Chiron Real Estate Inc. (XRN) Q3 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the Global Medical REIT Third Quarter 2020 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Evelyn Infurna. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Global Medical REIT's Third Quarter Earnings Conference Call. On the call today, we have Jeff Busch, Chief Executive Officer; Alfonzo Leon, Chief Investment Officer; and Bob Kiernan, Chief Financial Officer. Please note the use of forward-looking statements by the Company on this conference call. Statements made on this call may include statements which are not historical facts and are considered forward-looking, including statements related to the COVID-19 pandemic and its effect on our tenants business. The Company intends these forward-looking statements to be covered by safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is making the statement for the purpose of complying with those safe harbor provisions. Furthermore, actual results may differ materially from those described in forward-looking statements and will be affected by a variety of risks and factors that are beyond the Company's control, including, without limitation, those contained in the Company's 10-K for the year ended December 31, 2019, and Form 10-Q, for the quarter ended September 30, 2020, and its other Securities and Exchange commission filings. The Company assumes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Additionally, on this conference call, the Company may refer to non-GAAP financial measures, such as funds from operations and adjusted funds from operations. You can find a tabular reconciliation of these non-GAAP financial measures to most currently comparable GAAP numbers in the Company's earnings release and its filings with the Securities and Exchange Commission. Additional information may be found on the Investor Relations page of the Company's website at www.globalmedicalreit.com. Please keep in mind that we are doing this call remotely. So given the circumstances, if we have any technical difficulties, just please standby. I'd like to turn the call over to Jeff Busch, Chief Executive Officer of Global Medical REIT.

Thank you, Evelyn. Good morning and thank you for joining our third quarter earnings conference call today. Joining me on the call are Alfonzo Leon, our Chief Investment Officer; and Bob Kiernan, our Chief Financial Officer. We hope that everyone continues to stay healthy and is doing well. The pandemic continues to test the economy and our industry in a variety of ways. Even in this challenging environment, I am pleased to share that Global Medical continues to perform extremely well. In the third quarter, our AFFO per share and our unit grew 21% compared to last year. And aside from agreed-upon deferrals, we collected all our base rent and collected over half the $1.1 million of rent deferrals we extended to our tenants. We continue to find success on the acquisitions front, closing on $171 million of properties year-to-date at an 8% weighted average cap rate. In addition to delivering strong operating results in the third quarter, we've reached $1 billion of real estate investments, increased our credit facility borrowing capacity by $100 million to $600 million and completed our management internalization transaction. I am pleased with our accomplishments in such a challenging year. Most importantly, we delivered on our primary business objective in the face of a global health crisis. This reinforces the resilience and reliability of our investment strategy, and we remain diligent and disciplined in our pursuits. Our strategy is aligned with the evolution of the health care delivery, and we are excited about the road ahead. With that, I'd like to turn the call over to Alfonzo to discuss our acquisition activity.

Thanks, Jeff. The interest and activity level in the medical real estate market has greatly improved over the last several months, and we believe that the opportunities we are seeing are incrementally more attractive and appropriate for our strategy. We have been extremely active, evaluating and closing transactions. In the third quarter, we closed on five properties for approximately $60 million. And through November 4, we closed on two additional properties for approximately $24 million. The acquisitions in the third quarter were purchased at a weighted average cap rate of 7%, and year-to-date, our weighted average cap rate for the $171 million of completed acquisitions is 8%. I'd now like to share some details on select properties we've purchased in the quarter. Among the larger acquisitions in the quarter were Franklin Square Center in Rosedale, Maryland, and Wake Forest Baptist Health in Winston-Salem, North Carolina. Franklin Square Center is a 2-property multi-tenant MOB, where we purchased an 83.4% condominium interest. The property is currently 89% leased and is anchored by MedStar Health, the largest health care provider in Maryland in the District of Columbia. The property is located less than 1 mile away from the 347-bed MedStar Franklin Square Medical Center. Moving on to Wake Forest Baptist Health. This is a 45,500 square foot single-tenant MOB, located in an infill market in a dominant medical corridor, approximate to two major area hospitals. Wake Forest Baptist Health recently completed a merger with Atrium Health, one of the largest health systems in the country. This was our second transaction with Wake Forest Baptist Health, and they are now one of our top 10 tenants. In addition to what we closed in the third quarter and to date, we have an additional eight properties with an aggregate value of approximately $72 million under contract. As has been our policy to date, we are carefully evaluating the properties to make sure that the properties and their operators meet our investment criteria, and we can offer no assurance that we will ultimately close on these acquisitions. We are optimistic about the quality of opportunities we are seeing. Deal flow is approaching net exceeding pre-COVID levels. Our discipline and methodical approach to this asset class as well as our ability to close affords us a key advantage over other market participants in the space. With that said, we are diligent about the accretive nature of all potential assets, and we value the specific potential of each rather than buying for their grow sake. Given the challenges that were introduced by COVID, we believe that our process has become even more stringent. We are pursuing acquisitions that we believe will endure over the long term, and our consistent approach should provide our shareholders with an attractive risk-adjusted return. I would now like to turn the call over to Bob to discuss our results in more detail. Bob?

Thank you, Alfonzo. I would like to echo Jeff's remarks in noting that we had a very strong quarter operationally. The continued growth of our investment portfolio over the last 12 months in our same-store rental increases resulted in the 38% year-over-year increase to our revenues to $25 million. As I go through our financial results, it's important to note that our management internalization transaction had a significant impact on our third quarter expenses and ultimately our results. In particular, a portion of the consideration that we paid in the transaction was recognized as a onetime expense. We also incurred additional professional fees in connection with the transaction, and our G&A expenses now include payroll and other administrative costs previously borne by our former manager. Our total expenses for the third quarter of 2020 increased to $34.7 million. Note that this total includes a onetime expense of $12.1 million that represents a portion of the consideration paid for internalization that was attributed to the settlement of our contractual relationship that is a settlement of our previous management agreement. In addition, we recognized $0.5 million of transaction-related costs in the quarter related to internalization, primarily professional fees. Apart from cost specific to internalization, our expenses were driven by our acquisition activity with depreciation and interest expense remaining our two largest expense items in the third quarter. Depreciation expense was $7 million in the third quarter of 2020 compared to $5 million in the prior year quarter. Interest expense was $4.9 million in the third quarter, up 6.9% from the year ago period due to higher average borrowings used to finance our acquisitions, partially offset by lower interest rates. Reflecting the impact of our internalization, G&A expense for the third quarter of 2020 was $4 million compared to $1.7 million in the prior year quarter. The incremental increase in cash G&A in the third quarter due to internalization was slightly less than $1.7 million and in line with our expectations. This incremental increase in cash G&A was more than offset by the elimination of the former management fee, which was $2 million in each of the first two quarters this year. We expect to continue to see accretive benefits of the internalization in the years ahead, as we continue to grow and scale the portfolio. Also included in G&A is noncash LTIP compensation expense of $1.6 million for the three months ended September 30, 2020, compared to approximately $900,000 in the prior quarter and $868,000 for the same period in 2019. The increase in our LTIP compensation expenses reflects the impact of LTIP grants that were made this quarter in connection with internalization, which vest over the next four years. Our weighted average interest rate for the third quarter of 2020 was 3.3% compared to 4.2% in the third quarter of 2019. The year-over-year decline was largely driven by the reduction in LIBOR over the past year. Net loss attributable to common stockholders for the third quarter of 2020 was $10.3 million compared to net income of $770,000 in the third quarter of 2019. The change was primarily due to the onetime $12.1 million management internalization expense previously discussed. Our FFO for the third quarter of 2020 was negative $0.03 per share in unit as compared to $0.19 per share in unit in the third quarter of last year. The change was again primarily due to the onetime $12.1 million management internalization expense, which is not considered an adjustment to FFO. Our AFFO for the third quarter of 2020, which does adjust for the onetime management internalization expense, was $0.23 per share in unit, up $0.04 or 21% compared to the prior year quarter. Moving on to the balance sheet. As of September 30, 2020, our gross investment in real estate was nearly $1.1 billion, an increase of $156 million or 17.2% from year-end 2019. Turning to the liability side of our balance sheet. Our total net debt was $519 million at the end of the quarter, up from $386 million at year-end 2019, reflecting our acquisition activity. With respect to equity issuances, during the third quarter, we issued 1.9 million shares through our ATM program at an average price of $12.98 per share, generating gross proceeds of $25.1 million. Year-to-date, through September 30, we generated gross proceeds of $39.2 million through our ATM program. Touching on our liquidity. During the third quarter, we increased our total credit facility capacity to $600 million and added approximately $15 million in mortgage debt to partially fund one of our acquisitions. We finished the quarter with total liquidity, including cash and availability on our credit facility of $144 million. And as of today, our total cash and availability on our credit facility is approximately $110 million. Though Jeff touched on collections earlier, I would like to provide a bit more detail. The impact of the COVID pandemic on our financial performance continues to wane. And aside from previously agreed-upon rent deferrals, we collected 100% of our base rent due for the third quarter. We did not enter into any new rent deferral agreements in the third quarter. And in fact, more than half of the $1.1 million of deferred rents we discussed on our last call were repaid during the quarter. As of September 30, $464,000 remained outstanding on our rent deferral program, the majority of which we expect to collect over the next three months. While we are optimistic about how 2020 will conclude and how we are positioned for 2021, recent reports indicate a spike in new COVID-19 cases in the U.S. and globally. This resurgence of the virus and any resulting regulatory decisions at state and local levels could potentially impact our operations. With that said, we are hopeful that given the nature of our tenants' businesses and our experience so far this year that our investment portfolio can continue to perform well in this environment. This concludes our prepared remarks, and we'd now like to open the call for questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Bryan Maher with B. Riley Securities. Please proceed with your question.

Pretty nice quarter there. Maybe for Alfonzo. Can you give us a little color on the Fairfax property you bought Spectrum? I appreciate the comments on Wake Forest and Franklin, but maybe a little bit more color on that property since it was a pretty big one for the quarter?

Sure. So the $17.6 million, 74,000 square foot medical center in Fairfax, that's 100% leased to Spectrum Health Care Resources, which is a military health care division of TeamHealth. So Spectrum signed a 10-year lease after they secured $242 million of federal contracts from the Defense Health Agency. So what they're, in essence, doing is they're providing a variety of -- like it's a multi-specialty clinic that serves the Defense Health Agency. There's a few military bases in the area and they're serving the service members and the families that are in these bases. And really, what they're doing is giving these military bases an attractive health care option at a lower cost than the local hospitals. So it's a contract that was competed. They beat out a couple other groups. And we did a lot of research into Spectrum and the nature of these contracts, and so very, very good that they're going to be in there for the 10 years.

And then on the acquisitions you've made so far in 4Q, I know there's more dialysis in there. How far down that road do you want to go? And do you think that there's anything out there, I would suspect not that could threaten that business over the long haul?

Yes. So the dialysis is something that we've looked at over the years. It's for -- in the past, it's -- a lot of what we've seen in the dialysis base has traded in the low to mid-6 cap. And it hasn't been that compelling. Recently, we've been able to find deals. And we have -- we do have a few dialysis tenants in our portfolio already. So on occasion, we do find deals where the pricing is attractive, and the context is attractive. We have spent a lot of time internally talking about the industry and try to think of how it's going to evolve in the future and what impact -- to what extent is home care going to really influence the nature of dialysis. The properties we actually bought recently were -- the seller is actually a group that has a ton of experience in dialysis. And so we've -- it's been a process of learning about the industry and getting our heads wrapped around it. We feel pretty good about where the industry sits. We like the facilities that we're buying. We think there's good local trends and fundamentals that support each facility, and we are liking the price point that we're finding them.

Great. And then just last for me. I mean given the resilience of health care assets, specifically [indiscernible] and some of the other subclasses in 2020, even with COVID, are you seeing anything different in the expectations of the sellers since the sector has held up, I would say, better than many of the real estate asset classes or is it more of the same?

I think it's very -- it really depends on -- I think just to start somewhere like, the facilities that are sort of right down the fairway for a lot of investors, the ones that are anchored by big health systems, newer facilities, the inventory that's trading at the five cap. I do sense that they do feel and they rightfully saw that there is meaningfully increased interest for that asset type. And I think they're being more aggressive with their ask. I think they're also being more thoughtful about selling. In the niche that we're targeting, I think I've seen actually a variety of reactions. I have -- there were a group of sellers that were of the mindset of selling their assets, diversifying. There was a group that, I would say during the summer, had much more aggressive stance on selling their buildings or more aggressive ask, but it softened as we started coming towards the end of the year, not clear exactly why. But I do sense that -- I think if I have to summarize it, like I do feel like in a niche that we're in, there's a realization that there is a very healthy liquid market for these assets. There is a lot of buyers. But I think there's also an acknowledgment. And I think for each seller, there's a learning process. I think each seller -- every seller thinks their building is a six cap, when in reality, it's probably a 7%. And so I think there is a learning process that happens with a lot of these sellers. And it takes a while for them to realize that, okay, I'm not going to get the pricing I was hoping to get, my expectations were unrealistic. But I do sense as we started towards the end of the year that there was for some sellers, a strong interest in selling assets this year. And there was some reference to concerns about the increased taxes. But I think broadly speaking, it really kind of depends. I mean I've seen a little bit of everything.

Our next question is from Amanda Sweitzer with Baird. Please proceed with your question.

I think your occupancy fell about 80 basis points during the quarter. Can you just break out what portion of that was maybe due to acquiring properties that weren't fully leased? I guess it sounds like Franklin Square Center? And then how much, if any, is due to kind of leasing dynamics within your portfolio?

Sure. So you're right. When we acquired the Rosedale asset, there was about 11,000 square feet that was vacant. There's about another 5,000 square feet in Bannockburn, and we're in discussions with the group to take the majority of that space. There's about 1,300 square feet in Grand Rapids that is leased, but the lease doesn't commence until 2021. And we have some small vacancies in Lavonia, and we have a vacancy in the Las Cruces. We have a lot of prospects on that building. And we're -- so cumulatively, that's how you get to the increase in vacancy.

Okay. That's helpful. And then what are you seeing in terms of dynamics? Have you guys gotten more inquiries for your vacant space? Any color you could provide there would be helpful.

Sure. So I would say any space that we have that is either has a lease expiration coming or is vacant, we have -- our team is actively pursuing leasing those spaces up or talking with the tenants to renew or doing -- looking for alternative tenants if the tenants have expressed -- for negotiations reasons, just wanting to move somewhere else. So I would say we're -- the team is getting ahead of these vacancies. There is a lot of discussion. I think we feel pretty good about the level of interest and activity. And I think that -- I'd say the team is on it, and there is a lot of activity.

That's helpful. And then apologies if I've missed it, but can you provide the estimated cap rate for the $72 million of acquisitions you currently have under contract?

Sure. So it ranges from low 7s to low 8. And on average, it's about mid-7s.

Our next question is with Connor Siversky with Berenberg. Please proceed with your question.

The first question on rent coverage, looking stable across the entire portfolio and I forgot if you had mentioned this last quarter, but for the acute care hospital property, I think there's only one within that portfolio. Does this metric include any contribution from the CARES Act or any other form of government support? And then if not, what's your strategy with that particular asset looking forward?

Alfonzo?

We're going to have to probably get back to you on that one. I'd have to consult with the group that prepares those numbers. But my neutral reaction is probably -- it depends on the tenant. I mean, if it's the inpatient, I think there might be some money in there. But I'd say for the physicians, I'd say probably a lot less, but I'd have to get back to you on that one.

Okay. Fair enough. And then looking at some of the information put out from the MOB peers this week and with some of the larger names eyeing the space for potential investment opportunities, maybe moving away from senior housing or what have you. I mean how do you look at the long-term opportunities as you're looking at the MOB markets? I mean I would imagine that within some of the top MSAs, pricing will become a little tight. So if you could just provide color on how you would look to invest in MOBs going forward, whether it'd be in secondary markets or if you would move down another avenue in the future to grow the portfolio or pricing might be more favorable?

And so our strategy has been to pursue secondary and tertiary markets. And historically, we've not been very active in the primary markets. So -- and I think in the primary market and the fact that there is more interest in MOBS, and there's a shift away from other asset types like senior housing, I think that is going to put more pressure on pricing in these primary markets, where, in particular, a lot of the new money in medical office wants to put their -- make their investments as in these bigger markets. In our niche, I mean our strategy has always been to try to be as nimble as we can and try to pursue as many opportunities as we can and try touse speed to our advantage. We felt a very good track record of execution that is really helping us get deals very often. We're getting called on deals that fall out of contract. That's becoming for whatever reason. And this year, that's become pretty common. And I suspect that, that might have to do with some 1,031 buyers that are not completing their transactions or financing that wasn't as attractive as initially underwritten. So we've our going forward, our strategy is to continue doing what we've been doing. And I don't think there's -- at least as I said today, I don't see any meaningful change to the market that I need to react to. I think our strategy is working, and we'll continue to pursue the strategy.

Okay. Fair enough. And then last quick one for me. Within those secondary, tertiary markets, then, do you have a maybe addressable market size or estimate for MOB assets or I understand if you don't?

Sure. And actually, I just got a note on the Cares money act, so -- from the asset management team. So the numbers do not include the Cares many act. But back to the other question, I mean the size of the MOB market, I don't have the figure in front of me, but it's become hundreds of billions off the top of my memory. Just looking at what I've seen over the years from research agencies like [Revista] or some of the bigger brokerage houses like CBRE or JLL, it's hundreds of billions. How that fragments into -- how much of it is owned by the health systems? How much of it is already owned by the REITs? How much of it is getting developed? How much of it is in the hands of physicians? And how much of it is in the hands of private investors? That granular detail I don't have, but it's -- the aggregate size and again, working off memory is hundreds of billions.

[Operator Instructions] Our next question is from Gaurav Mehta with National Securities. Please proceed with your question.

So I guess, as you think about impact of COVID on your acquisitions. So I was wondering if you have changed how you're underwriting these assets as compared to what you're doing pre-COVID in terms of your return hurdles or growth expectations?

Let me...

I'll answer that. Essentially, we're probably doing more due diligence than we did before. One of the key elements of our organization has always been deep due diligence. So therefore, unless we could visit properties were sort of kick the tires type of people. Unless we can visit properties, we won't be closing on them. We may have them on the contract, but the due diligence has to be finished. Right now, there are issues. We've gone out and required a tenant to put up a year worth of rent in escrow for this period, they had a strong group. We are looking at covert and any possible risk that could come from covert has been added to our due diligence, but we're not doing less due diligence because of the pandemic we sometimes have delays and slowness to close, but the due diligence has to stay at the same standard because that's sort of are key to us finding gems and secondary markets and having very high returns risk adjusted. So therefore, we're looking for low risk, but we -- part of that low risk is a deep due diligence dive.

We have reached -- it appears that there are no further questions at this time. I would like to turn the floor back over to Jeff Busch for concluding comments.

Thank you for everybody attending this quarter's earnings, and please be safe and healthy and careful in the coming six months. Thank You.

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