Global Medical REIT Inc (GMRE) 2018 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Global Medical REIT's 2018 Fourth Quarter and Year-end 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 can be obtained from the Investor Relations section of the company's website at www.globalmedicalreit.com. (Operator Instructions)

I will now turn the conference over to Global Medical REIT's Investor Relations Representative, Mary Jensen.

Thank you, operator. Good morning, everyone. Last night, after the market closed, Global Medical REIT announced its fourth quarter and year-end operating and financial results for the period ended December 31, 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 flows 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 statement regarding future dividend payments, any statement regarding future capital raising activity; 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 on Form 10-Q and elsewhere in the reports we have filed with the United States Securities and Exchange Commission. These risks factors include the risks that our 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 to or pursue in the future. We do not intend and undertake no obligation to update any forward-looking statements. 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 update as well as Revista medical real estate report.

With that, I'd like to turn the call over to Jeff Busch, Chief Executive Officer of Global Medical REIT. Please go ahead, Jeff.

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

I'll start off with a review of some of our excellent 2018 accomplishments and provide an update on our ongoing strategic and operational plans. Bob will follow with his review of the company's financial results for the fourth quarter and full year. Alfonzo will then provide a market update and a review of the company's acquisition activity.

We're very pleased with the track record we established as prudent investors of medical office and other health care real estate. We're also happy with how we have evolved as a public REIT. In addition to our fourth quarter and full year acquisition activity, GMRE continues to position itself well within the marketplace.

During the year, we utilized our network of underwriting expertise to complete 14 acquisitions totaling 812,000 square feet for approximately $196 million at a weighted average cap rate of 8.04%. This reflects more than a 32% increase in square feet compared to the 613,000 square feet we had acquired in 2017. The disposition of our Great Bend asset, which we sold in December, is a testament to our disciplined underwriting and the value we are creating through our net lease medical portfolio. We sold it for $32.5 million, generating a $7.7 million gain and achieving an internal rate of return of 43% on a leverage basis and 24% on an unleveraged basis.

Investors continue to show interest in GMRE during 2018. During the year, we raised approximately $57 million of equity at an average offering price of $9.23 per share. This includes $18 million through OP unit transactions, which we believe is a testament to our seller's confidence in our business and strategy; and another $39 million through various equity offerings.

Through these strategic capital raises, we were able to manage our leverage and create a more flexible balance sheet. We extended our credit facility maturities while increasing our borrowing capacity and fixing a portion of our interest rates. We are very pleased with the timing and execution of these various equity issuances and debt transactions during the year. We were able to raise capital through a tumultuous market volatility and from multiple sources of attractive prices to support our portfolio growth. Bob will provide you more color on these transactions in his remarks.

Further, we continue to forge our relationships with international investors as another source of potential capital. Our ongoing conversation with them as well as our domestic banks support our multifaceted approach to a diversified capital source.

In addition, as we continue to evolve as a publicly traded REIT, we further diversified our Board of Directors with the addition of Ms. Paula Crowley and Lori Wittman, both of whom have served in C-level positions and have extensive health care, real estate and capital markets expertise. Their contributions over the last few quarters have already strengthened the board. We believe these milestones demonstrate our commitment to our shareholders and that our goals are aligned with them.

As far as 2019 goes, it's shaping up to be another good growth year for us. So far this year, we've completed 1 transaction and have another under contract, representing a total of about 52,000 square feet for a purchase price of approximately $21 million, and we have a very strong pipeline of potential investors.

With that, I'd like to turn the call over to Bob Kiernan, our CFO, who'll provide details regarding the fourth quarter financial highlights.

Thank you, Jeff. Yesterday, we reported our fourth quarter and year-end financial results for 2018 via press release and simultaneous posting of our earnings package to our website.

Regarding the fourth quarter results -- fourth quarter and year-end results, our total revenue increased to $14.4 million in the fourth quarter of 2018, up from $9.9 million in the fourth quarter of 2017. For the year ended December 31, 2018, our total revenue increased to $53.2 million, up over 75% from last year. These were driven by 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.

On a same-store basis, our Q4 2018 cash rental revenue increased $170,000 or 2.3% compared to the fourth quarter of 2017. Total expenses for the fourth quarter of 2018 increased to $12.5 million, up from $8.6 million in the fourth quarter of 2017. For the year ended December 31, 2018, total expenses increased to $46.3 million compared to $30.4 million for the year ended December 31, 2017. Depreciation and amortization expenses as well as interest expense remain large components of our total expenses as we continue to actively acquire properties.

G&A expenses as a percent of our revenue continued to decline as a result of our cost-reduction efforts and increased revenue from our larger portfolio size. For the 3 months ended December 31, 2018, G&A as a percent of our total revenue was 10% compared to 11% in the comparative period. For the year ended December 31, 2018, G&A as a percent of total revenue was 10% compared to 18% in 2017.

For the year, these results were primarily impacted by an increase in noncash LTIP expenses, offset by a decrease of public company and other professional fees. Our noncash LTIP expenses in the fourth quarter of just under $700,000 was up from $300,000 in Q4 of 2017 and down slightly from last quarter.

Looking forward to 2019, we estimate that noncash LTIP expenses should range between $2.7 million and $2.9 million for the year. We continue to look for ways to actively reduce cash G&A expenses and have very scalable operating platform that is well positioned for continued portfolio growth without too much of an impact on our G&A. Therefore, we estimate that cash G&A for 2019 should range between $700,000 to $850,000 per quarter, representing an annual run rate of $2.8 million to $3.1 million.

Depreciation and interest expense were again our 2 largest expense line items in the fourth quarter and for the year. Both are positively correlated with our robust acquisition activity in 2018. Depreciation expense was $3.7 million in the fourth quarter of 2018 versus $2.6 million in the prior year quarter. For the year ended December 31, 2018, depreciation expense totaled $13.6 million compared to $7.9 million in 2017.

Interest expense was $4.3 million in the fourth quarter compared to $2.2 million in the fourth quarter of 2017. For the year ended December 31, 2018, interest expense totaled $15 million compared to $7.4 million in 2017. These increases in interest expense were primarily driven by higher interest rates and higher average borrowings, the proceeds of which were used to finance our property acquisitions.

As Jeff mentioned, during the fourth quarter, we sold our Great Bend asset and generated a gain of $7.7 million. Reflecting the impact of increased rental revenue in this gain, we reported net income attributable to common shareholders in the fourth quarter of $7 million or $0.31 per share. This compares to a loss of $200,000 or a loss of $0.01 per share in the comparative quarter. For the year ended December 31, 2018, net income attributable to common shareholders increased to approximately $7.7 million or $0.35 per share compared to a net loss of approximately $1.8 million or a loss of $0.09 per share in 2017.

Higher rental revenue driven by our investment activities positively impacted funds from operations. FFO for the fourth quarter increased to $0.21 per share and AFFO improved to $0.20 per share versus $0.14 and $0.15, respectively, in the fourth quarter of 2017. On a sequential basis, FFO and AFFO remained flat at $0.21 and $0.20 per share, respectively. For the year ended December 31, 2018, FFO increased to $0.78 per share compared to $0.41 per share in 2017. AFFO for the year ended December 31, 2018, increased to $0.76 per share compared to $0.54 per share in 2017.

Moving on to the balance sheet. As of December 31, 2018, our portfolio of real estate assets was carried at a gross value of $648 million, a sequential increase of $35 million and significantly up from $472 million at the end of 2017. Looking at the liability side of our balance sheet, at year-end 2018, we've reduced our total debt to approximately $315 million from $332 million at September 30, 2018, net of unamortized debt discount.

The current balance sheet includes $280 million drawn on our credit facility and $39 million of fixed-rate notes payable. During the fourth quarter, we fixed the LIBOR component of an additional $70 million of our credit facility borrowings, bringing the total amount of hedged borrowing to $170 million. At December 31, 2018, the weighted average term of the company's debt was 4.24 years and our weighted average interest rate was 4.64%.

Lastly, as Jeff mentioned earlier, in 2018, we demonstrated demand for our public equity and the various sources available to us by raising approximately $57 million of equity through a combination of OP unit issuances, a direct public underwritten offering and activities through our ATM program. Specifically, in connection with property acquisitions during the year, our operating partnership issued 1.9 million OP units valued at $18 million at an average issuance price of $9.60 per OP unit. In December, we sold 3.7 million shares of our common stock through a public underwritten offering at $9 per share, generating gross proceeds of $32.9 million. In addition, through our ATM, we sold 662,000 shares of our common stock at an average price of $9.41 per share, generating gross proceeds of $6.2 million.

In addition, on March 5, our Board of Directors declared a $0.20 per share cash dividend to common stockholders of record as of March 26, 2019. The dividend represents an annualized rate of $0.80 per share.

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

Thanks, Bob. In 2018, we achieved impressive results which validates our strategy. We completed 14 transactions totaling 112,000 square feet for approximately $196 million. We did this at an average cap rate of 8% and $242 per square foot pricing. These assets are in Texas, Georgia, Florida, Ohio, Kansas, Illinois and California and are leased to tenants providing primary care, oncology, ENT, podiatry, OB/GYN and dermatology. Our $648 million portfolio today now consist of 84 properties totaling 2.1 million square feet at an average 8% investment yield.

By asset size, 58.4% of our portfolio is medical office, surgery center or outpatient; 21.9% is rehab hospital; 7.5% is surgical hospital; 4.4% is general acute care hospital; and 7.8% is a mix of others. Our goal has been to buy a diversified portfolio of quality real estate leased to leading health care providers in secondary and tertiary markets at attractive risk-adjusted yields that are 100 to 150 basis points above average. We focus on newer facilities, revenue-generating facilities, good locations with attractive submarkets and good health care fundamentals.

Our pipeline today is looking strong. We are currently in various phases of underwriting activities on a number of deals. Like last year and if market conditions remain status quo, we believe we can achieve another year of prudent growth.

As we have stated before, 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 demand within our geographic areas, which oftentimes is away from a hospital campus. Third, physicians have also assembled into larger groups that have real estate portfolios located strategically across the 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.

I would like to reiterate our business strategy. We are not just buying real estate, we are underwriting our tenants and why they are strategically valuable to the health care delivery network. We strive to turn every stone looking for value. We go the extra mile of that -- each investment, and we close on our deals with conviction in our underwriting. We look for providers that offer 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 on 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 comes from the line of Barry Oxford with D.A. Davidson.

And I guess this question is for Alfonzo. Alfonzo, how much is in your pipeline right now? And then, of that, what percentage you would say would be at least halfway or more late-stage negotiations?

Sure. So we're always looking for opportunities. And I view one of my roles here is to create as many options as possible. And we're all -- we always have a dozen deals, more or less, active at different stages as needed to match our corporate goals. So we're working on a bunch of stuff. We've got a lot of stuff in the pipeline. And we're -- all of it, which we will execute just as it fits our corporate needs.

Okay. Great, great. And then just kind of following up along the same lines. You guys did a fair amount of equity offerings via the OP units or the ATM or an offering. Do you guys anticipate tapping the equity markets as heavily in '18 -- in '19 as you did in '18?

That's hard to say. Basically, we raised based upon how -- finding good quality purchases. We do plan to grow. Right now, we have approximately $70 million worth of purchasing power. And we are optimistic -- opportunistic in the market. So therefore, we do always look for capital, but we don't necessarily need capital. So if the opportunity arises, we could raise capital when we need it for acquisitions.

Great. And just one more on the OP units. Are there a fair amount of deals or -- that would take OP units? Or is that more just on a runoff basis?

It's hard to predict. Last year, we did over $18 million in OP units in 3 deals. We've had a lot of discussions with a lot of groups. We completed an OP unit deal just recently, $0.5 million. In our pipeline, we have a few that are interested in it, and it's hard to predict until you really get to the finish line just how many they're willing to take. And the conversations are pretty fluid. Sometimes we start with a small number and end up with a big one. Case in point is the Corona deal that we closed last year. We started with a smaller number but ended up with $10 million. So it's hard to predict. But we're always discussing it. There is a lot of interest in it, and we're happy to take it.

Our next question comes from the line of Rob Stevenson with Janney Montgomery Scott.

Jeff or Alfonzo, are you guys planning on selling any assets in '19 at this point?

There's no plans right now, but we do look at conditions changing. What happened with the sale last year is the asset was upgraded. It was purchased by a major system. So suddenly, it became a rated asset and a lot of groups were contacting us about the sale. So we don't necessarily know if we're going to sell assets, but we do have to wait whether the asset on the sale we could reinvest it well and will return extra dividend to our investors. That's in the calculation.

Okay. And then, Alfonzo, targeting any specific types of health care assets in '19? Or is there anything in your pipeline that predominantly makes up the product mix at this point?

Yes. So we're -- our focus, what we look for hasn't changed. I mean, we're -- we like the niche that we're in. The inventory of properties that come to market fluctuates, varies quarter-by-quarter. Even if you look at what we've done quarter-by-quarter, it's -- it varies. So we're not necessarily quarter-by-quarter focusing on any one asset type. It's really just more about finding good opportunities, good real estate and really quarter-by-quarter trying to pick the best we can. So not necessarily asset focused, it's more quality focused.

And does the current pipeline comprise of anything in particular?

It's a mix as it always is, and it's a -- and everything is at different stages. And that's what I can say for now.

Okay. All right. And then, Bob, have you guys issued anything under the ATM thus far in the first quarter?

We have -- we've done about $3 million in the ATM so far in 2019.

Okay. And what was the -- because the equity offering came sort of middle of the month and everything, I mean, what was the -- what's the shares and units outstanding that you guys had collectively at December 31 that we should be using rolling forward for share count?

Sure. It's -- the year-end share was right -- shares in OP, right around 30 million, just under. And then for Q1, the weighted average shares will be right around -- right at 30 million.

Okay. And then, I guess, now that you guys are a maturing public company, how are you guys thinking about providing earnings guidance going forward? I mean, you've provided some guidance in terms of G&A and stuff like that. But how are you guys thinking about that as you guys continue to mature?

Yes. I think, Rob, I mean, based on the current size and the lumpiness of the acquisition activity, we're not really comfortable providing near-term guidance. We feel very good about the portfolio over the long term. And I -- we continue to grow the portfolio. I think we'll be able to provide more near-term outlook. But just not comfortable with providing that full guidance at this point, but rather kind of focusing -- hopefully providing some color on some of these individual lines to give better color around where we are on those that we can control.

Our next question comes from the line of Drew Babin with Robert W. Baird.

This is Alex on for Drew. Given the late quarter timing of your recent capital raising activity, do you anticipate any dilution leaking into the first quarter?

Yes. I mean, I think, the way I'd look at it was we ended the year at just under 50% leverage. And so for Q1, based on the timing of acquisitions, yes, there would be a little bit of a lag in Q1 as we redeploy and -- or deploy our dry powder.

Got it. That is helpful. And you mentioned a robust opportunity pipeline that you guys constantly are working on. We're just curious if you could give us any color on the pricing trends you're seeing. And how have cap rates generally trended in the last, call it, 6 to 12 months?

Sure. So cap rates is what I think about every day and try to figure out kind of where the trends are. As we start the year -- and I guess, kind of high level, in 2018, I did sense that cap rates softened a little bit, but by the year-end, I think, it strengthened again. And coming into 2019, and it's really hard to pinpoint exactly where the market is. Comps, you're looking at stuff that was priced 6 months in the past, which for our purposes is -- helps but not necessarily perfect. But as we start 2019, I get the sense that market is strengthening a little bit, but not materially different. So I -- as we start the year, I kind of think the market is kind of where it was last year. With the REIT shares strengthening, I don't think we've just yet felt the impact for that in the markets. I mean, I'm beginning to hear some sense of that coming back and some sense that they're going to start putting pricing pressure back into market, but too soon to tell. So that's -- best I can give you is I think we're sort of in the same market we were at the end of last year. And how that -- yes, and how that relates to us, I mean, our niche hasn't really changed too much, not dramatically. We're still seeing similar opportunities. So as it relates to us, we're still, as I see it, in the same market.

Got it. Last question for me. Looks like physician group rent coverage ticked down about 0.5 turn this quarter. Was that majority driven by transactional activity? Or is there some softening at certain properties? Obviously 6.5x is still really healthy, but any color there would be really appreciated.

I don't think it really means much. Their business tends to be pretty lumpy as well. So we're not concerned, given where we are, with their rent coverage and not -- I don't know if I have more commentary than that. I mean, I think, it's -- we would expect it to fluctuate up and down. The change hasn't been that relative.

(Operator Instructions) Our next question comes from the line of Bryan Maher with B. Riley FBR.

The AMG Specialty Hospital acquisition you did in the first quarter almost at 9% cap rate kind of jumped out at us. Was there anything particularly special about that property, pluses or minuses that was responsible for that?

Sure. So for starters, LTAC is an asset class that causes -- is not one that a lot of folks are pursuing. It's a great facility. It's next to Lane Regional Medical Center. I mean, when we -- we were very careful about making sure that the operator was solid, that the facility itself was profitable and understood exactly kind of the time line of when it was built, why it was built, the whole context. So that one also was a relationship deal. It's folks that I know and have known for many years. And they came to us off market with the opportunity. So it came together nicely. There were a few things that we had fixed in the lease, which we did, and resulted in what I view as a great acquisition of a very nice LTAC, very profitable, next to Lane Regional Medical Center in that area.

Okay. Great. And then you've danced around this question a couple of times with some of the analysts' questions, but your acquisition pace definitely was a little bit more brisk in 2018 than we were expecting and certainly what we're modeling for '19 and '20. I mean, to just give -- I'm not looking for guidance, but just kind of a broad swath. Are you looking for something in 2019 maybe no less than $100 million up to $200 million, in that broad zip code?

Yes. I mean, we alluded to -- if things stay status quo, we hope to continue growing as much as we did last year, for sure. I mean, my goal is to look for as many opportunities as I can. And we have a lot of options in front of us and great options. So we're excited. There's been good momentum that built up last year and a lot of folks reaching out to us. We're very busy running around, looking at a lot of stuff. So we're coming into the year with a lot of wind in our sails in terms of opportunities and really look forward to being able to grow.

And just lastly, are you seeing anything in the competitive landscape for acquisitions? Are people just as aggressive today as they were a year ago? Have they pulled back? Have they increased their appetite? What's the competitive environment looking like out there?

Yes. And it's -- that one is obviously hard to really pinpoint exactly. And you have to take as much data as you can and talk to as many people as you can. The volume is composed of, and the way I see it, sort of single assets and portfolios. I mean, last year, there were a good number of portfolios. This year, there have been a few smaller ones that have come out. The single-asset volume seems pretty robust. I mean, I don't have an exact stat for that, but there's just a lot of stuff that's become available. And it's -- honestly, it's getting to the point where I don't know how anyone can really keep up with it. I mean, it's a lot. And I try as best I can to keep tabs on what everybody else is up to and talk to them at conferences and try to get a sense of where things are headed. It's a very general comment. But as we start 2019, it feels a lot like where we were at third and fourth quarter of 2018. I don't see any material change. But what I'm waiting to see to have an impact on the market is the fact that REIT shares have come back up. And I would predict that it's probably going to trigger some portfolios to come back to market. And I know that there is a few big portfolios that have been priced recently. And pricing probably was a little stronger than some folks thought they were going to get. I don't think we're in the -- for the high kind of trophy asset quality stuff, I don't think we're sub-5. To be determined if something prices below that. I do know one comp that traded sub-5 in our niche. I mean, I don't see a dramatic change, if anything, from just pure supply-demand perspective. I kind of feel like there's a lot -- supply is kind of outstripping demand. And to my comment before, I mean, there's -- I don't know how anyone can really keep up with all of it. It's -- there's a lot. And there's not that many players in the space. So as we come into 2019, it looks to be as busy as it was last year. And for us, our niche, I think, we're looking at a similar market.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Jeffrey Busch for closing remarks.

We're very pleased with the direction of the company and look forward to another productive year. Thank you for joining our conference call.

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