Global Medical REIT Inc (GMRE) 2019 Q3 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Global Medical REIT Q3 Earnings Conference Call. (Operator Instructions) I'd now like to turn the conference over to Evelyn Infurna of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Global Medical REIT third quarter earnings conference call. On the call today, we have Jeff Busch, Chief Executive Officer; Bob Kiernan, Chief Financial Officer; and Alfonzo Leon, Chief Investment Officer.

Please note the use of forward-looking statements by the company on this conference call. Statements made on this call may include statements which are not historical facts and considered forward-looking. The company intends these forward-looking statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, is making this statement for purpose of complying with those safe harbor provisions.

Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including without limitation, those contained in the company's 10-K for the year ended December 31, 2018, and its other Securities and Exchange Commission filings. The company assumes no obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

Additionally, on this call, the company may refer to certain non-GAAP financial measures, such as funds from operations and adjusted funds from operations. You can find the tabular reconciliation of these non-GAAP financial measures to most currently comparable GAAP numbers in the company's earnings release and in its filings with the Securities and Exchange Commission. Additional information may be found on the Investor Relations page of the company's website at www.globalmedicalreit.com.

I'd now like to turn the call over to Jeff Busch, Chief Executive Officer of Global Medical.

Thank you, and welcome to our third quarter 2019 conference call. Joining me today are Bob Kiernan, our Chief Financial Officer; and Alfonzo Leon, our Chief Investment Officer.

I'd like to take just a few minutes to review GMRE's overall strategy and positioning. Bob will then discuss financial results for the third quarter and year-to-date, followed by Alfonzo update on the company's recent acquisitions and market outlook. And then, as always, we look forward to your questions.

Over the last 3 years, we continue to demonstrate our ability to combine health care knowledge with real estate expertise to create a portfolio with durable, reoccurring cash flows and strong coverage ratio, which in turn, has driven strong results for investors. Our strategy focuses on identifying and acquiring purpose-built medical facilities in secondary markets where we believe better risk-adjusted returns can be found. These health care properties are leased to medical groups with strong profitability and credit profiles on a long-term, triple net or absolute net basis, which provides our stockholders with a stable income stream.

Our portfolio of health care facilities is well diversified by asset type, geography and tenant space. We structured our business model to take advantage of shifting demographics, consumer preferences and distributed health care service delivery trends, such as the rise of specialty medical facilities and outpatient services. Healthcare needs are market-agnostic and occur in all metro areas. Given better economics not only for property fundamentals, but also for established medical teams, we prefer to target well established practices and facilities in dense, mid-tier markets or bedroom communities of larger cities. Our team and our board bring both real estate expertise and health care expertise to the table, helping GMRE understand nuances, regulatory implications and structural factors that provide us with valuable insight into pursuing accretive transactions.

We also believe that our focus on MOB transactions below $20 million gives us another advantage, as these facilities are not typically on the radar of private equity or larger institutional buyers. Our willingness to structure transactions with OP units has also been a benefit when pursuing acquisitions, providing a level of flexibility that can be very attractive to physician groups that need to address tax planning needs. Our holistic approach to medical real estate business, our deep health care community relations and our reputation for execution keeps our pipeline full and active.

Year-to-date, we are pleased to have closed on 16 properties encompassing over 660,000 square feet for a total purchase price of approximately $240 million at a weighted average cap rate of 7.5%. At the same time, our acquisition pipeline continues to expand, and even as we continue to anticipate growth through our acquisitions, we will not sacrifice profitability or quality merely to meet the sake of growth. We remain committed to our underwriting discipline, which focuses on identifying property with sustainable cash flow to support our dividend and maximize risk-adjusted returns over time.

With that, I would like to turn the call over to Bob Kiernan, our CFO, who will provide an overview of our third quarter financial results.

Thank you, Jeff. Last night after the market closed, GMRE reported financial results for the third quarter and 9 months ended September 30, 2019, via our press release and simultaneous posting of our supplemental earnings package to our website. Reflecting the positive impact of the continued growth of our investment portfolio, our total revenue in the third quarter rose approximately 30% to $18.2 million compared to the third quarter of last year. For the 9 months ended September 30, total revenue similarly increased approximately 30% to $50.3 million. Our same-store portfolio contractual rent increased $241,000 during the third quarter of 2019 or 2.2% compared to the third quarter of 2018. This increase reflects the effect of contractual rent increases on our portfolio on a same-store basis.

Total expenses for the third quarter of 2019 were $15.9 million, up 30% from the third quarter of 2018. For the 9 months of 2019, total expense was $43.5 million, up 29% as compared to the first 9 months of 2018. Depreciation and amortization expenses as well as interest expense remain large components of our total expense for each period as we continue to actively acquire properties.

G&A expenses for the third quarter of 2019 was $1.7 million, up 21% compared to $1.4 million in the third quarter of 2018. The quarterly increase was primarily due to an increase in noncash LTIP compensation expense. The LTIP compensation expense was $868,000 for the 3 months ended September 30, 2019, compared to $741,000 for the same period in 2018. For the 9 months ended September 30, 2019, G&A was $4.9 million, up 18% compared to $4.2 million for the 9 months ended September 30, 2018. The increase for the 9 months was also primarily related to increases in stock compensation costs.

Reflecting our acquisition activity, depreciation and interest expense were actually the largest expense line items in the third quarter. Depreciation expense was $5 million in the third quarter of 2019 compared to $3.6 million in the prior year quarter. Interest expense was $4.5 million in the quarter, up 12% from last year. For the 9 months ended September 30, depreciation expense was $13.5 million compared to $10 million in the prior year period, and interest expense was $12.7 million, up 19% from the same period last year. These increases are directly a result of our acquisition activity over the past year, and with respect to interest expense, higher average borrowings used to finance our acquisitions. Our average borrowing costs for the third quarter of 2019 was 4.21% compared to 4.23% in the third quarter of 2018.

Relative to our overall results, debt income attributable to common stockholders for the third quarter of 2019 was $770,000 compared to net income of $286,000 in the third quarter of last year. For the 9 month period, our net income increased to $2.2 million, up from $632,000 in the prior year period.

Our FFO and AFFO for the third quarter of 2019 were both $0.19 per share and unit down $0.01 compared to the prior year quarter. Likewise, for the first 9 months of 2019, our FFO and AFFO per share and unit were each $0.54, down $0.02 from the same period a year ago. Both of these per share decreases resulted from the impact of our March equity rate and our higher share count in 2019.

Moving on to the balance sheet, as of September 30, 2019, our gross investment in real estate was $830.4 million, an increase of $183 million or 28% from year-end 2018.

Looking at the liability side of our balance sheet, our total debt was $402 million at September 30, 2019, up from $315 million at year-end, reflecting the growth of our portfolio.

On September 30, we amended and expanded our credit facility. A particular note that we exercised to remaining $75 million accordion feature and added a new $150 million accordion to the new -- to the facility. Our credit facility is now comprised of a $200 million revolver and a $300 million term loan and $150 million accordion. In terms of our total liquidity, including cash and availability on our revolver, we ended the quarter with $136 million. Just after the quarter-end, we entered into 2 interest rate swaps with an aggregate notional amount of $130 million, which fixed the LIBOR component of corresponding term loan borrowings at 1.21%. Factoring in all of our hedges, we have now fixed the LIBOR component of the entire balance of the term loan at 2.17% on a weighted average basis.

With respect to equity issuances, since the end of the second quarter, we raised $18.5 million on our ATM at a weighted average price of $10.93 per share.

Looking ahead to the fourth quarter, based on the impact of the new interest rate and swaps, as well as declining interest rates, we're projecting our average borrowing cost to decrease from 4.21% in the third quarter to approximately 3.95% in Q4. Additionally, based on this decrease, coupled with our completed fourth quarter acquisitions, we expect our FFO and AFFO to increase on a per share basis in Q4 2019.

With that, I will turn the call over to Alfonzo, who will review the investment landscape and our investment activity.

Thank you, Bob. GMRE has been, and remains, very active since the beginning of the third quarter as we completed due diligence and closed on $124 million of purpose-built health care properties at a weighted average cap rate of 7.6%. Consistent with our acquisition strategy, we were able to acquire these properties at cap rates 100 to 150 basis points above the market average. Portfolio metrics based on just the third quarter have changed on the margin. Our properties are well diversified and now number 101 buildings in 27 states. The 2.6 million square foot portfolio is 100% leased at a weighted average per-square foot rental rate of $24.87 at a weighted average lease term of 8.9 years, and average rent escalations of 2.1% per year. Additionally, the properties have a portfolio-wide coverage ratio of 4.9x.

In total, we have completed 10 transactions since the end of the second quarter. These transactions further grow and diversify our portfolio with high-quality facilities leased to leading health care providers. These facilities and health care providers include the $11.9 million Cancer Centre leased to cCARE in San Marcos, California, an affluent suburb of San Diego. cCARE is the largest full service private oncology and hematology practice in Southern California; [an] $11 million MOB and Surgery Center portfolio located 1 mile from a new $450 million McLaren Hospital in Lansing, Michigan. The portfolio is anchored by FEMA and is a locally dominant multispecialty group of 50 providers in partnership with McLaren; a $6.9 million multitenant MOB in Bannockburn, Illinois, an affluent suburb on the North Shore of Chicago. This building is anchored by Illinois Bone and Joint, one of the largest orthopedic groups in the Chicago metro area with over 100 physicians in 20 locations; the $12.5 million medical facility leased to Dreyer Clinic, an affiliate of Advocate Aurora Health Care, on a newly built Advocate outpatient campus in Aurora, Illinois. Aurora Health Care is the 10th largest not-for-profit health system; the $10.5 million multi-tenant MOB anchored by Ascension Health and Trinity Health, both investment-grade systems in Livonia, Michigan. Services provided at the property include radiology and lab, urgent care, primary care, wellness, OBGYN, and physical therapy; a $5.5 million MOB lease with Covenant Surgical Partners in Gilbert, Arizona, a rapidly growing suburb of Phoenix. Covenant is a leading surgical operator with 59 locations across 19 states. This is our second transaction with them; the $7.8 million medical facility leased to MedExpress in Morgantown, West Virginia, 10 miles from West Virginia University. MedExpress is a subsidiary of UnitedHealthcare Group with more than 200 urgent care clinics nationwide; the $33.6 million specialty surgical hospital in Beaumont, Texas, leased to the Medical Center of Southeast Texas, a subsidiary of Steward Health Systems, which is one of the largest for-profit health systems in the United States; the $11.8 million freestanding emergency department in (inaudible), Texas, leased to St. David's Healthcare, which is part of ATA, the nation's leading for-profit health system. This facility is one of the busiest freestanding (inaudible) in the Austin submarket; and the $12.9 million Surgery Center and MOB portfolio leased to the EyeSouth Partners in Panama City, Florida. EyeSouth has partnerships with 11 ophthalmology practices across 4 states with a total of 75 providers. This is our second transaction with them.

We have had an exceptional year with respect to finding high-quality product in volume. It is important to remember that the amount of assets we identify and buy will vary year-to-year and that we are focused on pursuing acquisitions that are accretive, of high quality and meet our strict underwriting standards.

As Jeff mentioned earlier, we have a very full pipeline driven by the depth and quality of our relationships, and our reputation for execution. We find ourselves in an enviable position given some of the market trends we see unfolding. Health insurers continue to encourage, if not require, patients to pursue treatment and surgeries in outpatient facilities as a want of controlling rising health care costs. This pressure has driven -- driving patient demand out of hospitals and off-campus to specialized or standalone facilities like those in our portfolio, which in turn, could improve the profitability of our facilities. We see this trend continuing and believe that it will provide us with ample opportunities for investment. We are confident in our strategy and believe that we have built, and continue to build, a portfolio that will provide durable cash flows for our shareholders.

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

(Operator Instructions) Drew Babin, Baird.

I was hoping to (inaudible) on the Steward Surgical Hospital. Can you hear me okay?

Yes, yes.

Okay. So the Steward Surgical Hospital in Beaumont, Texas, I was hoping you could talk about any factors influencing the competitive environment there, how they might be taking share, kind of how that hospital system is supported with (inaudible) properties locally, and their ability to pay escalating rents over the year. Could you just give a little more color on that specific asset, given the size of it?

Sure. So the Beaumont market is shared by 3 systems, basically have Christus, Baptist and Steward. Steward came into the market when they merged with Iasis, which was just 2 years ago. And the way I look at it, this is a market where the health systems generated $100 million of EBITDA, of which Christus is 50%, Baptist is 25%, and Steward is 25%. Steward has 2 hospitals in that market. They have their Port Arthur Hospital in Port Arthur and they have their Beaumont Hospital, which is the facility we acquired. The facility we acquired is newer than their Port Arthur Hospital. It's in the better part of town. When you look at that submarket, Port Arthur is more blue collar, whereas Beaumont has a higher income, better demographic profile. Christus, their main campus is actually just a couple of miles from the facility we acquired. The facility we acquired is on a big campus. In our discussions with Steward and with the physicians who are part of that hospital that are significant to the Steward system, their long-term goal is to actually continue building on that campus, and add MOB and add services, and use that campus as their Beaumont footprint to compete with Christus and target sort of more high-end, higher-revenue service lines.

So Steward is a very large system with a lot of resources. One of the things that they focused on right away when they came into the market was aligning themselves with large physician practice groups and to help them execute their strategy in that market. So based on our conversations with the local Steward leadership, with the physicians who are prominent in that community and part of the facility, it was pretty clear to us that this facility is important for their execution in that market. There was a press release that actually came out when we were under diligence that highlights that case. So we view our facility as a strategically important asset for Steward in that market, which from a health care perspective, is a very healthy market, and one that when you look across Steward's entire network is also one of their more profitable ones. So I'll pause there and let me know if that addresses your question.

Yes, it's great. I appreciate the detail. That makes sense. And then just one more for me and it may be a little more top-down. I guess the proceeds from the first quarter equity offering, most of which have kind of deployed with leverage, but there may be a little more room to kind of increase leverage back to where it was before the deal. I guess how do you quantify the dry power kind of remaining before new capital is sourced right now and kind of square that up relative to the deal flow that you're currently looking at? I guess how do you quantify some of the dry powder as of today?

Sure, Drew. So we ended the quarter at about, we'll call it, $135 million of dry powder relative to availability on the credit facility and cash. And so if you think about Q4 purchases at about $50 million to date, it leaves us with a ballpark of $70 million, $75 million, in that -- $70 million, in that range of available capacity, and just kind of stage our acquisitions from that point forward, looking at our capacity, thinking of our available alternatives, whether it be ATM or additional credit and just managing through that from a timing perspective.

Okay. And I guess kind of tying this together, you mentioned earlier that you expect FFO and AFFO to increase in the fourth quarter. And given that you were one [stack] below dividend coverage in the third quarter, should we assume that we'll be pretty close to covering the dividend, or covering the dividend once again by year-end with kind of additional benefit coming beyond that with these deals that are currently in the pipeline?

Yes, Drew. So if I think about where we ran leverage during the third quarter, it was, call it, high 40s on average during the period. And with the acquisitions that we've done already in Q4, we have pushed our leverage up into the low 50s, which is where we need to be in terms of covering the dividend. So feel good about that from an outlet perspective.

Great, appreciate all the color. Thank you.

Chad Vanacore, Stifel.

This is (inaudible) on for Chad. My first question, you guys mentioned earlier that the $20 million and below the sweet spot for acquisitions is sort of where you guys have been really successful. Can you just talk about how large the potential pipeline is? And have you seen any compression in cap rates, or has your focus shifted to one asset class over another?

Yes, so we -- many ways to kind of address that. So the volume of deals that we're seeing is approximately about 30 a month, and that covers a wide range of types of deals. We work pretty hard to keep $100 million to $200 million of potential deals in our pipeline at all times, and it goes up and down depending on when we close things and depending on market conditions. So we've been able to sustain that volume for the past couple of years basically, and don't really see anything right now that would lead me to think that that's going to change in any material way in the near future.

From a pricing perspective, when you get over $20 million, you start attracting a lot of more well-capitalized private equity groups; especially when you get over $50 million, it really becomes very, very competitive. In our sweet spot, which it shifts every quarter, but right now for me, in my opinion, it's somewhere in the range of $7 million to $14 million is sort of our sweet spot for acquisitions, where we can get the quality we're looking for and the type of tenants we like, the locations we like and the yield that we -- that works for our model. In terms of asset type, we're -- our main focus is to continue looking for as many MOBs that fit our profile, but opportunistically, we'll look for inpatient opportunities. And the lion's share of the inpatient facilities that we think make sense are rehab hospitals, and very, very selectively look for other types of assets within inpatient.

In terms of when we choose inpatient or MOB, it's really driven by market. Our perspective is we'd rather focus on searching for quality and yield versus adhering to sort of a strict policy about what types of assets we look for at any given quarter, especially given how much the market changes quarter-to-quarter. And it comes in waves where there's a period of time when, for whatever reason, there's just a lot of rehab facilities that become available, and then there will be a long stretch where you won't see any. And that goes for all asset types, even surgery centers, where for a while, there's a cluster of surgery centers that become available for purchase. And then you'll go for months without seeing a single one. So really, kind of our strategy from an acquisition perspective is to respond to the market and look for good deals and good investments and good tenants versus adhering to sort of a strict policy on percentages, types of assets. And our portfolio really reflects sort of what's available in the market and what fits our model.

All right, great. thanks. That's very helpful. And then when we just look at the weighted average cap rate for the portfolio, it increased sequentially from (inaudible). I think this year, you guys had bid acquisitions in the 7.5% range. So the last call, you mentioned that sometimes you buy a portfolio for 7.3% and then that increases to 7.6%. And can you just talk about maybe what's driving the overall portfolio cap rate higher?

I think it's continuing to look for deals that are sort of in that mid-7 cap range and benefiting from rent increases. I think that's simplistically the answer.

Okay. So we should -- do you expect sort of the 2%, 2.5% escalators each year just [pumping] that higher?

Yes, I think on average, it's 2.1% across the portfolio as of 9-30.

Okay, great. And then the -- you mentioned that coverage has been really strong for the portfolio and continues to be strong. But it looks like coverage ticked up the (inaudible) in the surgical hospitals, but then you're up for the MOBs. Is there -- am I reading too much into that, or can you just explain sort of those moves within the bucket? Is that driven by just acquisitions rolling in, or something else?

There's -- if you look across each one individually, they move up and down for very specific reasons. I think as a trend, our portfolio is probably not large enough for those trends to communicate sort of industry trends. I'd say it hasn't moved in a way that concerns us in any way. If anything, we continue to be encouraged by the metrics that we have at a portfolio level. So I don't think there's really any further commentary than that. We track it, we stay in touch with our tenants. There's the information that we get from our tenants that we can't show numerically, just the conversations and their activity and what they're doing in the market, and it's all very positive. But it -- health care, especially at the facility level, is not -- it doesn't move in a straight line and there's seasonality. And you'll have impacts from adding a physician or losing a physician. It moves around quite a bit, but in the aggregate, we think it's all very positive.

Bryan Maher, B. Reilly.

A couple of quick questions. When we look at the portfolio occupancy of 100% every quarter, while that is precedent, how long do you think you can keep that number at that level? When we look at some of the competitors, not too many people can rent 100% for very long.

I think it's -- can we sustain 100%? How long, that is a good question. We're staying ahead of our renewals. When we acquire properties that have -- our occupancy is not 100.000%. We do have a small 0.1% or 0.2% vacancy and then those were vacancies that were in place when we acquired. But during our acquisition and just working off memory, there was a couple of suites that leased up while we were acquiring it. It's something that is very much part of our underwriting, to think about keeping the properties full and what the rent roll looks like and what the lease expiration looks like. So it's definitely top of mind but can we predict? No. So far, we've been surprised on the upside in terms of renewing spaces and leasing them up. And we -- one of our main goals, when we're buying, is to try to find properties that will stay as full as possible, but beyond that, I can't -- we can't predict when it -- what that occupancy is going to look like.

If you look at our lease expiration schedule, we have 0.2% expiring in 2020 and w4e feel great about that. And in 2021, we have a couple Encompass facilities in Pennsylvania that are going to -- their lease expires. And we feel very good about those lease renewals, very good conversations had this year with Encompass about those facilities, but we can't predict.

Okay. And then that was some good commentary you gave on asset size and your sweet spot being in that $7 million to $14 million range. But as you get bigger inevitably, we see this a lot with small REITs that grow to be midsize and then large REITs, and they tend to shift to the bigger-size asset or portfolio transactions. How do weight managing GMRE to keep in that sweet spot versus kind of getting pulled up to that bigger level and competing with the private equity buyers and other REITs?

Well, we gave a lot of thought to this question as we grow. At this point right now, our goal is to buy as high a quality as possible and to stay into that mid-7 cap. So there's no plan at this time to decrease that strategy going forward, at least the next few years. I know others have gone to buy bulk and I believe sometimes, sacrificed either quality or cap. We won't sacrifice our cap rates unless the market changes, or we won't set it, but we definitely won't sacrifice quality. So I don't think we're going to be following exactly what the others done before us because we see a real potential to grow the AFFO for our investors and their stock share price by continuing to do what we do because of the spread we have, by buying 7.5. And the course of our capital is substantially coming down with our stock price going up and also the interest rates that we locked in. And the interest rates, even if they stay where they are or go down, we have such a good spread that we could just add that to the AFFO, increase our stock price. And at least for the next few years, that's our strategy.

Rob Stevenson, Janney.

Alfonzo, to ask the asset pricing question maybe a different way, you guys did your 2018 deals at a sort of blended-[8%] cap. Year-to-date, you're at a 7.5% cap. How much of the 50 basis points differential year-over-year is just due to asset pricing because of lower debt cost and the impact of pricing there, versus you guys maybe looking at doing better deals with higher -- with better tenants and/or doing deals in larger markets or anything of that nature, or is it all just random?

It's a good question. I think it's for a number of reasons and not any one reason that kind of rises to the top honestly. I think it's all of the above almost, and how that shakes out of the portfolio, it would be hard to really quantify how much of an impact from each one. I guess part of the question you're asking is how much has the market changed, and I guess in broad strokes, in 2018 when the MOB REITs pulled back a lot, there was definitely an impact in the market. And then I'd say around summer of this year, there was definitely the impact of the fed cuts that worked its way through the debt markets and worked its way through the private equity groups. And I'd say in the last quarter, what I've noticed is I guess you can say sort of a bifurcated market where the really, if you want to call it the core product type that everybody wants, that stuff has gotten very, very, very competitive, probably the most competitive it's been in a while where there is a bit of a frenzy.

In the niche we're in, we're still finding enough deals to grow our portfolio that we like, and we feel like the quality of the stuff we're acquiring this year is higher than it has been in the past. So we feel like we're getting a double benefit, but it does mean that this year, we've had to, in a sense, work faster and harder to sort of out-maneuver other -- our competitors. And there have been moments when we're chasing something and are surprised with where it ultimately trades. And so what we've done to kind of counteract that is just by really acting more decisively and moving faster towards the deal that we do like, and being more assertive and trying to lock it down as fast as we can. So, so far, so good.

But I feel like the market changes every quarter and to the surprise, I think it's hard to predict kind of where things are going to be in a couple of quarters. And I think I view my role as just adapting to market conditions and taking -- responding to the market in a way that fits where we are as a company, and with the capacity we have, our balance sheet, our strategy, and just making it work. But to your question, why have the numbers trended in the way they have, it's hard to address because I think it's due to many, many factors.

Okay. Bob, after the October [deals], how much dry powder do you currently have for incremental acquisitions?

So after -- so again, just walking through that, after we ended the quarter with about $133 million of capacity on the revolver, and with the Q4 purchases, that pushes the available powder down to about $70-ish million.

Okay. And then whatever you guys are looking at today, you think that, plus the ATM, is sufficient enough to be able to do what you want to do in the near term?

Certainly in the near term.

Okay. And then lastly for me, Jeff, how's the board -- you guys added another, call it, $120-some million of acquisitions in the last whatever it is, 4-plus months. So you're getting to the size. What's the latest thoughts from the board in terms of internalization? And then also you guys, depending on your equity issuance, are covering your dividend on an AFFO basis. What are the metrics that the board is looking at to sort of think about doing even incremental, small incremental, dividend increases there?

Right now, we're coming into a year where a lot could go very favorably for GMRE. Number one, given where we are size-wise, cost of capital, cost of debt, we see a nice AFFO growth. I'd like to see the AFFO -- and talking on the board, we'd like to see the AFFO grow go for a little bit, work a little bit on decreasing our debt, and at some point, with the growth, consider a dividend increase, but not for a while, in there.

And then the internalization?

On the internalization, we're currently at compensable equity as of 9-30 of $440 million. At $500 million, it goes to the former special committee. Within the quarter, they have been brief legally about it. They will then retain -- the special committee will be appointed. They will retain counsel; they'll retain other groups. And then negotiations goes into effect on internalization. The payout is cooked in the numbers. We're a little different than others who have gone through this process is that we actually know exactly what it is from the numbers that we did earlier on good planning, what the payoff to the external manager would be. I see the process should move smoothly in my view.

Barry Oxford, D.A. Davidson.

Alfonzo, getting back to the pipeline, you said that the facilities that you look at and move, depending upon the market, from year-to-year, quarter-to-quarter, what are the facilities like if there is one kind of overweight in the acquisition pipeline?

Simplistically, mostly looking for MOBs. Love to get as many surgery centers as I can, but those are hard to find. There are some surgical hospitals that I would love to get, but those sometimes surprise me with how competitively they get priced. So within MOB, you do have a few different categories. And switching over to tenants, I very much like the physician groups, especially the mid-to-large-size groups. I am surprised sometimes where pricing comes in for MOBs, at least the large MOB groups. They're getting priced almost like they're leased to a health system. So we're -- our groups tend to have 8, 12, 15, 20 doctors. It seems like when you get over 40 or 50, they're getting fully priced.

In terms of operators, very selective, especially among the for-profit operators, and being very thoughtful about how much exposure we want to have to any one of those. Health systems, obviously, we'd love to have more health systems, but again, the pricing gets very competitive for a lot of those and you also, with health systems, have to be very thoughtful about whether or not they plan to renew. Health systems are very strategic about their footprint, so you've got to put a lot of thought into what that footprint will look like in 5 or 10 years.

In terms of rehab hospitals, we like what we have, very selective with adding more and that -- again, it surprises me sometimes when we do look at the opportunities that become available, sometimes, it does get very competitive. So we back off and it's hard to predict. So I don't know if that answers your question, but mostly MOBs. We'd love to have a lot more surgery centers, but they're hard to get. And then the rest of it is very selective.

Oh, that's definitely helpful. And then when you look at the growth of the company and the G&A, do you guys have to add some personnel as you go forward, or you basically look when you continue to go to the portfolio at the basically the personnel headcount that we have right now?

We are adding to the property management. If you could see our substantial growth each year, it's an area I want to get ahead of, not behind. So we put on an asset manager with some really good skills. We're looking at adding a specialty lease administrator to be on the staff and somebody also working hand-in-hand on the accounting level. That should get us for quite a while pretty good with that, but I like to -- and generally, my planning -- as many of you know, I've done this for 30 years with companies -- is I like to be about 6 months ahead of when you have -- when you're going to have it short, also given the market, it's hard to find people. So we are adding personnel to assist us in the property management to tell if there is going to be any problems, early warning systems evaluating where -- are they still keeping the coverage ratios. Good property management is the key to a business like ours, a little easier with triple net and absolute net leases, to be honest. But on the other hand, you got to be very vigilant in that field, so we are adding staff in that area.

Well, thank you, everybody, for joining us. We appreciate your support. Bye.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.