Chiron Real Estate Inc. (XRN) Q1 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the GMRE Q1 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeremy Hellman of The Equity Group. Thank you, Mr. Hellman. You may begin.

Thank you very much, and good morning, everyone. Last night, after the market close, Global Medical REIT Inc. issued the announcement of its financial results for the first quarter ended March 31, 2018. Certain statements contained herein may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and it is the company's intent that any such statements be protected by the safe harbor created thereby. These forward-looking statements are identified by the use of terms and phrases, such as anticipate, believe, could, estimate, expect, intend, may, should, plan, predict, project, will, continue and other similar terms and phrases, including any references to assumptions and forecasts of future results. Except for historical information, the matters set forth herein, including, but not limited to, any projections or forecasts of revenues, expenses, operating results, cash flow or other financial items, including our FFO and AFFO; any statements concerning our plans, strategies and objectives for future operations and our pipeline of acquisition opportunities and expected acquisition activity; any statements regarding future regulatory changes and their impact on our industry or business; and any statements regarding future economic conditions or performance are forward-looking statements. These forward-looking statements are based on our current expectations, estimates and assumptions and are subject to certain risks and uncertainties. Although we believe that the expectations, estimates and assumptions reflected in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Important factors that could cause our actual results to differ materially from estimates or projections contained in our forward-looking statements are set forth in the Risk Factors section of our annual report on Form 10-K, which was filed on Monday, March 12, our quarterly report on Form 10-Q, which we expect to file later today and elsewhere in the reports we have filed with the United States Securities and Exchange Commission. These risks factors include the risks that our financial projections, include projections for FFO and AFFO, may not be realized due to, among other things, lower-than-anticipated revenues or higher-than-anticipated expenses, or we may not be successful in completing all of the acquisitions or our -- in our investment pipeline or that we identify or pursue in the future. We do not intend and undertake no obligation to update any forward-looking statements. With that, I'd like to turn the call over to Jeff Busch, CEO of Global Medical REIT. Please go ahead, Jeff.

Thank you, Jeremy, and welcome, everyone, to our call. Joining me today are our Chief Financial Officer, Bob Kiernan; and our Chief Investment Officer, Alfonzo Leon. I'll start off with some acquisition highlights since our last call and also discuss our strategic and operational plans for the next few quarters. Bob will follow with his review of the company's financial results for the first quarter, and then Alfonzo will provide his review of the company's acquisition activity. Since our last call in early March, we closed the 2 portfolio acquisitions that we had under contract at the time: Orlando Health, which is a 5-building medical office portfolio in Orlando, Florida; and Memorial Health Systems, which is an on-campus, 4-building medical office portfolio in Belpre, Ohio. Following the Belpre closing, our gross investment in real estate now exceeds $600 million or annualized base rent of over $46 million. Although we continue to be flexible with our available capital, right now, we are primarily focused on terming out a portion of our revolving credit facility debt at attractive fixed interest rates. At the same time, we're also working with our credit facility lenders to better align the terms of that facility with our current business and credit profile that has improved. We hope that by the mid- or end of the third quarter, we will have accomplished these objectives regarding our debt profile. Now I would like to turn the call over to Bob Kiernan, our CFO, who'll provide details regarding the first quarter financial highlights and provide more detail regarding our efforts around managing our debt cost. Then Alfonzo Leon, our CIO, will discuss the company's profile -- portfolio and recent acquisition activity. After that, I'll return for closing remarks and questions.

Thank you, Jeff. I encourage everyone to review our press release from late yesterday afternoon. In addition, note that we intend to file our first quarter 10-Q later today, which will include additional details regarding our financial condition and performance. Now onto the financial highlights. Our first quarter 2018 total revenue was $11.6 million compared to $4.7 million during the first quarter of 2017. As has consistently been the case in prior quarters, our revenue growth was predominantly driven by the increased size of our property portfolio. Our total expenses for the first quarter of 2018 increased to $9.7 million from $6 million in the first quarter of 2017 as with the increased revenue, a good portion of our expense increase compared to the prior year, particularly depreciation and amortization expenses as well as interest expenses due to the increased size of our portfolio. Our efforts to manage our G&A expenses resulted in a year-over-year reduction of approximately $600,000 from $1.6 million during the first quarter of 2017 to $1 million during the first quarter of 2018. The primary drivers of the reduced cost were lowered on cash LTIP expenses and corporate legal costs, while our noncash LTIP expenses were reduced in Q1. Note that changes in our share price as well as grants made in 2018 will impact this respectively. Based on the current value of our shares, I'd expect that our current -- our quarterly run rate for the remainder of 2018 will increase to a range from $600,000 to $800,000. Our cash G&A expenses, including nonreimbursed property operating expenses were approximately $860,000 in the first quarter, which is up from the fourth quarter of 2017, primarily due to normal increases in professional fees experienced in the first quarter related to our 10-K and proxy filings with the SEC as well as tax filings. Looking ahead, I still forecast these cash G&A expenses to average approximately $800,000 per quarter in 2018, but I'm continuing to pursue opportunities to reduce costs below this level. Our 2 largest expense lines in the first quarter were depreciation and interest, both of which tend to be positively correlated with our portfolio growth. Depreciation expense was $2.9 million in the first quarter of 2018 versus $1.3 million in the prior year quarter. Interest expense was $2.7 million in the first quarter compared to $1.1 million in the first quarter of 2017. Our net income attributable to common shareholders in the first quarter was roughly $400,000 or $0.02 per share, which was up from a net loss of approximately $1.3 million or $0.07 loss per share for the comparable period in 2017. First quarter 2018 FFO increased to $0.18 per share, and AFFO improved to $0.16 per share versus $0.02 and $0.09, respectively, in the first quarter of 2017 and $0.14 and $0.15 per share, respectively, in the fourth quarter of 2017. Our FFO was greater than our AFFO in the first quarter, primarily due to the impact of straight-line deferred rental revenue adjustments, which impact AFFO but not FFO. Moving on to the balance sheet. As of March 31, 2018, our portfolio of real estate assets was carried on our balance sheet at a gross value of $537 million. Looking at the liability side of our balance sheet, we have total debt of approximately $268 million, which included $229 million that was drawn on our credit facility and $39 million of fixed rate notes payable. At March 31, 2018, the weighted average term of the company's debt was 2.44 years with a weighted average interest rate of 3.95%. As Jeff mentioned, we are currently exploring options for terming out a portion of our revolving credit facility debt at fixed rates in order to mitigate the risk of increasing rates, although it is too early to comment on which option or options we will ultimately pursue, we hope to be able to update the market soon with more detailed information on which path or paths we'll take. Also, as Jeff noted, given the growth of the company and our portfolio, we are working with our lenders to improve the terms of our credit facility in line with our larger portfolio and stronger credit profile. Ultimately, our objectives have a debt structure, whereby assets are placed on the credit facility temporarily and then move to a longer-term fixed-rate financing on a regular basis with an option to keep assets in the credit facility, we feel rates are more attractive there. With that, I'll turn things over to Alfonzo to discuss the company's acquisition activity.

Thank you, Bob. As we've grown, we've continued to solidify our positioning in the market as a preferred capital partner. Our network of relationships and sources continues to expand with every deal we close. We are increasingly able to dictate pricing as evidenced by the cap rates of our recently closed transactions. The average cap rate of the closings year-to-date, which includes the first quarter and the Belpre deal in April was 8.15%. We are seeing a lot of opportunities in the market, the quality of the assets that has been made available in the past year is truly the highest I've seen in, like, 18 years in the sector. One of our competitive advantages in our space is our reputation as an acquirer that closes properties you put under contract in a timely manner. This reputation helps fuel our deal flow pipeline and in some instances, results in deals coming back to us at our price. We are being selective, persistent and diligent. Updating our significant acquisition activity. On April [ 20 ], we completed the purchase of a $64.2 million 4-building portfolio on-campus at Belpre, Ohio at an approximate 8% cap that is 100% leased and Memorial Health System based in Marietta, Ohio. Marietta Health is a leading provider in Washington County with a 70% market share with 2,500 employees and over 200 accredited physicians in their medical staff. They are a vertically integrated health system that has won many awards for high-quality care and that employs over 90% of the physicians in the market. The system has a strong management team that thinks very strategically, does a great job of recruiting physicians and has shown a good track record of growing profitable service lines. Net revenues of the system grew from $319 million in fiscal year 2013 to $463 million annualized in the fiscal year 2018 year-to-date. The portfolio required that the system second hospital campus that was built and expanded between 2011 and 2017 and includes the flagship Strecker Cancer Center, an imaging center and an ER department and a comprehensive mix of primary care physicians and specialists. In our opinion, the Belpre campus is the best health campus and a purpose-built Marietta, Belpre, MSA that provides the system much-needed expansion space that they could not accommodate on their Marietta campus. We continue to see a robust pipeline of opportunities and are focusing our efforts on those deals that offer us the best combination of attractive cap rates, quality tenants and geographic exposure. With that, I'll hand the call back to Jeff.

Thanks, Alfonso. As many of you know, my team and I worked tirelessly to create shareholder value. In that frame, and as Bob discussed earlier, we've been actively pursuing ways to fix our interest rate expense during an otherwise quiet time in the capital markets. We view those in the overall capital markets for REIT as an opportunity to continue creating shareholder value by improving our balance sheet and lowering our expenses as well as fostering relationships with potential sellers and tenants so we will be in the best position. We also value our relationships with foreign sources of capital that gives us a competitive advantage over other REITs that tend to focus more domestically when raising capital. In summary, we strive to be active when others are not. And as many of you know, my team and I are always in touch with our stockholders as we believe investor outreach is a vital component of our corporate DNA. We are very proud of what we have accomplished so far and more importantly, we are excited about our future, and we hope our stockholders feel the same way. Thanks, again, to all of you for joining us on the call today. Operator, let's open up for questions.

[Operator Instructions] Our first question comes from the line of Barry Oxford with D.A. Davidson.

When you guys are looking at your acquisition pipeline, Jeff, could you kind of characterize that, is that newer buildings for outpatient surgeries? iCare got some -- all that kind of stuff, give us a little characteristic would be great.

I'll let Alfonzo take this question. He's out there [ in the field ]. Sorry.

Barry, so you're talking about portfolio or future pipeline?

Future pipeline. I get the portfolio, but this is future pipeline, if you kind of characterize what you're looking at, if there's any specific types of -- or whether, look, it's just consistent with our portfolio?

Generally consistent with our portfolio, the market doesn't come out with a steady supply of any asset types, in particular. There'll be -- it's the supply by asset type comes out in -- it's lumpy. So you'll get a whole bunch of MOBs that become available, and then you'll have a whole bunch of rehab hospitals that become available. So we're being very selective as we see opportunities but not necessarily focusing exclusively on any one type.

Great, great. And then the second question is, you all look at spread investing activity. Has that spread come in as of late or not necessarily?

That question in reference to cap rates?

Cap rates versus your cost to capital, yes.

Well, I'll start with the cap rates. I mean, so -- and I guess, before I start there, I'll start with focusing a second on a yield curve. So the short end of the yield curve is high demand of capital and the long side of the yield curve is driven by inflation mostly. And cap rates are more correlated with the 10-year than it is with the short term. So cap rates haven't really moved as much. I'd say it's moved about as much as the 10-year if that, and it really depends on the asset types. The bulk of capital in the health care real estate market is pursuing the same thing, which is on-campus, investment-grade- rated system assets. And my sense of those cap rates is that it hasn't really moved that much. But in the niche that we're focusing on, it has moved a bit. I'd say, probably 25 to 50 basis points up from where it was 6 months ago.

Okay. Great, great. And then my last question is for Jeff. Jeff, I know it runs a little counter-intuitive what you guys are trying to do as far as grow the portfolio and grow the company, but how do you look at share buybacks?

I don't see share buybacks at this time, partly because our goals are to get on the indexes. And the indexes are out there and somewhere in the $300 million to $400 million -- more $400 million range, the others have joined the index have seen a short -- in a short period of time a 40% rise. So it's -- ought to be counter-intuitive to do a share buyback even though, especially when the stock was in the 6s, that became a real consideration, and we had cash in the bank. It could have been a quick 11% return, but it's sort of a short-term benefit, may have even helped in some of the coverage ratios. Would have been a short-term benefit, but I think, long term in building a company, I've always built my companies on a long-term basis and my long-term goal is to get a -- equity and hit the indexes and get carried by the indexes to another level and then make more profit because we stay in this sort of higher range of rates because we're running around 8% -- or 7.9% averages in our cap rates and purchases and have a lower cost of capital and then excel in our profit. So it wasn't consideration, if I was going to do it, I probably would have done in those 6s -- was very tempting.

[Operator Instructions] Our next question comes from the line of Brian Maher with B. Riley FBR.

So kind of following up on Barry's questioning with the buyback question. Yes, Jeff, what do you attribute to share price weakness in the first quarter to be? I mean, our phone was ringing off the hook when you were in the 6s. Is there something that you saw on the marketplace during your discussion with investors that led you to think that, that was really unusual?

Yes. I did feel that, that was quite unusual. Essentially, we're a small cap, and the big caps are all coming down, and most of the investors were rather buying the discounts and the big caps. You could buy Aventis, or you buy somebody else's discounted, and maybe we're a little bit more discounted. Well, we seem to be moving up more towards our proper levels, even in a sort of depressed market where many of the funds had less money. A lot are out there searching for larger purchases also, in my view. And you couldn't buy a lot in the 6s. I mean, there weren't really sellers. There was just -- it was dropping because there wasn't buyers, in my view. So we're now moving up somewhat. My real belief on this, and I've had companies before that I ran the control stake of other public companies through downturns, is you just got to run a good business. If we run a good business, we buy good solid properties. Our team does the due diligence. We don't panic in any mode that the price is up or the price is down. And we don't dilute our investors, and we stay to a investor plan, which is essentially moving towards covering our dividend, moving towards securing our interest rates, moving towards getting the capital eventually to be over $400 million or [ $300-something million ] to get on indexes. We are on some indexes, but other indexes keep coming. Eventually, we could get the share prices to compress instead of paying 10% or 11%, we could be paying what the other start paying in the market, which is a 4% or 5%, which has an 80% to 100% growth potential for our investors. It's just -- we have a little bit of kickback in the market, but we're still building the business solidly, buying very good properties, and that's our job.

And then just as a kind of a 2-part question here. When you look at your capital stack and you think about your acquisition capabilities for the balance of this year, what does that [ look like ]? And who are you bumping up against when you're bidding for assets, mostly?

Okay. So I'll answer the second half of that question first, who we're bumping up against. So it's not consistent, and it's few and in some instances, nobody. We're getting pulled into opportunities, unique situations, for example, if there was a deal that was going on the path with somebody else and [ they thought of a ] contract, we're benefiting from people knowing us and liking us and calling us with an exclusive to take over. But no -- I'd say, for the most part, definitely not the big REITs, not the big private equity funds. You're looking at really the smaller groups that are more niche players that we come across, but it's not consistent. It's sporadic, and it's a bit random. In terms of capacity, I'll start, and I'll let Bob add, but we've got -- we still have funds that we could pull from our credit facility to pursue acquisitions. Other avenues that we've been discussing and exploring is using our OP units and in essence, pursuing all strategies that are -- I'm sure everyone's familiar with in terms of controlling the business. So from my perspective, we still have a pretty busy third quarter. And with that, I'll throw it back to Bob.

No, Alfonzo, that's exactly right. So we -- after the Belpre acquisition, we moved to have a -- our borrowing is on a credit facility up to around $290 million. So there's room above that, and as Alfonzo said, the OP unit is an option for us, $5.5 million in the Belpre transaction was done with OP units that were marked at a -- from a transaction perspective at a value of $9. And so that continues to be an option for us as well.

[Operator Instructions] There are no further questions at the time -- at this time. I'd like to turn the call back to management for closing comments.

We look forward to speaking with each of you, again, on our 2018 second quarter conference call. Thanks again.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.