Global Medical REIT Inc (GMRE) 2016 Q3 法說會逐字稿

Greetings and welcome to the Global Medical REIT, Inc. third-quarter 2016 earnings conference call. (Operator Instructions)

As a reminder, this conference is being recorded.

I would now like turn the conference over to your host, Mr. Jeremy Hellman of the Equity Group. Thank you Mr. Hellman, you may begin.

Thank you very much and good morning everyone. This morning before the market opened, Global Medical REIT Inc. issued the announcement of its financial results for the third quarter and nine months ended September 30, 2016. These results are also filed with the Securities and Exchange Commission via a Form 8-K and the Company intends to file its 2016 third-quarter Form 10-Q this afternoon.

Certain statements contained herein may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. And that it is the Company's intent that any such statements be protected by the Safe Harbor created thereby.

These forward-looking statements are identified by the use of terms and phrases such as anticipate, believe, could, estimate, expect, intend, may, should, plan, predict, project, will, continue and other similar terms and phrases, including references to assumptions and forecasts of future results.

Except for historical information, the matters set forth herein including, but not limited to, any projections of revenues, earnings, per share earnings or other financial items, any statements concerning our plans, strategies and objectives for future operations and our pipeline of acquisition opportunities and expected acquisition activity, any statements regarding the expected size and growth of the healthcare real estate market and any statements regarding future economic conditions or performance are forward-looking statements.

These forward-looking statements are based on our current expectations, estimates and assumptions and are subject to certain risks and uncertainties. Although we believe that the expectations, estimates, and assumptions reflected in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements.

Important factors that could cause our actual results to differ materially from estimates or projections contained in our forward-looking statements as set forth in the risk factors section and elsewhere in the reports we have filed with the Securities and Exchange Commission, including that unfavorable global and domestic economic conditions may adversely impact our business, we may not be successful in completing all the acquisitions in our investment pipeline or that we identify or pursue in the future and are [expected] may be higher than anticipated. We do not intend and undertake no obligation to update any forward-looking statements.

With that, I would like to turn the call over to David Young, CEO of Global Medical REIT. Please go ahead David.

Thank you very much Jeremy and welcome everyone to the call, our first as a public company. Joining me today is our Chief Financial Officer, Mr. Don McClure.

First, I want to thank everyone that assisted us in conducting our initial public offering, which we just completed in July. It's a truly exciting time for our Company and we're very excited. Before handing the call over to Don for his review of the Company financial results, I'd like to spend a few minutes reviewing our higher level business strategy and opportunities.

For those of you who are new to the Company or the healthcare REIT space in general, I think instructive to spend a few minutes on the market opportunity that we see. By deploying what we feel is a very effective and a very focused business strategy in a uniquely attractive space we believe we are going to create significant value for our shareholders over the long-term.

According to a report authored by the CoStar Group in conjunction with the University of San Diego in 2010, the total value of US commercial real estate approaches $10 trillion. Of that installed base, healthcare is estimated to be approximately $1.3 trillion out of that total.

Even if we were to look at only properties that already exist, that implies an ample market opportunity for our Company. In reality, the healthcare industry in the US continues to expand in concert with the growing and aging population, as has been widely expected. As a result, we expect demand for healthcare real estate to continue to grow nationally.

When we combine the new building with the existing installed base, the addressable market for us is obviously significant. Against that backdrop, we feel we have an excellent business model that's attractive to physician and other medical operators. With our pipeline of opportunities expanding, confidence in this value proposition has never been higher.

During our IPO roadshow, we communicated a goal of building our investment in real estate from almost $100 million pre-IPO to $400 million over the subsequent 12 months, which would take us to mid 2017. Based on what we've announced to date, along with what we see in our pipeline and what we are working on currently, I'm comfortable and confident we can achieve that goal by mid-2017.

For additional context here, our average target acquisition size is likely to be in the $5 million to $20 million range, although we certainly will and do consider larger acquisitions when they meet our credit and real estate acquisition criteria.

As stated at the time of the IPO, our portfolio stood at almost $100 million. That consisted at the time of 12 licensed medical treatment facilities and since then we've completed acquisitions for 13 more properties, with an additional six buildings under current contract, bringing the total to 31 licensed medical treatment facilities. Should all six facilities under contract successfully close, we will total leasable square footage of over 506,000 triple net leased licensed medical treatment facilities.

As of today, including properties we've closed on subsequent to the end of the third quarter and the six that we have under contract; the gross value of our portfolio would stand at approximately $149 million, not including projects under letter of intent an additional pipeline that we are reviewing.

Another key point to highlight is that our properties are all triple net leased, 100% occupied. We look for acquisitions where there is a single high-profile tenant medical operator that dominates the local market where we are able to form a relationship as their real estate capital partner rather than simply as a landlord.

We have a weighted average lease term remaining of over 11 years. We have an average annual base rent of $27.27 a square foot. Our average asset age of 10 years is also well below our peers. The earliest lease term maturity in our current portfolio does not occur until 2023. So from a risk standpoint I really do like where we are right now.

In addition to updating you all on acquisition efforts instituting a dividend was also a top priority for the Company. Accordingly, we announced on September 14, a quarterly dividend of $0.20 per share that was paid on October 11. As we noted on the September 14 press release announcing our dividend, we intend to pay dividends quarterly.

Now I would like to turn the call over to Don McClure, our Chief Financial Officer, who will go through a summary of our financial highlights and then I'll return for closing remarks and questions with you all. Thank you. Don, please take it from there.

Thank you Dave. Now I will briefly go through the financial highlights for the quarter and nine month ended September 30, 2016. I encourage everyone to review our press release from earlier this morning if you have not done so already. In addition, as stated earlier, we intend to file our third-quarter Form 10-Q this afternoon, which will include details regarding our results of operation with the MD&A, our financial conditions and result of operations.

Our third-quarter 2016 rental revenue was $1.9 million versus $482,000 during the comparable quarter last year. The year-over-year increase was driven by expansion of our property portfolio, which grew from 3 properties a year ago, to 18 at the end of the third quarter 2016. For the nine months ended September 30, rental revenue was $5 million versus $1.4 million from the comparable quarter last year, due primarily to the increase in size of our portfolio which I just noted.

Our total expenses, consisting mainly of G&A, management fees to our external advisor, depreciation, amortization and interest expense, increased from $1 million in the third quarter last year, to $4 million in the third quarter of the current year. Our growing medical portfolio was the largest driver of increasing operating expenses, as well as compensation expense incurred related to our incentive compensation program.

Within our operating expenses for the quarter, G&A expense was the largest line item at $1.7 million, followed by $1.1 million of interest expense. Management fees and depreciation each accounted for roughly $600,000 of expense in the quarter. Our net loss in the third quarter was $2 million, which was up from $0.5 million from the comparable period last year; largely due to the increase in expenses associated with our larger portfolio properties at the end of the quarter.

For the nine months ended September 30, 2016, operating expenses were $9.5 million versus $2.2 million during the comparable period last year. As stated above, these expenses consist of G&A, management fees, depreciation, amortization and interest expense. As was the case for the third quarter, the increase in expenses during the nine month period was driven by our growing triple net lease property portfolio which drove increased G&A, interest and depreciation expense.

As result of this increase, expenses during the nine month period, net loss for the nine month period ending September 30, 2016 was $4.4 million versus $819,000 for the first nine months of 2015.

For the third quarter of this year, we recorded a net loss of $0.11 per share basic and diluted that compares to a net loss per share basic and diluted in the third quarter of 2015 of $1.99. Bear in mind that we have approximately 17.4 million shares outstanding during the current quarter following our IPO, compared to 250,000 shares of outstanding for the comparable period last year.

Third-quarter 2016 FFO was negative $0.08 per share and AFFO was negative $0.03 per share. For the nine month period FFO was negative $0.44, while AFFO was negative $0.20 per share.

Moving on to our balance sheet, our portfolio of real estate assets at September 30 included 18 buildings. Those assets are carried on our balance sheet at $124.3 million. As of the day of this call, our portfolio consists of 25 buildings, with an additional 6 buildings under purchase contract.

When these transactions successfully close, we will have 31 buildings and gross investment in real estate of approximately $149 million. We used IPO proceeds of approximately $10 million to retire convertible debt that was due to related parties upon closing of the IPO. That left us with debt outstanding of $40.3 million in the form of notes payable to third parties associated with our prior acquisitions. This is net of unamortized debt discounts.

As of September 30, 2016, the average term of the Company's debt is 8.13 years, with an average interest rate of 4.88%. Of the remaining $40.3 million in our notes payable; around $39 million is due in 2019 or thereafter. So overall we feel that we are in a really good position in terms of our debt.

With that, I'll turn things back over to David to share some closing comments.

Thanks Don. Before we open the call to your questions, I just want to reiterate a few key points.

From our successful IPO that closed in July, we raised $150 million in gross proceeds; $137 million net of underwriting discounts, commissions, advisory fees and costs and as result our cash position remains very strong. We ended the current quarter with cash of $81.3 million.

Subsequent to quarter end, we announced the closing of two transactions totaling $8.6 million, along with three executed contracts totaling an additional $15.2 million, which will be funded using the proceeds from the IPO shortly. Additionally, we've entered into letters of intent for additional projects which are expected to close before the end of the year.

The trend that we are following right now will invest the totality of our IPO proceeds by the end of the calendar year. We're also in the process of obtaining mortgage financing on each of the properties that we've acquired during the quarter which will positively impact our cash balance.

As Don touched on, our balance sheet is very well-positioned as a result of the IPO. And as noted in the press release, subsequent to quarter end we received a commitment for a negotiated $75 million secured credit facility with a major money center bank. That credit facility will provide us with additional funds to focus squarely on more accretive acquisitions. I'd also like to point out that we're focusing on growing our investment team to allow us to pursue more acquisition opportunities.

As noted earlier, the addressable market is significant. We see an incredible opportunity to grow our business over the long term and I believe we're on the correct trajectory and we expect to comfortably achieve our goals as stated at the time of the IPO.

Thanks again to all of you for joining us on the call today. We appreciate your interest and your investment in our Company and we look forward to speaking with all of you. So operator, let's open it up for any questions and we'll take it from there.

At this time we will open the lines for questions. At this time we will be conducting a question-and-answer session.

(Operator Instructions)

One moment, please, while we poll for questions. Our first question comes from line of Craig Kucera of Wunderlich Securities. Please proceed with your question, Craig.

Hey, good morning guys.

Hi, Craig.

I'd like to talk about the acquisitions broadly speaking, and then maybe drill down a little more detail. Just so we understand, is the expectation to close this quarter basically what you've already closed and what is under LOI? And I guess that totals maybe somewhere around $30 million-ish? Is that correct?

It will likely be a much larger number when we advance the projects that are currently under LOI and which are moving rapidly towards binding contracts. I can't really give you details on those, obviously, because we're under confidentiality agreements. But we'll very shortly have obligated the vast majority of our IPO proceeds and we'll close all of those transactions by the end of the year. So it will be a much larger number.

Well, certainly you could give me a number, like a total dollar amount, maybe a rough cap rate for modeling purposes? Maybe not any details particularly about the properties.

To the extent that a range, I would say that our cash position by the end of the year will be diminished significantly down to perhaps about $10 million of liquidity of remaining proceeds. Perhaps even lower than that.

Yes, I would add to that, we have about $80 million currently in cash on our balance sheet. And as Dave said, we have a $75 million commitment, a credit facility commitment, and we plan to utilize a portion of that credit facility to acquire assets in the fourth quarter, in addition to the $80 million.

So, I guess it's back of the envelope math, then; you're probably looking at, at least $70 million to bring your cash down, so you call it $10 million. And then, utilization of the line of credit of maybe another, obviously that's a $75 million line of credit, but is that another $30 million? I guess the concern I think from the buy side that we're trying to get a little more information on, is just what pace of acquisition should we expect, given that it was, at the time of the IPO, the expectation was that the money would be deployed by year end. And I understand it flipped in the first quarter. Now it sounds like it's maybe mid-2017. So what should we expect, all in?

I'd say, Craig, we're back on the rails. We're back on track with our original objectives and our original goals. We had a softer investment quarter immediately following the IPO because we had a multi-facility transaction that we discarded because it didn't meet our credit criteria and underwriting. So we had a less than planned investment amount during that quarter.

But as far as achieving the year-end goal, of investing substantially all of the IPO proceeds, we are on track. So we've regained our momentum as we expected that we would all along. I do expect we're going to continue to achieve roughly $100 million per quarter, which was our original objective, and achieve $400 million in total assets by the middle of next year.

And as you think about the pipeline and what you're seeing, are cap rates still trending in the high 7%s and low 8%s? And can you give us some color on the size of the pipeline you're looking at?

Yes, well, our pipeline is hundreds of millions and it's growing weekly, daily. We're looking at more and more projects. And as we expected, the momentum is building and the pipeline is getting bigger and bigger. But the cap rate assumptions are stable.

As you know, we are acquiring and leasing in our triple net environment at a higher cap rate range than the over-bought, multi-tenant, MOB market which we are not participating in, which has been driven down to sort of a 6% cap range. But anyway, we're comfortable that the opportunities are stable and in the same range as when we launched the IPO and pre-IPO.

Okay, great. You've hired a couple of business development people since the IPO. Can you talk about what the impact is going to be to G&A? And what a normalized run rate cash G&A would be going forward?

There won't be any direct impact on G&A as you see it, because their compensation is captured within the external advisor budget and it is, as you know, capped at 1.5% of equity. So bringing those people on board did not actually layer in any additional read overhead.

They will be compensated on a production basis with long-term incentives, shares, and so on, so there will be some accretive or some additional expenses in that regard, based entirely on production. But we'll be leveraging the expense of this additional staff tremendously, and you'll see a lot more earnings per share based on those expenses. So it will be de minimis.

That's it for me. Thanks, guys.

Thank you.

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

Great. Thanks, guys. On your G&A, are there some one-time charges in there that we need to take into account for, because the number was a little higher than what I anticipated?

Yes, and Don can elucidate on that for you, Barry.

Great. Thanks Don.

Yes, there are some one-time charges. Prior to the IPO there were some one-time acquisition fees. There's a $500,000 acquisition fee on the balance sheet for our Plano facility. But that's the only large mature one-time charge.

Great, thanks guys.

Thank you, Barry.

(Operator Instructions). Our next question comes from the line of Steve Shaw of Compass Point. Please proceed with your question.

Hey guys,

Hey, good morning Steve.

I was a little confused on the timing on the use of proceeds. I heard year end and then I've heard second quarter of 2017. I just wanted to clear that up

Yes, no, the use of IPO proceeds will be completed by end of this calendar year. But our initially stated goal of $400 million of total real estate assets by mid-2017 is still correct. But it will require application of the warehouse facility -- the revolver that we recently got commitment on from a major bank. So the next layer of capital early 2017 will be corporate level debt, if you will. And so we're on track with our original goals.

Okay. And then, so the facility will be used after the full IPO proceeds are done?

That's correct.

All right; and then getting backs towards Craig's question, a little bit on the pipeline. Can you just talk a little bit more about how that has evolved, if you're still seeing the same quality of assets in markets out there? Or if things have changed at all?

Well, as you may already know, we originate transactions directly with medical operators as well as reviewing and screening opportunities that come to us through the brokerage community and advisors and consultants. So we're getting a mixture of inputs.

Because of our increased overt business development activity, we're seeing a higher volume of originated deals by our own group. We attend and exhibit at multiple medical conferences and shows, and we have a lot more exposure now than we did a year ago, pre-IPO. So we have a lot more deals in the pipeline as a function of that.

We also have more visibility now, obviously, since we're public. We're getting more invitations to propose through intermediaries in the marketplace, just because we're more visible now. So the pipeline is dramatically increasing.

Okay. And then lastly, can you guys just talk about the LTV plans for the upcoming acquisitions? Or maybe the facility related acquisitions?

The LTV? Oh, loan-to-value. Are you talking about -- we're not going to be leveraging on a project level, project-by-project, as we had been pre-IPO. We had been leveraging at the 2-to-1 or even 3-to-1 level as we acquired when we were ?- or pre-IPO. And so we were using parallel bank underwriting and mortgage debt on a project-level financing basis.

Post IPO we are shifted into a corporate balance sheet financing stage of our corporate evolution. And we're planning to lever up or down, as it were, to about a 60% leverage number mid-2017. Right now we're actually under-leveraged. I think our current leverage is probably in the 30% range, something like that. Because we are working actively to deploy the IPO proceeds as efficiently as we can, after which we will lever at the corporate level.

Thanks, David.

You're welcome.

(Operator Instructions). Our next question comes from the line of Adam France of 1492 Capital. Please proceed with your question.

Thanks for squeezing me in here. Could you speak to the ability -- you mentioned some of the larger deals, getting pushed out or still sitting on the fence. Are some of these definitely no longer worth pursuing? Or how should we think about some of the larger packages?

Adam, thank you for the question. I'm glad to hear you're on the call.

The deal that we extinguished post-IPO was something that was under letter of intent immediately pre-IPO, and it was a hospital portfolio package in Louisiana with a -- we were going to be funding the real estate fraction of an acquisition by a corporate operator. That corporate operator would be the single tenant and the guarantor of triple net leases.

We decided not to underwrite that operator at the corporate level because their corporate balance sheet and their revenues and margins were a little bit too weak to give us comfort, so we just willfully took a pass. We ended the diligence and extinguished that deal, which actually then left us a little bit short on quarterly investment goals for that first quarter post-IPO.

Since then, we have discovered and successfully negotiated and are moving forward rapidly on several actually larger transactions that are stronger credit and better investments, better yields, and better properties. So it's just testimony to the fact that the market is so opportunistic and so hungry for capital in our space.

Plus, we do have very aggressive business development, very focused business development in the space as well. So we are now positioned to acquire better properties with better credits, actually two or three times the volume of what we willfully walked away from in that first quarter post IPO.

I wish I could tell you more details about specific transactions, but we are under NDAs and we're very close to a binding contract on multiple opportunities. So I'm really not at freedom to give you any more detail. But stay tuned in, because there will be more detail very shortly.

Got you. Great. Thank you very much, Dave.

Thank you for the question. I appreciate it.

There are no further questions at this time over the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks.

Okay, well, thank you very much for dialing in. We'll look forward to visiting with all of you again soon and conveying more information to you and more encouragement. We look forward to speaking to you again on the 2016 fourth-quarter and year-end conference call. I appreciate your participation. Have a great day. Thank you.

Thank you.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.