Chiron Real Estate Inc. (XRN) Q1 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Global Medical REIT's First Quarter 2019 Earnings Conference Call [Operator instructions] Please note that today's conference call is being recorded, with the 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 section of the Company's website at www.globalmedicalreit.com [Operator instructions] I will now turn the conference call over to Global Medical REIT's Investor Relations Representative, Mary Jensen.

Good morning, everyone. Last night, after the market closed, Global Medical REIT announced its first quarter 2019 operating and financial results for the period ended March, 31, 2019. Certain statements contained herein may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and it’s 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 flows 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 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 the 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 herein 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 to undertake no obligation to update any forward-looking statements. With that, I'd like to turn the call over to Jeff Busch, Chief Executive Officer of Global Medical REIT. Please go ahead, Jeff.

Thank you, Mary, and welcome, everyone, to our call. Joining me today are Bob Kiernan, our Chief Financial Officer; and Alfonzo Leon, our Chief Investment Officer. Today, I will provide an update on our ongoing strategic and operational plans for 2019. Bob will follow with his review of the Company's financial results for the first quarter, and Alfonzo will provide a market update and a review of the Company's acquisition activities. Back in March, we said that 2019 is shaping up to be another good growth year for us. So far this year, we have raised $84 million of equity, increased our borrowing capacity by $75 million and invested $150 million in medical real estate. Specifically, we have completed 3 acquisitions comprised of 6 medical facilities, with approximately 259,000 rentable square feet. Right now, we have over 100,000 square feet under contract for an aggregate purchase price of approximately $26 million and a very strong pipeline of potential investments. Global Medical REIT continues to have a disciplined approach to both growth and acquisitions. I expect that we will meet or exceed our acquisition goals for the year. These acquisitions are the catalysts to our value-creation capabilities. Our prudent underwriting reached a predictable long-term cash flows that are supported by high-quality tenants with long-term leases and underlying businesses in health care delivery, one of the highest growth industries around. Our total return to shareholders from our IPO through May 6, 2019 was 29.44%, which outperformed all of the primary REIT indices -- indexes during this period. We believe sustainable cash flow from our portfolio will support our dividend and lead to continued increases in shareholder value. With that, I would like to turn the call over to Bob Kiernan, our CFO, who will provide details regarding the first quarter's financial highlights.

Thank you, Jeff. Yesterday, we reported our first quarter financial results for 2019 via press release and a simultaneous posting of our earnings package to our website. Regarding our 2019 first quarter results, our total revenue increased to $15.2 million in the first quarter of 2019, up from $11.6 million in the first quarter of 2018. The increase was attributable to an increase in rental revenue from our net lease health care portfolio. Revenue growth continues to be positively impacted by our acquisition activity and the terms of our underlying leases. On a same-store basis, our Q1 2019 cash rental revenue increased $202,000 or 2.4% compared to the first quarter of 2018. Total expenses for the first quarter of 2019 increased to $13.2 million from $9.7 million in the first quarter of 2018. Depreciation and amortization expenses as well as interest expense remain large components of our total expenses as we continue actively acquiring properties. G&A expenses were $1.6 million in the first quarter of 2019 compared to $1 million in the first quarter of 2018. The increase in G&A was driven by an increase in our noncash LTIP expenses from $200,000 in the first quarter of 2018 to $800,000 in the first quarter of 2019. This increase was primarily attributable to the change in the way we account for stock compensation. As we've previously noted, prior to the third quarter of last year, our LTIP expenses varied based on changes in our share price. The low level of Q1 2018 expense reflects the impact of that variability. We estimate that the noncash LTIP expenses should average $800,000 per quarter and $3.2 million for the year 2019. Our cash G&A expenses in the first quarter of 2019 were relatively unchanged compared to the first quarter of 2018. We continue to expect G&A for 2019 to range between $700,000 to $850,000 for quarter, representing an annual run rate of $2.8 million to $3.1 million. Depreciation and interest expense were again our two largest expense line items in the first quarter, both are positively correlated with our acquisition activity. Depreciation expense was $3.9 million in the first quarter of 2019 versus $2.9 million in the prior year quarter. Interest expense was $4 million in the first quarter of 2019 compared to $2.7 million in the first quarter of 2018. The increase in interest expense was driven by both higher interest rates and higher average borrowings, the proceeds of which were used to finance our property acquisitions. Our first quarter funds from operations was negatively impacted by short-term dilution as a result of our capital raising activities late in the fourth quarter of last year and during the first quarter. We believe that fully deploying and leveraging these proceeds will have a long-term positive impact on FFO. FFO and AFFO for the first quarter of 2019 were $0.17 per share compared to $0.18 and $0.16, respectively, in the first quarter of 2018. Moving on to the balance sheet. As of March 31, 2019, our gross investment in real estate was $669 million, an increase of $21 million from year-end 2018 and significantly up from $472 million at the end of 2017. Looking at the liability side of our balance sheet. As of March 31, 2019, we reduced our total debt to approximately $259 million from $315 million at December 31, 2018, net of unamortized debt discount. Our March 31 debt balance includes $224 million drawn on our credit facility and $39 million of fixed-rate notes payable. Regarding our credit facility. In April, we exercised $75 million of our $150 million accordion, increasing our borrowing capacity to $425 million. Lastly, and as Jeff mentioned earlier, during the quarter, we continued to demonstrate demand for our public equity and the various sources available to us by raising approximately $84 million of equity in the quarter. Most significantly, we sold 8.2 million shares of our common stock through a public underwritten offering at $9.75 per share, generating gross proceeds of $80.3 million. And we also sold 321,000 shares of common stock at an average price of $9.68 per share through our ATM, generating gross proceeds of $3.1 million. In addition to these issuances, in connection with the property acquisition, our operating partnership issued 49,000 OP units valuing it at $506,000 at an issuance price of $10.30 per OP unit. 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. So far, in 2019, we have continued to execute our business plan and allocate capital efficiently. During the first quarter, we completed acquisitions in Gilbert, Arizona and Zachary, Louisiana, totaling almost 52,000 square feet for approximately $20.6 million at a weighted average cap rate of approximately 7.6%. In April, shortly after quarter's end, we deployed another $94 million to our previously announced acquisition of a 4-property portfolio of inpatient rehabilitation hospitals. That acquisition included facilities located in South Bend, Indiana, connected by Saint Joseph's Regional Medical Center, which is a part of Trinity Health; Oklahoma City, Oklahoma is connected by a Kindred-Mercy joint venture; Surprise, Arizona connected by Cobalt Rehabilitation Hospital; and in Las Vegas, Nevada connected by Encompass Health. The acquisition of all 4 hospitals totals approximately 207,000 square feet, is expected to generate approximately $6.9 million in initial annual rent, has a weighted average lease term of more than 8 years and generates an initial yield of approximately 7.3%, which is expected to increase to approximately 7.6% in the second year of ownership. Building on this momentum, we have a robust pipeline of potential investments that we are pursuing. This pipeline includes more than $26 million or 100,000 square feet from deals under contract at an average yield of approximately 7.5% and an additional approximately $66 million or 250,000 square feet in deals under letter of intent and active purchase contract negotiations. Also, we have closed almost $115 million so far this year, which combined with the deals under PSA and LOI results in approximately $197 million of transactions closed or in process to date. As always, in-process deals are subject to rigorous underwriting and due diligence standards and are not guarantees. Nonetheless, we believe that this year's closings and our current pipeline demonstrate convincingly our team's prowess and prudence in identifying and closing on attractive investment opportunities to the benefit of our shareholders. With that, we will be happy to take your questions.

[Operator Instructions] The first question comes from Rob Stevenson from Janney Montgomery Scott. Please go ahead.

Alfonzo, in terms of the assets that you guys are targeting, anything specific asset class wise that you guys find more interesting these days relative to the rest?

No. So nothing in particular. I mean, we're -- we evaluate all the asset classes that we've been acquiring thus far. Nothing really jumps out. As I've said in previous calls, the flow of product that comes to market is not consistent. Sometimes, it's heavy MOBs. Sometimes, there's a wave of surgery centers. Sometimes, there's just a lot of rehab hospitals available. So it fluctuates, and we're always primarily just focused on good tenants, good properties and attractive pricing. So nothing in particular. It's not how I see it. It's just really driven more by quality deals.

And given the $94 million portfolio purchased in April, anything that's big and chunky in the portfolio that you may need to access something other than the ATM to fund?

No. Nothing like that. No. I mean, right now -- so if you think about it, we've just completed raising $135 million of equity over a 13-week period from mid-December to mid-March. We increased our share by -- share count by 50%. The rest of our business has been business, business as usual. We're matching that equity raise with the $115 million that we closed and the $1 million that we have -- $80 million that we have in process for a total of $195 million. And the IRF portfolio transaction was an all-hands-on-deck effort. I'm proud to say that it was exceptionally well executed. Post closing of the IRF portfolio, we immediately filled up our pipeline with MOBs and have about half of our capital called for. We expect to invest the bulk of this capital in the next couple of quarters. And as we do so, we'll make progress on growing our portfolio. So right now, right after the IRF portfolio, we've really just turned around and started really selling up our pipeline with deals, but nothing in particular. Right now, there's nothing -- no large transactions like the portfolio that we just completed.

Okay. And then, Bob, the preferred market seems to have come back. I mean, how are you looking at that in terms of capital stack and ability or capacity within the capital stack to add anything more on that slog?

Sure. I mean, Rob, we look at that all the time. There's -- we're just trying to be careful in terms of our growth and just be thoughtful about how we look to the capital markets on our next step. Right now, we have a lot of dry powder that we need to invest and are being cautious on that front.

The next question from the phone comes from the line of Chad Vanacore with Stifel.

So could you provide us with some more details on the two assets they have under contract this quarter, maybe some lease terms there?

Sure. Yes, okay. So the two we have under contract, it's a -- the Minneapolis property has a dialysis and a VA clinic in it. It's two leases, long-term leases, pretty straightforward deal. The dialysis and the VA Clinic are complementary. Very good demographic zone as well. The East Lansing, Michigan portfolio is composed of six properties. It's a seller that accumulated this portfolio. Again, this is very much in line with what we've been buying thus far. Good-looking real estate, good tenants. This one has a handful of leases in it, but-- it's a pretty good provider and pretty good real estate.

All right. And I'm sorry what kind of cap rates were we talking about on each?

So the Minneapolis one is a 7.2% cap and then East Lansing, Michigan one is a 7.8% cap.

All right. And just, Alfonzo, thinking about the overall pipeline, what kind of size deals are you looking at overall in aggregate? And then maybe give us a little idea of what type of properties that is weighted toward?

Sure. So right now, our pipeline is composed of MOBs. So we're targeting deals from $5 million to $15 million. What we have in our pipeline is closer to the $10 million average per deal size. And we're targeting that segment of the market right now. North of $20 million in the pricing is not where it needs to be for us, but we are looking at those opportunities, selectively looking at other asset types other than MOBs. I have been reviewing some rehabs, properties of some surgery centers, some surgical hospitals. Thus far, a lot of those haven't really made sense. But right now, the bulk of our pipeline has been sort of an average of about $8 million to $10 million per property size MOBs across the country, very much in line what we've been buying thus far. And we're targeting to hit an average cap rate of about 7.5% cap on average, but that's kind of a general description of what we're looking at.

Okay. And just thinking about the surgical hospitals that you mentioned, are those still trading somewhere around low 7s or have they dipped below 7% kind of cap rates with them?

So it depends. There's been a few that I've looked at that have actually been trading well into the 6s surprisingly. And there's some that probably should trade into 7s, but it's not, which I find kind of surprising. So it's all over the map. I think that's whereas with -- within specific segments of the MOB space, you get more -- you get cap rate spreads that are more narrow. Within the surgical hospital, it can vary a lot because really at the end of the day, you're -- the quality of the tenant varies a lot. Sometimes, the entities that are working -- operating the facility. If it's a joint venture with a health system or if there is a national surgical operator, it can be very, very different than one that's just physician owned that is independent. And so it's all over the map. I've looked at a few recently, but nothing thus far that's been -- that's made sense to us.

Alright. Now is there anything in that portfolio now that you're looking to dispose, it maybe doesn't fit you any longer?

No.

Alright. Just one more question for me. What was your average debt balance this quarter because you had your equity raise, I assume presumably you paid down your revolver for a time and that it's going to pop back up as you closed on the CNL transaction.

Right. Yes, so Chad, the average in the credit facility in the first quarter was about $275 million and the fixed-rate debt was at $40 million.

Alright. And Bob, can you remind what do you say you expect the interest expense for the year to be?

Well, it will depend on the timing of acquisitions. But from a rate perspective, kind of looking -- if you look into the second quarter, our average balance in the second quarter is looking at low 300s, $305 million on the credit facility. And the rate there will go down because of the mix. The other impact in the first quarter with the mix between the hedged and un-hedged with the pay down on the credit facility, revolver side, the hedged piece, the $170 million that we have under -- with interest rate swaps was disproportionately higher than the floating piece. So that pushed our rate up to 4.63% on the credit facility. And I'd expect that to go down to around 4.30% in the second quarter with that mix, but with the average balance going up toward $305 million level on the credit facility.

The next question comes from Drew Babin with Robert W. Baird & Co.

I appreciate the disclosure on the acquisition. I think it was 2.2% in-place lease escalator around those. So I was hoping you could remind us. And apologies if I missed it, kind of what the overall portfolio cash around escalator is currently?

On average, the 2% -- 2.1% even on the overall portfolio.

Okay. That's helpful. And I guess, just quickly is kind of running down your list of tenants, is there anybody on that tenant list that is maybe on a watch list or maybe their ability to pay a rent is maybe trending the wrong way? And on the other hand, do you see any tenants there gaining strength where there could be credit upgrades, as you saw last year, the Great Bend Hospital in Kansas? Is there anything kind of popping out at you either ways if you kind of looked at your tenant list?

Yes. The first part, at this point, we don't have any, I'd say, material credit issues. We're active with our tenants on a month-to-month basis, and it's a real focus of our diligence process. As we get larger, we're bound to have tenant issues, but at this point, they're nothing material of note.

Okay. And that's on the positive side too. There's nothing that's kind of improving your pace faster than you might have expected?

No. I don't know. On the positive side, anything I can think of that might be interesting to point out is our tenant pipeline. They had an investment from Deerfield. That's pretty significant one into their company. So they're growing, It's a group that I think very highly of. We met with the Deerfield folks, also very interesting group. So -- but there -- that facility is performing as expected. And -- but other than that, nothing really comes to mind.

The next question from the phone comes from Matt Boone with FBR Capital Market.

Most of my questions have been answered. But I guess, to start off, when looking at the acquisitions environment currently, what are you seeing from a competitive perspective or competition perspective? And how's that impacting pricing at all? If there are any deals you're currently pursuing?

This is Alfonzo. The market has been, I guess, all things considered, I'd say, stable with the way rates have been moving. I think it's responding to the fact that rates have been stable as well. There has been an update from my perspective from the DST buyers, Delaware Statutory Trust buyers, that are looking for long-term leases. That seems to have increased significantly over the last 12 months. I started hearing more and more of them about 12 months ago and it's continued to go up. In terms of the private buyers, my sense of it is that number continues to increase. Especially when I compare five years ago or even 10 years ago, there's just a lot more private -- small private equity funds that are buying medical office. I hear anecdotally some of these funds struggling with execution. I hear of a lot of deals that come back to market and it seems like some of these funds are doing well, but it seems to me like some of these funds are having a hard time getting a foothold. I suspect maybe what's happened is when they were raising funds for their -- money for their funds, they were probably promising cap rates that are higher than where they are today and it's causing them to really have to stretch. I'd say the other thing that continues is just the amount of properties that are coming to market and if anything, right now, what I would say is a competitive advantage and I hear it actually more and more is there's just a lot of noise and a lot of -- for sellers, a certainty of close is -- has always mattered, but it seems like it's mattering more and more. And I just hear a lot of folks frustrated with the transaction processes, especially with the newer funds, which is really helping us because we've really set ourselves up to be predictable. People like working with us. The volume of inbound calls continues to go up and it allows us to be even more selective. We're getting kind of invite-only situations where we're really being asked on an off-market basis to very targeted opportunities that look very promising. So it's kind of long-winded, but the market from a cap rate perspective is not, I'd say, has stabilized. Some pockets have gotten more competitive, especially the longer-term lease opportunities that we were targeting have gotten harder to access. We've -- what we've done instead is target stuff that has less than 10 years, 7 or 8 years and that substantially helped us. But -- and as I look at the broader -- the rest of the market, I don't hear of a lot of deals trading under 5, it's rare. And it seems like portfolios are trading sort of in that 5 and 6 range, one-off deals. I think the bulk of the market is still kind of in that 6 to 6.5 range. And for the higher-quality stuff, it's just under 6. For the stuff we're targeting, which is primarily physician credit or not-for-profit, lower -- noninvestment-grade credit, that market continues mostly where it was before and we're benefiting tremendously from the fact of our track record and our growth and have become really sort of a preferred buyer, which really gets us ahead of the pack. So that's kind of long-winded. I don't know if that's what you're looking for.

And then I have one more question just pertaining to your lease expiration schedule. It looks like you guys have minimal near-term lease maturities but for the 2 that are expected to expire this year. Is it your expectation that you will re-shine those tenants or what conversations have gone on there?

Yes. That's our expectation. We're getting ahead of it. And right now, thus far, we're expecting those to be renewed.

Ladies and gentlemen, this concludes the Q&A portion of today's call. I'll turn the call back to Mr. Busch for his closing remarks.

We're very pleased with the direction of the Company and looking forward to seeing many of you at the upcoming Nareit conference next month. Thank you very much.

That concludes today's call. You may now disconnect.