Chiron Real Estate Inc. (XRN) Q3 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to the Global Medical REIT’s 2018 Third 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 obtained from the Investor Relations section of the company’s website at www.globalmedicalreit.com. After our speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] I will now turn the conference over to Global Medical REIT’s Investor Relations representative, Mary Jensen. Please go ahead.

Thank you, operator. Good morning, everyone. Last night, after the market closed, Global Medical REIT issued the announcement of its financial results for the third quarter and 9 months ended September 30, 2018. Certain statements contained herein maybe 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 funds from operations or FFO and adjusted funds from operations or 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 statements regarding future dividend payments, any statements regarding future capital raising activities and 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 and quarterly report on Form 10-Q 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, including projections for funds from operations or FFO and adjusted funds from operations or 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 dispositions 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. Please note that market commentary referenced in our prepared remarks today is based on data obtained from JLL healthcare real estate capital markets as well as resistant medical real estate reports. With that, I would like to turn the call over to Jeff Busch, our CEO of Global Medical REIT. Jeff, please go ahead.

Thank you, Mary and welcome everyone to our call. Joining me today is Bob Kiernan, our Chief Financial Officer and Alfonzo Leon, our Chief Investment Officer and the rest of the GMRE management team. I will start off with highlights from the quarter followed by our ongoing strategic and operational plans. Bob will follow with his review of the company’s financial results for the third quarter and then Alfonzo will provide a market update and a review of the company’s acquisition activity. 2018 has been a great year for GMRE. We have covered our dividend on an AFFO basis for the last two quarters, which is something we are very proud of. In addition to increasing our borrowing capacity and fixing a portion of our interest rate, we have grown our medical office net lease portfolio and have a solid pipeline for external growth opportunities that will continue to support our long-term business strategy. Since last quarter, we have acquired 4 properties for $17 million for a blended cap rate of 8%. Currently we have three additional assets under contract totaling $37 million and a blended cap rate of 7.86%. These medical assays are located in our target markets where we can continue to build efficiencies of scale across the portfolio, while systematically improving our tenant quality. Including what we have closed so far the year, gross investments in real estate now exceed $621 million generating estimated annual cash rent of approximately $48.4 million. As we mentioned last quarter our tenant at Great Bend Regional Hospital located in Kansas was recently acquired by the University of Kansas Hospital System, a AA- credit tenant. Since the change of operators several potential buyers have approached us with attractive offers. Although we are a buy and hold owner and an operator, we are cognizant of opportunities to realize the appreciative value of our assets. With that in mind, we believe that agreed upon price we have a unique opportunity to realize an $8 million gain on one of our properties where we can redeploy to purchase additional assets. Alfonzo will provide more color on this transaction in his remarks. During the quarter we continued to strengthen our balance sheet, extending our credit facility debt maturity, increasing our borrowing capacity and fixing a portion of our interest rate. In addition, we began selling shares of our 50 million ATM program at above $9. We believe that our ATM serves as an essential and competing capital source to fund acquisitions and other corporate purposes which could include paying down debt. Bob will provide additional details on our recent ATM activity during and after the third quarter. In addition, we continued to force our relationship with the Israeli debt and equity market as another source of capital and continue identify this as additional capital sources. These relationships as well as our relationship with our domestic banks where we discussed public and private equity are part of a multifaceted approach to diversify capital sources. We are happy to discuss this more in detail during Q&A session on this call. Now, I would like to turn the call over to Bob Kiernan, our CFO who will provide details regarding the third quarter financial highlights.

Thank you, Jeff. Yesterday we released by our press release and also posted on our – posted our earnings package to our website which provides details on our financial position and operating results for the quarter and nine months period. We continued to appreciate our investors and analysts ongoing comments and suggestions on our package and look forward to enhancing the package in future quarters. Now on to our 2018 third quarter results, total revenue increased to $14 million in the third quarter of 2018, up from $8.4 million in the third quarter of 2017. The nine months ended September 30, 2018, GMRE total revenue increased to $38.8 million, up almost 90% from the same period last year. The driver for this increase – driver for this is an increase in rental revenue from our net lease healthcare portfolio. Revenue growth continues to be positively impacted by our acquisition activity and the terms of our underlying leases. Total expenses for the third quarter of 2018 increased to $12.2 million from $7.8 million in the third quarter of 2017. The nine months ended September 30, 2018, total expenses increased to $33.8 million compared to $21.8 million for the nine months ended September 30, 2017. Depreciation and amortization expenses as well as interest expense from a large component of our total expenses as we continued to actively invest in our portfolio. To put this in perspective, total expense as a percent of total revenue for the third quarter was 87%. G&A expenses as a percent of our revenue continued to decline as a result of our cost reduction efforts and increased revenue from our larger portfolio size. For the three months ended September 30, 2018, G&A as a percent of our total revenue was 10% compared to 11.8% in the comparative period and a sequential decline from 13.3% last quarter. For the nine months ended September 30, 2018, G&A as a percent of total revenue was 10.7% compared to 21.6% in the comparative period. These 9-month ended results were primarily impacted by an increase in non-cash LTIP expense offset by a decrease in Sarbanes-Oxley implementation costs and other professional fees. During the quarter, we early adopted accounting guidance related to stock compensation that will allow us to account for expenses related to LTIP awards granted to employees of our manager at fixed values as of the Grant Date rather than revaluing these awards of each reporting date. Please note that sequentially, our non-cash LTIP expenses decreased from $1.1 million in Q2 to $741,000 in Q3. This decrease was driven by the implementation of this new stock comp accounting standard. Looking ahead, the new guidance will serve to limit the variability of this expense as changes in these costs will be driven primarily by the cost of any new LTIP awards in the achievement of performance thresholds and not fluctuations in our share price. Based on outstanding awards at September 30, our Q4 LTIP expense is expected to be approximately $700,000. We continue to look for ways to actively reduce our cash G&A expenses and we currently expect G&A to range between $700,000 to $800,000 per quarter representing an annual run-rate ranging between $2.8 million to $3.2 million. Our two largest expense line items in the third quarter were depreciation and interest, both of which are positively correlated with our portfolio growth. Depreciation expense was $3.6 million in the third quarter of 2018 versus $2.2 million in the prior quarter. For the 9 months ended September 30, 2018, depreciation totaled $10 million compared to $5.4 million in the comparative period. Interest expense was $4.1 million in the third quarter compared to $2.2 million in the third quarter of 2017. For the 9 months ended September 30, 2018, interest expense totaled $10.7 million compared to $5.3 million in the same period last year. These increases in interest expense were primarily due to higher average borrowings during the respective periods and increasing rates. Reflecting the impact of increased rental revenue, we had net income attributable to common shareholders in the third quarter of $286,000 or $0.01 per share, which was down from net income of approximately $381,000 or $0.02 per share to comparable period in 2017. For the 9 months ended September 30, 2018, net income attributable to common shareholders increased to $632,000 or $0.03 per share compared to a net loss of approximately $1.6 million or a loss of $0.08 per share in the comparative period. Due primarily to higher rental revenue, third quarter 2018 FFO increased to $0.21 per share and AFFO improved to $0.20 per share versus $0.14 and $0.17 respectively in the third quarter of 2017. On a sequential basis, FFO increased from $0.19 per share and AFFO remained flat at $0.20 per share. For the 9 months ended September 30, 2018, FFO increased to $0.58 per share compared to $0.27 per share in the comparative period. AFFO for the 9 months ended September 30, 2018 increased to $0.56 per share compared to $0.40 per share in the same period last year. Moving on to the balance sheet as of September 30, 2018, our portfolio of real estate assets was carried on our balance sheet at a gross value of $613 million. Looking at the liability side of the balance sheet at September 30, 2018, we have total debt of approximately $332 million net of unamortized debt discount, which includes $293 million drawn on our credit facility and $39 million of fixed rate notes payable. During the quarter, we amended our credit facility and 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. We also reduced our credit spreads across our pricing grid. The facility includes an accordion feature to increase the aggregate capacity up to $500 million. And in addition, we hedged our interest rate risk on the term loan by entering into a swap agreement that fixes the LIBOR component on the term loan to 2.88%. As of September 30, 2018, the weighted average term of the company’s debt was 4.46 years, with a weighted average interest rate of 4.35%. Lastly as Jeff mentioned earlier, we began using our $50 million ATM program. During the quarter, we sold 372,000 shares of common stock at an average price of $9.42 per share generating gross proceeds of $3.5 million. We anticipate using the ATM for future acquisitions and other corporate purposes, which could include paying down our debt. With that, I will turn things over to Alfonzo Leon, our Chief Investment Officer who will provide an overview of the investment landscape and GMRE’s portfolio.

Thanks Bob. We are pleased to report continued progress in building and strengthening GMRE through our robust acquisition pipeline. As a result our AFFO has grown from $0.06 per share in the fourth quarter of 2016 to $0.14 per share in the fourth quarter of 2017, $0.20 per share in the second and third quarters of 2018. And we accomplished this despite seven hikes that set the Fed rate from 50 basis points to 225 basis points. We are proud of the progress we make every quarter and enjoy finding ways to push forward. I am most proud of our ability as the team to set ambitious goals, rally around key initiatives and overcome challenges. All of the near-term goal of building a $500 million market cap REIT with excellent long-term growth potential. Within our niche we have established ourselves as an experienced investor of medical real estate and have proven our ability to build a quality healthcare real estate portfolio at the yields that are 100 basis points to 150 basis points above the market average. Our $621 million portfolio today now consists of 72 properties totaling over 1.9 million square feet at a 7.9 average investment yield. By asset type, 53% of our portfolio is medical office/surgery center or outpatient, 23% is rehab hospital, 9% is general acute care hospital, 8% is surgical hospital and 7% is the mix of other. Our strategy has always been to lever our experience in the sector, our deep knowledge of healthcare fundamentals and our relationship across the industry to source attractive deals with Fed risk adjusted deal. We get higher yields by looking for properties in secondary and tertiary markets leased to great healthcare providers that have non-rated credit. We also play to our strength by bringing the same underwriting expertise found in larger REITs to acquire MOBs in the $5 million to $15 million range. We can be extremely efficient processing deals. We pride ourselves accretive deal making and we leverage our close relationships with referral sources in a market to get priority access to deals. The market is probably the biggest it’s even been and nobody has time to waste on indecisiveness ambiguity of bureaucracy. Our competitive edge is speed and reliability. With that said, we remain very disciplined in our underwriting taken a conservative stance with our selection process. As we mentioned last quarter, the University of Kansas Health System acquired our tenant Great Bend Regional Hospital. We spent a lot of time underwriting this deal and predicted that a local health system would likely acquire a tenant. News of our transaction with KU caught the attention of potential buyers who have approached us with offers at attractive valuations. Based on this interest we have decided to move forward with the disposition process. Ultimately we believe we have maximized the return on this asset and we believe we will create meaningful shareholder value with this disposition. We are the beneficiaries of several dynamics in this space. First, healthcare providers are diversifying our real estate strategies to capture growing patient demand which is resulting in more settings for care. Second, an aging population has created more outpatient procedures that are driving the need to meet patients demand within geographic areas which oftentimes is away from the hospital campus. Third, physicians have also assembled into large groups that had real estate portfolios located strategically across suburban communities they serve. We believe these groups are poised to thrive in a value based healthcare reimbursement environment. And fourth, we believe technology will continue pushing more healthcare into outpatient settings. Healthcare real estate transaction market is extremely active. Too many deals getting put in front of too fee investors, is too much capital. Core deals are getting 30 plus offers, but other deals are getting ignored. It’s an unusual environment. Since 2000, a lot has changed in the MOB market. In fact, then the MOB market was still very pioneering, data and comps were scarce, deal flow was anemic. Today the MOB market is extremely likely in a broad mix of investors, robust deal flow, almost weekly new listings and ample capital dedicated to the space. And MOBs have also gotten bigger as outpatient services in these buildings have expanded. The largest MOB in 2012 sold for approximately $100 million, this year an MOB anchored by Memorial Hermann sold for $405 million. This transformation is coincided with the MOB sector going from opportunistic returns to core returns. Fundamentally, this was positive for the MOB sector as it increases transparency, liquidity and efficiency. I would like to reiterate our business strategy. We are not just buying real estate, we are underwriting our tenants as well and why they are strategically valuable to the healthcare delivery network. The Great Bend transaction is a good case study of this strategy. We are not chasing product 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 healthcare and lower cost settings. We look for critically needed providers in suburban communities that lease buildings with solid EBITDA or the rent coverage ratios. There is an enormous investment opportunity for these deals and we are uniquely suited to pursue this niche. With that we will be happy to take your questions.

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Drew Babin of Robert W. Baird. Please go ahead.

Hey, good morning.

Good morning.

I was hoping Alfonzo for some detail on the acquisitions that were closed in the third quarter, the ones that closed so far in the fourth quarter and ones under contract. If you could you talk about maybe just a few of them on the bigger ones and sort of what made them unique, did you see any competition, what are you excited about there in terms of the tenants and their local strength?

Great. So I will start with the Valley ENT McAllen. So, this one was attractive for a few reasons. First of all, McAllen is growing tremendously. This is an ENT doctor in the place that doesn’t have a lot of ENT doctors. So the group that we are affiliating ourselves with has 9 of 11 ENT doctors in McAllen. The other thing that was attractive about this deal is that initially it was being operated as a condominium. So during diligence what we did is we actually collapsed the condos and made it into one building. So we were able to get through that process a higher yield than we would have, if we were just filling our condo. So rapidly growing city, very stable tenants, great rent coverage, it’s a group that’s grown tremendously and the fact that it was a condo offered us a pretty attractive – resulted in attractive yields for us. The surgery center in Derby interesting contact, the group that’s behind the tenancy is developing a hospital, a mile up the road called Rock Regional Hospital, which recently announced that Via Christi, the large health system and which has the investment grade acquired a 25% interest in the hospital. So we met with the group when they were in the trailer, when they were rebuilding hospital and they kind of outlined for us their strategy, why they were compelled to build a new hospital. This hospital was funded by private investors incredibly nice facility, very well thought out, great sponsorship by the local physicians. So this was a chance for us to align ourselves with the leading docs in Derby, very nice community growing suburb of Wichita that was going to be part of a hospital that is now associated with Via Christi. The property in Bountiful, Utah very nice facility, also interesting contact. Our tenant now was a tenant previously that had an option to purchase the building under lease, so we worked with the doctor in essence execute their purchase option that was assigned to us at close and so we were able to get higher yield as a result of that process. And as additional collateral in that deal we got that 2 years prepaid of rent with that tenant. We are currently in discussions to put a surgery center in the first floor. This was the group that’s while we were in diligence acquired another group in Tooele, Utah and is growing pretty quickly. So it’s a very entrepreneurial dock with the pretty – very good business sense that we felt we want to align ourselves with. The deal in Cincinnati, the TriHealth deal, this one is a lot more straightforward. This is just an opportunity to buy a nice property with a very attractive yield with TriHealth which its one of largest health operators in Cincinnati with $1.8 billion in revenues and 11,000 employees. So very – the facility is used for primary primary care by the health system. It looks great and a very nice yield associated with potentially a health system our credit. Those are the deals we have in process.

Okay, great. That’s great color. And the acquisitions that are under contract, why they ask if there is demand for OP units potentially in concurrence with the closing of any of these deals, is that something that’s being discussed or something that’s on the table?

Yes. So – for a couple of them the Heartland Women’s Healthcare and Texas MLB portfolio both have OP components of about 3 million each.

Okay. And I assume those are negotiated prices?

Yes. So they are all north of nine. I don’t remember exactly what’s negotiated, but they are both north of line.

Great. And one more question Bob on the line of credit, the accordion feature, I guess what conditions need to be in place for that to be used and is there a potential to add additional term loans that might be swapped to fixed rates with that?

Yes. So we need lender approval to exercise the accordion to that subject to their approval. And yes, of course we could as we grow we could definitely we could incorporate additional term into that as we look ahead now to speed discussions with the bank group.

Okay, great, that’s all for me. Thank you.

Thank you. Our next question is coming from Barry Oxford of D.A. Davidson. Please go ahead.

Great. Thanks guys. On the Israeli bonds, I think it’s great that you guys have more sources of capital out there, the more – the better, but are you getting better rates on those bonds, is there a new voice from a traditional bank here in the U.S.?

Hi Barry, this is Jeff. The answer – yes, otherwise we won’t take them. These are all equity opportunities there. It really varies because they have a different sort of rate of their Inc. like their FED rate is much lower than ours. So it’s a risk profile and we will only take the bonds if it’s a better deal than here. And then on the other side there is also equity available to us. So we are sourcing – in this type of market, we are sourcing equity. They tend to take less of a discount they are on the equity to the market, so there is a possibility you could raise money at just better rates for the company. So our goal is to keep growing and keep bringing in equity, but also to cover the dividend. And in this type of environment we have to be clever to do that and we got a look at all sources of income.

Right, great. Thanks for the color on that. And then lastly, Alfonzo when you look at the 2019 you mentioned the competitive market and so do you think you can do as many acquisitions in ‘19 as you did in ‘18?

Yes. So I don’t think the market is going to change substantially in 2019. It will be interesting to see how the trend line is converged next year. I have been a bit surprised that despite the rates going up, I mean there was a little bit of a low but as year end approached volume picked up again. And as I talked to folks and I go to conferences, I mean there is a lot of eagerness by a lot of people to chase deals. So it’s hard to really predict how that’s going to play out. But there is a very healthy supply of deals come into market, I think the market has matured and I don’t see that changing next year.

Right. So you still see a good even though there is a lot of competition out there, supply seems to be kind of you picking up as far as number of buildings out there on the market, so you should be able to corner I guess the lack of a better word your fair share?

Yes. And I would say supply has steadily increased over the years. I mean it fluctuates up and down, but the timeline is clearly up. And as there is more outpatient, as more services get pushed into outpatient and off-campus becomes more and more of a strategy employed by providers, this is more. And so there is – I don’t think that’s going to change anytime soon. I mean I think the market is going to continue to get bigger.

Great. Thanks. I will yield the floor. Thanks, guys.

Thank you. At this time, I would like to turn the floor back over to management for any additional or closing comments.

We are very pleased with the direction of the company and are looking forward to seeing many of you at NAREIT conference in San Francisco. Thank you very much.

Ladies and gentlemen, this concludes today’s conference. You may disconnect your lines at this time and have a wonderful day.