Global Medical REIT Inc (GMRE) 2020 Q2 法說會逐字稿

Greetings. And welcome to Global Medical REIT's Second Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Evelyn Infurna. Please go ahead.

Thank you, operator. Good morning, everyone. And welcome to Global Medical REIT's Second 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 are considered forward-looking, including statements related to the COVID-19 pandemic and its effect on our and its tenants -- and in our tenants' businesses. The company intends these forward-looking statements to be covered by safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is making the statement for the 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, 2019, and Form 10-Q for the quarter ended June 30, 2020, and its other Securities and Exchange Commission filings. The company assumes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

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

Please keep in mind that we are doing this call remotely and given the circumstances. So bear with us if we have any technical difficulties.

I would like to turn the call over to Jeff Busch, Chief Executive Officer of Global Medical REIT.

Thank you, Evelyn. Good morning. Thank you for joining our second quarter earnings conference call today. Joining me on the call today are Bob Kiernan, our Chief Financial Officer; and Alfonzo Leon, our Chief Investment Officer. We hope that everyone is staying healthy and doing well as we navigate through this unprecedented time.

Global Medical had a strong second quarter despite the challenges that the pandemic has introduced to our operations and those of our tenants. All of our facilities affected by the pandemic are open and operating. For the second quarter, we collected 95% of our rent, and we saw a significant reduction in tenant rent deferral requests, which now represents 3% of our rents. While, of course, there are some tenants facing challenges in the current environment, our properties are 99% occupied, and the essential nature of the health care services our tenants provide gives us confidence that the portfolio will continue to perform well.

As we anticipated, acquisition volume in the second quarter slowed. However, year-to-date, we have completed $132 million of transactions at an 8.1% weighted average cap rate. Looking ahead, we continue to be measured with respect to our acquisition activity, given the fluid nature of the pandemic. We will prioritize both our team's health and safety as well as our on-site due diligence process as we pursue acquisitions for the remainder of the year.

After quarter ended, Global Medical achieved several important milestones. First, the most significant, we completed our internalization process. I would like to thank the Board's special committee for all its work on the internalization transaction and for managing through the process during the unprecedented times. I believe that the cost-effective internalization transaction that was delivered will provide long-term value to the company's stockholders.

Second, our portfolio now exceeds $1 billion and has a weighted average cap rate of 7.9%. I am very proud of our team's work in building this portfolio asset by asset over the past 5 years and believe that it provides an excellent foundation for the company's continued growth.

Lastly, we increased our borrowing capacity by $100 million by upsizing our credit facility to $600 million while expanding our bank participants. We believe that this increased borrowing capacity positions us well ahead heading into the second half of this year and 2021.

I will now turn the call over to Bob to discuss our second quarter results.

Thank you, Jeff. Last night, after the market closed, GMRE reported financial results for the second quarter ended June 30, 2020, via our press release and posting of our supplemental earnings package to our website.

Total revenue for the quarter increased 30.7% year-over-year to $22.1 million due to the continued growth of our investment portfolio through our accretive acquisition strategy as well as same-store contractual rent increases.

Regarding rent collections and tenant activity, note that we collected 95% of our second quarter rents and reduced our rent deferral amounts to $1.1 million of total rent or approximately 3% of our second quarter rent. This deferral number represents rent that would have been collected between April and July, and we expect to collect these deferrals primarily between July and December of 2020.

Lastly, in the quarter, we recognized reserves for approximately $1 million of rent, including approximately $400,000 of deferred rent, primarily related to one tenant.

Total expenses for the second quarter of 2020 increased 41.4% to $20.4 million year-over-year. Depreciation and amortization expenses and interest expense remain large components of our total expenses for each period as we continue to actively acquire properties. Included in total expenses for the quarter were $920,000 of costs related to the internalization of the manager.

G&A expenses for the second quarter of 2020 was $1.6 million, relatively flat compared to the year-ago period. Included in this line is LTIP compensation expense of $897,000 for the 3 months ended June 30, 2020, as compared to $854,000 for the same period in 2019. Depreciation and interest expense continued to be our 2 largest expense line items in the second quarter, driven by our acquisition activity.

Depreciation expense was $6.6 million in the second quarter of 2020 compared to $4.6 million in the prior year quarter. Interest expense was approximately $4.4 million in the second quarter, up 5.9% from the year-ago period due to higher average borrowings used to finance our acquisitions.

Our average borrowing cost for the second quarter of 2020 was 3.38% compared to 3.81% in the prior quarter and 4.27% in the second quarter of 2019. The sequential quarterly and year-over-year decline in our borrowing costs was largely driven by the reduction in LIBOR over the past year.

Net income attributable to common stockholders for the second quarter of 2020 was $204,000 compared to net income of $904,000 in the second quarter of 2019. The change was primarily due to the rent reserves and $920,000 in expenses related to the management internalization that I mentioned.

Our FFO for the second quarter of 2020 was $0.19 per share and unit, up $0.01 as compared to the prior year quarter. Our AFFO for the second quarter of 2020 was $0.21 per share and unit, up $0.03 as compared to the prior year quarter.

Moving on to the balance sheet. As of June 30, 2020, our gross investment in real estate was nearly $997 million, an increase of $91 million or 10% from year-end 2019.

Turning to the liability side of our balance sheet. Our total debt was $466 million as of the end of the second quarter, up slightly from $464 million at the end of the first quarter and $386 million at year-end 2019.

Activity during the second quarter reflects the previously discussed slower pace of acquisition volume as well as repayments using proceeds from equity issuances. Specifically, we issued $14 million of our common stock at a weighted average price of $11.44 per share through our ATM sales program.

Regarding our liquidity, we finished the quarter with total liquidity, including cash and availability on our credit facility, of $89 million. Since quarter end, we've had some significant updates to this, including closing on our internalization, which I will discuss in more detail shortly, closing on $45 million of acquisitions and expanding our credit facility by $100 million. After considering these events, as of today, our total cash and availability on our credit facility is approximately $130 million.

We also swapped $50 million of our new term debt in this facility at 0.158% LIBOR for the remainder of the term, effectively fixing the LIBOR component of the $350 million term loan at 1.91%.

I would now like to discuss the financial details related to the recent management internalization. With the transaction, we internalized the functions performed by our previous manager, Inter-American Management, by acquiring the entities that own the manager for $18.1 million in cash.

All the employees of the manager are now employees of the REIT, ensuring management continuity. The elimination of the manager streamlines our organizational structure and eliminates management fees, including prospective fees on new equity, allowing GMRE to keep more of any future capital raise proceeds and importantly also eliminates future potential incentive fees.

Going forward, we're projecting an additional $1.7 million to $1.8 million of quarterly cash G&A associated with internalizing management. This incremental G&A will be offset by eliminating the former management fee, which was running at $2 million per quarter. In future years, we anticipate that the accretive financial benefit of internalization can potentially be more meaningful as we continue to grow and achieve economies of scale in the portfolio.

As we shared on our first quarter call, because of the uncertainties of the pandemic, including the lack of clarity and changing regulations at the state and local level, we're unable to give you a specific outlook for the rest of the year. With that noted, we believe that our ongoing engagement with tenants and collection rate we've achieved to date, including collections here in the third quarter that are progressing consistent with the second quarter, position us well to navigate these uncertainties.

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

Thank you, Bob. We've completed $132 million of acquisitions for the year thus far at a weighted average cap rate of 8.1%. We had a strong start to 2020 with approximately $68 million of acquisitions comprised of 4 properties at a weighted average cap rate of 8.6% in the first quarter, followed by an additional acquisition of $19.3 million in Dumfries, Virginia at an 8.8% cap in the second quarter.

Since the end of the second quarter, we have closed on 3 additional properties, including MercyOne Hospital in Centerville, Iowa for $5 million; Spectrum Health in Fairfax, Virginia for approximately $17.6 million; and a multi-tenant MOB anchored by MedStar in Rosedale, Maryland for $22.5 million. Last week, in conjunction with the expansion of our credit facility, we announced that our overall portfolio crossed the $1 billion mark. That was an exciting milestone for us to reach, in addition to the many other milestones we have reached this year.

As Jeff mentioned earlier, our acquisition pace slowed in the second quarter due to the impact of COVID on the real estate market and our adoption to all COVID-related restrictions. According to a recent CBRE report, real estate investment sales in the Americas across all asset types were down roughly 70% year-over-year in the second quarter, mainly due to fewer large portfolio transactions. Within the health care real estate sector, as reported by Revista, transaction volumes were down 35% year-over-year in the first half of the year.

Now I'd like to provide you with a more detailed overview of what we have been seeing in the transaction markets over the several months past. Although public REITs pulled back, private equity buyers have stepped in and more than picked up the slack left by public REITs. To a large degree, the private equity buyers kept the market moving forward with little to no disruption to offerings, but resulting in delays and uncertainty in closings, which is impacting reported transaction volumes. The market for health care real estate has been very active since mid-May with offering volumes in our niche tracking the monthly averages since 2018.

In July, the transaction market was back to pre-COVID levels with many operators we are talking to seemingly back to 60% to 80% of historical volumes and many operators remained open during April and May with little to no deferment in rent. Pricing remained generally consistent. However, with higher-quality deals are pricing 10 to 25 basis points tighter, while other lower-quality properties, in particular, properties that are having difficulty getting financing, are pricing 25 to 35 basis points higher.

We are still seeing deal flow and practices are stabilizing. We see more optimism about the second half of 2020 and 2021. And the consensus in the industry seems to be that deal volumes will continue at a healthy pace. It seems like many deals that were put on the sidelines in April and May came back to the market in June and July. So although volumes of deals coming to market quickly recovered, the volumes in June and July may have been higher than they would have been without the delays from April and May.

Since deals typically take 90 to 120 days from LOI to closing, we would expect to see a lot of deals closing in the third quarter that were delayed from the second quarter. August is typically a slower month with respect to deals coming to market, so the real test will be the month of September, which is usually one of the busiest months of the year for deals with everyone trying to get their transactions to market with the goal of closing by year-end.

At this time, we have 2 properties under contract for $15 million, which, if completed, would bring our total for the year at $147 million. As has been our policy to date, we will be carefully evaluating these properties and operators against our investment criteria with no assurance can be made that we will ultimately close on these acquisitions.

Thank you for joining us today. We would now like to open the call for questions.

(Operator Instructions) Our first question comes from Bryan Maher with B. Riley.

Congratulations on the internalization. I know that, that was a big deal for you guys, so congrats.

Thank you.

As it relates to -- 2 items I just wanted to touch upon. Rent collections, you briefly touched upon that in your prepared comments. But are you getting any body language from your tenants that with some of the stimulus coming to an end at the end of July that there may be more need in the second half of 2020? Or is business recovering to the level where that's probably not going to be a need looking forward?

Bryan, it's Jeff. The answer to that essentially is most of our facilities are nondiscretionary services. If you don't do it now, you got to do it later. So when they canceled out and had most of our facilities closed or only do emergency procedures, there was a backlog of business. We can't predict how much the pandemic will cause a delay, maybe less people will come at one time. But the business is pretty standard for most of our places and it came back right away. We had a lot of eye surgery places that pretty much closed down, but the cataracts don't go away. The laser surgeries don't go away. And immediately after they opened, it was a nice amount of business.

We don't expect this type of business. Our tenants are now open. We don't expect them to close again like they closed in the past because the general health care community, the government community and others see that as was a real problem. There were more deaths attributed to closing facilities and lack of procedures than ever been for that type of situation. So with the protective gear, with the abilities they're doing at these facilities, we don't see them to close. They may have dips of business, and then it comes back again when the pandemic moves out of their area because people feel like going in now and may delay their procedures. But we see the business is pretty steady.

Great. And then my other question relates to sellers out there. And if -- and maybe this is for Alfonzo. Are you seeing any change in the motivation of the sellers? I know you talked about the cap rate expectations for higher-quality and lower-quality assets. But are the sellers coming to the table because they need cash? Or is it really the same reasons as they had for selling assets pre-COVID?

So I think it's hard to tell. I mean it's always hard to tell why sellers are selling. I suspect that there is probably a heightened desire for cash or probably a higher desire for diversification. But I mean, thus far, I mean, what I'm sensing and what I'm hearing is not very different from what I was hearing before.

Next question comes from Alex Kubicek with Baird.

When you guys think about your cost of capital today, is it fair to say you're a little more comfortable investing at the lower end of your target cap rate range? Or are the 7% cap rates we've seen thus far in the third quarter more just a by-product of the pricing that's coming to market today, just like you said, high quality gets a little more expensive? Just curious on that front.

Our cost of capital has definitely gone down. But we still have the same targets at about a 7.5%, and it's an average rate. So you saw a bunch of projects that we closed on -- facilities we closed on around 8%. That was just unusual high. And then we tend to buy different types, sometimes more MOBs that are close to the 7%. So -- and we look at it as an average, trying to hit an average of 7.5%. And the extra spread that we get, because everything for us is about spread, the extra spread it just makes us more accretive to the shareholders. It's not intentionally going lower. It's what the deals are, what the averages are, what the size of the deals are.

That makes sense. And then the other question I have, I noticed in the fourth quarter this year, it looks like in your credit facility, there's going to be a new covenant that you have to keep your dividend at 95% of AFFO. Jeff, from your perspective and the Board's perspective, would you anticipate keeping a relatively tight payout ratio kind of in that 90% to 95% range? Or do you think over time, as you grow, you kind of want to build in some sort of cushion for volatility? Just kind of curious on what your thoughts are.

We have 2 goals. And it's good with the extra -- the extra earnings we make from the spread right now because our stock has gone up because the lower interest rate, we have 2 goals: one, a very strong goal is to lower our debt percentage to bring down the leverage; the other goal is also at the same time, because we could manage it as we go, is to bring up the AFFO. So our coverage ratio is much more above -- 85% is just a requirement for the banks. We plan to go higher than that and at the same time, deleverage at the same time. We're fortunate to be in that position with our just over 2% rent increases a year and our cost base is flat and our internalization improves our cost bases. So our spread is tremendous compared to where we were. I mean it just keeps going and getting better. So therefore, those are our 2 goals, and we're going to do them both at the same time.

Our next question comes from Connor Siversky with Berenberg.

Just a little bit more on leverage, still somewhat high compared to the rest of the group. Could you maybe provide a little more detail on your financing strategy over the next several years? Perhaps offer a little perspective on how you could incrementally bring down leverage or if the strategy in the current environment is to grow EBITDA to hit that certain target.

Bob?

Sure. So Connor, so we look at this more in the near-term and driven by the acquisition pipeline as much as anything. And so for the near term, as Jeff mentioned, our goal is to bring down leverage, but to do that gradually and over time, and all at the same time of increasing our AFFO and hitting our targets relative to that. So that's really our first priority. And again, I think we really need to look into the acquisition pipeline in terms of how that guides us relative to that process. And so I don't really want to speak to a 3-year target per se. And I think what we're dealing with right now is kind of a more of a near-term look at both our leverage and our acquisition pipeline.

Okay. Appreciate the color there. And then a little bit on collections, 95%, a little better than perhaps what we were all initially anticipating. Any rhyme or reason to categorize the tenants that haven't paid yet? Is it any specific practices or markets where there may be more impact for COVID in the current time frame?

No, Connor. I mean it's -- if you think of the 95% of collections, the delta largely there is deferrals that we've entered into. So -- and those deferrals have varied from -- there's not a real common denominator among the deferrals, I don't -- I wouldn't say, and so you're just bridging from that 95% up to 100%. And again, primarily deferrals, we -- in terms of the difference there. So nothing in particular in that.

Thank you. I would like to turn the floor over to Jeff for closing comments.

Well thank you, everybody and I hope you are safe. Stay safe, you and your family. Thank you.

This concludes today's teleconference. Thank you for your participation.