Global Medical REIT Inc (GMRE) 2018 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Global Medical REIT's 2018 Third Quarter Earnings Conference Call. (Operator Instructions)

Please note that today's conference call is being recorded with the webcast replay available for the next 90 days. The dial-in details for the replay can be found in yesterday's press release and could be obtained from the Investor Relations section of the company's website at www.globalmedicalreit.com. (Operator Instructions)

I'll now turn the conference over to Global Medical REIT's Investor Relations Representative, Mary Jensen. Please go ahead.

Thank you, operator. Good morning, everyone. Last night, after the market closed, Global Medical REIT issued the announcement of its financial results for the third quarter and 9 months ended September 30, 2018.

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, including our funds from operations, or FFO, and adjusted funds from operations, or AFFO; any statements concerning our plans, strategies and objectives for future operations and our pipeline of acquisition opportunities and expected acquisition activity, including information about our current and prospective tenants; any statements regarding future dividend payments; any statement regarding future capital raising activity; and any statements regarding future regulatory changes and their impact on our industry or business; 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 are set forth in the Risk Factors section of our annual report on Form 10-K and quarterly report of Form 10-Q and elsewhere in the reports we have filed with the United States Securities and Exchange Commission. These risk factors include the risks that are financial projections, including projections for funds from operations, or FFO, and adjusted funds from operations, or AFFO, may not be realized due to, among other things, lower-than-anticipated revenues or higher-than-anticipated expenses or we may not be successful in completing all of the acquisitions or dispositions in our investment pipeline or that we identify we'll pursue in the future. We do not intend and undertake no obligation to update any forward-looking statement.

Please note that the market commentary referenced in our prepared remarks today is based on data obtained from JLL health care, real estate, capital markets as well as Revista Medical Real Estate Report.

With that, I'd like to turn the call over to Jeff Busch, our CEO of Global Medical REIT. Jeff, please go ahead.

Thank you, Mary, and welcome, everyone, to our call. Joining me today is Bob Kiernan, our Chief Financial Officer; and Alfonzo Leon, our Chief Investment Officer; and the rest of the GMRE management team. I will start off with highlights from the quarter, followed by our ongoing strategic and operational plans. Bob will follow with his review of the company's financial results for the third quarter, and then Alfonzo will provide a market update and a review of the company's acquisition activity.

2018 has been a great year for GMRE. We have covered our dividend on an AFFO basis for the last 2 quarters, which is something we are very proud of. In addition to increasing our borrowing capacity and fixing a portion of our interest rate, we have grown our medical office net lease portfolio and have a solid pipeline for external growth opportunities that will continue to support our long-term business strategy.

Since last quarter, we have acquired 4 properties for $17 million for a blended cap rate of 8%. Currently, we have 3 additional assets under contract, totaling $37 million and a blended cap rate of 7.86%. These medical assets are located in our target markets, where we continue to build efficiencies of scale across the portfolio while systematically improving our tenant quality. Including what we have closed so far in the year, gross investments in real estate now exceed $621 million, generating estimate annual cash rent of approximately $48.4 million.

As we mentioned last quarter, our tenant at Great Bend Regional Hospital, located in Kansas, was recently acquired by The University of Kansas Hospital System, a AA- credit tenant. Since the change of operators, several potential buyers have approached us with attractive offers. Although we are a buy-and-hold owner and operator, we are cognizant of opportunities to realize the appreciated value of our assets. With that in mind, we believe at agreed-upon price we have a unique opportunity to realize an $8 million gain on one of our properties where we can redeploy to purchase additional assets. Alfonzo will provide more color on this transaction in his remarks.

During the quarter, we continue to strengthen our balance sheet, extending our credit facility debt maturity, increasing our borrowing capacity and fixing a portion of our interest rate. In addition, we began selling shares of our $50 million ATM program at above $9. We believe that our ATM serves as an essential and convenient capital source to fund acquisitions and other corporate purposes, which could include paying down debt. Bob will provide additional details on our recent ATM activity during and after the third quarter.

In addition, we've continued to force our relationship with the Israeli debt and equity market as another source of capital and continue identify this as additional capital sources. These relationships as well as our relationship with our domestic banks, where we discuss public and private equity, are part of a multifaceted approach to diversify capital sources. We are happy to discuss this more in detail during Q&A session on this call.

Now I'd like to turn the call over to Bob Kiernan, our CFO, who will provide details regarding the third quarter financial highlights.

Thank you, Jeff. Yesterday, we released via press release and also posted our earnings package to our website, which provides details on our financial position and operating results for the quarter and 9 months periods. We continue to appreciate our investors' and analysts' ongoing comments and suggestions on our package and look forward to enhancing the package in future quarters.

Now on to our 2018 third quarter results. Total revenue increased to $14 million in the third quarter of 2018, up from $8.4 million in the third quarter of 2017. The 9 months ended September 30, 2018, GMRE total revenue increased to $38.8 million, up almost 90% from the same period last year. The driver for this increase -- driver for this is an increase in rental revenue from our net lease health care portfolio. Revenue growth continues to be positively impacted by our acquisition activity and the terms of our underlying leases.

Total expenses for the third quarter of 2018 increased to $12.2 million from $7.8 million in the third quarter of 2017. For the 9 months ended September 30, 2018, total expenses increased to $33.8 million compared to $21.8 million for the 9 months ended September 30, 2017. Depreciation, and amortization expenses as well as interest expense remain large components of our total expenses as we continue to actively invest in our portfolio. To put this in perspective, total expenses, as a percent of total revenue for the third quarter, was 87%.

G&A expenses, as a percent of our revenue, continue to decline as a result of our cost-reduction efforts and increased revenue from of our larger portfolio size. For the 3 months ended September 30, 2018, G&A, as a percent of our total revenue, was 10% compared to 11.8% in the comparative period and a sequential decline from 13.3% last quarter. For the 9 months ended September 30, 2018, G&A, as a percent of total revenue was 10.7% compared to 21.6% in the comparative period. These 9 months ended results are primarily impacted by an increase in noncash LTIP expense, offset by a decrease in Sarbanes-Oxley implementation costs and other professional fees.

During the quarter, we early adopted accounting guidance related to stock compensation that will allow us to account for expenses related to LTIP awards granted to employees of our manager at fixed values as of the grant date rather than revaluing these awards at each reporting date. Please note that, sequentially, our noncash LTIP expenses decreased from $1.1 million in Q2 to $741,000 in Q3. This decrease was driven by the implementation of this new stock comp accounting standard. Looking ahead, the new guidance will serve to limit the variability of this expense as change in these costs will be driven primarily by the cost of any new LTIP awards and the achievement of performance thresholds and not fluctuations in our share price. Based on outstanding awards at September 30, our Q4 LTIP expense is expected to be approximately $700,000.

We continue to look for ways to actively reduce our cash G&A expenses, and we currently expect G&A to range between $700,000 to $800,000 per quarter, representing an annual run rate ranging between $2.8 million to $3.2 million. Our 2 largest expense line items in the third quarter were depreciation and interest, both of which are positively correlated with our portfolio growth. Depreciation expense was $3.6 million in the third quarter of 2018 versus $2.2 million in the prior quarter. For the 9 months ended September 30, 2018, depreciation totaled $10 million compared to $5.4 million in the comparative period. Interest expense was $4.1 million in the third quarter compared to $2.2 million in the third quarter of 2017. For the 9 months ended September 30, 2018, interest expense totaled $10.7 million compared to $5.3 million in the same period last year. These increases in interest expense were primarily due to higher average borrowings during their respective periods and increasing rates.

Reflecting the impact of increased rental revenue, we had net income attributable to common shareholders in the third quarter of $286,000 or $0.01 per share, which was down from net income of approximately $381,000 or $0.02 per share for the comparable period in 2017. For the 9 months ended September 30, 2018, net income attributable to common shareholders increased to $632,000 or $0.03 per share compared to a net loss of approximately $1.6 million or a loss of $0.08 per share in the comparative period.

Due primarily to higher rental revenue, third quarter 2018 FFO increased to $0.21 per share and AFFO improved to $0.20 per share versus $0.14 and $0.17, respectively, in the third quarter of 2017. On a sequential basis, FFO increased from $0.19 per share and AFFO remained flat to $0.20 per share. For the 9 months ended September 30, 2018, FFO increased to $0.58 per share compared to $0.27 per share in the comparative period. AFFO for the 9 months ended September 30, 2018, increased to $0.56 per share compared to $0.40 per share in the same period last year.

Moving on to the balance sheet. As of September 30, 2018, our portfolio of real estate assets was carried on our balance sheet at a gross value of $613 million. Looking at the liability side of a balance sheet. At September 30, 2018, we have total debt of approximately $332 million, net of an unamortized debt discount, which includes $293 million drawn on our credit facility and $39 million of fixed rate notes payable.

During the quarter, we amended our credit facility and increased its capacity to $350 million, which includes a $250 million revolving credit facility and a new $100 million 5-year term loan. We also extended the term of the revolver to August 22 with a 1-year extension option. We also reduced our credit spreads across our pricing grid. The facility includes an accordion feature to increase the aggregate capacity up to $500 million. And in addition, we hedged our interest rate risk on a term loan by entering into a swap agreement that fixes the LIBOR component on the term loan to 2.88%. As of September 30, 2018, the weighted average term of the company's debt was 4.46 years with a weighted average interest rate of 4.35%.

Lastly, as Jeff mentioned earlier, we began using our $50 million ATM program. During the quarter, we sold 372,000 shares of common stock at an average price of $9.42 per share, generating gross proceeds of $3.5 million. We anticipate using the ATM for future acquisitions and other corporate purposes, which could include paying down our debt.

With that, I'll turn things over to Alfonzo Leon, our Chief Investment Officer, who will provide an overview of the investment landscape and GMRE's portfolio.

Thanks, Bob. We're pleased to report continued progress in building and strengthening GMRE through a robust acquisition pipeline. As a result, our AFFO has grown from $0.06 per share in the fourth quarter of 2016 to $0.14 per share in the fourth quarter of 2017, $0.20 per share in the second and third quarters of 2018. And we accomplished this despite 7 hikes that set the fed rate from 50 to 225 basis points. We are proud of the progress we make every quarter and enjoy finding ways to push forward.

I am most proud of our ability as the team set ambitious goals to rally around key initiatives and overcome challenges, all with a near-term growth of building a $500 million market cap REIT with excellent long-term growth potential. Within our niche, we have established ourselves as an astute investor of medical real estate and have proven our ability to build a quality health care real estate portfolios at yields that are 100 to 150 basis points above the market average.

Our $621 million portfolio today now consists of 72 properties totaling over 1.9 million square feet at a 7.9% average investment yield. By asset type, 53% of our portfolio is medical office, surgery center or outpatient; 23% is rehab hospital; 9% is general acute care hospital; 8% is surgical hospital; and 7% is a mix of other.

Our strategy has always been to lever our experience in the sector, our deep knowledge of health care fundamentals and our relationship across the industry to source attractive deals with good risk-adjusted yields. We get higher yields by looking for properties in secondary and tertiary markets leased to great health care providers that has non-rated credit. We also play to our strength by bringing the same underwriting expertise found in larger REITS to acquire MOBs in the $5 million to $15 million range. We can be extremely efficient processing deals. We pride ourselves with creative dealmaking, and we leverage our close relationships with referral sources in a market to get priority access to deals. The market is probably the busiest it's ever been, and nobody has time to waste on indecisiveness, ambiguity or bureaucracy. Our competitive edge is speed and reliability. With that said, we remain very disciplined in our underwriting, taking a conservative stance with our selection process.

As we mentioned last quarter, The University of Kansas Health System acquired our tenant, Great Bend Regional Hospital. We spent a lot of time underwriting this deal and predicted that a local health system would likely acquire a tenant. News of our transaction with KU caught the attention of potential buyers who have approached us with offers at attractive valuations. Based on this interest, we have decided to move forward with the disposition process. Ultimately, we believe we have maximized the return on this asset, and we believe we will create meaningful shareholder value with this disposition.

We are the beneficiaries of several dynamics in this space. First, health care providers are diversifying their real estate strategies to capture growing patient demand, which is resulting in more settings for care. Second, an aging population has created more outpatient procedures that are driving the need to meet patients' demands within the geographic areas, which, oftentimes, is away from the hospital campus. Third, physicians have also assembled into large groups that have real estate portfolios located strategically across suburban communities they serve. We believe these groups are poised to thrive in a value-based health care reimbursement environment. And fourth, we believe technology will continue pushing more health care into outpatient settings.

The health care real estate transaction market is extremely active. Too many deals getting put in front of too few investors is too much capital. Core deals are getting 30-plus offers, but other deals are getting ignored. It's an unusual environment. Since 2000, a lot has changed in the MOB market. Back then, the MOB market was still very pioneering, data and comps were scarce, deal flow was anemic. Today, the MOB market is extremely liquid with a broad mix of investors, robust deal flow, almost weekly new listings and ample capital dedicated to the space. And MOBs have also gotten bigger as outpatient services in these buildings have expanded. The largest MOB in 2012 sold for approximately $100 million. This year, an MOB anchored by Memorial Hermann sold for $405 million. This transformation has coincided with the MOB sector going from opportunistic returns to core returns. Fundamentally, this is positive for the MOB sector as it increases transparency, liquidity and efficiency.

I would like to reiterate our business strategy. We are not just buying real estate. We are underwriting our tenants as well and why they are strategically valuable to the health care delivery network. The Great Bend transaction is a good case study of this strategy. We are not chasing crowded, obvious investment-grade tenant deals. We spend a lot of time focused on understanding our tenants, their business, their physician recruitment strategy and their growth plans. We look for providers that are for high-quality health care and lower-cost settings. We look for critically needed providers in suburban communities that lease buildings with solid EBITDA-to-rent coverage ratios. There is an enormous investment opportunity for these deals, and we are uniquely suited to pursue this niche.

With that, we will be happy to take your questions.

(Operator Instructions) Our first question is coming from Drew Babin of Robert W. Baird.

I was hoping, Alfonzo, for some detail on the acquisitions that were closed in the third quarter, the ones that closed so far in the fourth quarter and the ones under contract. If you could talk about maybe just a few of them, the bigger ones. Sort of what made them unique? Did you see any competition? Sort of what are you excited about there in terms of the tenants and their local strength?

Great. So I'll start with the Valley ENT in McAllen. So this one was attractive for a few reasons. First of all, McAllen is growing tremendously. This is an ENT doctor in a place that doesn't have a lot of ENT doctors. So the group that we're affiliating ourselves with has 9 of 11 ENT doctors in McAllen. The other thing that was attractive about this deal is that, initially, it was being offered as a condominium. So during diligence, what we did is we actually collapsed the condos and made it into one building. So we were able to get, through that process, a higher yield than we would've if it were not a condo. So rapidly growing city, a very stable tenant, great rent coverage. It's a group that's grown tremendously, and the fact that it was a condo offered us a pretty attractive -- resulted in attractive yields for us. The Surgery Center in Derby, interesting context. The group that's behind the tenancy is developing a hospital a mile up the road called the Rock Regional Hospital, which recently announced a -- that Via Christi, the large health system within Wichita, investment-grade, acquired a 25% interest in that hospital. So we met with the group when they were in the trailer when they were building the hospital, and they've kind of outlined for us their strategy, why they were compelled to build a new hospital. This hospital was funded by private investors, incredibly nice facility, very well-thought-out, great sponsorship by the local physicians. So this was a chance for us to align ourselves with the leading docs in Derby, a very nice community, growing suburb of Wichita that was going to be part of a hospital that is now associated with Via Christi. The property in Bountiful, Utah, very nice facility. The -- also interesting context. Our tenant now was a tenant previously that had an option to purchase the building in their lease. So we worked with the doctor to, in essence, execute their purchase option that was assigned to us at close, and so we were able to get a higher yield as a result of that process. And as additional collateral in that deal, we got 2 years prepaid of rent with that tenant. We're currently in discussions to put a surgery center in the first floor. This is a group that's, while we were in diligence, acquired another group in Tooele, Utah and is growing pretty quickly. So it's a very entrepreneurial doc with a pretty -- very good business sense that we felt we wanted to align ourselves with. The deal in Cincinnati, the TriHealth deal, this one's a lot more straightforward. This is just an opportunity to buy a nice property with a very attractive yield with TriHealth, which -- it's one of the largest health operators in Cincinnati with $1.8 billion in revenues and 11,000 employees, so very -- the facility is used for primary care by the health system, looks great and a very nice yield associated with, essentially, a health system credit. Those are the deals we have -- that we have in process.

Okay, great. That's great color. And the acquisitions that are under contract, might I ask if there's demand for OP units, potentially, in concurrence with the closing of any of these deals? Is that something that's being discussed or something that's on the table?

Yes. So for a couple of them, the Heartland Women's Healthcare and the Texas MOB Portfolio, both have OP components of about $3 million each. That's the total (inaudible).

Okay. And I assume those are negotiated prices?

Yes. So they're all north of $9 million. I don't remember exactly what we negotiated, but they're both north of $9 million.

Great. And one more question, Bob, on the line of credit, the accordion feature. I guess what conditions need to be in place for that to be used? And is there a potential to add additional term loans that might be swapped to fix rates with that?

Yes. So we need lender approval to exercise the accordion. So that's subject to their approval. And yes, of course, we could -- as we grow, we could definitely -- we could incorporate additional term into that as we look ahead, and that would just be discussions with the bank group.

Our next question is coming from Barry Oxford of D.A. Davidson.

On the Israeli bonds, I think it's great that you guys have more sources of capital out there. The more, the better. But are you getting better rates on those bonds than you would from a traditional bank here in the U.S.?

Barry, this is Jeff. The answer -- yes, otherwise, we won't take them. There's also equity opportunities there. It really varies because they have a different sort of rate of their -- like they're fed rate is much lower than ours. So it's a risk profile. And we will only take the bonds if it's a better deal than here. And then on the other side, there's also equity available to us. So we're sourcing -- in this type of market, we're sourcing equity. They tend to take less of a discount there on the equity to the market. So there's a possibility you could raise money at just better rates for the company. So the -- our goal is to keep growing and keep bringing in equity but also to cover the dividend. And in this type of environment, we have to be clever to do that and we've got to look at all sources of income.

Right, great. And then lastly, Alfonzo, when you look out to 2019, you mentioned the competitive market. And so do you think you can do as many acquisitions in '19 as you did in '18?

Yes. I don't think the market is going to change substantially in 2019. It'll be interesting to see how the trend lines converge next year. I've been a bit surprised that, despite the rates going up, there was a little bit of a lull. But as year-end approached, volume picked up again. And as I talked to folks and I go to conferences, I mean, there's a lot of eagerness by a lot of people to chase deals. So hard to really predict how that's going to play out, but there's a very healthy supply of deals coming to market. I think the market has matured, and there's -- I don't see that changing next year.

Right. So you still see a good -- even though there's a lot of competition out there, supply seems to be kind of picking up as far as number of buildings out there on the market. So you should be able to garner, I guess, for lack of a better word, your fair share.

Yes. And I'd say supply has steadily increased over the years. I mean, it fluctuates up and down, but the trend line is clearly up. And there's more outpatient. As more services get put into outpatient and off-campus becomes more and more of a strategy employed by providers, there's just more. And so there's -- I don't think that's going to change anytime soon. I mean, I think the market's going to continue getting bigger.

At this time, I'd like to turn the floor back over to management for any additional or closing comments.

We are very pleased with the direction of the company and looking forward to seeing many of you at Nareit conference in San Francisco. Thank you very much.

Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.