Chiron Real Estate Inc. (XRN) Q2 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to Global Medical REIT Second Quarter 2021 Earnings Call. As a reminder, 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 is being recorded. I would now like to turn the conference over to your host, Steve Swett, Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to Global Medical REIT's second 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 COTVID-19 pandemic and its effect on our tenants' businesses. The Company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is making this statement for purpose of complying with those safe harbor provisions. Furthermore, actual results may differ materially from those described in the 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 SEC filings. The Company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Additionally, on this call, the Company may refer to certain 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 the most currently comparable GAAP numbers in the Company's earnings release and in filings with the SEC. Additional information may be found on the Investor Relations page of the Company's website at www.globalmedicalreit.com. I would now like to turn the call over to Jeff Busch, Chief Executive Officer of Global Medical REIT. Jeff?

Thank you, Steve. Good morning and thank you for joining our second quarter 2021 earnings conference call. Joining me today are Alfonzo Leon, our Chief Investment Officer; and Bob Kiernan, our Chief Financial Officer. We hope that everybody continues to stay healthy and enjoy their summer. GMRE is committed to building a high-quality portfolio of medical facilities, aligned with strong operators and health care systems that will generate stable and growing returns for our investors. We continue to execute against this strategy and are very pleased with our performance in 2021. In the second quarter, we further strengthened our balance sheet and enhanced our financial flexibility, positioning us to continue executing on our growth plans and drive value for our investors. Importantly, our 2021 equity issuance have reduced our leverage from 52% at the year-end of 2020 to 41% and at both March 31 and June 30, 2021. Specifically, in the second quarter, we raised $51 million to our ATM program at an average price of $15.27 per share. Adding to the $150 million of equity we raised in the first quarter. In addition to our equity activity, we also amended our credit facility in the second quarter. The recast facility is unsecured and now has a total capacity of $750 million. We also reduced our pricing grid meaningfully and extended our debt maturity. With respect to earnings in the second quarter, we grew net income attributable to common shareholders to $0.04 per share. We also grew our FFO per share and unit to $0.22, up 16% from the second quarter of 2020. And our AFFO per share and unit to $0.23, up 10% compared to the same quarter last year. Despite the fact that we are seeing increased competition for acquisitions in our target markets, we remain disciplined and have been able to complete $140 million of acquisitions at a 7.4% weighted average cap rate to-date in 2021. We have made steady progress so far this year, and we look forward to continuing to provide value to our shareholders through the rest of 2021. With that, I'd like to turn the call over to Alfonzo to discuss our acquisition activity.

Thanks, Jeff. The market for medical facilities remains competitive. Investors are valuing the benefits of medical facilities due to their outperformance during the pandemic and optimism in the long-term fundamentals of health care. Despite increasing competition, we continue to successfully source attractive properties within our target cap rate range. During the second quarter, we closed on seven acquisitions totaling $71 million at a weighted average cap rate of 7.2%. Year-to-date, we have completed $140 million of acquisitions at a weighted average cap rate of 7.4%. Since our last earnings call, we acquired four MOBs, namely a $19 million two-building portfolio, which is 94% leased to A2-rated [Memora Health and Fortis], Illinois with 10 years of weighted average lease term. A $9 million primary care clinic with lab and imaging in Northeast Tallahassee, Florida, leased to one of the largest independent primary care groups in the market. A $7 million cancer center with Diagnostics, located adjacent to a 321 bed HCA hospital in North Charleston, South Carolina, which was acquired on a new 15-year single-tenant lease; and a $4 million acquisition of a Blue Sky Vision clinic and a suburb of Grand Rapids, Michigan. This is an add-on to our existing portfolio with Blue Sky Vision in the Grand Rapids MSA, which was acquired in March 2020 were $22.5 million. After factoring in our 2021 acquisition, we now have a $1.3 billion portfolio in 33 states. We have averaged 18 closings per year, which ranks us among the most active investors in the MOB sector. Our focus on acquiring individual assets has benefited us tremendously as most other investors focus on acquiring large portfolios. As we continue to grow, we will leverage our relationships and network to continue to source and secure deals. To that end, we currently have three properties with an aggregate purchase price of $23.2 million under contract. These properties are currently in due diligence and subject to customary closing conditions, and we can offer no assurance that they will be closed. Looking ahead to the remainder of the year, we are reaffirming our expectation for acquisitions in 2021 to be within our guidance range of $175 million and $225 million. I'd like now to turn the call over to Bob to discuss our financial results. Bob?

Thank you, Alfonzo. GMRE continues to benefit from a stable platform and from the strong and reliable relationships that we have built with our tenant. This quarter, our portfolio produced strong results, and we are excited to see with the remainder of 2021 bring. With respect to key performance metrics, we ended the quarter with $4.1 million of total leasable square feet portfolio occupancy of 99.1% with weighted average base rent of $23.90 per square foot and 2.1% weighted average contractual rent escalation. Our tenants had an average rent coverage ratio of 4.4x and our weighted average lease term at quarter end was 7.5 years. In the second quarter, we achieved a 28% year-over-year increase in rental revenues to $28.2 million, driven by our acquisition activity and rent escalations. Rent collections remained strong. Overall, we've collected over 98% of Q2 rent, including the impact of two tenants that we account for on a cash basis. Our total expenses for the second quarter of 2021 increased to $24.1 million from $20.4 million in the second quarter of 2020. The growth in expenses is primarily due to acquisitions completed over the past 12 months. G&A expense for the second quarter of 2021 was $4.3 million compared to $1.6 million for the second quarter of 2020. The difference is primarily due to the Company being externally managed during the second quarter of last year as opposed to our current internally managed structure. Including the $2 million of management fees incurred in Q2 last year in this comparison reduces the increase in our 2021 G&A cost to $600,000 year-over-year. This remaining increase is due to an increase in noncash stock compensation costs, which went from $900,000 in the second quarter last year to $1.6 million this year. Looking ahead, we anticipate our G&A expense to remain between $4 million and $4.3 million on a quarterly basis in the second half of 2021, even as we increase the size of our portfolio. Net income attributable to common stockholders for the second quarter of 2021 was $2.55 million or $0.04 per share as compared to net income of $0.2 million in the second quarter of 2020. FFO in the second quarter was $0.22 per share and unit, up 16% or $0.19 per share in units in the second quarter of 2020. AFFO for the second quarter was $0.23 per share in unit, up 10% from $0.21 per share in unit in the prior year quarter. Moving on to the balance sheet. As of June 30, 2021, gross investment in real estate was approximately $1.3 billion, which is up $263 million or 26% from the second quarter of 2020. In the second quarter, we generated gross proceeds of $51 million through ATM equity issuances of 3.4 million shares of our common stock at an average price of $15.27 per share. Year-to-date, we have raised $201 million from new equity issuances. Proceeds from these issuances were used to fund acquisitions, pay down the balance on our revolver and for general corporate purposes. Reflecting the impact of equity issuances, at June 30, 2021, we had $507 million of net debt, and our leverage ratio was 41%, which was consistent with the end of the first quarter of this year and down significantly from 52% at year-end 2020. As Jeff mentioned earlier, we amended and re-staged our credit facility this quarter increasing capacity by $150 million to $750 million, reducing borrowing costs across our pricing gains, converting to an unsecured facility and extending maturity. Our weighted average interest rate during the quarter was 3.17%, and our current unutilized borrowing capacity into the revolver is approximately $265 million. Overall, based on the progress we've seen so far in 2021, we are well positioned to continue executing on our acquisition and overall business strategy and look forward to sharing our progress with you throughout the rest of the year. This concludes our prepared remarks. Operator, please open the call for questions.

[Operator Instructions] Our first question today is from Amanda Sweitzer of Baird. Please proceed with your question.

I wanted to start on your unchanged acquisition guidance. And just given that you're approaching the low end of that guidance when you include your under contract pipeline. Can you give us a sense of what you need to see to give you greater confidence to raise that full year acquisition guidance or at least point investors towards the higher end?

Sure. So in our -- as you pointed out in our prepared remarks, we reaffirmed our guidance of $175 million to $225 million. Every week, we have pipeline calls to discuss deals in process, new deals and potential deals. And this helps management and the entire company keep a pulse on deal flows, capital needs, timing of closing and sequencing for logistical purposes. So, these calls also help management calibrate the pace of deals and market pricing. And every quarter, we sit down as a management team to prepare our earnings report and our acquisition guidance is a product of the cumulative knowledge we have at the time. Given our relative small size, there's always the possibility that we may find deals that will move the needle. Historically, we've come across larger transactions that offer a good value. It's not possible to predict whether or not we will find these larger transactions. So, the deal of -- the flow of deals in the market is inherently unpredictable, but we try to provide a guidance number that is a reasonable based on what we know at the time.

That's helpful, Alfonzo. And then I guess kind of following up on that, you talked about the increased competition in the deal market. But can you quantify at all how much deal volume you are seeing on a monthly basis and how that compares to either earlier this year or pre-COVID levels?

Sure. So I think just based on my tracking of the market, it's -- just to give you a rough sense, I mean, we -- on average, before we would see 25, 30 deals a month. It's closer to 40 to 50 deals a month in terms of dollar numbers, dollar values, it's running at, call it, 70%, 80% above average. And if you look at across time, every month, there's a lot of volatility in terms of number of deals and volume that comes to market, but the last three months have clearly been very busy. And everyone I talked to is running full and with more to come. So everyone is expecting this year to have a lot of transactions come to market. It's very, very busy. Everyone is really stretched pretty thin. So, it's dramatic.

Yes. That's helpful. And then final question from me, I mean, debt and equity capital are both available to you today. Can you provide an update on how you're thinking about funding deals for the rest of the year between leverage and equity and where you're comfortable taking that leverage level today?

Sure. So just kind of thinking back and looking at what we've done so for this year with the $200 million of equity that we have raised. We were very opportunistic in this second quarter and able to sell shares at an attractive price and are comfortable doing that and taking advantage of those situations. And we'll -- as we look ahead, we'll look at our pipeline and assess market conditions and consider additional equity. But we're comfortable in this range of between $40 million and $45 million leverage. And so far, we've been at the lower end of that range, but I think that range is still a comfortable range for us.

The next question is from Rob Stevenson of Janney. Please proceed with your question.

You guys have had very little lease expirations over the past few years, but when you start looking out in 2023 and especially 2024, the lease rollover starts to increase pretty noticeably. When you look at those, is that one or two large tenants? Is that a lot of little tenants that are in that sort of 6% and 17%? And when do you guys start approaching those tenants to sort of knock that down a little bit so that you're not doing a lot of heavy lifting in the back half of 2023?

So Rob, I'll start and with respect to 2023, 4% of that 6% is two specific tenants. So it's pretty highly concentrated. And as you get into 2024 and you look at the percentages increase up towards '16, there are a number of individually significant tenants say that call it, 3% level -- 2% to 3% level that start to add up. And we're working on that today. I mean, those are things that we are kind of socializing and are part of the kind of the process that we're going through at this point. So it's really never too early to be focused on it and I think the team is really starting those process today and staging it the way that we can be successful against that.

Okay. And then...

Let me just add to that. We renewed number two of our top three tenants for 10 years this last year. And that was -- one of them was in advance, one of them came up. We do get -- we are in front of our tenants all the time, and we're starting conversations with all of them even a few years out.

Okay. And then Alfonzo, are you seeing any better opportunities given the volume and the pricing in certain asset types these days over others, among your core?

Not necessarily, no. There's -- I would characterize it more as supply is meeting demand. But it's -- not that I can tell that it's really opened up any -- nothing really kind of popped the mind in terms of -- as a result of the supply coming to market.

Okay. And then last one for me. Jeff, you guys bumped the dividend to $0.05 earlier this year on the common. You have a 80% to 85% targeted payout, you were about 89% here in the second quarter. How are you and the Board thinking about future dividend increases and the magnitude of those increases in the frequency?

Well, it's up to the Board, so I can't really give what they're thinking. I mean the idea of the last time was we were going to start a dividend policy and hopefully do every year. Right now, what we've done is we brought down -- we traded off AFFO for leverage. So you see how our leverage went from 52% to 41%, and a lot of that was a strategic trade-off to reduce our leverage in there. But right now, I expect now that we're at the low end of our cycle and leverage as we get larger, our AFFO will go larger. So the coverage ratio -- I mean, the ratio that we calculate our dividend will be right in target. I do expect that.

The next question is from Connor Siversky of Berenberg. Please proceed with your question.

Just to start on rent coverage. I noticed in the MOB portfolio, coverage had ticked down slightly in the last quarter. Wondering if this is due to acquisition activity, rolling new tenants into the list? Or was there kind of a change in the complexion of operations in the tenant base within the last two quarters or so?

Connor, there wasn't -- I mean, anything really in particular that drove that change. I think when we look at the number as a whole, we're still kind of very comfortable up at the level that it is. And that decrease from from Q1 to Q2, it wasn't anything kind of call it individually significant or trend as I went back and looked through it.

Okay. That helps. And then I think it was mentioned in the prepared remarks the two tenants on a cash basis, apologies if I missed this. Are they current on rent? And then what's the plan with those two tenants? Is there a plan to transition those properties or maybe dispose of them as we go along?

Yes. So I can give some color on those. And yes, so kind of backing up, there's two tenants are Derby, Kansas and Melbourne, Florida tenants that are both on a cash basis, and we did not receive any payments from them during the quarter. The Derby asset is much smaller. So I'm going to -- I'll focus on the Melbourne asset and just give an update as to the current status. As we've mentioned in the past, is company that is in Chapter 11 bankruptcy, and they have gone through the Chapter 11 proceedings and they have a court-approved reorganization plan. And as part of that, they have affirmed an updated lease with us. However, the tenant hasn't complied with the provisions of the reorganization and continues to be in default under our lease for nonpayment. We had -- we've been encouraged by the way they were handling the Chapter 11, and how it was moving along with their pursuit of both equity and capital and PPP debt. But the lack of progress in securing capital and ongoing violation of the bankruptcy provisions, we've initiated some more aggressive efforts to improve our position and just pursue alternative tenancy for the building should that opportunity arise. And as we work the different sides of the situation, and including some administrative elements of our underlying CMBS debt that finances that asset. We received very positive feedback from several high-quality tenant prospects over the last month. So we certainly have better visibility into that market and what that looks like. And I think although we're disappointed that the progress here is moving more slowly than we hoped, we continue to be very optimistic about the long-term prospects of this building. And right now, our next step is to really pursue potential remedies with the bankruptcy court, as I mentioned, is there in violation of the rework plan. We were going to be more aggressive on that front. And that could result in a situation where we -- two positive results for us. We can possibly begin to more actively pursue retenanting, or we can begin to force them to to comply with the provisions of the bankruptcy. So that's really -- those are our next steps, and that next court date is later in August. So it's something that is coming up, something that we're working and obviously has complexities in it due to the bankruptcy.

The next question is from Barry Oxford of Colliers. Please proceed with your question.

Great, Alfonzo. So when you're looking at the acquisition market right now, and I know you're always looking at kind of different property types. When you look at behavioral health, how are you viewing that now given that that is probably in more demand? Have you seen cap rates moved? Or are you liking that property type going forward more so?

Sure. So I -- so we've been looking at behavioral pretty much since the beginning, not with a heavy emphasis. But -- and what's different about behavioral -- and this is my perspective on it is that, when I compare it to medical office or surgery centers, the variety of operator, the variety of building type is much narrower than within behavioral -- the variety of facilities within behavioral is pretty wide. Everything from institutional kind of hospital setting to resorts, to things that look more like camps. So that's one obstacle. The other one is the types of businesses. It also varies a lot, and there's a lot more nuance behind kind of each type of operator and type of business they're doing and how they're positioned, what their reimbursements look like, what their payers look like and what kind of services they provide. For me, a big thing is how resilient is their business model, what are their competitive advantages, what their financials look like. The other challenge with behavioral is they tend to want to monetize our assets at a pricing that is meaningfully above appraised value, so that becomes a challenge too. Having said that though, I mean there have been opportunities that make sense to us that the real estate is attractive has good residual value, the pricing is reasonable, the rents are reasonable. But from our perspective, it's a smaller subset of what's available. So -- and the other thing to keep in mind is in the last couple of years, cap rates for behavioral just across the board have gotten compressed. They were reliably sort of north of eight cap or seven cap and now there's been some comps that have printed into fixes. So that's shifted as well. I don't think the market is doing a good job of differentiating between the types of operators and types of businesses. They're applying sort of a simplistic approach maybe. So that makes it challenging, too. But we are looking. There are some segments like geriatric behavioral or pediatric behavioral that make a ton of sense. And there are some operators that are very good as well that we like and know a few. But it's -- you have to dig through a lot to get deals that we find attractive.

Got it. No, perfect. I appreciate the color on that. A question for Jeff, with the Delta COVID, the kind of coming back and kind of we're in a cycle ahead in some states out there. Jeff, would you see us kind of going back to postponing electric surgeries? Or would you say, look, Barry, I don't think that's really on the table?

They kind of want -- I mean some of it is on the table realistically, but they got a lot better at what they're doing. I mean, the time they postponed it, there wasn't vaccination, there wasn't other issues. So it's possible it could be a short slump in those, but not major. The medical practices themselves got really good procedures and how to protect the patients excellent procedures and worked a lot. So the Delta out there can have some impact. I mean, even during the time that they postponed we still collected 99% of our rent. Our tenants are in good shape, but there could be a little bit of that realistically.

The next question is from Bryan Maher of B. Riley Securities. Please proceed with your question.

Most of my questions have been asked and answered. But one of the things that we learned early on, on Wall Street is for every buyer, there's a seller. And Alfonzo, you talked a lot about how deal activity you're seeing a lot of assets for sale. Maybe Alfonzo or Jeff, you can talk about what's motivating the sellers? Is it just purely pricing? Is it developers looking to sell an asset and move on to the next property. What is going on out down the seller side?

I think it's a combination of things. I mean, yes, pricing is attractive. I think -- there is some tax concerns. I mean that's come up in conversation. And one way to look at it is less than you would have expected, but I'm always a little skeptical when I hear it as a rationale. M&A activity also drives -- has brought a lot of monetizations to the market. The private equity investors, they like selling the real estate when they buy the opcos. And more often than not, it's the physician group and the founders that own the real estate, they are the ones that are selling in conjunction with or ahead of or after they get acquired by a private equity group. I think there's just a natural life cycle, end of life cycle where you've got a founder that's owned the building for 5, 10 years, it just feels it's the right time to sell. There's a state planning. There's always a variety of reasons. You mentioned investors, too. I mean that's been a growing inventory of real estate that's come to market. I mean just as the industry has matured, there's just more investors that own a bigger amount of real estate. So it's a combination of things, and -- so it's not any one thing.

There are no additional questions at this time. I would like to turn the call back to Jeff Busch for closing remarks.

I'd like to thank everybody. And I just want to mention one milestone that we hit, which wasn't easy. We went over $1 billion market cap in this quarter. And thank you very much for attending this meeting, and stay safe. Bye.

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