Global Medical REIT Inc (GMRE) 2020 Q1 法說會逐字稿

Greetings, and welcome to Global Medical REIT First Quarter 2020 Earnings Conference Call. (Operator Instructions)

Please note this conference call is being recorded. I would now like to turn the conference over to your host, Evelyn Infurna. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Global Medical REIT first quarter 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 relating to the COVID-19 pandemic and its effect on our and 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 this 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 March 31, 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 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.

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

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

Thank you, Evelyn, and welcome to our first quarter 2020 conference call. Joining me today are Bob Kiernan, our Chief Financial Officer; and Alfonzo Leon, our Chief Investment Officer.

On behalf of our company, I would like to recognize our health care and essential workers for their dedication during this challenging time and to extend well wishes for the health and safety of all GMRE stakeholders.

At the time of our fourth quarter call in early March, the frequency of headlines featuring the spread of the coronavirus were accelerating. Within only a few days after the call, we recognized that it was likely just a matter of time before the virus would be disruptive factor in running our day-to-day operations and that we needed to implement our business continuity and contingency plan. As precautionary measure, we began to test work from home protocols to ensure that our systems were capable of handling remote workloads. As shelter in place and social distancing directives were implemented by local authorities, we were confident that the team could function seamlessly in safe, remote locations to ensure business continuity. Additionally, we began to limit travel of our acquisition team to keep them safe and to comply with nonessential travel recommendation.

By mid-March, various states and the CMS recommended limiting medical services to emergency or urgent services in order to conserve health care resources such as PPE and to limit the spread of the virus. This development obviously affected our tenants' business as many of our tenants rely on elective procedures for a large part of their business. Since health care is critical infrastructure and our tenants primarily perform nondiscretionary medical services, we expect them to quickly rebound with substantial pent-up demand.

In early April, we shifted our focus from growing our business to assisting our tenants during this unprecedented time in the health care industry. As a result of our efforts, we collected 96% of our April rents and 76% of our May rents as of yesterday. At the same time, we were working with tenants who are under financial distress, and we entered into a rent deferral agreement with certain tenants whom we believe need short-term relief to weather this pandemic. These agreements provide near-term rent relief with full repayment of deferred rents by the end of 2020 in most cases. Bob will provide more details on the rent deferrals.

The situation around COVID-19 is still unfolding, and it is difficult to assess the ultimate potential impact on our operation. But we believe the work we completed to date will minimize the COVID-19 pandemic effect on our portfolio and our company.

Relative to our acquisition activity, I am very pleased with the $87 million of acquisitions we completed to date in 2020 and the additional $45 million that we have under contract. Looking ahead, given the uncertainties associated with the acquisition environment and the physical nature of many diligent paths, we will be measured in our approach to acquisition growth. As always, we will prioritize the satisfactory completion of our due diligence process over the desire to grow the company's balance sheet. To reiterate, in these uncertain times, our focus remains on our employees, tenants and minimizing the effect of COVID-19 pandemic on our business. We believe that GMRE is well positioned to withstand the challenges of the current environment and that we are well positioned to execute on our business plan as the country begins the reopening process.

Prior to turning the call over to Bob. I'd like to provide a brief update on the company's internalization process. The special committee met with the Board on March 3 and recommended that the company pursue an internalization transaction with our adviser. The Board agreed with the recommendation and since then, the special committee has been negotiating terms with the adviser. If an agreement is reached, it will be approved by the Board and potentially by the stockholders. At this time, we do not provide an update on the timing or if a transaction will be completed. Unfortunately, given the nature of the situation, there is a little more than we could share on this call.

Bob will now discuss our results in more detail.

Thank you, Jeff. Last night, after the market closed, GMRE reported financial results for the first quarter ended March 31, 2020 via our press release and simultaneous posting of our supplemental earnings package on our website.

Total revenue for the quarter increased by 42.4% year-over-year to approximately $22 million, reflecting the growth of our investment portfolio through our accretive acquisition strategy as well as same-store portfolio contractual rental increases. Our same-store portfolio contractual rent increased $295,000 during the first quarter of 2020 or 2.3% compared to the first quarter of 2019.

Total expenses during the quarter grew to somewhat similar pace as our revenues to $19 million. Depreciation and amortization expenses as well as interest expense remain large components of our total expenses for each period as we continued actively -- to actively acquire properties.

G&A expense for the first quarter of 2020 was $1.8 million, up 14.5% compared to $1.6 million in the year ago period. The quarterly increase was primarily due to an increase in noncash LTIP compensation expense. LTIP compensation expense was $922,000 for the 3 months ended March 31, 2020 compared to $771,000 for the same period in 2019. The increase in our cash G&A was primarily a function of our increased size. In addition to these G&A expenses, note also that we recognized approximately $0.5 million of costs during the first quarter in connection with internalization.

Depreciation and interest expense continued to be our 2 largest expense line items in the first quarter, driven by our acquisition activity. Depreciation expense was $5.8 million in the first quarter of 2020 compared to $3.9 million in the prior year quarter. Interest expense was approximately $4.4 million in the quarter, up 8.8% from the year-ago period due to higher average borrowings used to finance our acquisitions.

Our average borrowing cost for the first quarter of 2020 was 3.81% compared to 3.87% in the prior quarter and 4.67% in the first quarter of 2019. The sequential quarterly decrease in our borrowing cost was largely driven by the reduction in LIBOR since the end of 2019.

Net income attributable to common stockholders for the first quarter of 2020 was $1.3 million compared to net income of $528,000 in the first quarter of 2019 due to the benefits of our accretive acquisition activity over the last 12 months. Our FFO for the first quarter of 2020 was $0.19 per share in unit, up $0.02 as compared to the prior year quarter. Our AFFO for the first quarter of 2020 was $0.20 per share in unit, up $0.03 as compared to the prior year quarter.

Moving on to the balance sheet. As of March 31, 2020, our gross investment in real estate was approximately $975 million, an increase of $69 million or 8% from year-end 2019.

Turning to the liability side of our balance sheet. Our total debt was $464 million as of the end of the quarter, up from $386 million at the end of 2019, reflecting the growth of our portfolio. We finished the quarter with total liquidity including cash and availability on our credit facility of $81.9 million.

I would now like to talk about the effects of the COVID-19 pandemic thus far on our financial performance. As Jeff mentioned earlier, for the month of April, we collected 96% of rent and we're progressing well on our May rent collections at 76% so far this month. Although we are pleased with our April and May rent collections to date, we expect that the next few months will be difficult for a number of our tenants as many have seen significant reductions in elective procedures and patient volumes due to the COVID-19 pandemic. With that backdrop, we entered into or expect to enter into rent deferral agreements with certain tenants to defer an aggregate of $2 million of rent that we ordinarily would collect over the next few months. These are tenants that we have determined have a need for short-term rent relief due to the effects of the COVID-19 pandemic on their operation. Our rent deferrals pertain primarily to the May, June and July rental periods, and the repayment periods primarily over the period July through December of this year.

In addition to rent deferral agreements, we have also entered into or expect to enter into other agreements with certain tenants, whereby we have either agreed to short-term rent reductions in exchange for extended lease terms; or two, agreed to apply certain deposits or committed tenant improvement funds towards rent, the net effect of which is immaterial to our financial results.

Looking ahead to the remainder of the second quarter and the rest of 2020. Because of the uncertainties of the pandemic including the lack of clarity on reopenings and its longer-term impact, we're unable to give you a specific outlook for the rest of the year. With that noted, we believe that the collection rate that we achieved to date and the results of our engagement with tenants over the past 6 weeks, positions 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 had a strong start to 2020 with the acquisition of approximately $68 million comprised of 4 properties at a weighted average cap rate of 8.3% in the quarter, followed by an additional acquisition for $19.3 million subsequent to quarter end, bringing our total capital deployment to date to approximately $87 million. Overall, our portfolio metrics have changed, reflecting the addition of our recent acquisitions. Our properties are well diversified and now number 115 buildings in 29 states. The 3.1 million square foot portfolio is 99.7% leased at a weighted average per square foot rental rate of approximately $24.50 with a weighted average lease term of 8.4 years and average rent escalations of 2.1% per year.

The first for 9.1 million is a 34,000 square foot MOB leased to Columbia St. Mary's Hospital, a wholly owned subsidiary of Ascension. The property is located in West Allis, a suburb of Milwaukee. The location is one of Columbia's busiest in the area and houses an array of specialists, including a surgical suite, primarily used for endoscopy and pain procedures.

On March 20, we acquired a 4-building, 95,000 square foot MOB portfolio in Grand Rapids, Michigan, for approximately $22.5 million. The Grand Rapids MSA is a 2.5-hour drive from Chicago with a population of just over 1 million people. The portfolio includes 2 surgery centers and is anchored by a Blue Sky Vision, the largest ophthalmology/optometry practice in the area.

After the quarter ended, we acquired a 100,000 square foot MOB for $19.3 million in Dumfries, Virginia, a rapidly growing metro submarket of Washington, D.C. The property is 100% leased to Spectrum Health Care Resources, which operates the property as the Dumfries Health Center via long-term federal government contract to provide outpatient clinical services in support of the nearby Fort Belvoir Community Hospital.

We are currently under contract to acquire 3 additional properties for approximately $45 million. As has been our practice in the past, if we identify problems with one or more of these properties or the operator of the property during our due diligence review, we may not close the transaction on a timely basis or we may terminate the purchase agreement and not close the transaction.

During our last call, I mentioned that our acquisition goal for 2020 was between $180 million and $220 million. Although we have made substantial progress towards our 2020 acquisition goals, the COVID-19 pandemic has added new challenges to the acquisition process. Given the current environment, it is uncertain whether we will be able to achieve our 2020 acquisition goals until the acquisition environment normalizes. In the meantime, we remain engaged and informed so that we can resume our acquisition strategy at the appropriate time.

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

(Operator Instructions) Our first question comes from Alex Kubicek with Baird.

We were wondering if you could provide a little more information on just the profile of tenants that have yet to pay May rents. Types, when are they coming to you, kind of asking for relief, just kind of how are those discussions going?

Bob, why don't you answer that?

Sure, sure. I don't think there's really anything unusual or unique about our collections so far this month, as I'm speaking to the May collections. In fact, we're now -- the number this morning is 79% of May rent being collected as of this morning. So there's -- I don't think there's anything really unusual or noteworthy about the collections so far, or anything noteworthy really about the tenants not collected yet. With 96 tenants, there's a flow to the process. And I think what we're seeing right now and where we are in the process is just really reflective of that flow.

And is that -- could you give us a comparable number? That 79% today, what was that -- what did that number look like after the first week of April? Just kind of curious where that's trended.

I think it'd be about the same. I don't really -- again, I don't think there's really anything kind of noteworthy about the kind of morning of May 7 being right around 80% of collections. I can add maybe based on the deferrals that we've noted, over the next couple of months, we -- our total collections will probably end up in the higher 80s in terms of percentages. So if you think about the deferrals that we talked about in kind of coming in over the next couple of months, including May, we're going to end up likely in that high 80s in terms of the total percentage. So -- and for the quarter, probably in that kind of 90% type range.

That's really helpful. And then kind of looking -- turning to acquisitions. I was wondering if we could get a little more color on those 3 properties you have under contracts. Were these contract signs pre or post COVID? I was just kind of wondering if that came up and affected anything along the way in negotiations.

Alfonzo, why don't you answer that?

Sure. So we had a really good start to our acquisitions in 2020. So these contracts were entered into prior to the month of March.

And the second part of your question, what was it?

Just kind of how -- if COVID came up in those negotiations and kind of just wondering how that might change the negotiation landscape in the near term?

So no, not in these deals. Didn't come up because by the time we were -- our diligence period had expired, we were already in March and it didn't come up in these deals, in terms of negotiation and COVID discussions and impact. Going forward, I mean, it's -- COVID is definitely going to be part of our discussions with sellers. And really, it's going to be case-by-case, as it always has been, and it's something that we're going to be really focused on going forward as well.

That's helpful. And then one quick follow-up for you, Alfonzo. Just you guys have always kind of talked about being on site, meeting the doctors, seeing the asset with yourself. Obviously, near term, you guys are going to pull it back a little bit. But just wondering kind of what your thoughts are and how underwriting can -- what the underwriting looks like in the next, call it, 3 to 6 months? And just kind of how your team is thinking about approaching opportunities from the go forward?

Well, yes, that's correct. I mean, visiting the property is a big part of our analysis. And we've always been very holistic about our diligence. I mean a big part of it is having extensive discussions with our tenants and understanding what their business model is, what the trends have been, what their recruitment -- physician recruitment strategy is like, what is their main source of revenue and really getting an understanding of all that. I mean, what's going to be added to that discussion is how are you responding to COVID and how is that going to impact your business? I mean it's -- so from that perspective, our diligence process is not going to change, but it's going to be lengthier.

The fact that the month of April we were all working from home makes it really hard to go visit property. And in many states, there's still stay at home mandates, which is going to continue making it hard to go visit properties. And as they start reopening, that's something that's going to make it easier to go see properties. But undoubtedly, these restrictions have an impact on our process to look for properties for sure.

Our next question comes from Bryan Maher with B. Riley.

I don't know if this is better for Jeff or Bob. But when you think about the deferrals that you're granting, maybe on a scale of 1 to 10, what is your level of comfort that those deferrals in full will ultimately be paid?

I'll answer this. We see and the industry is seeing a substantial backup in the procedures that our tenants tend to perform. So when they came out and said to stop anything that's not urgent, our procedures are mostly nondiscretionary. So for example, we have eye centers that people stop going into cataracts and other type of surgeries, and they were booked out like 2 to 3 months in advance. And now in Texas and Oklahoma or in Florida, where we have a lot of our facilities, they were open doing emergencies. Now they're expanding back with the reopening. So one of the first areas that's going to see the rebound that's coming right away is medical. And a lot of people, even in New York are talking, we've got to take care of our patients because a lot of pent-up demand has came. So that's one of the things we considered.

When we went into this, our coverage ratios, which was a very key element of our underwriting, were very high, which meant our facilities were making money. So we expect them to be making money again, just they got caught to a minimal level for the month of March and the month of April, now they're starting in May to start accelerating. So we became comfortable and we brought it to a committee, and we had to see their financials. We -- one of them, we brought to the Board. And each one of us, we evaluated their financials, the potential to pay back. So we're expecting them to pay back.

Obviously, it's a difficult time and you can't project. But of all the industries out there, we're going to be the first ones to really reopen in mass because it was sort of shut down and told to sit on your hands, while there was a lot of urgent -- I wouldn't call it urgent, they defined it, but there's a lot of nondiscretionary procedures and surgeries and others that needed to happen that have been pushed back. And naturally, over time, there's more. So if you're closed for 6 weeks, you've got 6 weeks more. And if your book of appointments was for 3 months out, now you got those 6 weeks that you didn't. So we expect our places to have the cash flow to pay us back.

Okay. And then following up on the comments related to the $2 million in deferrals. But I think you also said that you expect it to toughen out there over the next couple of months in order of magnitude, but that more deferrals would be immaterial. I just want to make sure I get this right, that you currently expect about $2 million in deferrals but you wouldn't expect $2 million to become $4 million or $6 million or $8 million, is that correct?

Bob, would you want to?

Yes. Yes, sure, Bryan. Yes. I mean, we're actively engaged with all of our tenants. I mean, this has really been a very thorough process over the last 6 weeks. And this is where we are today. I mean, could it increase? Of course, there's uncertainty as to how things are going to progress. But from a magnitude perspective, based on the work that we've done so far, I don't think the magnitude would be to any -- to a large degree, at least based on what we know today.

Great. And then just last for me, maybe for Alfonzo. When it comes to acquisitions, and we did note all of the comments that you've made thus far on the due diligence and the potential for slowing and not potentially reaching your goals for the year. But are you seeing any change in the type of deals you're being shown, the type of assets or the cap rates of those that you're being shown as we sit here today?

Yes. So in the month of April, it's definitely slowed. And I've been in a lot of discussions with folks continuously throughout the month of April to stay -- try to stay ahead of the curve and stay in touch with everyone.

I would say it's too soon to know, really. I mean, what everybody went through in April was unprecedented. And it's not clear yet how this will evolve. I mean, there's a lot of cross currents. And just right now, it's hard to really predict and know how things are going to play out over the next rest of the year.

(Operator Instructions) Our next question comes from Gaurav Mehta with National Securities.

First question that I have is on the funding market. Maybe talk about what you guys are seeing in the debt markets as far as CMBS loans and maybe comment on the funding for the assets that you have under contract?

Bob, why don't you answer?

Sure. So as you know, we noted in the release, as of April 30, we have about $70 million of cash in capacity under our credit facility. And based on the current market conditions, we're comfortable with where we are today, but are looking at different approaches to increasing our debt capacity. We'd consider increasing the credit facility as well as new standalone debt. Note that as part of the acquisition that we closed in April, we assumed a $12 million CMBS. So we took a small step in this direction, but it's still an ongoing process. So we're comfortable with where we are today. But again, as I look ahead, we'll continue to evaluate and pursue opportunities to just increase flexibility.

Okay. And second question that I have is on the common dividends. Maybe you can provide some more color on how you're viewing your common dividends in the current climate of economic uncertainty, given your payout is almost 100% as of 1Q '20?

Yes. I'll answer that. We have a very good liquidity position. We have a very good collection rate, and we'll be -- we don't -- I don't see any issues right now. But this always goes up to the Board, and the Board has to decide on the dividend. But as of now, we are in a very good position.

We have reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Jeff Busch for closing comments.

I'd like to thank everybody for participating in this conference call. Thank you.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.