g., at least 75% of assets must be qualified real estate assets) may require the company to liquidate otherwise attractive investments[159][160] Item 1B. Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[180] Item 2. Properties This section incorporates by reference the information provided under "Our Properties" in Item 1 of the report - The information regarding the company's properties is incorporated by reference from Item 1 of this Annual Report[181] Item 3. Legal Proceedings The company states that it is not currently involved in any pending legal proceedings that would have a material adverse effect - The company is not involved in any pending legal proceeding or litigation that would be likely to have a material adverse effect on its financial condition or results of operations[182] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[183] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "GMRE," paid a $0.21 quarterly dividend in 2022, and outperformed benchmark indices from 2017-2022 - The company's common stock is listed on the New York Stock Exchange under the ticker symbol "GMRE"[186] Quarterly Dividend Per Share | Fiscal Year | Quarterly Dividend per Share | | :--- | :--- | | 2022 | $0.21 | | 2021 | $0.205 | Cumulative Total Return Performance (2017-2022) | Index | 12/31/17 | 12/31/22 | | :--- | :--- | :--- | | Global Medical REIT Inc. | $100.00 | $166.49 | | S&P 500 Index | $100.00 | $156.88 | | MSCI U.S. REIT Index | $100.00 | $119.87 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 2022 financial results, including revenue growth, increased interest expense, acquisitions, liquidity, and non-GAAP reconciliations 2022 Executive Summary In 2022, GMRE's rental revenue increased, FFO and AFFO per share grew, and the company expanded its portfolio through acquisitions and a credit facility amendment Key Financial Metrics (Year Ended Dec 31) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Rental revenue | $137,167 | $115,804 | | Interest expense | $25,230 | $19,696 | | Net income per share | $0.20 | $0.19 | | FFO per share and unit | $0.92 | $0.90 | | AFFO per share and unit | $0.98 | $0.95 | - During 2022, the company completed 14 acquisitions for an aggregate purchase price of $148.9 million[201] - In July 2022, a medical office building was sold for gross proceeds of $17.9 million, resulting in a gain of approximately $6.8 million[202] - The company amended its Credit Facility, adding a new $150 million term loan (Term Loan B), extending the revolver's maturity to August 2026, and transitioning from LIBOR to SOFR-based loans[204] Trends and Critical Accounting Estimates Positive trends include aging population and outpatient shift, while negative trends involve high interest rates and inflation, impacting critical accounting estimates - Positive operational trends include an aging population driving healthcare demand and a continuing shift towards outpatient care[210] - Negative financial trends include the increased interest rate and inflation environment, which has raised the company's cost of capital and reduced its ability to acquire assets[210] - Critical accounting estimates requiring significant management judgment include the allocation of purchase price for real estate investments, assessing assets for impairment, and determining the collectability of revenue[214][217] Consolidated Results of Operations Total revenue increased by $21.4 million in 2022 due to acquisitions, but expenses also rose significantly, leading to a slight increase in net income after a larger gain on sale Comparison of Operations (in thousands) | Item | 2022 | 2021 | $ Change | | :--- | :--- | :--- | :--- | | Total revenue | $137,283 | $115,936 | $21,347 | | Operating expenses | $25,188 | $15,488 | $9,700 | | Depreciation & Amortization | $56,723 | $46,875 | $9,848 | | Interest expense | $25,230 | $19,696 | $5,534 | | Gain on sale of investment property | $6,753 | $1,069 | $5,684 | | Net income | $19,996 | $18,342 | $1,654 | - The increase in revenue was primarily the result of rental income from facilities acquired during 2022 and a full year of revenue from 2021 acquisitions[229] - The increase in interest expense was due to higher average borrowings and increased interest rates during 2022. The weighted average interest rate of debt was 3.43% in 2022 compared to 3.06% in 2021[234][235] Liquidity and Capital Resources The company manages liquidity through cash flow, debt financing, and equity issuances, utilizing interest rate swaps to hedge its $500 million term loans - Short-term liquidity requirements include interest expense, G&A, operating expenses, acquisitions, and distributions[242] - The company's Credit Facility consists of a $350M Term Loan A, a $150M Term Loan B, and a $400M Revolver. As of February 24, 2023, there was $245.0 million of unutilized borrowing capacity[250] - The company uses interest rate swaps to hedge interest rate risk on its $500 million of term loans, fixing the SOFR component through their respective maturities[205][253] Cash Flow Summary (Year ended Dec 31, in millions) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $76.5 | $69.0 | | Net cash used in investing activities | ($137.3) | ($194.7) | | Net cash provided by financing activities | $62.4 | $127.7 | Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures like FFO, AFFO, and EBITDAre, used by management to evaluate operating performance FFO and AFFO Reconciliation (Year ended Dec 31, in thousands) | Line Item | 2022 | 2021 | | :--- | :--- | :--- | | Net income (loss) | $19,996 | $18,342 | | Less: Preferred stock dividends | (5,822) | (5,822) | | Depreciation and amortization expense | 56,611 | 46,764 | | Gain on sale of investment property | (6,753) | (1,069) | | FFO | $64,032 | $58,215 | | Adjustments (Straight-line rent, stock comp, etc.) | 4,012 | 3,146 | | AFFO | $68,044 | $61,361 | FFO and AFFO Per Share/Unit | Metric | 2022 | 2021 | | :--- | :--- | :--- | | FFO per share and unit | $0.92 | $0.90 | | AFFO per share and unit | $0.98 | $0.95 | EBITDAre and Adjusted EBITDAre (Year ended Dec 31, in thousands) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | EBITDAre | $95,196 | $83,844 | | Adjusted EBITDAre | $101,258 | $90,325 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk from variable-rate debt, which it mitigates using derivative instruments like interest rate swaps - The primary market risk exposure is interest rate risk from variable-rate debt[268] - As of December 31, 2022, the company had $145.7 million of unhedged variable-rate debt. A 100 basis point (1.0%) increase in SOFR would decrease annual cash flow by approximately $1.5 million[270] - The company uses derivative financial instruments, including interest rate swaps, to mitigate interest rate risk on future borrowings[272][273] Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements, notes, and the independent auditor's unqualified opinion Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on the financial statements and internal controls, identifying real estate acquisition valuation as a critical audit matter - The auditor, Deloitte & Touche LLP, issued an unqualified opinion on the company's financial statements and internal control over financial reporting[279][280] - The acquisition of real estate assets was identified as a Critical Audit Matter due to the significant estimates and high degree of auditor judgment required to evaluate the reasonableness of management's assumptions for purchase price allocation[283][284][287] Consolidated Financial Statements The consolidated financial statements show total assets of $1.39 billion, total liabilities of $744.2 million, and net income of $20.0 million for 2022 Consolidated Balance Sheet Highlights (as of Dec 31, 2022, in thousands) | Account | Amount | | :--- | :--- | | Investment in real estate, net | $1,285,959 | | Total assets | $1,393,261 | | Total debt, net | $694,119 | | Total liabilities | $744,196 | | Total equity | $649,065 | Consolidated Statement of Operations Highlights (Year ended Dec 31, 2022, in thousands) | Account | Amount | | :--- | :--- | | Total revenue | $137,283 | | Total expenses | $124,040 | | Net income | $19,996 | | Net income attributable to common stockholders | $13,320 | | Net income per share - basic and diluted | $0.20 | Notes to Consolidated Financial Statements The notes detail accounting policies for asset acquisitions, debt, equity, and stock-based compensation, including the $900 million credit facility and preferred stock terms - All 14 property acquisitions in 2022, totaling approximately $148.9 million, were accounted for as asset acquisitions, with transaction costs capitalized[307][345] - The company's debt is primarily composed of a $900 million unsecured syndicated credit facility, which includes $500 million in term loans and a $400 million revolver[357] - The company has 3.105 million shares of 7.50% Series A Cumulative Redeemable Preferred Stock outstanding with a liquidation preference of $25 per share[381] - The company grants time-based and performance-based LTIP unit awards to employees and directors. As of Dec 31, 2022, total unamortized compensation expense was approximately $4.5 million, to be recognized over a weighted average of 1.4 years[396][413] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[427] Item 9A. Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal controls over financial reporting were effective as of December 31, 2022 - Based on an evaluation as of December 31, 2022, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[428] - Management concluded that the company's internal controls over financial reporting were effective as of December 31, 2022[432] - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[435] PART III Items 10-14 Information for Items 10-14 is incorporated by reference from the company's definitive Proxy Statement, to be filed within 120 days after fiscal year-end - Information for Items 10 through 14 is incorporated by reference from the company's definitive Proxy Statement for its 2023 Annual Meeting of Stockholders[445][446][447][448][449] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including detailed real estate portfolio data and corporate governance documents - This section lists all financial statements, schedules, and exhibits filed with the report[452] - Includes Schedule III - Consolidated Real Estate and Accumulated Depreciation, which details the cost basis, additions, and accumulated depreciation for each property in the portfolio[453][454] Item 16. Form 10-K Summary The company indicates that there is no Form 10-K summary - None[463]