Chiron Real Estate Inc. (XRN) Q2 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Global Medical REIT's 2018 Second Quarter Earnings Conference Call. [Operator Instructions] Please note that today's conference call is being recorded with a webcast replay available for the next 90 days. The dial-in details for the replay can be found in yesterday's press release and can be attained from the Investor Relations section of the company's website at www.globalmedicalreit.com [Operator Instructions] I will now turn the conference call over to Mary Jensen.

Thank you, operator. Good morning, everyone. Last night, after the market closed, Global Medical REIT issued the announcement of its financial results for the second quarter ended June 30, 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 in 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 the 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, including information about our current and prospective tenants; any statement regarding future dividend payments; any statement regarding future capital-raising 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 our 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 in our Annual Report on Form 10-K and our Quarterly Report on Form 10-Q and elsewhere in the reports we have filed with the United States Security and Exchange Commissions. These risk 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 in our investment pipeline or that we identify or pursue in the future. We do not intend to 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, Mary, 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 highlights since our last call and also discuss our strategic and operational plans for the remainder of the year. Bob would follow up with his review of the company's financial results for the second quarter, and Alfonzo will provide his review of the properties -- the company's acquisition activity. I am pleased with our accomplishments through the first half of 2018. In particular, we achieved full quarterly AFFO dividend coverage in the second quarter, which is a major milestone for us. This has been, and will continue to be, one of our key priorities as we strive for consistent coverage of our dividend. During the second quarter, we continued to be active acquirers of net lease medical office properties via the previously announced acquisition of a portfolio of 4 medical office buildings on campus in Belpre, Ohio, for an aggregate purchase price of $64 million. Since June 30, 2018, we have closed 2 acquisitions for a total purchase price of $8.7 million at a weighted average cap of 8%. Additionally, since the end of the second quarter, we have 3 facilities under contract for a combined purchase price of $29.9 million at a weighted average cap rate of 8.2%. These medical assets are triple-net leased to tenants located in our target markets, where we continue to build efficiencies of scale across the portfolio while systematically improving our tenant quality. For example, our tenant located in Great Bend, Kansas was recently acquired by The University of Kansas Hospital System. Attracting a AA- credit tenant demonstrates the demand for our facilities and validates that our underwriting process identifies value for our investors. Including what we have closed to date, gross investment now exceeds $611 million, generating estimate annual cash rent of approximately $47 million. Moving on to our capital structure. Yesterday, with the strong support and assistance from our lenders, which we thank very much, we amended our credit facility, which includes significant rate reductions across our pricing grid and obtained a term loan component that helped us deliver on our promise to term out our -- and fix a large portion of our debt. Bob will get into the greater details in this regard. Finally, we have made strategic inroads in establishing a solid network with Israeli debt and equity markets. We will continue to foster these relationship as part of our ongoing consideration to have a diversified capital sources. Now I'd like to turn the call over to Bob Kiernan, our CFO, who'll provide details regarding the second quarter financial highlights and provide more details regarding our efforts around managing our debt cost. Following Bob, Alfonzo Leon, our Chief Investment Officer, will discuss the company's investment portfolio.

Thank you, Jeff. Yesterday, we posted a new earnings package to our website, which provides more details on our financial position and operating results. Each quarter, we will try to add additional pertinent detail that will allow you to better understand our operating strategy and business platform. In that regard, I encourage everyone to review this package and let us know if you have any questions or suggestions. In addition, we intend to file our second quarter 10-Q later today. Now on to our 2018 second quarter results. Total revenue was $13.2 million for the second quarter of 2018 compared to $7.4 million in the second quarter of 2017. In the first half of 2018, we generated total revenues of $24.8 million compared to $12.1 million in the first half of 2017. Additionally and on a sequential basis, total revenue increased almost 14% from $11.6 million in the from -- in the first quarter of 2018. Revenue growth continued to be positively impacted by our acquisition volumes and the terms of our underlying leases. Total expenses for the second quarter of 2018 increased to $11.9 million from $8 million in the second quarter of 2017. For the first half of 2018, total expenses increased to $21.5 million compared to $14 million in the first half of 2017. Depreciation and amortization expenses as well as interest expense remain large components of our total expenses as we continued to be an active acquirer. G&A expenses as a percent of our revenues continued to decline as a result of our cost-reduction efforts and increased portfolio size. For the 3 months ended June 30, 2018, G&A as a percent of our total revenues was 13% compared to 25% in the comparative period. For the first half of 2018, G&A as a percent of total revenue was 11% compared to 28% in the comparative period. These results were primarily impacted by an increase in noncash LTIP expense, offset by a decrease in Sarbanes-Oxley implementation costs and other professional fees. Please note that sequentially, our noncash LTIP expenses increased from $182,000 in Q1 to just under $1.1 million in Q2. This increase was driven by the increase in our share price at June 30 compared to March 31. Looking ahead, based on our June 30 share price, our stock compensation cost in the second half of 2018 will be slightly above $700,000 in each quarter. As we continue to look for ways to actively reduce cash G&A expenses, we anticipate that in the second half of the year, these G&A costs will range between $1.5 million to $1.7 million or $750,000 to $850,000 per quarter, representing annual run rate ranging from between $3 million and $3.4 million. Our 2 largest expense items in the second quarter were depreciation and interest, both of which are positively correlated with our portfolio growth. Depreciation expense was $3.4 million in the second quarter of 2018 versus $1.9 million in the prior year quarter. For the first 6 months of 2018, depreciation totaled $6.4 million compared to $3.2 million in the comparative period. Interest expense was $3.9 million in the second quarter compared to $2 million in the second quarter of 2017. For the first 6 months of 2018, interest expense totaled $6.6 million compared to $3.1 million in the same period last year. These increases in interest expense during the second quarter and first half of the year were primarily due to the higher average borrowings during the periods. Reflecting the impact of increased rental revenue, we had a net loss attributable to common shareholders in the second quarter of $64,000 or breakeven on a per-share basis, which was up from a net loss of approximately $623,000 or $0.04 per share for the comparable period in 2017. For the first half of 2018, net income attributable to common shareholders increased to approximately $346,000 or $0.02 per share compared to a net loss of approximately $1.9 million or $0.11 per share in the comparative period. Due to higher rental revenue throughout our portfolio, second quarter 2018 FFO increased to $0.19 per share, and AFFO improved to $0.20 per share versus $0.10 and $0.14, respectively, in the second quarter of 2017. On a sequential basis, FFO and AFFO increased from $0.18 and $0.16 per share, respectively. For the first half of 2018, FFO increased to $0.37 per share compared to $0.12 per share in the comparative period. AFFO in the first half of 2018 increased to $0.36 per share compared to $0.23 per share in the same period last year. For the first half of the year, FFO was greater than AFFO primarily due to the impact of straight-line deferred rental revenue adjustments, which impacted AFFO but not FFO. Moving on to the balance sheet. As of June 30, 2018, our portfolio of real estate assets was carried in our balance sheet at a gross value of $602 million. Looking at the liability side of our balance sheet. We have total debt of approximately $327 million, which included $288 million that was drawn on our credit facility and $39 million of fixed rate notes payable. At June 30, 2018, the weighted average term of the company's debt was 2.05 years with a weighted average interest rate of 4.38%. Subsequent to quarter -- the end of the quarter, we amended our credit facility, increased its capacity to $350 million, which includes a $250 million revolving credit facility and a new $100 million 5-year term loan. We also extended the term of the revolver to August 22, with a 1-year extension option. The facility also includes an accordion feature to increase the aggregate capacity up to $500 million. In addition, we were able to hedge our interest rate risk on the term loan by entering into a swap agreement that essentially fixes the LIBOR component on the term loan to 2.88%. Lastly, in June, our Board of Directors declared a second quarter cash dividend of $0.20 per share, representing an annualized rate of $0.80 per share and a dividend yield of 9.4% as of the closing price on August 7, 2018. With that, I'll turn things over to Alfonzo to discuss the company's acquisition activity.

Thank you, Bob. Since IPO, we've acquired approximately $510 million of health care real estate in our target niche and added $40 million of net rents to our portfolio. Over this period, we've been one of the fastest-growing funds in the health care real estate sector, and we've consistently acquired properties at cap rates that are 100 to 150 basis points above the market average. Our strategy has always been to leverage our experience in the sector, our deep knowledge of health care fundamentals and our relationships across the industry to source attractive deals with good risk-adjusted yields. We get higher yields by looking for great health care providers in secondary and tertiary markets that are overlooked by others. We are not chasing crowded, obvious investment-grade tenant deals. We spend a lot of time focused on understanding our tenants, their business, their physician recruitment strategy and their growth plans. We look for providers that offer high-quality health care in lower-cost settings. As a result, we've added great tenants to our portfolio who we believe are top providers in their respective specialties and submarkets. We believe health care is needed everywhere and continues to grow with the aging population, and the drivers of health care revenues are the same regardless of market size. Physicians are the key to any health care strategy, and we look for solid physician groups that provide critical care to their communities. As Jeff mentioned, The University of Kansas Health System completed the purchase of our tenant, Great Bend Regional Hospital. During our due diligence, we spent a lot of time understanding the health care submarket of Central Kansas. We invested in Great Bend Regional Hospital because we were impressed with the physician leadership, the state-of-the-art facility and the quality of care. One of the founding doctors was elected as U.S. representative for Kansas in 2016. The imaging center at the hospital is very impressive. Joining the state's academic medical center solidifies them as a top provider in the region. As of June 30, we had $602 million gross investments in real estate, generating a 7.8% cash yield on our investment. Our portfolio today is composed of 41 tenants with 1.9 million square feet. As a percentage of rent, 32% of our portfolio is located on campus or adjacent to campus, 19% is in medical office parks with critical mass of physicians and specialists. Approximately 49% of our tenants are health systems or in joint ventures with health systems. These include Orlando Health, Memorial Health in Ohio, INTEGRIS in Oklahoma, Piedmont in Georgia, Geisinger in Pennsylvania, Seton in Austin, Rochester Regional in New York and Methodist in Tennessee. Additionally, 20% of our tenants have joint ventures with national surgical operators, like Surgery Partners, SMP, USPI and Covenant. By asset type, 53% of our portfolio is medical office, medical office with surgery center, surgery center or medical office with out-patient. 23% is rehab hospital, 9% is general acute care hospital, 8% is surgical hospital and 7% is a mix of other health care-related facilities. Excluding credit-rated tenants leasing medical office buildings in our portfolio, our physician group and hospital tenants generated approximately $1 billion in net revenues -- health care revenues, paying GMRE approximately $32.5 million in rents. On Page 10 of our earnings package, you'll notice we've put in some operating metrics to better communicate the value proposition of our real estate portfolio. We have a well-diversified portfolio with no significant base rent concentration being generated by any one state or tenant. Our rent coverage ratio for our physician group tenants is 7x, and our rent coverage for our rehab hospital, surgical hospital and long-term hospital tenants is 3.8x. With that, we'll be happy to take your questions.

[Operator Instructions] Our first question is coming from the line of Rob Stevenson with Janney Montgomery Scott.

Jeff, how do you guys anticipate using this new relationship in -- with the Israeli debt and equity markets? Help us understand what your goal is there, what you will and what you won't do, and what gets done here in the U.S., et cetera.

Sure. Thanks, Rob. Basically, we're looking for a diversified sources of capital. What we won't do is we won't take anything in shekels, we'll only take in dollars. That I could tell you. So we're not taking any currency risk. The opportunities there or other markets, for instance, in China, we have $30 million worth of equity investments from China currently in the company. It gives us the opportunity in Israel to raise equity that is accretive, especially if the markets have closed here or they're not attractive rates. It gives us the opportunity to raise debt here if the debt is not attractive. So it opens up our opportunities to get better rates for our investors at the same security level they have here. I want to substantiate that we would not take currency risk on any of these potential international investments.

So I mean -- so how does the equity investment wind-up working? Are you basically -- are you pursuing a listing over there? Or is this basically selling GMRE stock instead of an $8.53, at $9, to -- into the Israeli market?

Well, the potential there, we're considering a listing in the Israeli market. We did do a roadshow, and we met 40 institutions that are interested in investing on us. So if we did need equity based upon the price here, we could raise equity there if the market was not available to us. As I've always said, with raising equity, we only raise equity that's accretive to our portfolio. So we're very disciplined on pricing on this type of situation.

And that would be common, or that would be preferred, if you were doing equity over there?

It would be common if we were doing it.

Okay. And then, Bob, I mean, given the comments that you made, I mean, so in the back half of the year, you benefit, relative to the second quarter, by, I think it was like -- the magnitude's, like, $400,000 on the LTIP, given the current stock price is what you were saying, down from, like, $1.1 million, down to like $750,000?

Right. We were subject to that volatility with the share price change from March to June. And looking at -- if you take the share price that was there at the end of June and if it stays constant, that would be the range you'd be in on the -- on that expense for the rest of the back half of the year exactly.

Okay. So when you factor that in, I mean, are you anticipating permanently, at least until some additional capital, equity capital raise, comes into the equation, on a run-rate basis, basically covering the dividend on -- in the back half of the year? Or is there other stuff that comes into play that, on an AFFO basis, wouldn't quite get you there in '18?

I'll answer that. We have multiple sources of income to keep acquiring properties. There has been a tremendous interest in our operating OP units, our operating units for acquisition. We will, at some point, raise money, but it has to be accretive. We have various sources to keep growing right now.

Okay. And so just back to the dividend coverage saying, I mean, is it -- is that looking like back half '18? Or is that more of a sort of '19 sort of proposition, and sort of get there on a sustainable basis?

I mean, Rob, the way the numbers work for the second quarter, and if you factor in some NOI growth from revenue out of additional properties and you think about the way the interest rates are, I mean, there -- it runs very consistent -- not too inconsistently with where we were for the second quarter. So it's right in that same band, plus or minus the net impact of any interest rate increases with additional rental increases that we get from our rent bumps as well as additional acquisitions.

Okay. But there's no one-offs or anything else from an expense standpoint that we have to be factoring in, in the back half of the year that would wind up sort of throwing that out of whack at this point?

No. Not -- there's nothing -- yes, there shouldn't be anything unusual from that -- from a cash G&A run rate perspective that we haven't been talking about.

Our next question is coming from the line of Matt Boone with B. Riley.

Just to start off real quick. From a supply perspective, how are your core markets trending across the different asset classes? And where do you see cap rates trending for the balance of the year?

Sure. So the supply-demand balance in the market has tilted in our favor. It's clear to me that yields have gone up from last year. How much, it really depends on the market, on the asset type. I get the sense that the really core stuff is still trading at or low 5s. But in our niche, the ones that we're targeting, it has softened. The pricing has softened a bit. Yields have gone up a bit. How much, it's hard to really be precise. My sense of it is it's gone up 25, 50 basis points, depending. The tone of sellers has changed. There's -- I don't -- it's no longer a question of whether cap rates are trending down or -- it's more a question of are they staying where they are, or are they trending up? Based on anecdotal conversations, information, what I've seen, comp, stats, adding it all up together, I do get the sense that the supply-demand balance has titled in our favor. And I feel like even into the third quarter, it's improved relative to the second quarter. But again, it's hard to really pin exactly a number, but it's just a general sense that it's improved for us.

Got it. And then transitioning from that, looking at your investment pipeline, and sorry if I missed this, but how do the cap rates of those properties compare to what you're seeing in the market? Just trying to get a sense of how they compare from a pricing perspective.

So in the first half of the year, our average yield was 8.25%. And I would -- it's been consistent in the third quarter. And so we're aiming to sustain yields that are in the high 7s at least, depending -- and again, we look at -- we think about things at a portfolio level, and we will chase deals within a bandwidth. But we've been fortunate to find deals that have averaged this year at 8.25%, and the market has been pretty robust. There's been a lot of stuff that's become available. I think, also, the success we've had in the past couple of years and the reputation we've built, the relationships that we've strengthened over the past year has really put us in a position to be top of mind in a lot of people's list in terms of calling if there's a deal that they are working on in some capacity. So we -- on a weekly basis, we get a lot of calls coming in, a lot of people reaching out with us in different forms. So it's been a pretty robust supply of deals that have come into the market, a lot of it that fits kind of our parameters, deals that we like. So it's been a good market and one that we're finding very good deals.

Okay. And then last one for me. With the closing of the UKHA acquisition during the quarter, what percentage of your portfolio is now investment-grade?

It's a good question. Well, that's $24.5 million divided by $600 million and add it to the number that we had before. And I don't have a calculator in front of me, but that's the percentage.

[Operator Instructions] Ladies and gentlemen, this does conclude the Q&A portion of today's call. I'll turn the call back over to Mr. Busch for his closing remarks.

We are very pleased with the direction of the company and the accomplishments we've made this quarter, including covering our dividend and fixing a good part of our outstanding loans. And we are looking forward to talking with you again next quarter. Thank you.

Ladies and gentlemen, that concludes today's call. You may now disconnect.