Chiron Real Estate Inc. (XRN) Q2 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Global Medical REIT's Second Quarter 2019 Earnings Conference Call. At this time, all lines have been placed in listen-only mode. 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 Investors section of the company's website at www.globalmedicalreit.com. After our speakers' remarks, there will be a question-and-answer period [Operator Instructions] As a reminder, this conference is being recorded. I would now turn the conference over to Global Medical REIT's Investor Relations representative, Mary Jensen.

Thank you, operator. Good morning, everyone. Last night, after the market closed, Global Medical REIT announced its operating and financial results for the 3 and 6 months ended June 30, 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 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 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 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 reports on Form 10-Q, and elsewhere in the reports we have filed with the United States Securities and Exchange Commission. These risk factors include the risks that are 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 identified 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, 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 how we are progressing with our strategic and operational plans. Bob will follow with a review of second quarter and first half 2019 financial results, and Alfonzo will provide a review of the company's acquisition activities with a market update. We are very pleased with the progress we are making so far this year. July 1 marked our third year anniversary as a public company. And over the last 3 years, we have demonstrated impressive acquisition activity through a focused and sourcing strategy, coupled with disciplined due diligence. Through prudent acquisitions, we have grown our medical real estate portfolio from $94 million to $764 million today. During the quarter, we closed on the previously announced IRF portfolio and have since closed on or have under contract another 9 properties and an aggregate purchase price of $105 million. We funded these acquisitions by raising over $92 million of equity and increased our borrowing capacity by $75 million. Our goal is to continue to expand our real estate portfolio through our proven acquisition sourcing and our due diligence strategy. As of yesterday, GMRE has generated a total return to shareholders, since our IPO, of over 33.7%, which continues to outperform all of the primary REIT indices 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 second quarter financial highlights.

Thank you, Jeff. Yesterday, we reported our financial results for the 3 and 6 months ended June 30, 2019, via press release and simultaneous posting of our earnings package to our website. Reflecting the positive impact of the continued growth of our investment portfolio, our total revenue increased $16.9 million in the second quarter of 2019, up from $13.2 million in the second quarter of 2018. In the first half of this year, total revenue increased to $32.1 million, up from $24.8 million in the first half of 2018. Same-store rental revenue, on a cash basis, increased $202,000 during the second quarter of 2019 or 2.1% compared to the second quarter of 2018. During the first half of 2019, same-store rental revenue, on a cash basis, increased $404,000 or 2.3% when compared to the first half of 2018. Total expenses for the second quarter of 2019 increased to $14.4 million, up from $11.9 million in the first quarter of 2018. For the first half of 2019, total expenses increased to $27.6 million, up from $21.5 million in the first half of 2018. Depreciation and amortization expenses as well as interest expense remain large components of our total expenses for each period as we continue actively acquiring properties. G&A expenses decreased during the second quarter of 2019 to $1.6 million compared to $1.8 million in the second quarter of 2018. The quarterly decline was due to a decrease in noncash LTIP compensation expense. The LTIP compensation expense was $854,000 for the 3 months ended June 30, 2019, compared to $1.1 million for the same period in 2018. For the 6 months ended June 30, 2019, G&A increased to $3.2 million compared to $2.8 million for the 6 months ended June 30, 2018. The increase in this case was also primarily attributable to stock compensation costs, specifically our LTIP-related costs for the first 6 months of 2019 were $1.6 million compared to $1.2 million in the comparable 2018 period. Looking forward to the second half of 2019, we estimate that our stock compensation costs will average around $800,000 per quarter and $3.2 million for the full year. Our second quarter 2019 cash G&A expenses of just under $800,000 were down slightly compared to the first quarter. And looking ahead, we estimate that these costs will continue to run at approximately $800,000 per quarter. Depreciation and interest expense were, again, our 2 largest expense line items in the second quarter, both are positively correlated with our acquisition activity. Depreciation expense was $4.6 million in the second quarter of 2019 versus $3.4 million in the prior year quarter. Interest expense was $4.1 million for the second quarter of 2019 compared to $3.9 million in the second quarter of 2018. For the first half of 2019, interest expense was $8.2 million compared to $6.6 million in the first half of 2018. The increase in year-over-year interest expense was driven by higher interest rates and higher average borrowings, the proceeds of which were used to finance our property acquisitions. Our average borrowing rate during the second quarter of 2019 was 4.27%, and our average rate as of the end of the quarter was 4.14%. Our net income attributable to common stockholders for the second quarter of 2019 was $904,000 compared to a net loss of $64,000 in the second quarter of last year. For the first 6 months of 2019, our net income was $1.4 million compared to $346,000 in the first half of 2018. Our FFO for the second quarter of 2019 of $0.18 per share was flat compared to the prior year quarter, and our AFFO of $0.18 per share in the current quarter was down from $0.20 when compared to the second quarter of 2018. In the first half of 2019, our FFO and AFFO were both $0.35 per share, each down from $0.36 per share in the first half of 2018. Our funds from operations and AFFO on a per share basis for the 3 and 6 months ended June 30, 2019, were negatively impacted by short-term dilution resulting from our recent capital raising activities to support our acquisition activity. However, we believe these activities will have a long-term positive impact on FFO and AFFO as we fully leverage this capital and put these proceeds to work in long-term accretive acquisition. Moving on to the balance sheet. As of June 30, 2019, our gross investment in real estate was $764 million, an increase of $116 million from year-end 2018. Looking at the liability side of our balance sheet. As of June 30, 2019, our total debt, net of unamortized discounts and deferred costs increased to $354.3 million as a result of our ongoing acquisition activity. This compares to our total debt of $315 million at December 31, 2018. On a gross basis, our June 30 debt balance includes $319.5 million drawn on our credit facility and $39 million of fixed rate notes payable. On April 15, 2019, we exercised $75 million of the $150 million accordion feature in our credit facility. The partial exercise of the accordion feature increased the term loan component of the credit facility to $175 million from $100 million, and the total borrowing capacity under the credit facility to $425 million. As we look forward on credit, we're currently discussing potential options related to prospective debt financing, including approaches both within and outside our credit facility. Our primary goal here is to position ourselves well for future acquisitions as well as positioning the company to benefit from projected credit quality gains as we continue to evolve. Regarding equity, so far this year, we've raised a total of $93 million of equity through a combination of common stock and OP unit issuances at an average offering price of $9.84 per share. These issuances include 8.2 million shares of common stock in an underwritten public offering at a price of $9.75 per share, generating gross proceeds of $80 million, 1.2 million shares of common stock through the company's at-the-market offering program at an average offering price of $10.43 per share, generating gross proceeds of $12 million. In addition, we issued 49,000 OP units valued at $500,000 in connection with a medical facility acquisition. With that, I will now turn things over to Alfonzo Leon, our Chief Investment Officer, who will provide an overview of the investment landscape in GMRE's portfolio.

Thank you, Bob. In the 3 years since our IPO, we have assembled a great portfolio of health care real estate, leased exceptional health care providers on long-term triple net leases, and we did this at cap rates that are 100 to 150 basis points above the market average. What we've accomplished is exceptional, and in the process, we have built a network of relationships that are helping us source more exclusive deals. I am proud of all the hard work we've invested to build this REIT, and it is great to see our efforts are beginning to get recognized. As of June 30, our $59 million of rental revenue is well diversified across 91 properties leased to 56 tenants in 26 states. Our 2.3 million square foot portfolio is 100% leased at a cap rate of 7.8% with a weighted average lease term of 9.3 years and average rent escalations of 2.2% per year. As a percentage of rents, 44% of our portfolio is on an absolute triple net basis with zero landlord capital expense obligations and the balance of leases are all on triple net basis. Our core strategy has not changed since IPO. We focus on buying high-quality real estate in desirable secondary and tertiary markets, lease to profitable health care providers that are leaders in their respective fields. We focus primarily on acquiring medical office and outpatient treatment facilities in the $5 million to $15 million range and opportunistically acquire inpatient facilities typically in the $20 million to $40 million range. We leverage our experience and knowledge of health care real estate, identify deals with good risk-adjusted returns at cap rates that allow us to invest our capital accretively. We work tirelessly to build and maintain a robust pipeline of deals, which gives us the ability to be very selective and strategic with our growth. With this strategy, we have built a diversified $800 million portfolio for our shareholders leased to great tenants. There continues to be ample opportunities in the market for deals to grow our portfolio, and we have built an outstanding platform to source, underwrite and acquire these deals. Over 55% of our tenants are established physician group practices that provide essential care to their communities, making them attractive M&A targets for both hospital and private equity consolidators. Over 30% of our tenants are for profit operators like Encompass, Kindred, Prospect and USPI that are leaders in their fields of expertise. The balance of tenants are not-for-profit health systems that include large A-rated systems like Orlando Health, Geisinger, Piedmont, Rochester Regional, and Trinity, and the Ba2-rated Memorial Health, which is a small, locally dominant profitable system. Moving on to our acquisition activity. We had a busy second quarter investing $94 million in 4 new rehab hospitals, totaling 207,000 square feet at a forward 12-month cash yield of 7.3%. The 4 property portfolio of inpatient rehab hospitals included facilities located in South Bend, Indiana, tenanted by Saint Joseph Regional Medical Center, which is part of the Trinity Health System; Oklahoma -- Oklahoma City, Oklahoma, tenanted by Kindred and Mercy Health joint venture; Surprise, Arizona, tenanted by Cobalt Rehabilitation Hospitals, now part of Curahealth Network; and in Las Vegas, Nevada, tenanted by Encompass Health. Building on this momentum, we have already closed on 4 acquisitions in the third quarter totaling $42 million or almost 157,000 square feet in deals at an average yield of approximately 7.7%. On July 12, we acquired a 20,000 square-foot cancer center for $11.9 million and an in-going cap rate of 7.3%. This property is located in San Marcos, California, an affluent city in the Northern County region of San Diego, less than 2 miles from the $900 million Palomar Medical Center built in 2009. The property was built in 2009 and is 100% occupied by California Cancer Associates for Research and Excellence, cCARE for short, with 8.3 years of remaining lease term with 3% annual rent increases. cCARE is the largest full service, private oncology and hematology practice in California with 6 offices in San Diego and 2 offices in Fresno. On August 1, we acquired a 42,000 square foot portfolio consisting of two medical office buildings and 1 surgery center located in Lansing, Michigan, the state Capital, near Michigan State University for $11 million and an in-going cap rate of 7.8% with a weighted average lease term of 8.7 years and 2.3% average annual rent increases. This portfolio is 1 mile away from the new 250 bed $450 million hospital currently under construction for McLaren Health Care in Michigan State University. The portfolio was owned by a partnership among local physicians, McLaren Health and USPI. We are currently under contract on a fourth MOB at a price of $5.1 million with this group. This portfolio is also anchored by CIMA, a locally dominant multi-specialty group with 50 providers. On August 5, we acquired a 44,000 square foot multi-tenant medical office buildings in Bannockburn, Illinois, an affluent suburb of Chicago for $6.9 million and an in-going cap rate of 7.5%. The building is anchored by Illinois Bone and Joint, who occupies 1/3 of the space for clinic, physical therapy and imaging. Illinois Bone and Joint is one of the largest orthopedic groups in the Chicago metro area with over 100 physicians in 20 locations. This property was a unique opportunity sourced off-market to acquire a great property in an affluent submarket at a very attractive price of $157 per square foot, which is well below replacement cost. On August 6, we acquired a 42,000 square foot medical facility in Aurora, Illinois, for $12.5 million and an in-going cap rate of 8.2% and includes 3% annual escalators. This property was built in 2015 and is 100% occupied by Dreyer Clinic and affiliates of Advocate Aurora Health Care and is adjacent to an advocate outpatient medical center. Aurora Health Care is the 10th largest not-for-profit health system and has AA3 credit rating from Moody's. Currently, we have 4 additional deals that are under purchase contract. We are under purchase contract to acquire a 61,000 square foot multi-tenant medical office building located in Livonia, Michigan, an affluent Western Suburb of Detroit at a purchase price of $10.5 million representing a significant discount to replacement cost and a going-in cap rate of approximately 8.2%. The property is 97% leased and is anchored by a large health system. We are under purchase contract to acquire a 14,000 square foot medical office property located in Gilbert, Arizona, expanding our footprint in focused areas surrounding the Phoenix, MSA, at a purchase price of $5.5 million and a going-in cap rate of 7.1% with 3% annual increases. The property will be leased by covenant, a leading surgical operator with 59 locations across 19 states. We are under purchase contract to acquire a 25,000 square foot medical facility located just outside Morgantown, West Virginia, 10 miles from West Virginia University at a purchase price of $7.8 million and an in-going cap rate of 7.7% with an average 2% annual increase. The asset was constructed earlier this year and serves as the headquarters for MedExpress, a subsidiary of UnitedHealthcare Group with more than 200 urgent care clinics nationwide. We are under purchase contract to acquire an 85,000 square foot Class A specialty surgical hospital in Beaumont, Texas, at a purchase price of $33.6 million and an in-going cap rate of 7.6%. The property was built in 2013 and is 100% leased to the medical center of Southeast Texas. As always, the timing of the closing of these deals is unpredictable, and some of these deals might fall out a contract during a due diligent process. All of these deals closed and in-process are in line with our core strategy, namely to focus on buying high-quality real estate and desirable secondary and tertiary markets and leased to profitable health care providers that are leaders in their respective fields. We focus primarily on acquiring medical office and outpatient treatment facilities and opportunistically acquire inpatient facilities. We are constantly sourcing new deals to keep our robust pipeline of $100 million to $200 million of deals in process at all times. This pipeline allows us to be selective and strategic with our portfolio growth. We leverage our knowledge of health care to find less credit deals at cap rates of 7% or higher that offer good risk-adjusted returns. Health care real estate has become a very desirable asset class with excellent fundamentals offering investors stable cash flows through various economic cycles. Supporting this thesis is the fact that health care spending is not discretionary. Health care real estate transaction volumes have averaged $2 billion to $4 billion per quarter over the last 5 years. Since our IPO, we've built an outstanding acquisition platform, and we believe GMRE is uniquely positioned to continue sourcing and acquiring deals in our niche. Our goal is to find quality health care providers that are essential to their communities to build a durable and diversified portfolio for our shareholders. With that, we will be happy to take your questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]Our first question comes from the line of Rob Stevenson of Janney Montgomery Scott. Please proceed with your question.

Good morning, guys. Alfonzo, you talked about it a little bit, but you guys made a couple of sub 7% cap rate acquisitions in the second quarter, the Arizona and the Oklahoma one. Can you talk about specifically why those assets and why those prices made sense to you guys? And if there is any incremental upsides that would juice those returns other than just the normal annual rental rate bumps?

Sure. So a couple of things to point out. It was part of a portfolio, and the average was 7.3% on a forward basis. And the cap rates we report are as of a specific month. So when we look at things, we look at -- from an acquisition perspective, we look at it on a go-forward basis. But when we report it, we report it at the point of time, which creates a little bit of a disconnect. But I want to highlight that, that was part of a portfolio, and we look at things on an average basis, and that was a 7.3% cap portfolio. And year

And then for those assets, I mean, at point in time, is there -- I mean is that by next year? Does that go up substantially? Or are we talking about a 6.9% going to a 6.95% and a 6.7% going to a 6.75% type of thing?

I don't have it property by property, but the portfolio goes from 7.3% to 7.6% in year 2.

Okay. So meaningful, Bob. Okay. That's helpful. And then, Jeff, given the current acquisition pace, you're on track to hit $1 billion of gross assets probably in early 2020. Has the Board already started laying the groundwork for the internalization discussion and everything? Or is that something that happens either later this year or early next year?

Yes. Internalization is -- as you know, is in the management contract, and there has been discussions among the Board, among legal and others of what has to go through the process. Since we're now finishing our acquisition stage and a certain amount, the capital needs to be raised, we're expecting that to be something that gets more heavy in discussion in 2020 as opposed to 2019. But there has been presentations to the Board, there has been legal discussions, there has been a process.

Okay. Thanks guys.

Our next question comes from the line of Drew Babin of Robert W. Baird & Company. Please proceed with your question.

Hey, good morning. Question on the coverage ratios reported in the supplemental. Just curious whether those were influenced by some of the acquisition activity or something else on a same-store basis. I noticed that the inpatient rehab ratios were up quite a bit with surgical hospitals down. I was just wondering if there's kind of anything beneath that or just kind of normal volatility or external growth influence there.

I'm going to say, it's most likely just volatility, normal volatility. But I'm not sure how much of an impact our acquisitions have had on the coverage ratios.

Okay. And I guess, Alfonzo, you answered most of my acquisition questions preemptively, but just curious what happened to the small neighborhood outpatient clinic deal that was listed last quarter as being under contract. I don't see that now. I was just curious what may or may not have happen there?

Yes. So during our tenant interview, we discovered that we were not comfortable with the renewal probably. So we walked out.

Okay. Given that will be important. That’s all for me. Thank you.

Our next question comes from the line of Chad Vanacore of Stifel. Please proceed with your question.

All right. Thanks. So you mentioned financing and specifically debt financing. Can you give us an idea of where your capital plans are and what you're thinking about?

Sure. Sure, Chad. So first, on the debt side, we're looking within the credit facility, we've got the remaining $75 million accordion that we would look to exercise at some point as we go forward. And we're in discussions with the lenders on that. And then secondly, any potential -- looking at potential debt away from the facility just to give some flexibility as we look forward to 2020 and beyond to just develop just some alternative financing beyond the credit facility, take some pressure off of it. So that's the general idea on the debt side, and that's a work in process right now relative to equity capital. I think it's really more of timing that up as we look at future acquisitions and being prudent about when we go forward on that front, being prudent relative to when we expect the next wave of acquisition.

Okay. So just thinking about that debt alternatives that you have. Are we looking more secured or unsecured debt, still below, I guess?

Yes, still secured. And probably -- maybe some mortgage -- at this point, mortgage financings may be taking a few of the assets out of the credit facility and getting stand-alone permanent financing on those assets, probably not in the CMBS structure, just looking to have some flexibility, also not looking too long term with the idea that as we get larger and we evolve our credit -- our credit spreads should continue to improve as we get larger. So thinking of it really along those lines as much as anything.

Okay. And related to that average interest rate is declined pretty significantly, like 4.7% to 4.1%. You had tried to put some swaps in place and hedge. Just want to understand what are the factors that are contributing to that interest expense decline?

Sure. So in the quarter, we went down in our pricing grid. So our average in the quarter was 4.27%. So we went down from 4.67%. And in Q1, there was significant weighting. We had much more of the hedged debt than the floating debt. So that kind of skewed the rate in Q1 higher. We came down with the additional borrowings in Q2. We increased our amount of floating debt and also went down in the pricing grid during the quarter as well. We'll move up the pricing grids midway through Q3 here as our leverage moves into the next -- up one level in the grid. But as we look into Q3, our end-of-period rate of 4.14% looks about the general ballpark of where we should end up from a rate perspective in Q3.

Okay. Thanks. And then just one more. Just thinking about the assets that are under contract for acquisition, how should we really think about timing on those?

Sure. So we have a few of these that are -- we were hoping to close -- we're hoping to close any week now. I would say the bulk of this is August, and then the Beaumont facility, September.

Our next question comes from the line of Bryan Maher of B. Riley. Please proceed with your question.

Yeah. Good morning. So a couple of quick things. We've noticed a couple of these 8.2% cap rates. I think one that you did in the quarter or subsequent to the quarter, another when you talked about under purchase contract. What type of a product is that? And what's impacting that higher cap rate?

Well, so the Aurora one is recently built. It's a relationship deal. Our acquisition officer based out of Chicago has a relationship with the developer. So we had a chance to get very attractive pricing. We've actually even in discussion with this party for about a year. And for state planning purposes, it made sense, finally, for this person to transact. So I'd say, it's a very nice-looking, newly built property for the system. It's next to their outpatient facility, and it's in a pretty good part of Chicago. So I'd say, the yield is driven mostly by the fact that we're -- it's off-market relationship. The other one also, it's the Mission Health Livonia deal. That one also kind of a unique situation. Just folks that I know approached me, this property had been down the road with another party pretty far down the road. And so when I was approached, we were presented a great opportunity to buy this at a pretty significant discount to where it was. It's a situation where the selling party really wants surety of close. So we've -- this is the first one who reached out to me, knows our track record, likes us and was looking for a very surety of close. So I think it's driven mostly by the track record we've built and our relationships, and it's a nicer looking building. It's multi-storey. It's high quality. It was built about 15 years ago. So it's a great-looking asset, and we were really looking forward to having it be part of our portfolio. But again, this is one where we've leveraged our relationships and situations that are a bit unique where we're able to get extra value.

Okay. And then another question I had was, when we look at what you've closed year-to-date than what you currently have in the pipeline to close, that's pending. You're about, I don't know, roughly $220 million. We've been looking at maybe $180 million in our model for this year. And in light of comments that Community Health Care made kind of warning analysts not to take their acquisition estimates up. How do you think we should be thinking about full year '19? And as we look out to 2020, what do you think with your pipeline would be a reasonable expectation?

Well, so it's -- we're -- we've got a busy pipeline and if deals make sense, we'll continue pursuing. I don't see any change today versus where we were 3 months ago or 6 months ago. It's really a function of us finding deals that meet our underwriting and makes sense for us to add to our portfolio. So I don't see any change in the last -- all year. I mean we're going to continue going. And if it makes sense to buy and it makes sense as a company, we'll continue growing.

Yes, I think we came into the year with that goal of maybe $150 million to $200 million, similar to what you said, Bryan, and we were able to exceed that goal. And it was really a matter of being opportunistic on our acquisitions and what we're able to get done.

Okay. So you don't see anything that changing in the landscape currently that would trip up where you're kind of at a run rate now?

No, and it sounds like you're also asking a little bit about the market. I mean the market, I'd say, during the summer, did -- and this is -- it's always hard to kind of pinpoint exactly. But my sense of it is during the summer, I did sense that things were getting a little bit more competitive. And I -- but it's hard to really predict how things are evolving. I'd say, the trend line is probably things are getting a little bit more competitive. But what I try to do is try to stay as busy as humanly possible and talk to as many people as we can and get ahead of things. And thus far, it's worked well for us. And we have a lot of -- we're working on a lot of deals. We're closing a lot of deals. I'm not worried right now with where we are and the growth opportunities. We've got another, call it, half dozen discussions that we're having with different parties with deals that we really like that are not under contract yet. That -- if parties come to a meeting of the minds. So we'll have -- that will be great asset there, and we'll have a pretty busy next couple of quarters. But it's hard to predict. So I don't sense anything dramatic or any significant change that's really noteworthy. It is interesting that during the summer, I think things got a little bit more competitive, but too soon to tell whether it's a significant change in trend.

Our next question comes from the line of Barry Oxford of D.A. Davidson. Please proceed with your question.

Great, thanks guys. When you guys think about the acquisition and the debt and equity and where your leverage metrics are right now, how do you view leverage? Do you feel you have some capacity to take it up higher? Or is this kind of where you want to stay at -- meaning you're going to be doing leverage-neutral deals going forward?

Yes, hi Barry. So we ended the quarter with leverage right around 47%. And I'd expect that we would look to increase our leverage into the low 50s. As you've seen from last year's results, when we run leverage into the low 50s, we're able to generate enough income, and we cover our dividend at that level. And so I think it's a balancing act between being able to start to cover the dividend at lower levels of leverage. And so that's really our ultimate goal is to cover our dividend. And I think you'll see our leverage increase here as we put these acquisitions on, and we look into kind of Q3 and Q4.

Right. Great. That's helpful. And then Alfonzo, just kind of along the same lines of financing, when you're looking at deals out in the marketplace, are there OP unit deals or what -- I just kind of come across them every once in a while.

So it's -- I feel like every other week, I'm having some discussion with somebody if I don't know doing a deal. But those are very hard to predict, both ways. I've been surprised with conversations that start off with little to no interest and then we end up with $10 million of OPs and conversations that start off with OPs and end up being all cash. Given the nature of what it is, it's -- and the fact that the selling party engages with their state planners and tax experts, it's really hard to predict. But it is part of our monthly discussions with parties, and it is something that sometimes helps us get deal because we'll start off with those discussions. It's definitely well received, just a combination of the benefits of doing an OP unit deal combined with where our dividend trades -- where our stock trades and our dividend yield is, it makes it pretty compelling for some physicians, and physicians are very much -- when you think of the real estate, there is a big part of it that is the state planning. So it makes a lot of sense to have those discussions. But it's hard to predict. But again, definitely on a monthly basis, I feel like I end up in a few conversations of that nature.

At this time, there are no further questions over the question-and-answer session. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day. Actually, pardon myself, I would like to turn the conference back over to management for closing remarks.

Okay. Thank you. We are extremely happy with the progress we made this year. We take a very strong disciplined approach to both acquisitions and growth and debt. So with the progress this year on all those fronts has been tremendous, and we look forward to the next quarter. Thank you for your time and support.

At this time, this does conclude today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.