Global Medical REIT Inc. (NYSE:GMRE) Q1 2020 Earnings Conference Call May 7, 2020 9:00 AM ET
Jeff Busch - Chief Executive Officer
Bob Kiernan - Chief Financial Officer
Alfonzo Leon - Chief Investment Officer
Evelyn Infurna - Investor Relations
Conference Call Participants
Alex Kubicek - Baird
Bryan Maher - B. Riley
Gaurav Mehta - National Securities
Greetings! And welcome to Global Medical REIT’s, First Quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Instructions will be given at that time. [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 the 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 updated 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 healthcare 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 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 recognize that it was likely just a matter of time before the virus would be a disruptive factor in running our day-to-day operations and that we needed to implement our business continuity and contingency plans.
As a precautionary measure, we began test work-from-home protocols to ensure that our systems were capable of hands-on remote work load. Our 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 non-essential travel recommendation. By mid-March various states and that CMS recommended limiting medical services to emergency or urgent services in order to conserve healthcare resources such as PTE and to limit the spread of the virus.
This development obviously affected our tenants business as many of our tenants relay on elective procedures for a large part of their business. Since healthcare is critical infrastructure and our tenants primarily perform non-discretionary 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 healthcare industry. As a result of our efforts, we collected 96% of our April rents and 76% of our May rent 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 operations. But we believe the work we've 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 uncertainty 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 plans 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 advisor. The board agreed with the recommendation and since then the special committee has been negotiating terms with the advisor. If an agreement is reached, it will be approved by the Board and potentially by the stockholders. At this time we cannot provide an update on the timing or if a transaction will be completed. Unfortunately given the nature of the situation, there's 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 a somewhat similar pace as our revenue to $19 million.
Depreciation and amortization expenses, as well as interest expense remain large components of our total expenses for each period as we continue 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 non-cash LTIP compensation expense. LTIP compensation expense was $922,000 for the three 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 two 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 due to finance or acquisitions.
Our average borrowing costs 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 costs 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 benefit 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 $0.002 as compared to the prior year quarter. Our AFFO for the first quarter of 2020 was $0.20 per share in unit, up $0.003 as compared to the prior year quarter.
Moving on to the balance sheet. As of March 31, 2020 our growth investment and 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 in our financial performance. As Jeff mentioned earlier, for the month of April we collected 96% of rent and we are progressing well in 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 expect to enter into or expect to enter into rent deferral agreements with certain tenants to differ 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 are primarily over the periods of 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 reduction 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 uncertainty of the pandemic, including the lack of clarity on reopening and its longer term impact, we're unable to give you 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 six 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’ve had a strong start to 2020 with the acquisition of approximately $68 million, comprised of four 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. Our 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.
But first, for a $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 use for endoscopy and pain procedures.
On March 20 we acquired a four 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 two surgery centers and is anchored by Bue Sky Vision, the larger ophthalmology, optometry practice in the area.
After the quarter ended we acquired a 100,000 square MOB for $19.3 million in Dumfries, Virginia, a rapidly growing metro submarket of Washington DC. The property is 100% leased of Spectrum Healthcare Resources, which operates the property at the Dumfries Health Center via a 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 three additional properties for approximately $45 million. As has been our practice in the past, as we identify problems as one or more of these properties or the operator of the properties 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.
Thank you. [Operator Instructions]. Our first question comes from Alex Kubicek with Baird. Please proceed with your question.
Good morning everyone. 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. Whether they are come to you kind of asking for relief, just kind of how are those discussions going?
Bob, why don’t you answer that.
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 you know we’re now – the number this morning it 79% of May rent being collected as of this morning.
So there is – I don’t think there’s anything really unusual or noteworthy about the collection so far, anything noteworthy really about the tenants not collected yet. With 96 tenants there is a flow to the process and I think you know what we're seeing right now and where we in the process is just really reflective of that flow.
And then, could you give us a comparable number, that 79% today. What did that number look like after the first week of April? Just kind of curious where that's trended.
I think it would be about the same. I don't really – again, I don’t think there’s really anything noteworthy about, the morning of May 7 being right around 80% of collections.
I can add maybe you know based on the deferral that we've noted. You know over the next couple months, 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 and kind of coming in over the next couple of months, including May, you know 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, thanks for the color. And then kind of looking, turning to acquisitions. I was wondering if we could get a little more color on those three properties you have under contracts. Was these contracts signed pre or post COVID? I’m just kind of wondering if you know 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 the 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. They didn’t come up, because by the time we were, our diligence period had expired we were already in March, and they didn’t come up in these deals, in terms of negotiation and COVID discussions and impact.
Going forward, I mean it's – you know 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. You guys have always kind of talked about being on site, meeting with doctors, seeing the asset with yourself. Obviously near term your guys have now pulled back a little bit, but just wondering kind of what your thoughts are and how underwriting – what the underwriting looks like in the next you know call it three to six months, and just kind of how your team is thinking about approaching opportunities on a go-forward.
Well yeah, 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 the 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, you are all working from home. You know it makes it really hard to go visit the property, and in many states there are still stay-at-home mandates, which is going to continue and making it hard to go visit properties. And as states 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.
That’s really helpful color. Thanks for taking my questions.
Your next question comes from Bryan Maher with B. Riley. Please proceed with your question.
Hi, good morning. I don’t know if this is better for Jeff or Bob, but when you think about the deferrals that you’re granting, you know maybe on a scale of one 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 back up in the procedures that our tenants tend to perform. So when they came out and said you know to stop anything that's not urgent, our procedures are mostly non-discretionary. So for example, we have eye-centers that people stopped going in for cataracts and other type of surgeries and they were booked out like two to three months in advance, and now in Texas and Oklahoma and Florida where we have a lot of our facilities, they were opened during emergencies, now they are expanding back with the re-opening.
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 got to take care of our patients, because a lot of pent-up demand just 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 are starting in May to start accelerating. So we became comfortable and we brought it through a committee and we had to see their financials. One of them we brought to the Board and each one of us, we evaluated their financials, their potential to pay back, so we're expecting them to pay back.
You know 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 re-open 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 non-discretionary procedures and surgeries and others that needed to happen, that had been pushed back, and naturally over time there's more.
So if you’re closed for six weeks, you got six weeks more and if your book of appointments was for three months out, now you got those six 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’s more – you know 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?
A - Jeff Busch
Bob, would you answer it.
A - Bob Kiernan
Yes, sure Brian. I mean we're actively engaged with all of our tenants. I mean this has really been you know a very thorough process over the last six weeks and this is, where we are today. I mean could it increase? You know of course to certain – there’s uncertainty you know 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 a large degree, at least based on what we know, you know 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 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 deal 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 think a lot of discussions with folks continuously throughout the month of April to 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 you know just right now it's hard to really predict and know how things are going to play out over the next – the rest of the year.
Alright, thanks. That’s all for me.
A - Jeff Busch
[Operator Instructions] Our next question comes from the Gaurav Mehta with National Securities. Please proceed with your question.
Good morning. First question that I have is on the funding market. Maybe you know talk about what you guys are seeing in the debt markets as far as CNBS loans and maybe comment on the funding for the assets that you have under contract.
A - Jeff Busch
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 and 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 you know new standalone debt.
No debt 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 a look ahead, we’ll continue to evaluate and pursue opportunities to just increase flexibility.
Okay, and the second question that I have is on the common dividends. Maybe 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 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 very good position.
Okay, great, that's all I had.
A - Jeff Busch
We've 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 like that 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.