Global Medical REIT(GMRE) - 2023 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The unaudited condensed consolidated financial statements detail the company's financial position and performance Condensed Consolidated Balance Sheets | Metric | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total assets | $1,302,520 | $1,393,261 | | Investment in real estate, net | $1,192,488 | $1,285,959 | | Total liabilities | $668,872 | $744,196 | | Total equity | $633,648 | $649,065 | Condensed Consolidated Statements of Operations | Metric | Three Months Ended Sep 30, 2023 (in thousands) | Three Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $35,507 | $35,406 | $108,088 | $100,977 | | Total expenses | $32,963 | $32,130 | $102,465 | $89,582 | | Net income | $4,833 | $10,029 | $21,183 | $18,148 | | Net income attributable to common stockholders | $3,138 | $8,057 | $15,630 | $12,952 | | Net income attributable to common stockholders per share – basic and diluted | $0.05 | $0.12 | $0.24 | $0.20 | Condensed Consolidated Statements of Comprehensive Income | Metric | Three Months Ended Sep 30, 2023 (in thousands) | Three Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net income | $4,833 | $10,029 | $21,183 | $18,148 | | Increase in fair value of interest rate swap agreements | $2,520 | $20,356 | $3,705 | $43,519 | | Comprehensive income | $7,353 | $30,385 | $24,888 | $61,667 | Condensed Consolidated Statements of Equity For the Nine Months Ended September 30, 2023 (in thousands) | Metric | Balance Dec 31, 2022 | Net Income | Dividends to Common Stockholders | Dividends to Preferred Stockholders | Balance Sep 30, 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Global Medical REIT Inc stockholders' equity | $632,984 | $19,996 | $(41,299) | $(4,366) | $611,447 | | Noncontrolling interest | $16,081 | $1,187 | — | — | $22,201 | | Total Equity | $649,065 | $21,183 | $(41,299) | $(4,366) | $633,648 | For the Nine Months Ended September 30, 2022 (in thousands) | Metric | Balance Dec 31, 2021 | Net Income | Dividends to Common Stockholders | Dividends to Preferred Stockholders | Balance Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Global Medical REIT Inc stockholders' equity | $622,785 | $17,318 | $(41,251) | $(4,366) | $648,666 | | Noncontrolling interest | $14,792 | $830 | — | — | $15,918 | | Total Equity | $637,577 | $18,148 | $(41,251) | $(4,366) | $664,584 | Condensed Consolidated Statements of Cash Flows | Metric | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $50,315 | $58,233 | | Net cash provided by (used in) investing activities | $70,730 | $(135,842) | | Net cash (used in) provided by financing activities | $(127,888) | $78,445 | | Net (decrease) increase in cash and cash equivalents and restricted cash | $(6,843) | $836 | | Cash and cash equivalents and restricted cash—end of period | $7,612 | $13,595 | Notes to the Unaudited Condensed Consolidated Financial Statements Note 1 – Organization - Global Medical REIT Inc is a Maryland corporation and internally managed real estate investment trust (REIT) that owns and acquires healthcare facilities, leasing them to physician groups and healthcare systems[24] - The Company conducts operations through its subsidiary, Global Medical REIT L.P, and holds a 92.91% limited partner interest in the Operating Partnership as of September 30, 2023[24] Note 2 – Summary of Significant Accounting Policies - The condensed consolidated financial statements are unaudited and prepared in accordance with U.S GAAP and SEC rules, consolidating the Company and its wholly-owned subsidiaries[25][26] - Acquisitions are accounted for as either business combinations or asset acquisitions, with purchase price allocated to tangible and intangible assets/liabilities based on fair values[29][30][31][32] - Revenue primarily consists of rental revenue from operating leases, recognized on a straight-line basis for fixed escalators, and expense recoveries are recognized on a gross basis[33] | Metric | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $1,281 | $4,016 | | Restricted cash | $6,331 | $10,439 | | Total cash and cash equivalents and restricted cash | $7,612 | $14,455 | | Tenant receivables, net | $7,527 | $8,040 | | Escrow deposits | $9,861 | $7,833 | | Deferred assets | $26,748 | $29,616 | | Derivative asset | $38,379 | $34,705 | | Other assets | $13,713 | $6,550 | | Goodwill | $5,903 | $5,903 | | Other liabilities | $12,138 | $7,363 | Note 3 – Property Portfolio - During the nine months ended September 30, 2023, the Company completed one asset acquisition and three property dispositions, generating aggregate gross proceeds of $80.5 million and a gain of $15.6 million[50][51] - As of September 30, 2023, the Company had approximately $24.0 million in aggregate capital improvement commitments, with $9.7 million expected in the next twelve months[55] | Metric | December 31, 2022 (in thousands) | Additions (in thousands) | Dispositions (in thousands) | September 30, 2023 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Gross Investment in Real Estate | $1,484,177 | $10,656 | $(69,827) | $1,425,006 | | Depreciation expense (9M period) | N/A | N/A | N/A | $31,062 (2023) / $29,428 (2022) | | Lease Intangible Assets (Net) | $91,175 | N/A | N/A | $70,286 | | Lease Intangible Liabilities (Net)| $7,613 | N/A | N/A | $5,860 | Note 4 – Credit Facility, Notes Payable and Derivative Instruments - The Company has a $900 million unsecured syndicated Credit Facility, consisting of $500 million in term loans and a $400 million revolver, with a $500 million accordion feature[60] - Management believes it complied with all financial and non-financial covenants of the Credit Facility as of September 30, 2023[61] - During the nine months ended September 30, 2023, the Company made a net repayment of $77.3 million under the Credit Facility[63] - The Company uses ten interest rate swaps and three forward-starting interest rate swaps to hedge the SOFR component of its Term Loans, fixing rates through their respective maturities[76][77] | Metric | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Credit Facility, net | $560,783 | $636,447 | | Notes payable, net | $56,823 | $57,672 | | Derivative asset (interest rate swaps) | $38,379 | $34,705 | | Weighted average interest rate | 3.78% | 4.20% | | Weighted average term | 3.1 years | 3.9 years | Note 5 – Equity - As of September 30, 2023, there were 3,105 shares of Series A Preferred Stock outstanding, with a 7.50% annual dividend rate ($1.875 per share)[84][85] - Common stock outstanding increased slightly to 65,565 shares as of September 30, 2023, from 65,518 shares at December 31, 2022[86] - Total dividends paid on common stock, LTIP Units, and OP Units for the nine months ended September 30, 2023, aggregated $44.2 million[87] - The Operating Partnership issued 577 OP Units valued at $5.482 million for a facility acquisition during the nine months ended September 30, 2023[91] Note 6 – Related Party Transactions - Amounts due from related parties, primarily for taxes paid on behalf of LTIP Unit and OP Unit holders, increased to $289,000 as of September 30, 2023, from $200,000 at December 31, 2022[93] Note 7 – Stock-Based Compensation - The 2016 Equity Incentive Plan is used for recruiting and retaining employees, directors, and officers, with 844 common stock shares remaining available for grant as of September 30, 2023[94][95] - During the nine months ended September 30, 2023, 289 time-based LTIP Units were issued, and 47 vested LTIP Units were redeemed for common stock[96] - As of September 30, 2023, there were 2,756 LTIP Units outstanding (2,270 vested, 486 unvested) and 468 total target performance awards (2021, 2022, and 2023 programs)[96][98] - Stock compensation expense for the nine months ended September 30, 2023, was $3.02 million, with approximately $6.0 million in unamortized expense expected to be recognized over a weighted average remaining period of 1.5 years[110][111] Note 8 – Leases - As a lessor, the Company's operating leases generated $108.0 million in rental revenue for the nine months ended September 30, 2023, with a portfolio-average-lease-years remaining of approximately 10 years[113][117] - Future aggregate annual cash to be received from noncancelable operating leases totals $731.4 million[118] - As a lessee, the Company recorded a right of use asset and liability of $4.634 million for its new corporate headquarters lease, and has seven buildings on operating ground leases with a weighted average remaining term of approximately 43 years[119] - The operating lease liability for ground leases was $7.614 million as of September 30, 2023[120] - No single tenant accounted for more than 10% of the Company's rental revenue during the nine months ended September 30, 2023[121] Note 9 – Commitments and Contingencies - The Company is not currently subject to any material litigation or environmental liabilities that would have a material adverse effect on its financial position, results of operations, or cash flows[123][124] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, and key business factors Special Note Regarding Forward-Looking Statements - The report contains forward-looking statements, identifiable by terms such as 'believes,' 'expects,' 'may,' 'will,' 'should,' 'seeks,' 'intends,' 'plans,' 'estimates,' or 'anticipates,' which are subject to numerous risks and uncertainties[127] - Key risk factors include difficulties in acquisitions, tenant defaults, increases in interest rates and operating costs, macroeconomic and geopolitical factors, the ongoing COVID-19 epidemic, and the ability to satisfy debt covenants and maintain REIT qualification[128][131] Objective of MD&A - The MD&A aims to provide a narrative explanation of financial statements from management's perspective, enhance financial disclosure, and offer insights into the quality and variability of earnings and cash flow[133][137] Overview - Global Medical REIT Inc is a Maryland corporation and internally managed REIT that owns and acquires healthcare facilities, leasing them primarily under medium to long-term triple net leases with contractual rent escalation provisions[134][135] - The Company operates through Global Medical REIT L.P, with the Company owning 92.91% of the outstanding common operating partnership units as of September 30, 2023[134] - Primary expenses include depreciation, interest, and general and administrative expenses, with acquisitions financed through a mixture of debt and equity[135] Business Overview and Strategy - The Company's business strategy focuses on investing in healthcare properties that offer attractive returns and are operated by profitable physician groups or healthcare systems, aiming to provide reliable dividends and stock price appreciation[136] - Investment priorities include medical office buildings and decentralized healthcare facilities, small to mid-sized facilities in secondary markets serving an aging population, and opportunistic acquisitions of acute-care hospitals, corporate offices, and behavioral health facilities[138] - Most facilities are leased to single-tenants under triple-net leases, with some multi-tenant properties under gross or modified gross lease structures[140] Corporate Sustainability and Social Responsibility - The Company integrates environmental sustainability, social responsibility, and strong governance practices, with the Board of Directors leading ESG efforts through a standing ESG committee[141][142] - A second Corporate Social Responsibility Report was released in June 2023, detailing progress in ESG areas[143] - The Company prioritizes energy efficiency and sustainability in investment evaluations, monitors its portfolio for climate risk factors using software, and explores ways to mitigate climate impact through proactive asset management[145] Impact of Increased Interest Rates and Inflation - Elevated U.S inflation and Federal Reserve interest rate hikes (Federal Funds Rate at 5.25%-5.50%) have negatively impacted operating profits and delayed investment portfolio growth due to higher interest costs on floating rate borrowings (SOFR increased from 5.06% to 5.32% from July to November 2023)[147][149] - While triple-net leases offer some insulation from operating expense inflation, the long-term nature of leases limits the ability to quickly increase rents to fully offset rising interest rates and other costs[150] Continuing Impact of COVID-19 - The COVID-19 epidemic has led to material increases in labor costs for healthcare systems, contributing to rapid inflation in 2022 and remaining elevated through Q3 2023[151] - The continued spread of COVID-19 variants could prolong disruptions to the operations of the Company and its tenants[152] Executive Summary | Metric | Three Months Ended Sep 30, 2023 (in thousands) | Three Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Rental revenue | $35,487 | $35,347 | $108,003 | $100,877 | | Interest expense | $7,170 | $6,963 | $23,909 | $17,166 | | Gain on sale of investment properties | $2,289 | $6,753 | $15,560 | $6,753 | | Net income attributable to common stockholders per share | $0.05 | $0.12 | $0.24 | $0.20 | | FFO per share and unit | $0.22 | $0.23 | $0.64 | $0.70 | | AFFO per share and unit | $0.23 | $0.25 | $0.69 | $0.74 | | Dividends per share of common stock | $0.21 | $0.21 | $0.63 | $0.63 | | Metric | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Investment in real estate, gross | $1,425,006 | $1,484,177 | | Total debt, net | $617,606 | $694,119 | | Weighted average interest rate | 3.78% | 4.20% | | Total equity (including noncontrolling interest) | $633,648 | $649,065 | | Net leasable square feet | 4,747,336 | 4,895,635 | Our Properties - During the nine months ended September 30, 2023, the Company completed one acquisition for $6.7 million, adding 18,698 leasable square feet and $0.5 million in annualized base rent[157] - Three property dispositions were completed during the nine months ended September 30, 2023, generating aggregate gross proceeds of $80.5 million and a $15.6 million gain[158] Capital Raising Activity - No shares were sold under the $300 million ATM Program during the nine months ended September 30, 2023[159] Debt Activity - During the nine months ended September 30, 2023, the Company made a net repayment of $77.3 million under the Credit Facility, resulting in an outstanding balance of $560.8 million[160] - As of November 6, 2023, the Company had $317.6 million in unutilized borrowing capacity under the Revolver[160] Trends Which May Influence Our Results of Operations - Positive trends include an aging population, a continuing shift towards outpatient care, and physician practice group and hospital consolidation, which are expected to strengthen tenant credit quality and demand for healthcare facilities[162] - Negative trends include the increased interest rate and inflation environment, leading to elevated cost of capital and reduced acquisition ability, and the continuation of the COVID-19 epidemic, causing increased labor costs and operational disruptions[161][164][166] - Changes in third-party reimbursement methods and policies are also a negative trend, potentially impacting tenants' ability to pay rent[166] Critical Accounting Estimates - The preparation of financial statements requires management to use judgment, estimates, and assumptions, which are re-evaluated periodically, and actual results may differ from these estimates[165] Consolidated Results of Operations - Financial results for the three and nine months ended September 30, 2023, were primarily influenced by higher interest rates, significantly lower acquisition activity, and increased disposition activity[166] - The weighted average interest rate of debt increased to 3.98% for the three months ended September 30, 2023 (from 3.65% in 2022) and to 4.22% for the nine months ended September 30, 2023 (from 3.18% in 2022)[176][190] | Metric | Three Months Ended Sep 30, 2023 (in thousands) | Three Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $35,507 (↑ $0.1M) | $35,406 | $108,088 (↑ $7.1M) | $100,977 | | General and Administrative | $4,367 (↑ $0.4M) | $3,961 | $12,633 (↑ $0.1M) | $12,494 | | Operating Expenses | $7,231 (↑ $0.5M) | $6,679 | $21,989 (↑ $3.9M) | $18,050 | | Depreciation Expense | $10,100 (↓ $0.028M) | $10,128 | $31,062 (↑ $1.7M) | $29,428 | | Amortization Expense | $4,095 (↓ $0.2M) | $4,287 | $12,828 (↑ $0.6M) | $12,202 | | Interest Expense | $7,170 (↑ $0.2M) | $6,963 | $23,909 (↑ $6.7M) | $17,166 | | Gain on Sale of Investment Properties | $2,289 (↓ $4.5M) | $6,753 | $15,560 (↑ $8.8M) | $6,753 | | Net Income | $4,833 (↓ $5.2M) | $10,029 | $21,183 (↑ $3.0M) | $18,148 | Assets and Liabilities - Investments in real estate, net, decreased to $1.2 billion as of September 30, 2023, from $1.3 billion at December 31, 2022, due to one acquisition and six property dispositions[195] - Cash and cash equivalents and restricted cash decreased to $7.6 million as of September 30, 2023, from $14.5 million at December 31, 2022, primarily due to net debt repayments, dividends, and capital expenditures, partially offset by property sales and operating cash[195][196] - Total liabilities decreased to $668.9 million as of September 30, 2023, from $744.2 million at December 31, 2022, mainly due to lower net borrowings outstanding[197] Liquidity and Capital Resources - Short-term liquidity requirements include debt payments, operating expenses, acquisitions, and distributions, while long-term needs cover acquisitions, capital improvements, and scheduled debt maturities[198] - The Company expects to meet liquidity needs through internal sources (cash flow from operations, property dispositions) and external sources (debt financing, equity issuances, OP Units)[199][200][201] - The Credit Facility has $317.6 million in unutilized borrowing capacity as of November 6, 2023, and the Company's fixed debt totaled $557.2 million gross at September 30, 2023, with a weighted average interest rate of 3.42%[202][207] - Net cash provided by operating activities decreased to $50.3 million for the nine months ended September 30, 2023 (from $58.2 million in 2022), while investing activities shifted to a net cash provided of $70.7 million (from net cash used of $135.8 million in 2022)[208][209] - Net cash used in financing activities significantly increased to $127.9 million for the nine months ended September 30, 2023 (from net cash provided of $78.4 million in 2022), primarily due to net repayments on the Credit Facility and no common equity offerings[210] Non-GAAP Financial Measures - The Company uses non-GAAP financial measures, Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO), as supplemental indicators of operating performance, consistent with REIT industry practices[211][213][216] - FFO is defined as GAAP net income before noncontrolling interests, excluding gains/losses from property sales and extraordinary items, less preferred stock dividends, plus real estate-related depreciation and amortization[214] - AFFO further adjusts FFO for certain cash and non-cash items, including recurring acquisition/disposition costs, straight-line deferred rental revenue, stock-based compensation, and amortization of above/below market leases and debt issuance costs[215] | Metric | Three Months Ended Sep 30, 2023 (in thousands) | Three Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | FFO | $15,250 | $16,208 | $45,053 | $48,576 | | AFFO | $16,541 | $17,133 | $48,361 | $51,523 | | EBITDAre | $23,909 | $24,654 | $73,422 | $70,191 | | Adjusted EBITDAre | $25,328 | $26,026 | $77,298 | $74,783 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's exposure to market risks, primarily interest rate fluctuations, is detailed along with mitigation strategies - The Company's primary market risk exposure is interest rate risk, arising from variable-rate debt, including borrowings under the Credit Facility[219][220] - As of September 30, 2023, the Company had $68.4 million of unhedged variable-rate borrowings outstanding under the Revolver[221] - A 100 basis point increase in SOFR would decrease annual cash flow by approximately $0.7 million, while a 100 basis point decrease would increase it by the same amount[221] - The Company uses derivative financial instruments, such as interest rate swaps and caps, to manage interest rate risk and lower borrowing costs, without engaging in speculative transactions[222][223] Item 4. Controls and Procedures Management confirms the effectiveness of disclosure controls and reports no material changes to internal financial reporting controls - The principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2023[225][227] - No changes were made to the Company's internal control over financial reporting during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[229] PART II OTHER INFORMATION Item 1. Legal Proceedings The company reports no current involvement in any material legal proceedings or litigation - The Company is not presently subject to any material legal proceedings or litigation, nor is any material litigation threatened against it[231] Item 1A. Risk Factors No material changes to risk factors disclosed in the Annual Report on Form 10-K occurred during the reporting period - There were no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, during the nine months ended September 30, 2023[232] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports that there were no unregistered sales of equity securities or use of proceeds to disclose - None[233] Item 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities during the reporting period - None[234] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the Company - Not applicable[235] Item 5. Other Information This section reports that there is no other information to disclose - None[236] Item 6. Exhibits A list of all exhibits filed with the Form 10-Q is provided, including key corporate and certification documents - The exhibits include Articles of Restatement, Amended and Restated Bylaws, Specimen Common Stock and Preferred Stock Certificates, Certifications of Principal Executive and Financial Officers (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act), and Inline XBRL Taxonomy Documents[238] Signatures The report is certified by the official signatures of the Chief Executive Officer and Chief Financial Officer - The report was signed on November 7, 2023, by Jeffrey M Busch, Chief Executive Officer, and Robert J Kiernan, Chief Financial Officer[242]