Chiron Real Estate Inc. (XRN) Q1 2021 Earnings Report, Transcript and Summary

Thank you for standing by, this is the conference operator. Welcome to the Global Medical REIT First Quarter 2021 Earnings Call. As a reminder, all participants are in a listen-only mode and this conference call is being recorded. After the presentation, there'll be an opportunity to ask questions [Operator Instructions] I'd now turn the conference over to Evelyn Infurna, Investor Relations. Please go ahead.

Thank you Operator, Good morning, everyone and welcome to Global Medical REIT's First Quarter 2021 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, 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. I'd like to turn the call over to Jeff Busch, Chief Executive Officer of Global Medical REIT. Jeff?

Thank you, Evelyn. Good morning and thank you for joining our First Quarter 2021 Earnings Conference Call. Joining me today 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. GMRE was founded with a vision to REIT to create a resilient high-quality portfolio of medical facilities, align with the strongest operators and healthcare systems in their local markets, with the expectation that these properties would generate stable revenue and return for our investors, coming off a strong year in 2020 as vaccinations continued to be administered. And we start to see a wide at the end of the tunnel, we are well positioned to continue to execute on our strategy 2021. With respect to earnings in the quarter, we grew our quarterly FFO per share and unit by 21% to $0.23 per share and our FFO per share and units by $0.20 to $0.24 compared to the first quarter of 2020 with a focus on both the leveraging and expanding financial capacity to execute on our growth plan. During the first quarter, we raised a total of $150 million from equity issuances, including $35 million from ATM issuances and $115 million from an underwritten equity offering in March. Despite the fact that we're seeing increasing competition for acquisitions in our target market, we were able to put this capital to work by completing $101 million of acquisitions at a 7.4% weighted average cap rate to date in 2021. While we are pleased with this acquisition volume so far in 2021, our activity in any quarter year period, isn't indicative of our annual expectations. We currently expect that patents will result in more typical annual acquisition total. After quartering, we amended and restated our credit facility to increase our borrowing capacity by $150 million. So we do so borrowing costs convert to an unsecured facility and extended a debt matured or amended credit facility and recent equity raises, provided us with the additional financial flexibility as we evaluate new acquisitions to grow our portfolio. We are off to a good start this year and we look forward to continuing success while executing on our growth plan for the rest of 2021. Now I will turn over to Alfonzo.

Thanks, Jeff. As Jeff just touched on the market for medical facilities is becoming increasingly competitive, given their relative outperformance during a pandemic and investors optimism and the long-term fundamentals of healthcare. We are seeing an increased interest in our target markets from participants that historically were concentrated in other asset classes and urban or high barrier markets. The increased liquidity and flow of capital into medical office is encouraging more sellers and resulting in an increased supply of MOB coming to market. Despite this increase in competition, we finished 2020 with good momentum and we continue to be successful in finding and acquiring a creative properties within our target cap rate range. In a quarter, we closed on four acquisitions, totaling $43 million at a weighted average cap rate of 7.6%. Today we completed $101 million of acquisitions at a weighted average cap rate of 7.4%. Additionally, we currently have three properties with an aggregate purchase price of $32 million under contract. As has been our policy today, we are carefully evaluating these properties to make sure that they and their operators meet our investment criteria and we can offer no assurances that they will ultimately close on these acquisitions. Among our completed acquisitions, there are two that we'd like to highlight. In April we acquired a 6 property portfolio, 82,000 square feet for $31.2 million and the Fort Myers market occupied by a large primary care and women's care practices, all but one of the buildings is located within half mile of a major hospital. Buildings have been occupied by these tenant groups since construction in the early two thousands, all the buildings are triple net lease with 2% contractual rent escalations. In March, we closed on a $17.4 million acquisition of a 34,000 square foot behavioral health facility occupied and guaranteed by Kindred Healthcare. The 46 bed facility is one of two behavioral hospitals, Kindred recently opened in the DFW market and is expandable on an overall 5.5 acre site. The time of acquisition, the facility reached, stabilize occupancy. After factoring in our 2021 acquisitions, we now have a diversified $1.2 billion portfolio in 32 states we've averaged 18 closings per year, which ranks us among those active investors in the MOB sector. We have been able to sustain our acquisition pace by primarily buying an individual asset of most MOB investors focused on acquiring large portfolios. As we continue to grow, we are leveraging our network and the track record we've built in our niche, the source and secure deals, but that said, while the market is increasingly competitive and we have completed $101 million of acquisitions to date, we are not changing our acquisition guidance of $175 to $225 million at this time. I'd like to now turn the call over to Bob to discuss our financial results. Bob?

Thank you. Well, Alfonzo. The GMRE benefits from a stable business model and from the strength and profitability of our tenants. Once again, the portfolio produced strong results this quarter. We have accomplished a tremendous amount already this year, and we're excited to see what the remainder of 2021 brings. With respect to key performance metrics, we ended the quarter with the portfolio occupancy of 99% total leaseable square feet of $3.8 million square feet with a weighted average base rent of $23 94 per square foot. And 2.1% weighted average contractual rent escalation. Our tenants had an average rent coverage ratio of 4.6 times and our weighted average lease term at quarter end was 7.9 years. We achieved a 27% year over year increase in our rental revenues to $27.3 million in the first quarter to the benefit of our acquisition activity and rent escalations. Rent collections remain strong. Overall we've collected over 98% of our Q1 rent, including the impact of two tenants that we account for on a cash basis. Our total expenses for the first quarter of 2021 increased to $24 million from $18.8 million in the first quarter of 2020. The growth in expenses is largely related to the acquisitions completed over the last 12 months. G&A expense for the first quarter of 2021 was $4.4 million and compares to a pre-interview journalization combined expenses $3.8 million, including $1.8 million and G&A and $2 billion in management fees to our former advisor in the prior year quarter. But then these G&A expenses, our non-cash compensation costs drove the overall increase with $1.7 million of stock compensation in 2021 compared to 922,000 in the first quarter of 2020. As discussed last quarter, this increase is the result of the one-time retention grants made at the time of internalization. We anticipate our gene expense to remain between $4 million and $4.4 million on a quarterly basis in 2021, even as we increase the size of our portfolio. Net income attributable to common stock will just for the first quarter of 2021 was $1.8 million or $0.03 per share. That's compared to net income of $1.3 million or $0.03 per share, in the first quarter of 2020. FFO for the first quarter was $0.23 per share in unit as compared to $0.19 per share in unit in the first quarter of 2020. AFFO for the first quarter was $0.24 per share in unit up 27% from prior year quarter. Moving on to the balance sheet, as of March 31, 2021, our gross investment in real estate was approximately $1.2 billion, an increase of $212 million for 22% in the first quarter of 2020. On March 18th, we completed an $8.6 million share equity offering raising approximately $150 million in gross proceeds when combined with equity issuances on our ATM during the quarter rate to approximately $150 million in gross proceeds at a weighted average price of $50.25 per share. Proceeds from these issuances were used to support our acquisition activity and to pay down the balance of our revolver. On the liability side of our balance sheet at March 31, we had $485 million of net debt and our leverage ratio is 41%. Our weighted average interest rate during the quarter was 3.17%. As Jeff mentioned, as we noted in our recent press release on May 3rd, the amended and restated our credit facility. This transaction is very significant to us on many fronts as we increased our borrowing capacity by $150 million reduced borrowing cost across our pricing grid, converted to an unsecured facility and expanded our debt maturity to a weighted average of 4.9 years. The facilities now comprised of a $400 million revolver, a $350 million term loan and a $500 million accordion. Those also that subsequent to closing the amended facility we entered into forward starting interest rate swaps to hedge the library components that the interest rate on the term log. These new swaps will be effective after our current interest rate swaps begin to mature in August of 2023, and they will run until May of 2026. As of today, our borrowing capacity under the revolvers, approximately $250 million, with the closing of this amended facility. I'd like to thank all of the syndicate lenders that's by JP Morgan for their support and vote of confidence in GMRE. Overall, based on the steps we've taken so far in 2021, we believe that we are well positioned to execute on our ex acquisition strategy and are looking forward to sharing our progress with even the coming quarters. This concludes our prepared remarks operative. Please open the call for questions.

We will now begin the question and answer session. [Operator Instructions]. The first question comes from Amanda Sweitzer from Baird. Please go ahead.

Thanks. Good morning. On your [inaudible] Acquisition guidance, Is that being driven more by your desire to do lever or because of that competition that you talked about that you're seeing in the market? I guess I'm trying to get a sense for whether that acquisition guidance could increase later this year, if you do find more opportunities or if you expect to maintain it, to maintain that leverage?

That's actually a great question. We buy whatever we could buy within the quality that we could buy and there's more competition on the market. So, you know, where we're basically, they asked if we do find product which may happen and it fits within that we will buy I'll, we're still, you know, working to the guidance on our leverage is really there because we want to absolutely bring down our leverage amount, but we do have the ability to buy and we will buy products. It's more of a realistic situation of the market right now at this point, but it could change later.

Okay. That makes sense. And then as you think about tax increases or potentially rolling back 1031 exchanges, are there any tools that you could use, like OP units or other things that you think could become more attractive to sellers down the line?

Alfonzo?

Sure. Yeah, I think so. I mean we always introduce the concept of OP units with as many selling parties as we can. I mean, I'm of the belief that it'll become more attractive, but it's, it's hard to predict, but we always offer it.

Cool. And then last one for me. Can you just talk more about what you're seeing in terms of leasing activity today? You obviously don't have much vacancy across the portfolio, but do you think we could see an occupancy uptick this year, especially given the low amount of lease maturities you have?

I'll be kind of, you know, one vacant. Yeah. We have one vacant property at this point. So our occupancies, it's a tick over 99% and we're, we're actively working to you know, to release that facility, but it's a work in progress and we don't have a more detailed update at this point, but it is something that we're actively, you know, we're actively working on.

Great, thank you. I appreciate the time guys.

The next question comes from Juan Sanabria from BMO capital markets. Please go ahead.

Hi, good morning. Maybe a question for Bob, So post the equity race and the leveraging, what is your new target, either leverage your end to EBITDA terms and how much a balance sheet firepower do you have to debt fund acquisitions?

Sure. So, you know, w we know at the end of the quarter, you know, we reported our leverage down, you know, in the lower forties at 41%. And, and, and as we talked in the last quarter, you know, our goal was to reduce our leverage and to do that over time. And so with our $250 million of borrowing capacity that we have today, you know, our expectation right now is that we would, you know, we would be comfortable increasing our Lethbridge, you know, into the, into the mid forties and, and to be comfortable at that level. So I could see, you know, from our target, you know, we're not, we're not really changing where our target is and where we're comfortable in that, in that mid forties. And as we get larger and we, you know, grow and get more scale, you know, over time, you know, we'll bring it down in, in, stay at these lower levels and possibly even lower as we, as we get larger. But right now we're, we're still comfortable in that, in that forties range.

Right. And then just the second question it seems like you're doing more dialysis and maybe a bit more behavioral health than in the past, is that a strategic shift away from traditional medical offices given just the risk reward and maybe cap rate compression for [indiscernible] and should we expect more of those to other food groups, dialysis and behavioral health?

And so we've been it's not like we've not been looking for dialysis, the bulk of the inventory that becomes available in the market in the dialysis space is a product type that doesn't really fit well with our portfolio. It's typically smaller typically trading at a pretty low cap rate. And, you know, typically it's single tenant long-term lease, which fits for us, but it makes it a product type that is very attractive to the 1031 exchange market. So if you look at the dialysis that we've acquired over the years, and we've off the top of my head, I feel like we've acquired dialysis centers you know, starting three years ago. But if you look at the ones that we have acquired a non-typically not single tenant, they've got one or two you know, two or three tenants. We acquired one that had a ground lease. So my point is dialysis centers that are not ideally suited for the 1031 exchange market. And we pick up extra yields because of that extra complexity on the behavioral side, similar story. I mean, we you know, I've been looking, we've been looking for years and a lot of what we've seen over the years, hasn't really needed a lot of sense for us. A lot of the behavioral product that is in the market is addiction centers. That niche within behavioral is not a niche that I like very much and there has been to my sense, a bit of an evolution in the market. When I compare what I was looking at three years ago, with what I'm looking at today, I am seeing more operators and more business models that make more sense to me. So case in point, the, the facility we bought in Texas with kindred makes a ton of sense starting with the fact that Kindred is a large operator. They know what they're doing. They have a balance sheet, have resources and these particular facilities are, you know ideally suited for what they want to do. We spoke with [ph] Kindred about our business plans. It makes a ton of sense you know, it's -- it fits our portfolio. It fits the way we look at deals if it's our underwriting. So it's not it's not been a shift. It's just that in the past, there hasn't really been opportunities that we'd liked and just want to be like.

Just one quick follow up to that, where our cap rates across the main food groups, if you look at dialysis, behavioral, and kind of traditional MOB's, and do you value dialysis on a per square foot basis? Or how do you think about that?

Okay. So there was multiple questions there, but starting with the dialysis one, I mean, it's same way. We look at all our deals. It's holistic. I mean, it's, it's the rent, it's the term, it's the price per square foot. It's the condition of the building. We talk with the specific group that's within the building, you know, where they're bringing their patients, why it makes sense. We look at the competition. So we look at many things. We obviously also look at the yield it needs to fit our portfolio. You know, we're not going to chase dialysis centers that are trading at five pounds. But you know, we are, if there's a dialysis opportunity that is within our price range or yield and make sense to us, you know, it makes sense that the service that they're offering makes sense. And, and there's we, you know, we, we come to the conclusion that there's it's a, it's a location that has long-term prospects, then yes, we'll, we'll, we'll buy that Dallas Central. So it's not any one metric is my point is we look at all of it. There were more parts of your question. What other questions do you have?

Sorry, just the relative yields for dialysis, MOBs and behavioral health, or are they different or kind of all lumped in similar ranges for us within the same bandwidth we're looking for?

Right. We're looking for a cap rates that are in the seven range in the market cap rates vary quite a bit. I mean, again, on that dialysis center, depending on the profile, you'll have a segment of the dialysis market that trades in a five in the six or the sevens for MOBs similar story. I mean, you've got a segment of the market that trades in a fives, another one that trades in a six and another one in the side of this behavioral historically has, has been higher cap rates, but in the last 12 months, there has been compression in that sector more than other sectors. And I've heard anecdotally that there's, there's a lot more interest in behavioral, a lot more private equity interest in behavioral. So behavioral that I saw trading NDAs are now trading in a seventh and, you know, there's, behaviorals that are trading in the sixth, which was rare before. So there's, there's been a shift, but behavioral is definitely an asset type that historically has traded at higher yields, but in the last six months, there's, there's definitely been a shift.

The next question comes from Bryan Maher from B. Riley Securities. Please go ahead.

Good morning, Jeff Alfonzo and Bob Kiernan. All right, So you're are interesting, but not surprising on new buyers entering the market. I mean, there's so much capital out there chasing real estate right now. I don't think any of us are really surprised by that, but can you identify for us kind of who the predominant players are chasing the assets that you're looking at and, you know, clearly this can't be good for cap rates in general, not specific to any one product type. Has there been any type of reset in your view as to kind of cap rate, you know, down 50 beds, 75 beds, a hundred pips from what you were used to before?

Sure. So well, one thing, one big thing to consider when, when you think about money, that's come into the sector, specially in the last six to nine months, it's money that wants to move in big increments, ideally they want to move $100 million to $200 million at a time. The money that has come in is, is less interested in growing their portfolios in $5 million, $10 million, $15 million increments. They would much, there was strongly prefer to grow in $25 million, $50 million and $100 million increments. So a lot of the pressure that's been put into the market in the last six to nine months has been most acutely in portfolios or larger assets. So things that are trading, you know, any asset over $50 million gets a lot of attention. And there's been compression to my, from my perspective, a lot more compression in that space in particular portfolios interest for portfolios is really strong. And a lot of parties show up a lot on new parties. So when I hear of a portfolio that is north of $100 million, that is, is coming to market I'm expecting that to trade, you know, 50 basis points, 75 basis points to where it probably would have been a year ago. So that's, that's where I see the bulk of the pressure from a new money coming in terms of you know, characterizing the money coming in. I mean, it's a mix. You have a handful of established private equity funds that has continued raising a lot of money and continue being very active. You also have new funds new players in the space and to be determined whether or not they're going to be a very active and successful but they're there and they're competing within our specific niche and, you know, we're, we're looking at MOBs and a$5 million to $15 million range and inpatient facilities. Still, you know, it's still a niche that doesn't necessarily attract as much interest, a lot of the money coming in once the chase, what everybody else wants to chase, which is investment grade health system anchored larger facilities, 30,000 to 40,000 square foot facilities in larger markets. So, you know, the, the competition work we're getting is more scattered it, and it's depending on the location, depending on the building, depending on the profile, it's a very different we're not running into the same people in every deal. It's actually kind of surprising how for the deals we chase the people that we've come across, varies a lot. You know, hopefully that helps paint the picture for your question.

Yeah, that's great. And maybe just one question for Bob you talked about G&A and the kind of four to four, four range, you know, per quarter, and you don't expect any changes really this year, but the bigger picture as you layer on assets you know, $50 million, $100 million, $150 million, you know, what's kind of the break point of incremental acquisitions in dollars that would require, you know, a new [ph] FTE at headquarter or asset management or accounting or whatever, how should we think about kind of longer term?

Sure. So, you know, where we are from a head down today is, you know, we have, you know, 24, you know, people, you know, total head count and we are, as we from a staffing perspective, we've senior leadership is very well in place. And so the additions that we make at this point are, are not at that senior management level, as much as it is just adding layers to help as the, you know, the company grows within either asset management, within accounting and things of that nature. And so from a systemic cost, a total cost perspective, as I look at, if you think of total G&A and we've, we've talked about the internalization grants and how those are going to start to roll off, you know, those costs are going to decrease. You know, you'll see that decreased over time and any replacement is going to come, you know, with additional head count, shouldn't have a significant impact on our, on our total G&A, as we scale up into that, you know, billion and a half and core looking into $2 billion of asset type. So this, you know, call it $17 million ish, you know, run rate of G&A, if you think about it, as we scale, it looks, I'm pretty comfortable with where we are from a total perspective of kind of bringing our, our, our total G&A costs as a percentage of our, of our, of our gross staff down and, and to be, you know, more in range with the, with the larger peers. So yeah, it's really going to be again incremental, but I think we're pretty well staffed today at the, certainly at the senior management level. And then it'll be more kind of additions, you know, to fill in and help to maintain our support for the assets that we have.

Okay. Great. Thanks.

That's all for me. Once again, if you have a question, please press star, then one, there are no further questions in the queue. I would like to turn the conference back over to Jeff Busch for any closing remarks.

Thank you everybody. We had a great quarter again, and I appreciate your time and questions. Have a good day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.