Chiron Real Estate Inc. (XRN) Q3 2021 Earnings Report, Transcript and Summary

Welcome to Global Medical REIT Third Quarter 2021 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator instructions] I'd now like to turn the conference over to Steve Swett with ICR. Please go ahead, Sir.

Thank you. 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. 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, adjusted funds from operations, EBITDARM and adjusted EBITDARM. 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 third quarter 2021 earnings conference call. Joining me today are Alfonzo Leon, our Chief Investment Officer; and Bob Kiernan, our Chief Financial Officer. During the third quarter, we produced strong and steady results, which again demonstrates the importance of our strategic focus as well as our team's ability to consistently execute at high level. With respect to earnings in the third quarter, net income attributable to common shareholders was $0.6 per share and our FFO was $0.23 per share in unit. We grew our FFO per share and unit to $0.24 in the third quarter and year to date our AFFO at $0.71 per share and unit is up 9.2% compared to last year. At fortifying our balance sheet and liquidity in the second quarter, we continue to identify and close target acquisitions that meet our quality standards and return hurdles. In the third quarter, we acquired five properties for $49 million bringing our year-to-date acquisition volume to $163 million at 7.5% cap rate. Alfonzo will provide more details later on this call, but I want to note that our portfolio is now over $1.3 billion in total assets and we now surpass $100 million in total annualized base rent for our properties. I'm proud of these accomplishments and believe we have a meaningful opportunity to grow accretively into the future. With that, I'd like to turn the call over to Alfonzo to discuss our acquisition activity in more detail.

Thanks Jeff. Due in part to the outperformance of medical facilities during the pandemic and optimism in the long-term fundamentals of healthcare, the market for medical facilities has been competitive this year. Despite increased competition, we continue to successfully source attractive properties within our target cap rate range to build a diversified portfolio leads to strong healthcare operators providing needed care to their communities. During the third quarter, we closed on five acquisitions, totaling $49.3 million at a weighted average cap rate of 7.6%, including an outpatient clinic and imaging center located in Illinois [ph] for $19.2 million with approximately 10 years of remaining lease term Decatur Memorial Hospital now part of the A-1 rated Memorial Health Systems accounts for 95% of the property revenue. A cancer infusion and imaging center in North Charleston, South Carolina for $7 million entering into a new 15-year lease for a 100% of the property was Charleston Oncology. The tenant is a largest independent oncology group in the area with 11 oncologists. 91% of an MLB condominium in Munster, Indiana for $6.6 million, upon closing, we assume five leases and executed three new leases with existing tenants with an weighted average remaining lease term of a approximately seven years. The property, which is anchored by Midwest with 41% of the total is located across the street from a 458 bed regional hospital owned by CHS, a multitenant MOB in Tallahassee [ph] Florida and the seller's interest in an existing ground lease for a total purchase price of $11.3 million. The MOB is on campus and attached to the 378 bed, Hialeah Hospital, which is now part of Steward Healthcare. And lastly, an MOB in Athens, Georgia for $5.3 million, the property is a 100% occupied at Piedmont Athens Regional Medical Center for use by their pediatric specialists. An acquisition in place lease had a remaining lease term of approximately three years. Year to date we have closed 60 acquisitions for $163 million at a weighted average cap rate of 7.5%. And at September 30, 2021, we had a $1.3 billion portfolio with properties in 33 states. 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. That end, we maintain an active pipeline of potential opportunities in different stages of discussions and currently have three properties with an aggregate purchase price of approximately $24 million under contract. These properties are currently in due diligence and subject to customary closing conditions. Looking ahead to the remainder of the year, we believe that we may close on 15 to 30 million of acquisitions by year end. Since quarter end, we sold one property for gross proceeds of $5.5 million resulting in a gain of approximately $1.1 million and have entered into a contract to sell another property in Belpre Ohio for gross proceeds of approximately $44.6 million. The Belpre transaction is subject to due diligence and customary closing conditions. And it's expected to close no earlier than March 2022. Although we don't actively look to sell our properties based on market conditions, we may sell properties for various strategic or opportunistic reasons. I'd like to now turn the call over to Bob to discuss our financial results. Bob?

Thank you. Alfonso. GMRE continues to benefit a stable platform and from a strong and reliable relationships that we have built with our tenants. This quarter, our portfolio produced strong results and we are confident that we can continue to produce strong results through year end. With respect to key performance metrics we ended the quarter with $4.2 million of lease -- total leaseable square feet, portfolio occupancy of 98.9%, but weighted average lease term of 7.3 years and a rent coverage ratio of 4.6 times with 2.1% weighted average contractual rent escalations. In the third quarter, we achieved a 19.6% year over year increase in rental revenues to $30 million driven primarily by our acquisition activity over the past year, as well as rent escalations. Rent collections remain strong. Overall, we collected over 99% Q3 rent, including the impact of two tenants that we account for on a cash basis. Our total expenses for the third quarter of 2021 were $24.6 million compared to $34.7 million in the third quarter of 2020. Net of the impact of $12.6 million of expenses related to the management internalization transaction that we incurred in the third quarter of 2020 expenses were up 11.4% primarily due to increased depreciation and amortization expense driven by acquisitions completed over the past 12 months. G&A expenses for the third quarter of 2021 were $3.9 million compared to $4 million for the third quarter of 2020. Within our G&A expenses note that our stock compensation costs in the quarter are $1.2 million and our cash G&A cost were $2.6 million. Looking ahead, we expect our G&A expenses to be modestly above this level that range between $4 million and $4.3 million on a quarterly basis even as we increase the size of our portfolio. Net income attributable to common stockholders for the third quarter of 2021 was $3.7 million or $0.06 per share as compared to a loss of $10.3 million or $0.22 per share in the third quarter of 2020. FFO in the third quarter was $0.23 per share in unit compared to negative $0.03 per share in units in the third quarter of 2020 AFFO for the third quarter was $0.24 per share in unit up from $0.23 per share in unit in the prior year quarter and analyzing these year over year comparison please remember that our net income attributable common stockholders in our FFO, the third quarter of 2020 reflect the effects of our management internalization transaction. Moving on to the balance sheet as of September 30, 2021, our gross investment in real estate was approximately $1.3 billion, which is up $169 million or 15% from the start of the year. At September 30, 2021, we had just under $555 million of net debt and our leverage ratio was 43%, up slightly from the prior quarter, but down meaningfully from 52% at yearend 2020. Our weighted average interest rate during the quarter was 3.04% and our current unutilized borrowing capacity on the revolver is approximately $240 million. Overall, we continue to believe we are well positioned to execute on our acquisition and overall business strategy and look forward to sharing our progress with you while we report full year results. This concludes our prepared remarks. Operator, please open the call for questions.

Thank you. We will now begin the question and answer session. [Operator instructions] Our first question is from Barry Oxford with Colliers. Please go ahead.

Great. Thanks guys. You guys mentioned that you're seeing increased competition for assets. Is it more of the same types of investors or are you seeing new investors sort of come into the market creating even more competition than there has been, like let's say at the beginning of the year?

Sure. So there is increased competition and there are more investors that have come in. I think most notably has been the entry into the space by large institutional capital like Nuveen and others that I've really found medical office properties to be something that they want to invest in a meaningful way. So yes, there's been an increase in the number of investors over the last 18 months.

Perfect. Perfect. And then as looking forward, not work cap rates, we're kind of right now, but looking forward, do you feel that you're going to have some cap rate compressions on acquisitions over the next year as we go into '22?

Sure. So as we've grown our portfolio and executed on our strategy, our cost of capital has improved. So we always focus on investing our capital accretively and we felt a pretty strong niche finding opportunities in secondary and tertiary markets in the Southern cap range. So our spread allows us to selectively look for opportunities in a sub seven cap range. And our goal is to continue growing our portfolio accretively.

Right, exactly, exactly. And then last question, kind of on the same lines when you're looking at acquisitions and the different property types that you guys like to invest in, is there one in particular that has better risk return characteristics right now, or is it just more kind of look, different markets, different runoff opportunities?

So I would say right now surgery centers just given the way healthcare has evolved and on the other side of 2020 surgery centers definitely seems to be a good place to allocate capital. And I would, and one of the things that we're looking to do and having discussions is to try to find ways to invest capital in newer surgery centers. So we're talking to tenants and developers that are looking to build new surgery centers.

Our next question is from Amanda Sweitzer with Baird. Please go ahead.

Thanks. Good morning. I wanted to start on your announced asset sales, can you just provide more detail on your thoughts at the time those two sales specifically as well as expected pricing?

Okay. basically these sales, both of them came to us, but it was I'll go through Belpre. Belpre was more for -- there was a great price that they were paying with a substantial profit for us. Two, it was to reduced concentration in the top 10 of our facilities. So basically Belpre, which is a small place, but really good assets and we still have asset in Belpre, but we decided to reduce it substantially to reduce the concentration in a smaller location as an overall portfolio walk. And it wasn't bad to take a profit and roll it into other assets that we have at the cap rates. So we sold that at a low cap rate and we reinvested a much better cap rate plus we reduced the concentration naps. So we thought it was good. We still are very favorable of Belpre, but we wanted to reduce the concentration in that small metro to not be -- not as high in our top 10 and the Prescott One. Prescott One is a small operator, had somebody buying them out who wanted to buy the building or they wouldn't buy them out. So if we didn't go along with the deal that made us a million dollars, we may have had a difficult time with the tenant going forward. And we weren't -- it was a good opportunistic to make basically a million dollars on a small property and moving on to another property. Going forward with sales -- going forward with sales we're always looking, people offering us out there and it's a pretty good market to sell in right now. So, if there are opportunities for us to sell in bring our portfolio more the way we would ride, but looking at it as a whole portfolio as an individual. So we buy individually, but we look at it as a whole portfolio at once. And if we need to make some corrections on our portfolio or others, we may do that in the future.

Okay. That makes sense. And then, as you think about the volume of acquisitions that you could complete next year with these sales in place, do you expect your acquisition volume to exceed kind of the 2 25 in storage will average you've achieved?

It's hard to tell that that is the honest, I mean, we're, we're starting to look with a different, we have our strategy of doing, the seventh plus, which again was very successful this year, but since our stock has gone up, our cost of capital substantially has come down. We're starting to look at larger volume as opposed to just doing these five tens 15 sometimes to 20, we're starting to look at larger projects and maybe, but those will be smaller taps more in that mid six range. But since it's so creative, as opposed to being possibly, it's just very creative for us. It also grows our size. It grows -- it starts to get us to compress where I think we're on the value because of size and liquidity in the market. It starts to get us there. So we are looking at larger projects with less cap rate. You can't find, $80 million to $100 million projects in the sevens that make a lot of sense. Sometimes we do, but you don't get that many.

Yeah. That's helpful. And then last one from me, you've commented on prior calls that you historically see stronger transaction volume between kind of the September to December time period. Have you not seen that volume come to the market or is it more a…

Of being disciplined on pricing today hard to say. I would say it and the big picture. Yes. It, this year end is going to be very busy. And I think when, when the data comes in and the deals get closed, I think you're going to see market-wise, it's numbers similar to the last several years. There's been this year has been notable with the number of portfolios that have come to market and that are, are getting closed. And so I don't think this year end is going to be different than others. It's going to be pretty busy.

That's helpful. Thanks all.

Our next question is from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Thank you and good morning. Just wanted to a warning. I wanted to just touch base on the acquisition guidance for the full year. I think Alfonzo, you mentioned another 15 to 30 by year end. And, and, and if so, does that is it the 15 to 30 plus the 1 63 a year to date? Is that, does that put us kind of in the lower half of the original range for, for full year guidance ended up in the $175 million to $200 million range? Is that the right way to think about it?

Yeah. That's how we framed it, correct? Yes. Okay. And you had said some comments on the last call and more recently that just volumes the market was moving at a frenetic pace. I think it's about volumes being at 50%, 60%, 70% in terms of transactions. And so, so just clarifying it it's the competition is there is your increased competition around those assets as well. There's a lot coming to market, but there's a lot more competition for these assets, which is harder to close, or is it just not the stuff that you guys are looking for? Historically the bulk of the market is, has traded at a cap rate that's lower than what makes sense for us. So, it hasn't like in 2021 that has gotten more competitive for us slightly. But I mean, historically it's always the bulk of the market has traded at a lower cap rate. What I would say has happened this year is yes, there's been more investors that have come in not just large investors, but also, smaller ones as well. A lot of, a lot of funds that have been started and has really made the segment of the market that is looking for a call it low to mid five caps, very, very competitive. And when I talk to people, it definitely it's become a very, very at that part of the market has become very competitive. But, what that's done is it's really added competition across the call it the cap rate yield curve. So in our segment as well, it's gotten more competitive. But, we've built a very good track record and have continued finding deals. And we're leveraging the fact that we've got a very good process and a very good team to get these deals done efficiently and in the most frictionless way possible. But what we've always had a focus on is investing our capital as creatively as we can. And, we're always looking to balance opportunities in the market with what we're trying to do as a company and trying to grow this company as prudently as we can. But, in short, I'd say, look, it's definitely gotten competitive. But our company has gotten bigger cost of capital has gone down and we have more resources and we've got a good track record. So we have more range of motion. And, we're, it's still finding a good investment opportunities. We're having a lot of conversations with our relationships, our tenant base and we have, pretty good pipeline of activity and we'll continue doing what we have in the past, which is continuing to grow our portfolio and the best way we can.

Well, I just wanted to circle back to Belfry. Yeah, I think I get the gist of how that came about. But did you guys mention pricing or valuation maybe, maybe sort of the expect style or Bob, do you want to give the, yeah, sure. So I think it's a, [inaudible] sorry I have broken up. No, I was just saying maybe the exit cap rate, if you don't have the IRR.

Yeah 6.2%, I think is the ideal cap rate. And it compares to, we set our basis in the property is just under understood under this, this one building is just under 30 million. So call it $15 million gain against, against that.

Okay. It sounds like a good return. And then lastly, I just want to say the return was important to us. We calculated out the reinvestment of the money was good for us, all those types of things, but it also to move sort of an off not big market or meat, it's really small a market that was doing really well. There's the main center for a while a while, and we still have an asset there, but not have so much concentration in there was attractive to us. That was actually probably the number one reason.

Okay and then the progress on Marina Towers, any update there, or maybe even the other couple assets that are you're working towards.

Yeah, sure. Jordan. Yeah. So, again, we're continuing to work with the tenant as they've progressed to the Brank bankruptcy, and it's, it's a, it's a slower process as they, as they work through their own issues. The update, from a financial perspective is that we did receive the Q3 numbers include about $400,000 from the tenant. And we've received 80,000 or so far in the, in the fourth quarter. But it's, there's just uncertainties related to how they're emerging from the bankruptcy. And it's, there's a lot of back and forth that can go on and that's going, that goes on in that process. It's difficult to say specifically how they're going to kind of perform. I think what we're doing from a strategy perspective is, we're reclaiming the building, the forces, as we can, and are looking at actively, working with perspective tenants to fill that space. And I've gotten strong interest in the space as well. So, I think that's kind of part of the process is we kind of are hearing Q4 and into Q1 to work with them as they say emerge and try to monetize the most that we can out of it. And at the same time look to add new tenants into the facility and that that's going well. I think that's where we're long-term optimistic about how we how we add this tenants into the space. So just to clarify, they affirmed the original lease. Are they downsizing?

They're downsizing from where they were and while they did from the original lease, what we talked about previously, look, they weren't really, they weren't performing under that, that affirmation. And, and so as that process continued, it evolved. And so we're looking to an additional arrangement that maintains our rights, as well as our ability to collect on the least that exists, but they yeah, and then also to, to bring in the new tenants to the building and say as they kind of alter their strategy from their bankruptcy.

Our next question is from Juan Sanabria with BMO Capital Markets. Please go ahead.

Hi, good morning. I was just hoping you could maybe talk a little bit more about the acquisition of volumes and strategies. You kind of seem to be shifting here. The volumes maybe felt short of expectations for some of the smaller, higher yielding assets. But you seem to be kind of hinting that you're, you're moving kind of up the quality curve towards bigger assets with lower cap rates. But I would think that those are even more competitive and harder to find some, just a little confused as to, to the trend that's going on.

Let me talk about it a little bit good to talk to you. We have a solid business it's more competitive than it used to be in, in these secondary markets. But we do find our niche and we do find our niche and in this type of market, we think we really did quite well getting a 7.5 cap, and we've been very strict on where we are. There are opportunities we find in our niche of the market that could be bigger, that are not necessarily attracting the quick money or the big money. And so we're opening up our look. So our main work right now and this has all to do with the cost of capital coming down substantially. So, at one point our cost of capital really was like almost a point and a half, 150 basis points above where we are now. And we were buying in the mid sevens and now where it is right now, we, we are taking a look at larger assets that are instilled the secondary markets or the suburbs of the primary markets that don't attract the necessarily attention of the big guys, but are some possibly because we have not bought those, but are possibly lower caps in the mid sixes or so, but we're still looking to average into the seventh. So I look at it as more of an average, but it could add to our volume a year ago, we made two years ago, we made some choices to try to move up our volume by going into the multiple tenant area. And the multiple tenant area is really been a godsend this year, because we're finding more of those. It is a much more competitive market right now. There is a lot more money out there. So we are just managing where we are right now in reality is, you get more we do have project, assets that we look at that used to be a hundred percent ours, that somebody else bids some people did without even visiting or looking at it in this I consider it a bubble when they start to buy things without really even caring what it is or spending any due diligence time. So, we're going to work through that market, but I have in mind right now, I also want to go for some size because we get some advantages on our cost of debt and also compressing the price of the stock, giving more volume and others. We get some advantages with size, and we're very creative also in the mid sixes. If we could pick up a, just give an example, a hundred million dollar project with multiple buildings or something in our type of market, in the mid sixes where the people are not doing it in the seven or anything. So we are looking at that. I'm not saying we're going to find that out there, but we're, we're actually trying to find other ways to increase the amount. It is much more competitive than it was a year or two years ago.

Okay. That's helpful. And then just following up on I guess I'm prior questions is, is the, I guess, shortfall to that trip. That's the right word to use relative to the original guidance for, is it just a timing issue though? Are you, cause you seem to be talking about a good pipeline or should we expect four deals in the second or first half of 22 that may be spilled over from the first year that I could see a good start to 22? Or is that not necessarily the case?

Well, every quarter yeah, no, every quarter the volume yeah, every quarter, you're going to see a lot of volatility in terms of volume. And, it's not the first time we've had large quarters followed by quarters that are a little more quiet. So I would say in general, yes. it's hard to have a consistent number every quarter, I guess it said another way. Like, some quarters are less than some quarters or more on and it's unpredictable and there's, we try to have as large a pipeline as we can at all times. And we always have a lot of conversations and sometimes you some things work out and some things don't, and it's not in our control. And part of what we have to do is stay disciplined and have kind of firm convictions around valuations. And what that means sometimes is we don't get the deals that we're chasing. And sometimes we do, so it's inherently unpredictable and some quarters are more than others and that's just the way the market works.

I'm interested in just for my smart for me. Should we think of any other markets out there that you may want to exit or prune as it relates to some of the dispositions that you noted in the press release? I'm not sure I have anything. Oh, go ahead. Go ahead.

Yeah, no, I think part of how we tried to frame it in the prepared remarks is, we're -- the sales that we've done thus far have been opportunistic and it's, it's been case by case and there've been compelling reasons to sell. So, that continues to be how we're looking at dispositions is just very selectively, very strategically in the case by case.

[Operator instructions] Our next question is from Bryan Maher with B. Riley Securities. Please go ahead.

Yes, good morning. Most of my questions have been asked and answered, but the two that I have here left one kind of housekeeping and one bigger picture on a housekeeping front. I noticed you guys didn't use the ATM and the third quarter. Just want to make sure that that's still in place and what the availability is there.

Yes, sir. Bryan, it's still in place and there's $20 million there's $23 million that's still left on the current ATM.

Okay, great. And then kind of a big picture, big picture question, Bloomberg ran an article I think it was on Tuesday about Fresno's medical care planning to cut 5,000 employees basically based upon, patient deaths related to COVID impact on dialysis patients. Are you seeing anything out in the marketplace that gives you pause as it relates to COVID's impact on this industry aside from what we saw last year with tenant stress,

We have not, we're one of the ways of being in this business for a long time, collecting rents, you start seeing it in the delay of rents and other things that does not happen to us in the industry. Our niche in the industry seems to not be that effected also the main strategy we have, which is a coverage ratio that they have to be making a good amount of money and not buying those that are just, two to one or two and a half to one, but trying to stay at an average, four, four to five coverage ratio. So they're all profitable is very important in a general strategy for if they have tough times, they're not ready to cut so much. I, we don't see that happening in our, our portfolio. I could see that happening in certain types of portfolios out there, but not really what we buy.

Okay. And then kind of drawing on some of the questions earlier in your answers related to going bigger assets, maybe down cap rate a little bit versus going higher cap rate, downmarket, more secondary, more tertiary kind of like community healthcare trust. It seems like the competitive nature of the lower cap rate, buyers out there and what we saw with community health care trust, their acquisition pace really kind of slowing. Does that Alfonzo maybe lead you to reassess your ability to make acquisitions in size, north of two or 300 million in a year because the kind of pressure on both ends, or do you remain competent, you can kind of do maybe 200 plus in 2022, 2023? A - Alfonzo Leon So yeah, what we've always tried to do as a couple of hundred million, 200 million per year and that that's, that's the target that we've been striving for and, and continue to strive for. So, we've done a very good job of balancing capital markets with the real estate market. I always keep in mind that quarter the quarter it's hard to the market evolves quarter by quarter and there are seasonalities to it. And, so it's hard to really have it's really hard to kind of predict kind of where things are going to be in a year or two. And, but I would say that we've done a very good job of leveraging our resources and our range know basically yeah, managing our resources and finding opportunities and leveraging our relationships to continue to find deals and going forward. That continues to be our target and one that we feel pretty good about reaching.

This concludes the question and answer session. I would like to turn the conference back over to Jeff Busch for any closing remarks.

Well, I'd like to thank everybody. We had a great quarter. We expect to have a great year in 2022 and thank you very much.

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