Global Medical REIT Inc (GMRE) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Global Medical REIT Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Jeremy Hellman of The Equity Group. Thank you. 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 second quarter and 6 months ended June 30, 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 Q2 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 assumption 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 performance or conditions; any statement regarding future dividend payments; and any intention to announce earnings, FFO, AFFO and normalized 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 the 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 #1 and the amendment #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'd like to turn the call over to David Young, CEO of Global Medical REIT. Please go ahead, Dave.

Thank you, Jeremy, and welcome, everyone to the call. Good morning. Joining me today is our Chief Financial Officer, Mr. Don McClure, who will be speaking to you in a moment. Before I hand 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 second quarter.

We closed 4 acquisitions in the second quarter of 2017. From $1 standpoint, we acquired approximately $39.8 million worth of medical treatment properties, highlighted by the purchase of a market-dominant portfolio, including a hospital facility located in Sherman, Texas for a purchase price of roughly $26 million.

We closed the second quarter acquisitions, which averaged an 8.24 cap rate brought our gross investment in real estate to approximately $355.1 million, including roughly $17 million of intangible assets and liabilities acquired, covering just about 1.1 million square feet of net leasable space.

Our pattern of late quarter closings continued with several properties closing during the last week of June. As we've noted in prior quarters and continue to emphasize, this results in our top line run rate being understated despite the fact that we incurred all the costs related to those acquisitions during the stated quarter.

The 4 acquisitions we closed in the second quarter are expected to contribute additional rental revenue just over $3 million per year. And as noted in our press release, the 3 largest of those transactions closed during the last week of June, therefore, had minimal impact on our Q2 top line. We expect to see the full impact of that anticipated rental revenue in the next quarter and beyond.

Now I'd like to turn the call over to Don, our CFO, who will go through a summary of the quarter's specific financial highlights, and then I'll return for some closing remarks and some questions.

So thank you. And Don, you can take it from there.

Thanks, Dave. I will briefly go through the financial highlights for the second quarter ended June 30, 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 second quarter 2017 Form 10-Q this afternoon, which will include details regarding our consolidated financial position and results of operations within the MD&A of financial condition and results of operation section of that filing. Please note that with this quarter's earnings, we have initiated a practice of providing a supplemental portfolio information document that includes more detail on our portfolio of properties. That supplement can be found on our website and also included in Form 8-K we filed this morning.

Our second quarter 2017 rental revenue was $6.7 million versus $1.8 million during the second quarter last year. Expenses funded by the tenant that we pay on their behalf and other income at an additional $700,000 of revenue bringing our total revenue for the quarter to $7.4 million. The increase in rental revenue compared with the same quarter last year was driven largely by the expansion of our property portfolio.

Our total expenses for the current quarter, consisting mainly of G&A, depreciation, interest, management fees and acquisition fees increased from $2.3 million in the second quarter last year to $8 million in the second quarter of the current year.

General and administrative expense was roughly $2.6 million in the current quarter, followed by approximately $1.9 million of depreciation expense, and approximately $628,000 of management fees. Approximately $700,000 of our general administrative expense for the quarter was derived from tenant expenses that they fund and we pay on their behalf.

With respect to the tenant expenses, I want to be clear that this is a 0 impact on our bottom line as the expense recoveries are equally included in both our revenue and expense line items.

Interest expense was roughly $2 million compared to approximately $1.3 million in the prior year quarter. The increase in the interest expense was primarily due to the utilization of more of our available credit facility to close acquisitions. The credit facility was not in place during the prior year quarter.

Our net loss in the second quarter was roughly $622,000, which was up from roughly $494,000 for the comparable period last year, largely due to the increase in expenses as discussed above.

For the second quarter of 2017, we recorded a net loss of $0.04 per share, basic and diluted, that compares with the net loss per share, basic and diluted, in the second quarter of 2016 of $0.35.

Second quarter 2017 FFO increased to $0.10 per share, and AFFO grew to $0.14 per share. Second quarter normalized AFFO, which represents AFFO adjusted for onetime expenses such as our SOX implementation costs and reimbursement obligations to our external manager, was $0.16 per share.

Our weighted average shares outstanding were $17.6 million for the current quarter compared to approximately $1.4 million for the same quarter last year.

Moving on to our balance sheet. Our portfolio of real estate assets at June 30, 2017 included 46 buildings, leased to 35 tenants. Those assets are carried on our balance sheet at approximately $355.1 million, including approximately $17 million of intangible assets acquired, net of intangible liabilities.

Looking at the liability side of our balance sheet at June 30, 2017, we had a total debt of approximately $183 million, which included notes payable to third parties, net of unamortized debt discount and $144.5 million, which is drawn on our credit facility.

As of June 30, 2017, the average term of company's debt was 3.85 years, with an average interest rate of 4.5%.

On June 30, 2017, the company closed on the public offering of 3.5 million shares of its common stock, resulting in net proceeds of $29.6 million. Subsequent to quarter-end, the underwriters exercised their overallotment option from the offering, resulting in sales of 525,000 additional shares of common stock, resulting in additional $4.5 million of net proceeds, for a total net proceeds from the offering of $34.1 million.

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

Don, thanks a lot. Continuing on, we continue to have very healthy pipeline of acquisition opportunities. Our pipeline remains very robust. And refining the medical operators are now reaching out to us, and that is a bigger part of our opportunity scope at this point because we are becoming more widely known.

The physician groups and hospital operators that we work with, speak with their peers in the industry, their trade groups, their old colleagues from medical school and others, leading to a more networking identity for us, and increasing name recognition, all of which, we anticipated and we enjoy.

At the same time, we're remaining true to our acquisition criteria, our strategy and our underwriting process as we work to make sure that every acquisition is the proper fit both from a strategic and credit perspective both for us and for our future tenants.

During the second quarter, we closed on roughly approximately $39 million of acquisitions, and this level during the second quarter was not all that unexpected given the significant number of deals that we were able to close in the immediately preceding quarter and month, and it was consistent with our financing strategy and our pace of capitalization for the second quarter given our follow-on offering did not close until the end of the second quarter also.

Those of you who that have followed us for a while know that our acquisitions tend to be lumpy. And as a result, I'll remind everyone to look at the activity on a longer-term basis, preferably annually, but we are on pace and on schedule on our original plan. As we recently passed the 1 year anniversary of our IPO, I'd like to reflect on all that we've accomplished, and thank everyone for all their hard work. In 1 year's time, we've grown our portfolio from an IPO level of approximately $100 million, $110 million to over $355 million of gross investment. And we've become a trusted real estate partner for a large number of leading medical operators.

Also, with our portfolio now exceeded 1 million leasable square feet, with 100% occupancy, we're shifting the timing of announcing our acquisitions. In some, we'll continue to announce larger acquisitions, which are substantial enough to merit an 8-K filing, and the smaller acquisitions that we also consummate along the way will continue to be part of our mix. But given their overall impact, deal by deal on the portfolio, we don't see a need to update you all in each of these deals as we consummate them, and instead, we'll provide discussion on those within the confines of our quarterly updates as we're doing today. So we'll aggregate and report the smaller deals on a quarterly basis.

Other than that, everything continues on schedule. We're very happy with our progress. We thank you all for your support and your reporting, and thanks again for being here on the call today. I will look forward to hearing questions from you.

So operator, let's open it up this point for any questions, and we'll do our best to answer them. Thank you.

(Operator Instructions) Our first question is from Rob Stevenson from Janney Montgomery Scott.

Other than the increased shares and the lower interest expense as a result of the equity offering, is there any other changes that we need to be thinking about in terms of your June 5 guidance for the third quarter and fourth quarter for earnings?

Yes. Let me take that. We issued guidance based on a hypothetical situation taking into the effect that if we didn't raise any additional revenue, didn't acquire any more properties -- and they reduced our expenses based on that assumption. Going forward, as we continue to raise funds, our expense line will support that process. So at this point, the guidance that was produced back in June is stale for the third and fourth quarter. Our intention also is to pick that back up at the beginning of 2018.

Yes. In other words, we did not contemplate raising capital in that guidance we have, since raised additional capital. And so the -- although the pipeline remains the same and our activity is very positive and so forth, the assumptions in that guidance have changed.

Okay. So no guidance until '18 to replace the June guidance?

That's correct.

Our next question is from Craig Kucera from FBR Capital Markets.

I just want to go through G&A expense a little closer again just so I understand all the pieces. It sounds like about $700,000 is operating expense. It looks like you had about $720,000 of share comp. Is the rest cash and -- or were there any other one-timers in there?

Yes, I think you're right on in your assessment. Yes, of the $2.8 million, about $944,000 relate to professional fees. In that number is the onetime SOX expense that falls to the bottom line in our normalized AFFO. The LTIP was $720,000. The expenses, there's an impound fee that -- on the expense line item that pops up this year -- I mean, this quarter, but it is offset on the revenue side so that's no impact to AFFO. Apart from that, no other onetime items.

Okay. Well, I think, last quarter, I think we were looking for maybe something closer to $700,000 on the cash component. Is that still a good assumption for the rest of the year? Or is something closer to $1.2 million, a little closer to how we should think about things?

No, I mean, I think it's probably reasonable. Our legal expenses have declined quarter-to-quarter, our audit expenses have declined quarter-to-quarter. So we're actively working on our expenses while driving the top line revenue.

Got it. So the -- I'm sorry, I didn't fully understand the answer. Are you saying that, that probably something closer to $700,000 is how we should think about it or the $1.2 million.

Yes, I think the $700,000 is realistic.

Got it. Okay. And is there a thought to with the operating expenses to maybe breaking those out separately? Or are they going to continue to be booked as G&A?

Up to this point, there has not been any additional conversation about breaking them out. I will continue to break them out in our earnings call, but we can have that discussion internally. You have to (inaudible)

Okay. So with the capital that you raised late in the quarter and early there -- I guess you said the overallotment completed, are you ultimately likely to lever that maybe somewhere in the 2:1 range? Or how are you thinking about leverage?

Yes. Yes, that's right, 2:1. There's still about $50 million left on the credit facility. There's still the accordion feature that we can exercise. We're having those conversations. And it's also fixed rate debt so amongst those different types of debt is how we're going to leverage going forward.

Okay. I know you guys haven't closed on the Austin purchase with Norvin, but generally, when you announce something, you have about 100% close rate. When you think about that piece, how would you handle the development component if it came up down the road? And can you tell us a little bit about the rent coverage there?

This is Dave. Craig, I can speak to that. The development component is tied to an adjacent lot, building lot that was -- to be acquired with the facility, that was part of the original package that the developer owned for their -- on behalf of the lessee, with the intent of future expansion development and so on. We have the right to divest that property, that lot, sell it and actually recapture some of our original investment and boost the return almost 100 basis points on the original investment, which we will actively pursue. So it's very likely that we will not be obligated to consummate future development, and we will divest. But there are a lot of details related to that development agreement and contract and successor carryforward obligations and so on that we're investigating right now. But we do not intend to enter into the development business. Of course, if we did, on this particular project, it would be an add-on and a lease amendment with a very strong credit and there really wouldn't be any speculative risk because it'll be preleased from the get-go. But nevertheless, our intention is to seek to divest that lot.

And do you have a sense of what the rent coverages at that asset?

It's beyond our threshold. We have a 2:1 minimum for anything we do, and I know this is in excess of the 2:1. I'd have to get back to you on the exact number. It's been computed. I just don't have it right in front of me at the moment, but I know it's better than 2:1.

Okay, but that's fine. I can take that offline. The reason I ask is -- how do you feel about Kindred as a guarantee to lease payments? I know they've had a few rough quarters here, and there seems to be some concern. But how do you look at them as sort of a guarantor of the payments?

Well, we look at them at the local operating level as far as their competitive footprint and success with a given hospital and a given location. And we also look at them at the corporate level as a worthy guarantor. So we look at it from both angles. I am comfortable with our assessments at both levels at this point. They are well established in both regards. They are the dominant provider in many, many markets. They're, I think, #2 only to HealthSouth in rehab. And actually, they're doing quite well overall. Again, if you have any specific concerns about any dimension of underwriting, or whatever, we can discuss that further with you in detail. But we are satisfied with their positioning and their stability, both in that market and also corporately.

(Operator Instructions) And our next question comes from Robert Carlson from Janney Montgomery Scott.

Just a real quick question. I know that you have -- I think it's 46 buildings. Is there any thought of being internally managed? And at what point do we reach critical mass for that to happen?

Per our management agreement contract which states to the inception of the company, we have an exit -- contemplated exit hurdle at $500 million of equity. The outside-dominated board, the outside component of the board, which is the dominant portion of the board will take up this issue as we approach that size hurdle. And they will do a risk analysis both ways and a cost analysis both ways, continuing on versus dismissing the external adviser. And it is generally contemplated that we will -- that the external adviser will exit when we hit that point.

Thoughts of when that could happen?

Well, at the rate that we're growing right now, I mean it's completely feasible. We could hit anywhere between $400 million and $500 million of assets, real estate by the end of this year, at the trajectory that we're on. I'm not promising that, but we're on a very good trajectory. And if we keep the same rate of growth going that we're on now, I think we're only a year or 2 away from hitting that intersect. It's not in the distant future. It's more in the intermediate future. And it's a simple challenge for the board to do a cost analysis on what it will take to buy out the external adviser versus continuing to pay that management fee as 1.5% of equity going forward. There's also been some historic discussion about the external adviser taking their fee and stock as opposed to cash. And it may end up having minimal cash impact on the company because -- if they in fact do that. So anyway, it's an issue of occasional discussion. We do have our board meetings and our periodic management meetings where it comes up and we talk about it. But at this point in time, there isn't any specific schedule or committed date or whatever, but it certainly -- it's on the horizon.

Our next question is from Steven Shaw from Compass Point.

Dave, did you talk about the Lubbock, Texas asset in terms of timing? It looks like it's the only previously announced pending acquisition that hasn't closed?

Yes, it's in process. And it will be done in the not-too-distant future. We had a -- we put out press release because we had to amend an 8-K for technical correctness. Initially, as the deal was negotiated, it included a full guarantee or pro rata guarantees by the parties and the tenant. And then there were some retrading of the deal before the PSA was signed -- or after the PSA was signed, I should say. But we had to make a correction. We, by the way, do not really consider that retrade or that renegotiation to be a highly material event in the context of our total portfolio. It doesn't represent significant risk, I believe, personally, to shareholders. But we are obligated, regulatorily, to report any changes in contracts and such. So we put it out there. I was a little bit surprised at the reaction to that announcement because it really was a regulatory technical requirement that we announced that. It wasn't really a major -- in my opinion, a major deal. But that deal should be closing very shortly. I know it's on track and we're happy to have it. It's going to be a very good tenant, very good locally dominant operator with a good track record. And as far as I know, everything's on track.

(Operator Instructions) And if there are no further questions, I'd like to turn the floor back over to management for any closing comments.

Well, I guess, that's it for the call. And once again, we really appreciate everybody being here, and thank you again for your excellent questions and for paying attention to our progress. So we look forward to speaking with all of you again on our 2017 third quarter conference call. I hope everyone has a wonderful day and be safe, and we'll talk to you all again soon. Thank you.

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