Chiron Real Estate Inc. (XRN, GMRE, XRN-PA, XRN-PB Q1 FY2024 earnings call

• Jeff Busch mentioned portfolio occupancy was 96.4% at the end of the first quarter, weighted average lease term was 5.8 years, and portfolio average rent coverage ratio was 4.8x. - Announced entering into a purchase agreement for a 15-property portfolio of outpatient medical real estate for an aggregate purchase price of $81.3 million, to close in 2 tranches during the third and fourth quarter of 2024. - Noted that Steward Health Care filed for Chapter 11 bankruptcy reorganization on May 6, 2024, representing 2.8% of the company's annualized base rent, primarily in a facility in Beaumont, Texas. - Alfonzo Leon stated the transaction market for target medical facilities aligning with quality and return criteria has made promising progress, and the company is actively engaging to identify acquisition opportunities. - Bob Kiernan discussed financial results including total revenues, expenses, FFO, AFFO, balance sheet details, and the company's financial exposure to Steward Health Care, as well as progress on renewals and capital expenditures.

In the first quarter, net income attributable to common shareholders was $794,000 or $0.01 per share compared to $673,000 or $0.01 per share in the first quarter of 2023. FFO in the first quarter was $0.21 per share and unit, down $0.01 from the prior-year quarter. AFFO was $0.23 per share and unit, unchanged from the prior-year quarter. Total revenues in the first quarter decreased by 3% compared to last year to $35.1 million due to dispositions. Total expenses in the first quarter of 2024 were $32.8 million compared to $34.5 million in the prior-year quarter, mainly due to disposition transactions completed in 2023 and lower interest expense. Interest expense in the first quarter was $6.9 million compared to $8.3 million in the comparable quarter of last year. Operating expenses in the first quarter of 2024 were $7.4 million compared to $7.5 million in the prior-year quarter, with the decrease due primarily to dispositions in 2023. G&A expenses in the first quarter of 2024 were $4.4 million compared to $3.8 million in the first quarter of 2023, mainly due to an increase in noncash LTIP compensation expense. As of March 31, 2024, gross investment in real estate was $1.4 billion, total gross debt was $624 million with a weighted average remaining term of 2.7 years, 84% of total debt was fixed-rate debt, leverage ratio was 44.0%, and weighted average interest rate was 3.85%. The current unutilized borrowing capacity under the credit facility was $290 million.

• The acquisition of the 15-property portfolio is expected to close in 2 tranches during the third and fourth quarter of 2024. - Expect G&A expenses throughout 2024 to be in the range of $4.4 million to $4.6 million on a quarterly basis. - Will be patient with funding plans for the acquisition, considering asset sales and market conditions, and optimistic about re-leasing the Steward Health Care facility in Beaumont, Texas.

• Steward Health Care's Chapter 11 bankruptcy reorganization may impact revenue, particularly for the facility in Beaumont, Texas. - Uncertainty regarding the acquisition of the 15-property portfolio, including whether it will close on a timely basis or at all. - Market volatility affecting capital raising for acquisitions and asset dispositions.

Q: Just want to hit on the acquisitions. So you've lined up the acquisitions at this point and are now contemplating funding plans. But I guess, how willing are you to wait and sort of speculate on the capital markets and the transaction market, just given the volatility that we've seen?

A: You're absolutely right. Right now, we're really pleased with this acquisition. These fit exactly what we like in our portfolio, triple-net, absolute-net, MOB-style acquisitions. We're going to be patient. We do -- we could sell assets. I wouldn't do it today. I think we need to see a stabilization. We're not doing any fire sale of assets. We're basically -- we could sell assets and be accretive. We're going to see [ whether ] there are equity markets. As in the past, where you got really -- where at least the last few rounds, we thought we had good Fed direction of 3 cuts. We -- I'm not relying upon any of that. So if the Fed doesn't cut for a while, we have other opportunities to do that, short-term debt increase, we do have something. But this portfolio was too good to pass up, and we felt we needed to continue our business progressing and getting good assets, and we'll probably wean some assets that are not strategic also.

Q: So as of now, just to understand, would you just put these on your line and fund it that way, and then sort of when these close, decide kind of what the ultimate funding plan is? Just trying to understand sort of the timeline of the acquisitions versus when you intend on funding.

A: The acquisitions, it could go on our credit line temporarily, but we do have things that we've put up for sale, which should match some of this, at least the earlier ones. So it's a combination, you're absolutely right. There's a combination of sale and a combination of possibly increasing -- unless the equity markets improve substantially, but we're just not [ counting ].

Q: Most of my questions have been asked and answered. But just thinking with Steward for one second, I would say if they've moved out already, they're probably not going to re-up. On the 15-property acquisition, can you talk about what the seller motivation was there?

A: It was strategic. These are assets that they're -- it's not a factor that they want to continue investing in.

Q: You mentioned potentially selling some assets to fund the acquisitions. What type of cap rate are you looking at for the disposition?

A: Yes. So we're looking to try to get the best pricing we can. And so we're looking for things in the low 7s.

Q: You mentioned you're looking to re-lease the Steward asset based on the demand, just like you had pretty good demand there. How quickly could you turn the asset? And what type of carry costs will you have in the meantime?

A: Sure. Yes. And so it's always hard to predict, but I mean, the interest was quick. So shortly after the announcement was made that the facility was available, we got interest from a number of parties that expressed strong interest. And the conversations went pretty quickly as well. But it's hard to gauge. I mean, it could be very soon that we are finding ourselves negotiating a lease or it could take a few months for us to be in that position, hard to say. But the interest seems sincere, and the conversations have been very positive. I'd say on the other end of having a deal signed with a prospective tenant, again, not clear exactly how long it would take for them to occupy the space. I mean one of the things that we're discussing is how exactly are they planning on using the space and what exactly they -- changes need to happen at the facility for that to happen. So on that second part of the question, a little hard of the gauge. I will say, though, that the facility is a premier surgical facility in Beaumont. I mean it's really arguably, probably one of the best ones in town. And despite its age, I mean when you walk in, it feels brand-new. I mean it's -- it was a really nicely done project. So not clear exactly what changes would need to be made, but that's something that we're in the process of trying to evaluate.

Q: There's a -- I look at the sequential change in revenue, there was a [ $2 million ] uptick. Was this largely due to variable rent?

A: The sequential increase in rent, that would be -- like yes, it would have been probably expense related versus anything from a base rent perspective. There really wasn't any material change relative to base rent quarter-over-quarter.