Global Medical REIT Inc (GMRE) 2017 Q1 法說會逐字稿

Greetings, and welcome to the Global Medical REIT First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeremy Hellman of the Equity Group. Thank you, sir. 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 first quarter ended March 31, 2017. These results were also filed with the Securities and Exchange Commission via a Form 8-K, and the company intends to file its 2017 Q1 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 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 therein, including, but not limited to, any projections or forecasts of revenues, expenses, operating results, cash flow 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 health care real estate market; any statements regarding future regulatory changes and their impact on our industry or business; and any statements regarding future economic conditions or performance; and any intention to announce earnings, FFO and AFFO guidance ranges 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 are set forth in the Risk Factors section of our annual report on Form 10-K as amended by amendment number #1 and amendment number #2 thereto for the year ended December 31, 2016, which were filed with the United States Securities and Exchange Commission on March 27, 2017; May 5, 2017; and May 9, 2017, respectively, and elsewhere in the reports we have filed with the United States 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 of the acquisitions in our investment pipeline or that we identify or pursue in the future, and our expenses may be higher than anticipated. We do not intend and undertake no obligation to update any forward-looking statements.

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

Thank you, Jeremy, and welcome, everyone, to the call. Joining me today is our Chief Financial Officer, Mr. Don McClure. Before handing the call over to Don for his review of the company's financial results, I'd like to spend a few minutes touching on some highlights from our first quarter.

We closed 8 acquisitions in the first quarter of 2017. From a dollar standpoint, we invested approximately $107.5 million worth of properties, highlighted by the purchase of a market-dominant portfolio, including a surgical hospital, physical therapy center and an associated outpatient ambulatory surgery center, all located in Oklahoma City, Oklahoma, for a purchase price of approximately $49.5 million.

The closed first quarter acquisitions brought our gross investment in real estate to approximately $315 million, including approximately $16 million of intangible assets and liabilities acquired, covering over 946,000 square feet of leasable space.

Subsequent to quarter-end, we also closed the acquisition of the seventh and final portfolio property from the Northern Ohio Medical Specialists portfolio. And we continue to be very busy evaluating a range of acquisition opportunities which we hope to move along through our due diligence process quickly.

Viewed on a year-over-year basis, our AFFO continues to improve. Our AFFO did drop a few cents in the first quarter compared to the fourth quarter of 2016, which was primarily a function of some G&A expense related to the implementation of our amended credit facility, our annual report on Form 10-K and our annual proxy statement and the establishment of our 2017 equity compensation plan. We expect these costs to be reduced for the remainder of 2017.

In addition, our Great Bend, Kansas, and Oklahoma City hospital acquisitions closed on the very last day of the first quarter. As a result, we realized minimal rental revenue from these properties during the first quarter, although we incurred all of the expenses related to the acquisitions. These properties began contributing to our revenues from day 1 of the second quarter.

Based on our portfolio as of March 31, our minimum contracted cash rent payments to be received in 2017 is approximately $17.6 million, which will increase to approximately $23.8 million in 2018. That is with a constant portfolio. Bear in mind that our actual reported revenues will be above these amounts, as we do report some noncash accrual-based revenues also.

As of March 31, we still had capacity available on a credit facility and are diligently working to sign additional purchase and sale agreements in order to put that money to work.

At this point, I'd like to turn the call over to Don McClure, our Chief Financial Officer, who will go through a summary of the quarter's financial highlights, and then I will return for some closing remarks and questions from our listeners. Thank you very much. Don, why don't you take it from there.

Thank you, Dave. I'll briefly go through the financial highlights for the first quarter ended March 31, 2017. 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 first quarter 2017 Form 10-Q this afternoon, which will include details regarding our consolidated financial position, results of operations within management discussion and an analysis of the financial conditions and results of operations section of that filing.

Our first quarter 2017 rental revenue was $4.6 million versus $1.3 million during the first quarter last year. The year-over-year increase was driven largely by the expansion of our property portfolio, which was highlighted by 8 completed acquisitions during the first quarter.

Our total expenses for the current quarter, consisting mainly of G&A, depreciation, interest expense and acquisition fees, increased from $3.3 million in the first quarter last year to $7.2 million in the first quarter of the current year.

Within our operating expenses for the quarter, G&A was the largest line item at $2.7 million, compared to approximately $889,000 in the prior-year quarter. The increase in G&A expense was primarily related to the implementation of our amended credit facility, our annual report on Form 10-K and proxy statement and the establishment of our 2017 equity compensation plan, which we expect expenses to be reduced for the remainder of 2017, as Dave noted earlier.

Depreciation expense was roughly $1.3 million in the quarter, followed by approximately $1.1 million of interest expense and approximately $940,000 of acquisition fees. Our net loss in the first quarter was $2.5 million, which was up from $1.9 million for the comparable period last year, largely due to the increase in expenses, as discussed above.

For the first quarter 2017, we recorded a net loss of $0.14 per share, basic and diluted. That compares with a net loss per share, basic and diluted, in the first quarter of 2016 of $3.11.

First quarter 2017 FFO was negative $0.05 per share, while AFFO was positive during the quarter at $0.02 per share. This positive AFFO was driven largely by the add-backs of acquisition costs and stock-based compensation expense. Additionally, we have acquisitions that we are actively pursuing, some of which we hope to have under contract within the next few weeks. Once these deals are under contract, we intend to announce FFO and AFFO guidance ranges for the remainder of 2017.

Our weighted average shares outstanding were 17.6 million for the current quarter compared to approximately 625,000 for the same period last year.

Moving on to our balance sheet. Our property portfolio of real estate assets at March 31, 2017 included 42 buildings. Those assets are carried on our balance sheet at approximately $315 million, including approximately $16 million of intangible assets net of intangible liabilities. As of the date of this call, our portfolio consists of 43 buildings, which includes the last property in the NOMS portfolio, which we closed on April 21.

Looking at the liability side of the balance sheet at March 31, 2017, we had a total debt of $167.8 million, which included notes payable to related parties and to third parties net of debt discounts. $128.9 million was drawn on our credit facility. As of March 31, 2017, the average term of the company's debt was 3.9 years, with an average interest rate of 3.38%.

With that, I'll turn things back over to Dave to share any closing comments.

Thank you, Don. Before we open the call to your questions, I want to add some additional color and context regarding our acquisition pace and process. During the first quarter, we closed on, as we said, roughly $107.5 million, which we were very happy about. At the same time, I'm sure you all noticed in our press release this morning, our last Northern Ohio Medical Specialists closing of a few weeks ago was in fact the last publicly announced acquisition. I want to proactively comment on this, as I expect you're all wondering if there's any bigger readthrough.

The answer is most definitively no. Our pipeline is as healthy and active as it ever has been. And what you're seeing is simply a function of timing of events. With our first quarter as active as it was, the preponderance of our acquisition team's time and activity was spent on closing already-signed acquisitions. That's not to say we weren't continuing to be actively looking to fill the front end of the pipe and originate more, but rather that the -- that end moved a little bit slower as a result of the backup of deals in the first quarter.

We also have a self-imposed moratorium on moving deals through our pipeline as we approach our earnings report. Rest assured that we expect our acquisition activity to continue to pick up appreciably after today, and we fully expect second quarter acquisition activity to continue to be robust.

Thank you, again, for all of you joining us today on the call. We look forward to answering any questions you might have. And so at this time, I'd like to ask the operator to go ahead and open up the lines for any questions. Thank you very much.

(Operator Instructions) Our first question comes from the line of Rob Stevenson with Janney Montgomery Scott.

A question in terms of the comments you guys are making around $17.6 million of '17 minimum contractual rent cash payments and the $23.8 million for '18. Does the $23.6 million -- is that just for the remaining 3 quarters of the year?

The $23.6 million projected for 2018 is the cash receipts expected on a constant base of properties which we currently already have on the balance sheet. In other words, if we did not add any more acquisitions for the rest of this year, we would collect throughout this year $17.6 million of cash and then next year $23.6 million on the same base of properties.

Okay. Because when I divide through the $23.8 million for next year, it's basically, call it, just under $6 million a quarter. But when I look at the $17.6 million, if I think that, that's only for 3 quarters, then that's also roughly in the same ballpark. But if you deduct the $4.6 million or so out from the first quarter, it's putting a run rate for the back half of the year at sort of low 4s. And so I just wanted to make sure that basically -- the takeaway here is that the current portfolio as situated today is running about $6 million a quarter. Right?

I believe that's correct. But I'd like Don to answer that, as he has more specific details.

Yes. There's also accrued noncash items in that number. So for the quarter, that number is about $382,000. So you can extrapolate that over the remainder of the year.

Okay, perfect. And then you talked about a healthy acquisition pipeline. I mean, you're basically $85 million away from sort of hitting that $400 million goal by the middle of the year that you guys have previously talked about. At this point, like how much dry powder do you have to be able to complete the next $50 million, $100 million of acquisitions? Or does something need to happen, either expanded debt or looking at the equity markets, in order to close that sort of level and get you to the sort of $400 million level?

Yes. So we have a little bit of dry powder left on our credit facility. And as you're aware, we're always looking at ways of raising money. We're looking at mortgage debt and looking at capital markets. So we're just pursuing all avenues at this point.

Our revolver does have an accordion feature also which we can trigger if we need to. We have not done that. But we have sufficient capital available to accomplish what you just asked.

Okay. And then as you're sitting out there looking at assets today, anything, any type of -- particular type of asset that you're seeing that you're finding better opportunities in relative to others?

It continues to be a real mix of asset classes and operator types monetizing. I think right now we're enjoying seeing probably a little bit more hospital-type properties available for us to propose on and to pursue, perhaps, than last year. I can't speak to that necessarily. I don't know if it's a trend or whether it's just a function of our increasing networking and visibility. Because we are becoming more and more visible. But it's still a mix. And the single-tenant universe of acute medical properties, which is our preferred appetite, it's robust. I mean, we're not seeing any shortage of opportunity.

All right. And then just last one from me. The acquisition costs, are you guys not going to capitalize those at all in '17? Is that an '18 event for you from an election into the change in accounting rules?

It depends on the type of deal, whether it's an originated sale-leaseback or a business combination where we would acquire an existing leasehold interest, a lease fee acquisition. They're treated differently from an accounting standpoint. And many times with, for example, a straight-up sale-leaseback, we can negotiate that the seller pays all the closing costs and then capitalize it into the lease. That isn't always the case with other types of deals. So it's going to be a mix. But we have an appetite for reducing and capitalizing, as much as possible, closing costs and reducing that expense line.

Okay. So at this point your acquisition costs -- your understanding of the accounting rule and your mix of the acquisition costs is going to wind up meaning that acquisition costs stick around at this company, from an expense standpoint, for the foreseeable future in some form or another, some level or another?

Yes, it's certainly -- it's deal specific. And we are looking at each deal with the understanding of its impact on our financials. So we look forward in that regard.

Our next question comes from the line of Barry Oxford with D.A. Davidson.

Don, could you give us a little more color in this -- what those one-time, nonrecurring items were in the G&A and maybe give some numbers to that? And what would the G&A have been if you kind of x-ed out all of the one-time/noncash items?

Yes, so our G&A for the quarter was $2.8 million. In that number, there's a $1.2 million expense for our credit facility, and that's for the syndication costs paid to the banks. So that's -- we don't expect to incur -- we don't expect to have that expense in future quarters. There's also about $500,000 related to the stock comp plan and proxy statements.

But I would point to the fact that we are planning on giving guidance in the next couple of weeks, and so I will be able to provide a more detailed range for the group at that point. And of course I want to add the LTIPs as another item of $400,000 that's in that G&A number. So for the quarter, it brings down the G&A for the quarter to about $700k.

Got it. One question for Dave. When you look at the environment healthcare perspective from the government and stuff, how is that affecting your underwriting of tenants going forward?

Well, it's sort of a mixed bag. What I tell most people most of the time when I answer this question is that in our asset class, in our segment of operators, real estate carrying cost is only about 10% or 15% of the P&L for an acute operator, a hospital operator, a medical group practice, whatever. These are not relatively real estate-intense businesses like multi-tenant MOBs or assisted living or senior housing.

So if there's any pressure, regulatory pressure on revenues for a medical -- licensed medical operator, by and large they have plenty of ability to manage variable expenses and mitigate that downward pressure on revenue, if there is any downward pressure on revenue or caseload, before it ever gets down to the fixed expense line affecting their ability to pay rent.

And I'll also add to that we have 7x -- over 7x coverage, I believe, for our portfolio, EBITDA divided by rent. So we really have very little exposure on that issue.

And a broader, higher-altitude answer to that would be I really don't expect revenues of operators to change, or caseloads or volumes to change, regardless of the regs, whether the ACA is repealed or not, because it's demographically driven. I mean, these are not elective cases, for the most part. Probably 80% of the volume of our operators or tenants is nonelective. So it's not a major driver of what we're doing, and we really don't expect to have any exposure from it.

(Operator Instructions) Our next question comes from the line of Brian Brennan from National Securities Corporation.

I just wanted to maybe get on to the distribution. Are you still comfortable, when you get into maybe the back half of this year, where you'll be in a position where that dividend or distribution number would be more covered at a 1x coverage and/or better? Is there any way -- I know you've got some guidance coming out in a few weeks. I don't know if you're able to maybe give me a little color today.

Well, as I said earlier, we do plan to provide guidance on expected FFO and AFFO ranges for the remainder of 2017 in the not too distant future here. Once we've announced some of the acquisitions we're currently working on that are close to fruition, we will proceed with that. But I've been advised that I really can't forecast today on the expected results before then. But we're trending in the right direction.

Our next question comes from the line of Craig Kucera with Wunderlich.

I would like to just circle back to the G&A again and some of your breakout, Don. Because in your calculation of AFFO, it looks like you only added back about $400,000 of noncash comp. So I'm trying to -- was the $500,000 stock comp -- I mean, how was that -- I'm just trying to understand the accounting for that.

Yes, so the noncash comp and the actual expenses that was required to actually implement the plan. So the $500,000 was a combination of those expenses along with our annual audit and proxy-related expenses.

Oh, I see. Okay. So that was just -- all right. Fair enough. So when you say that $700,000 is sort of a recurring cash number, I guess since you're -- you've been running at anywhere from $1.3 million to $1.7 million to $2.8 million, I guess should we start to expect to see something closer to $700,000 going forward? Or were there any other nonrecurring items in the past that we should have focused on?

Yes, there was a number of nonrecurring. We had -- and you're referring to 2016 run rate?

Right.

Yes, we had a $500,000 item in there for a development fee related to one of our properties. So there were a number of items that we don't expect to occur in future periods. But I will point back to the fact that we're going to provide guidance in a couple weeks. So that $700k is definitely a quarter point in time communication, and then in the guidance we'll communicate the run rate at that point.

Right. No, I understand that. I'm just trying to -- so that amount, though, is that just supporting more of the accounting and legal sort of outside because -- and the external manager is absorbing all the costs? I know you've had to hire some additional business development people to go out and help you source transactions. Is that still correct?

Yes, that's still correct. Yes, we are. So the company is incurring some costs related to that. The majority of the costs that I spoke to today is really specifically related to just setting up plans, just through the nature of our startup. The comp plan and comp committee just got formed, and all those processes are just now being put into place.

(Operator Instructions) Mr. Young, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thank you. Once again, thank you, everybody, for participating today and for your excellent questions. We look forward to seeing you all soon. And we look forward to speaking again with each of you on our second quarter conference call in a few months. And have a great day. Thanks again for your continued review of our company. Have a great day. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.