Chiron Real Estate Inc. (XRN) Earnings Call Transcript & Summary

Greetings, and welcome to the Global Medical REIT First Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Steve Swett of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to Global Medical REIT's First Quarter 2023 Earnings Conference Call. On the call today are Jeff Busch, Chief Executive Officer; Alfonzo Leon, Chief Investment Officer; and Bob Kiernan, Chief Financial 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. The company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is making the statement for purposes 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, 2022, and its other SEC filings. The company assumes no obligation to update publicly any forward-looking statements, 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, adjusted funds from operations, EBITDAre and adjusted EBITDAre. 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 filings with the SEC. Additional information may be found on the Investor Relations page of the company's website at www.globalmedicalreit.com. I would now like to turn the call over to Jeff Busch, Chief Executive Officer of Global Medical REIT. Jeff?

Thank you, Steve. Good morning, and thank you for joining our first quarter 2023 earnings call. Our high-quality portfolio of needs-based health care facilities continues to produce excellent results. At the end of the first quarter, our portfolio occupancy was 97%, up from 96.5% at year-end with a weighted average lease term of 6 years. Year-over-year, we achieved a 13.7% increase in total revenue, driven primarily by our acquisition activity in the first half of 2022. For the first quarter, reflecting the impact of rising interest rates, our net income attributable to common shareholders was $673,000 or $0.01 per share compared to $2.7 million or $0.04 per share in the first quarter of '22. Note that our net income in the first quarter of 2023 included a $485,000 gain on the sale of an investment property. FFO in the first quarter was $0.22 per share and unit, down $0.01 from the prior year quarter. And our AFFO was $0.23 per share and unit, also down $0.01 from the first quarter last year. With regards to acquisitions, we continue to look for properties that meet our investment criteria and our underwriting standards. Subsequent to quarter end, in April, we closed on one acquisition for 2 medical office buildings in Redding, California for $6.7 million. This acquisition was primarily funded by our issuance of OP units that were priced at $11 per unit. This type of transaction works well for us as we can use our advantage like OP units and our availability of liquidity to unlock opportunities and solve sellers' needs. Turning to dispositions. As we have mentioned previously, we are looking to identify properties that we could sell as a means to reduce our outstanding debt in preparation for when the market conditions improve. We are currently targeting approximately $90 million of sales at a weighted average cap rate of between 6% and 6.5%. In the first quarter, we closed on 1 sale for $4.4 million and have another $76 million under contract or letter of intent to sell. This is an important strategic goal of us. And if we can generate $90 million of proceeds from the sales, we would reduce our leverage to within our target range of 40% to 45% and reduce our variable rate debt by more than 50%. Overall, I am pleased with our first quarter results and want to thank the entire team for their hard work and contributions to our results. With that, I turn the call over to Alfonzo to discuss our investment activity and current acquisition market conditions in more detail.

Thank you, Jeff. The transaction market for our target medical facilities remains slow as buyers and sellers continue to adapt to higher interest rates and the bid-ask spread remains wide. We continue to see a large number of opportunities but remain disciplined in adhering to our underwriting standards. During the first quarter, we did not buy any properties, but I am pleased to note that subsequent to quarter end in April, as Jeff mentioned, we closed on the purchase of 2 medical office buildings in Redding, California for a purchase price of $6.7 million, which was primarily financed by our issuance of OP units at a per unit price of $11. We continue to engage with a variety of physician groups and corporate sellers and expect that opportunities will arise as some owners could be forced to sell if they're unable to refinance their mortgages. In addition, we continue to review ways to diversify our revenue sources, such as development financing and joint venture opportunities. Regarding efforts to reduce our leverage. In the first quarter, we sold 1 medical office building located in Jacksonville, Florida, receiving gross proceeds of $4.4 million, resulting in a gain of $500,000. As Jeff discussed, we continue to target dispositions of approximately $90 million at a cap rate between 6% and 6.5%, and we are pleased with the level of investor interest we are seeing. Given the uncertainty of equity markets as well as current equity values and their effect on our cost of capital, we are unable to predict when our acquisition activity will pick up and therefore, no longer have a target amount of acquisitions for 2023. However, we continue to remain active in the market, and we'll be able to hit the ground running once our cost of capital improves. In the meantime, the stability of our diversified portfolio of quality medical office and our available liquidity allows us to be patient. We have been through cycles such as this before and know that the transaction market takes time to adapt. We will continue to source opportunities that make sense and potentially use some competitive advantages such as scale, access to capital and OP unit deal structures where we can. I'd like now to turn the call over to Bob to discuss our financial results. Bob?

Thank you, Alfonzo. GMRE's portfolio continues to produce consistent and solid results. At the end of the first quarter 2023, our portfolio consisted of gross investments in real estate of $1.5 billion and included $4.9 million of total leasable square feet, 97% occupancy, 6 years of weighted average lease term, 4.1x rent coverage with 2.1% weighted average contractual rent escalations. In the first quarter, we achieved a 13.7% year-over-year increase in total revenues to $36.2 million, driven primarily by our acquisition activity since the comparable prior year period. On a same-store basis, excluding cash-basis leases, our first quarter revenues were up $257,000 or 1% compared to the first quarter of 2022. Our total expenses for the first quarter of 2023 were $34.5 million compared to $27.6 million in the prior year quarter. The increase was primarily due to higher interest costs due to increases in both market interest rates and average debt balances along with higher operating depreciation and amortization expenses due to our larger portfolio. Our interest expense in the first quarter was $8.3 million compared to $4.8 million in the comparable quarter last year, reflecting higher average debt balances in 2023 as well as an increase in our average borrowing rate from 2.87% in the first quarter of 2022 to 4.27% during the first quarter of 2023. G&A expenses for the first quarter of 2023 were $3.8 million compared to $4.2 million in the first quarter of 2022. Within our current quarter G&A expenses, note that our stock compensation cost of approximately $700,000 in the quarter included the impact of some equity forfeitures and our cash G&A cost of $3.1 million. Looking ahead, we expect our G&A expenses over the remainder of 2023 to increase and range between $4.3 million and $4.5 million on a quarterly basis. Our operating expenses for the first quarter were $7.5 million compared to $5.4 million in the prior year quarter, with the increase in these expenses primarily driven by the growth in our portfolio. Regarding these first quarter 2023 expenses, $5.2 million related to net leases, where the company recognized a comparable amount of expense recovery revenue, and $1.5 million related to gross leases. Net income attributable to common stockholders for the first quarter of 2023 was $673,000 or $0.01 per share compared to $2.7 million or $0.04 per share in the first quarter of 2022. Net income for the first quarter of 2023 included the gain on sale of an investment property of $485,000. FFO in the first quarter was $15.1 million or $0.22 per share in unit compared to $15 million or $0.23 per share in unit in the first quarter of 2022. AFFO in the first quarter was $16 million or $0.23 per share in unit compared to $16.8 million or $0.24 per share in unit in the first quarter of 2022. Moving on to the balance sheet. As of March 31, 2023, our gross investment in real estate was $1.5 billion, which is up $113 million from a year earlier, reflecting our debt investment activity. At March 31, 2023, we had $701 million of gross debt. Our leverage ratio was 47.4%, and our weighted average interest rate was 4.28%. As of quarter end, the weighted average remaining term of our debt was 3.7 years. Approximately 80% of our debt is fixed rate debt, and the current unutilized borrowing capacity under the credit facility is $245 million. We did not issue any shares of common stock under our ATM in the first quarter or to date in the second quarter of this year. Importantly, as Jeff noted, we plan to use the proceeds from our targeted dispositions to repay amounts on our revolver and reduce our overall leverage to our target range of between 40% and 45%. With respect to our investment portfolio and our 2023 lease expiration, we are pleased with our progress on renewals, and based on our activity to date, currently are projecting to retain between 85% and 90% of the 363,000 square feet that we've noted as expiring this year. Additionally, we executed new leases on previously vacant space that increased our occupancy by 28,000 square feet in the quarter. Currently, we are expecting that our occupancy during 2023 will be above 96% throughout the year. Regarding capital expenditures on the portfolio. During the first quarter, our cash spend was approximately $800,000, but we're expecting that to pick up as the year progresses. Consistent with our comments during our last call, we continue to project approximately $6 million in capital expenditures and $4 million in tenant improvement primarily associated with lease renewals and lease-up to be completed during 2023. While current market conditions remain uncertain, our portfolio remains strong, and we have ample liquidity available to us. We believe we are well positioned to continue to execute our growth strategy over time as conditions normalize. This concludes our prepared remarks. Operator, please open the call for questions.

[Operator Instructions] And our first question will come from the line of Juan Sanabria with BMO Capital Markets.

Bob or Alfonzo or for the team, I guess, just curious if you could expand a little bit on the expected occupancy throughout the year. You guys improved it to 97% in the first quarter, but it sounds like maybe that's ticking down. Is there any kind of material move-outs we should be aware of or any impact from watchlist tenants?

Juan, this is Bob. Relative to the trend, I think it's a matter of timing with respect to the lease expiration activity that's coming up later in the year is more weighted towards the third and fourth quarters. And so as we look at the trend this year, we have a pickup from the lease-up activity in the first quarter. And again, as we project out the rest of the year, there are some expirations that will be coming up that, again, will migrate into vacancy from a retention perspective. But then lease-up activity, again, will flow with that too, again, as our current forecast is that we expect to be above that 96% for the full year. And no, there's not any particular watchlist tenant or anything in particular that's as of currently that we're seeing is impacting that number.

Okay. And then just on the investments or transactions market. Just curious on where is that bid-ask spread? Where are the assets that you'd be looking to buy transacting at? And as part of that, I mean, I'm a little surprised at the dispositions you feel like you can execute in the low 6s. Would that be indicative of also the assets you're trying to buy? It seems like there's a bit of a location there.

We do a lot of [indiscernible] all the time. It happens consistently every year. Tenants who come in that we underwrite really well at 3- or 4-year leases then renew for 10-year lease. A lot of strong credit health systems come in pretty much mostly every year or big credits and buy out the operator as consolidation, so a lot of added value. Usually when we find a property, it tends to be a higher cap rate because of the hard work we do and also it's unusual. Most of the groups that buy right now buy very easy to underwrite like there's nothing you have to fix in the underwriting week, buy properties that may have a little more underwriting issues that we have to work out or credit issues that we want to add something to, not credit issues of not being able to pay, but areas that we want to add to more security on. So we do a lot of work in the underwriting and a lot of work in the buying. So that's why we get our 7.8 cap average out there. But the general market will buy a good percentage of our property in the low 6s because that's -- once we sort of -- I call it institutionalize by making it easier to understand, because they don't want to go into anything that's really difficult to work out, our properties could sell at a pretty good premium to what we bought them at. And that's one of the major elements of what we bring to the table at GMRE. And you could see us consistently, I mean our tenants are paying the rent. Our tenants are renewing. I'm quite confident of strong renewals. And it has to do with a much deeper hands-on due diligence, much deeper digging out the properties we like.

Okay. And just to confirm, the -- I think you said you had some LOIs on like $70 million plus with this business. Those are in the low 6s, just to confirm.

We have contracts in LOIs and one is in the low 5s. It's just what we buy tends to add value and become more institutional after we take it over, we make it into long-term leases. We often buy something with a short, then we get it into a longer lease. There's just things we do to add value in our proposition. So when we're selling, we're going to be selling low 6s, but we're coming back and buying in the high 7s to 8s again.

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

Just a follow-up. Jeff or Alfonzo, is that -- that 7.5%, 8%, is that where you guys would be seeing acquisitions these days? Is that where the cap rate is on the quality assets that you guys would be buying in the market today, if you were?

I'll first answer. Our cost of capital is too high right now. We have to be accretive. I've always said we have to be some level of accretiveness. So right now, it would be hard for us to buy 7.5 to 8. Unless it's OP units and unless -- like the last year, they took the OP units at a premium. Because of the tax advantage, sometimes they're willing to add a couple of dollars into the OP units. But where the stock is trading right now, where the debt is going, there's 2 beliefs I have is cap rates are going to go up because they naturally have to go up. I've been through a few of these cycles. I'm actually one of the rare people who borrowed my first set of money at 12% to do a development. And I understand that the market sort of adjusts to the prices. So right now to buy something at a lower price when I see it going higher is sort of silly and too our cost of capital is really high. I do see, once we hit a piece where the cost of capital between equity and debt is there, that we get back into the market and it may even be 8 caps that we're buying because there will be an adjustment phase. There is a market out there.

Okay. And by -- and just in terms of market cap rates, I mean, excluding whether or not you would buy it or not, but stuff in that quality, is that an 8%, a 9%? Where are market cap rates today for good quality assets that you would want in the portfolio?

Alfonzo?

Sure, yes. So it's a spectrum. But for the types of facilities that we've acquired historically, I mean those are trading in the mid- to high 7s. I mean there are some situations where we're seeing things in India, low 8s and even mid-8s, but that's rare. So the market has definitely moved considerably. Right now, what's considered core assets with really high credit health systems, I mean that stuff is trading in the low 6s. There have been some examples of stuff trading through a 6. For example, the property that we have under contract that's sub-6. And so -- but there has to be a combination of term and credit to get that kind of pricing. But I would say the bulk of transactions thus far this year that are on the quarter side of the spectrum are trading in that low 6 cap range and the inventory that we've pursued historically that's trading north of a 7 and towards the high end of mid- to high end of the 7 cap range.

Okay, because that's helpful because I was just trying to triangulate there between what potential acquisitions would yield versus where your stock is yielding on at the $9 stock price, which I think is, like call it an $8.25-ish versus reducing debt. And so I guess with that, Jeff, I mean, how do you and the Board thinking about the trade-off between reducing leverage with disposition proceeds versus buying back the stock if it's at $9 or $8 in that type of price range, the compellingness of those 2 options or doing some sort of mix?

Buying back the stock is just not good for a company like us that's looking for growth, looking to get more size of our stock price so that we could couple of things, you get better multiples the larger you are. So I haven't given up on the trend we just delayed to keep growing and get a better multiple by getting size, get a better interest rate by getting size being -- getting the rating agencies coming in and all that. So essentially, I'd rather pay down the debt right now than buy back stock. Now I'm not saying my stock -- woah, well you're just crazy to buy it -- not buy it back, but it's a crazy world. So I'm not leaving that out. But really, the main focus of the company this year is repositioning ourselves for 2024, where I believe they'll - the rates will start to come down. I'm just projecting myself and what I read, but the rates will start to come down. I think as soon as the Fed really stops raising -- each time the Fed -- literally, there was a feeling that the Fed is going to stop raising and possibly bring it down, our stock shot up several times. It happens historically -- in the recent historically shot up in towards the 11s and even towards the 12 not that long ago. So I think when we come back to a normal number, which will be there, we could get back into the buying, growing. But right now, I want to reduce debt, reduce the floating debt, get our leverage in order. And when we start buying again, I'd like to buy for more equity than debt to keep very focused on reducing our debt in the company going forward. So I want to have deals that are mostly equity out there and with some debt, but mostly equity at a higher percentage to keep reducing the debt.

Okay. That's helpful. And then, Bob, if I'm looking at it doing my math correctly, I think your line's at SOFR plus 150. So call it, 6.25, 6.5 depending on the day, which is roughly in line where the expected disposition proceeds are being. So there shouldn't be really any sort of earnings impact from the dispositions at this point?