Chiron Real Estate Inc. quarterly report, Q2 FY2017

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Business context and reporting period

The supplied filing is Global Medical REIT Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017. This conflicts with the request metadata naming Chiron Real Estate Inc.; the filing itself identifies Global Medical REIT Inc. as the registrant. The company acquires healthcare facilities and leases them to healthcare operators, primarily under triple-net leases.

The portfolio expanded to facilities from 26 acquisitions by June 30, 2017, versus seven at June 30, 2016. The company completed 12 acquisitions in the first half of 2017.

Financial results and position

  • Revenue: Second-quarter revenue was $7.42 million, up from $1.77 million a year earlier. First-half revenue was $12.08 million, up from $3.08 million. Growth primarily reflected acquired properties; second-quarter 2017 also included $0.70 million of tenant expense recoveries.
  • Profitability: Net loss was $0.62 million for Q2 2017 versus $0.49 million for Q2 2016, and $1.94 million for the first half versus $2.44 million in the prior-year period. Q2 basic and diluted loss per share was $0.04; first-half loss per share was $0.11.
  • Margins and REIT measures: GAAP net loss persisted despite higher revenue, with acquisition-related costs, G&A, depreciation, amortization and interest weighing on results. FFO was $1.68 million and AFFO $2.54 million in Q2; first-half FFO was $2.05 million and AFFO $4.04 million. These are non-GAAP measures and should be considered alongside GAAP results.
  • Cash flow: First-half operating cash flow was $3.81 million, compared with cash used of $0.20 million in 2016. Investing used $148.06 million, mainly for acquisitions; financing provided $136.61 million, principally through credit-facility borrowing and the equity offering. Cash declined to $12.03 million from $19.67 million at year-end 2016. Restricted cash was an additional $2.29 million.
  • Assets and debt: Total assets were $369.40 million, up from $227.32 million at December 31, 2016; net real estate investment was $331.61 million. Total liabilities were $193.09 million. The revolver balance rose to $144.50 million from $27.70 million; notes payable, net, were $38.48 million. The amended revolver has a $200 million commitment plus a conditional accordion of up to $50 million, subject to borrowing-base limits and covenants.
  • Equity and distributions: The June 30 offering of 3.5 million shares at $9.00 generated $29.55 million net proceeds. The company paid $7.21 million in dividends during the first half and declared a $0.20-per-share Q2 dividend, paid July 10. The underwriters’ 525,000-share over-allotment closed July 20, generating $4.47 million net proceeds.

Material changes versus the prior comparable period

Revenue rose sharply as the property base grew, while expenses also increased with acquisitions, portfolio scale and financing needs. Interest expense was $1.99 million for Q2, up from $1.26 million, and $3.09 million for the first half, up from $2.39 million. First-half G&A rose to $4.20 million from $1.26 million, including $1.14 million of non-cash LTIP compensation and reimbursable tenant expenses. The share base also expanded substantially: 21.11 million shares were outstanding at June 30, 2017, compared with 17.61 million at year-end 2016.

Outlook, risks and unusual items

  • Outlook: No numerical earnings or acquisition guidance is provided. Management said it expected to meet near-term liquidity needs through cash, operating cash flow, equity issuance and borrowings, while pursuing additional acquisitions as financing and suitable opportunities permit.
  • Planned acquisition: After quarter-end, the company agreed to acquire an Austin, Texas facility for $40.65 million, expected to close in Q3 2017 and intended to be funded with revolver borrowings. Closing remained subject to due diligence and other conditions; the filing cautions there is no assurance it would close.
  • Leverage and liquidity risk: Management reported covenant compliance at June 30, but warned that continued revolver borrowing without additional equity could constrain liquidity or require lender waivers. Revolver covenants include leverage and fixed-charge coverage limits.
  • Internal controls: Management concluded disclosure controls were ineffective because a material weakness—lack of segregation of duties—had not been remediated. Remediation efforts included adding personnel, reallocating responsibilities and engaging an independent consultant. Management warned that unresolved weaknesses could lead to future misstatements or post-closing adjustments.
  • Accounting correction: The company corrected approximately $1.22 million of revolving-facility costs that had been expensed in Q1 2017 by capitalizing them as deferred financing costs. Management determined the error and correction were not material to the previously issued Q1 statements.
  • Other risks and contingencies: Key risks include tenant defaults or lease non-renewals, interest-rate changes, acquisition execution and financing, access to capital, REIT qualification and healthcare reimbursement or regulatory changes. The company reported no material litigation or known material environmental liability and no material off-balance-sheet arrangements.

Important facts for investors to verify

  1. Confirm the registrant identity: the filing is for Global Medical REIT Inc., not the company named in the request metadata.
  2. Track remediation and independent testing of the material weakness, and assess whether future filings report effective controls.
  3. Review revolver availability under the borrowing base, covenant headroom, floating-rate exposure and ability to fund dividends and planned acquisitions.
  4. Verify completion, financing and lease terms of the proposed Austin acquisition, and the final purchase accounting for acquisitions with preliminary allocations.
  5. Assess tenant/operator credit quality and revenue concentration; HealthSouth represented about 21% of Q2 rental revenue and OCOM about 17%.
  6. Compare recurring cash generation and AFFO with the dividend commitment, while considering that AFFO is non-GAAP and excludes specified costs.