Global Medical REIT Inc (GMRE) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Global Medical REIT Third Quarter 2017 Earnings Release. (Operator Instructions) As a reminder, this conference is being recorded.

I would 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 third quarter ended September 30, 2017. These results were also furnished with the Securities and Exchange Commission via a Form 8-K, and the company intends to file its 2017 Q3 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 any references to assumptions and forecasts of future results.

Except for historical information, the matters set forth herein, 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; 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 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 Amendment #2 thereto for the year ended December 31, 2016, which were filed with the 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 Securities and Exchange Commission.

These risk factors include 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 Jeff Busch, CEO of Global Medical REIT. Please go ahead, Jeff.

Thank you, Jeremy, and welcome, everyone, to the call. Joining me today is our Chief Financial Officer, Bob Kiernan; and our Chief Investment Officer, Alfonzo Leon.

Before handing the call over to Bob for his review of the company's financial results, I'd like to spend a few minutes touching on some highlights from the third quarter. We closed 4 acquisitions in the third quarter of 2017 for an aggregate of approximately $66 million in asset value, which will add approximately $5.1 million of annual cash rent receipts. Bear in mind that because our closings occur at various times in the quarter, we will not see the full impact of these acquisitions on our top line until quarter 4.

These acquisitions were all accretive, with a weighted average cap rate of 7.67% and brought our gross investment in real estate to $422.3 million, covering approximately 1.2 million square feet of net leasable space. We have a strong pipeline for the fourth quarter of 2017. We are actively pursuing opportunities to acquire up to 12 properties comprising approximately 276,000 square feet of net leasable space with a total asset value of close to $90 million. We expect to close 3 of these properties comprising approximately 73,000 square feet and total asset value of approximately $24 million very shortly.

We have been focused on lowering and simplifying our cost structure, especially with respect to the G&A costs. For example, towards the end of the second quarter and into the third quarter, we internalized a significant amount of our corporate legal cost and have seen a significant lowering of these costs relative to the first quarter. We are also closely scrutinizing our outside vendor costs to determine how much of these costs can be brought in-house.

As Bob will explain in more details, for the third quarter and going forward, we are reporting the operating expenses related to our properties in a separate line item in our income statement as many of our properties' operating expenses are reimbursable by the tenant. Previously, these expenses were included in our G&A line item. We believe this change in presentation provide more transparency into our expenses.

Now I'd like to turn the call over to Bob Kiernan, our CFO, who will go into more details regarding the quarter's financial highlights, and then, I'll return for closing remarks and questions.

Thank you, Jeff. I encourage everyone to review our press release from earlier this morning if you've not done so already. In addition, as stated earlier, we intend to file our third quarter 2017 Form 10-Q this afternoon, which will include details regarding our financial condition and performance for the quarter. We also plan to publish our updated investor presentation early next week. The presentation will include a variety of supplemental information, including a comprehensive listing of our property portfolio.

Now on to the financial highlights. Our third quarter 2017 rental revenue was $7.9 million compared to $1.9 million during the third quarter last year. Expense recoveries and other income added an additional $467,000 of revenue, bringing our total revenue to $8.4 million. The increase in rental revenue compared to the same quarter last year was driven largely by the expansion of our property portfolio. Our total expenses for the current quarter increased to $7.8 million from $4 million in the third quarter last year. This increase was primarily due to expenses related to our increased portfolio size, including the impact of acquisitions that were accounted for as business combinations, which require all acquisition costs be expensed. However, compared to the second quarter of 2017, our total expenses decreased slightly in the current quarter despite our expanded portfolio.

Regarding our expense presentation, as Jeff mentioned, there's a new line item in our income statement, operating expenses, that includes expenses we recover from our tenants along with miscellaneous property-related expenses that are the company's responsibility and not reimbursable. Previously, these items were included in our G&A expense line. Regarding G&A expenses, our Q3 G&A expenses decreased by 44% from the second quarter, reflecting decreases in both noncash LTIP expenses, primarily as a result of forfeitures in the period and reductions in various other components of our G&A expenses, including decreased insurance costs, certain state taxes and reductions in public company costs.

With respect to LTIP forfeitures, as previously disclosed, pursuant to separation agreements with our former CEO and CFO, some of their LTIP units were forfeited, which resulted in a nonrecurring reduction to our compensation expense in the third quarter as we reversed previously recognized expense on these forfeited LTIPs.

Net of LTIP expenses, our Q3 G&A expenses totaled approximately $650,000 compared to approximately $1.1 million in Q2. Regarding the reduction in these G&A expenses compared to Q2, during the quarter, we identified approximately $200,000 of insurance costs that we determined to be tenant expenses and not borne by the company. Outside of this onetime benefit, the decrease primarily reflects the impact of various expenses that were elevated in Q2 and didn't repeat in Q3.

Looking forward to Q4, I expect that our non-LTIP-related G&A expenses will be comparable to Q3, but without the onetime benefit. Our net income available to common shareholders in the third quarter was roughly $380,000 or $0.02 per share, which was up from a loss of roughly $2 million or $0.11 per share for the comparable period last year. Third quarter 2017 FFO increased to $0.14 per share, and AFFO grew to $0.17 per share.

Moving on to the balance sheet. Our portfolio of real estate assets at September 30, 2017, included 50 buildings leased to 38 tenants. These assets are carried on our balance sheet at a gross value of $422.3 million. Looking at the liability side of our balance sheet at September 30, 2017, we had total debt of approximately $165 million, which included $126 million that was drawn on our credit facility and $39 million of fixed rate notes payable.

At quarter end, the weighted average term of the company's debt was 3.43 years, with a weighted average interest rate of 3.84%. Regarding our equity, on September 15, 2017, the company closed on the public offering of 3.1 million shares of its 7.5% Series A cumulative redeemable preferred stock, resulting in net proceeds to the company of $75 million.

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

Thanks, Bob. I'm really excited about the opportunity ahead of us. We truly believe we have a compelling value proposition for medical operators who are looking for a long-term real estate partner. Ours is a growth market with significant installed base, both of which creates a large quality pipeline of accretive acquisition opportunities. I firmly believe that coupling accretive portfolio growth with proper management of our expenses will allow us to continue working towards 100% AFFO coverage of our common stock dividend. While we are not giving a specific guidance on the time of that, but we feel we have provided a number of data points, which should help investors and analysts develop their own reasonable expectations on that front.

I have also made it a priority to get out on the road and to tell our stories, both at individual meetings with investors and at various conferences. I think our stock is a very compelling investment at the current levels, both in terms of the dividend and the potential capital appreciation. Those of you that I have had the pleasure of meeting lately, have likely heard me talk about my personal investment in the company. Like you and I, and our external manager, we are shareholders, and we are 100% committed to the success of this company.

Thanks again to all of you for joining us on the conference call today. Operator, let's open up for questions.

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

Jeff, give me your comments about the acquisition pipeline, and what's likely to close soon. Is that amount more or less what we should be thinking about between now and year-end? Or is some of that likely to spill over into January, February at this point in time?

Right now, we are targeting to year-end, but it's always possible, because we're in a lumpy business, for something to spill over because of a title search or other things. But we have a pretty good pipeline for fourth quarter, and we're targeting to close them all. But as you know, in our business, things can get delayed for a few weeks.

Okay. And then, Bob, given the preferred raise, I mean, when you take a look at your availability under debt, and preferred and cash on hand, what's the sort of dry powder to make acquisitions at this point in time on the balance sheet?

Well, with the accordion increase in the quarter, we've got $250 million of total available under the credit facility, of which we've drawn $126 million, and we also -- we have the ATM available to us as well.

Okay. And then, lastly, Jeff or Alfonzo, anything in particular concentration-wise in the next batch of acquisitions that we'll see in terms of properties or regions?

Sure. So this is Alfonzo. In terms of asset type, a lot of it is pretty consistent with what we've pursued in the past. So no significant variance from what we've been acquiring quarter by quarter.

Our next question comes from the line of Bryan Maher with FBR.

Just kind of following up -- and thanks for that pipeline information. That's really helpful. Are you seeing any changes in cap rates out there in the past quarter or so? And are you seeing any difference in the motivation or lack thereof of sellers?

Sure. Again, this is Alfonzo. So the market has -- the big headline things that I've seen in the market over the past couple of quarters are the big, big portfolios that have traded in the 4 caps, and that's been something that's gotten a lot of attention. My sense of how that's impacted the market, I think there is a consensus growing in the market that, that's -- those were kind of unique situations. And there's a bit of a tug-of-war in terms of whether people feel like cap rates are stabilizing or trending up or down. From my vantage point, I'd say that coming into year end, it's always very frantic. Everyone's trying to do year end closings. I'm more kind of focused on where I think 2018 is headed. The stuff that we have in process, it's locked. The stuff that's -- my viewpoint on 2018 is that we might start off the year a little tighter than we were, say at the first half of 2017, but just my sense is that it's going to -- cap rates are going to actually soften towards the second half of next year.

Okay. That's helpful. And then, one of the other REITs in the space had a tenant issue they talked about yesterday on their call, and the stock sold off pretty materially. How do you guys feel about your tenants and their ability to cover the rent? Are there -- is there anything in there that we should be thinking about?

Sure. So we -- our model is to really dig into the tenants first and get really comfortable with who they are. So we spend a lot of time before we acquire the building going through their P&Ls, talking to management, getting a sense for their business, how they're positioned. So at the time of purchase, we feel great that these tenants are very -- they're not going to give us any concerns on paying rent anytime soon. So from that perspective, I don't -- we feel very good about our tenant roster, and there's nothing that's -- that would make me feel concerned that we're going to have issues with our tenants paying rent.

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

We've talked about the 12 buildings that have been identified for acquisitions, but either Jeff or Alfonzo, if you could give us a little more color on what's kind of beyond that, as far as what you're seeing. Is it a good pipeline? Is there a lot of product out there in the marketplace? And then, also, in regards to your comment of cap rates softening maybe in the back half of '18, is that -- are you predicting that because that's going to be -- we're going to have an increase in interest rates and that's why? Maybe a little color behind that comment too.

Sure. Okay. So in terms of -- well, it's interesting. So I heard recently that from a research company that the trailing 12 months volume of transactions in this space is $20 billion, which is incredible. I remember when, if the industry did $3 billion or $4 billion, it was considered a pretty good year. Now we're doing it every 3 months, which is incredible. So the pricing that we've seen over the past couple of years has really, in my opinion, kind of opened a spigot in terms of volume, and it's really encouraged a lot of owners of assets to sell, especially the kind of stuff that we're looking for. I think there's a lot of physician groups out there with MOBs and surgery centers that are really compelled to sell. So from a volume and deals perspective, it's great. I mean, there's just a lot of stuff that is available and the flip side, though, is that there's a lot of capital chasing. Fortunately, from my vantage point, a lot of the capital that's come in, the lion's share of it is coming in looking for kind of center of the fairway underwriting that a lot of other folks have, which is on campus, investment-grade anchored facilities, not so much the physician sale leasebacks that we're pursuing, and the surgical -- the hospitals and surgery centers focus that we have and not necessarily on campus and not necessarily primary markets, but very good zip codes, very good physicians. So from that perspective, I mean, there's a lot out there. And one of the big challenges we have is just trying to process everything that is available in a timely way and converting it into a pipeline for us to acquire. So the second part of your question, in terms of why I feel the second half of 2018, it's just -- more than anything else, it's just kind of me adding up what I'm hearing from a variety of different sources, what I'm reading in a variety of different sources. So yes, a little bit of thinking that rates have probably bottomed, at least, and there's a little bit of pullback that I'm sensing from some of the bigger players in the space. I think we're probably going to stabilize back for the sort of down the fairway, on campus, investment-grade, probably going to stabilize closer to the 5s that we had early 2017. And that's most of kind of why I think second half is going to soften a bit.

Okay. Okay. And then, last question, maybe for Bob, the payout ratio on an AFFO basis. When do you guys think you'll cover that? Q1? Q2?

From a forecast perspective, we will come out next year with our guidance for 2018, as Jeff mentioned. We're really not in the position to comment on timing for coverage at this point.

Barry, I just want to add to that a little bit. If people see our trends and numbers, they could see we're heading in the right direction.

Our next question comes from the line of Robert Carlson with Janney Montgomery Scott.

Just a quick question on the time line going to internal management.

This is Jeff. It's all set that we're going to internal management. I could see that within the next 2 years happening. We have a nice acceleration. We expect that we're going to be covering our dividend at some point in this acceleration. Then, we'll get over the $400 million plus market cap group that some of our goals that we've announced before, and then, probably pretty shortly after that, we'll be heading into an internalization. So each one should give our investors a jump in value.

(Operator Instructions) Our next question comes from the line of [William James] with [Meyer Investments].

My question's been answered.

Well, thank you for joining us.

Thank you. Mr. Busch, at this time, there are no further questions. I'll turn the floor back to you for any final comments.

We look forward to speaking with each of you again on our 2017 fourth quarter conference early next year. Thanks again for joining us.

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