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Edited Transcript of GMRE earnings conference call or presentation 27-Mar-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Global Medical REIT Inc Earnings Call

Mar 27, 2017 (Thomson StreetEvents) -- Edited Transcript of Global Medical REIT Inc earnings conference call or presentation Monday, March 27, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeremy Hellman

The Equity Group - IR

* David Young

Global Medical REIT Inc. - CEO

* Don McClure

Global Medical REIT Inc. - CFO

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Conference Call Participants

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* Rob Stevenson

Janney Montgomery Scott - Analyst

* Barry Oxford

D.A. Davidson & Co. - Analyst

* Craig Kucera

Wunderlich Securities, Inc. - Analyst

* Steve Shaw

Compass Point Research & Trading - Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the GMRE fourth-quarter and year-end 2016 earnings results conference call. (Operator Instructions). As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Mr. Jeremy Hellman of The Equity Group. Thank you. You may begin.

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Jeremy Hellman, The Equity Group - IR [2]

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Thank you very much, and good morning, everyone.

This morning, before the market opened, Global Medical REIT Inc. issued the announcement of its financial results for the fourth quarter and year ended December 31, 2016. These results were also filed with the Securities and Exchange Commission via a Form 8-K and the Company intends to file a 2016 Form 10-K this afternoon.

Certain statements contained herein may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and it is the Company's intent that any such statements be protected by the Safe Harbor created thereby. These forward-looking statements are identified by the use of terms and phrases such as anticipate, believe, could, estimate, expect, intend, may, should, plan, predict, project, will, continue, and other similar terms and phrases, including references to assumptions and forecasts of future results.

Except for historical information, the matters set forth herein, including, but not limited to, any projections or forecasts of revenues, operating results, cash flow, or other financial items; any statements concerning our plans, strategies, and objectives for future operations and pipeline of acquisition opportunities and expected acquisition activity; any statements regarding the expected size and growth of the healthcare real estate market; any statements regarding future regulatory changes and their impact on our business or industry; and any statements regarding future economic conditions or performance, are forward-looking statements. These forward-looking statements are based on our current expectations, estimates, and assumptions and are subject to certain risks and uncertainties.

Although we believe that the expectations, estimates, and assumptions reflected in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Important factors that could cause our actual results to differ materially from estimates or projections contained in our forward-looking statements are set forth in the risk factors section and elsewhere in the reports we have filed with the Securities and Exchange Commission, including that unfavorable global and domestic economic conditions may adversely impact our business, we may not be successful in completing all the acquisitions in our investment pipelines or that we identify or pursue in the future, and our expenses may be higher than anticipated. We do not intend and undertake no obligation to update any forward-looking statements.

With that, I'd like to turn the call over to David Young, CEO of Global Medical REIT. Please go ahead, Dave.

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David Young, Global Medical REIT Inc. - CEO [3]

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Thank you, Jeremy, and welcome, everyone, to the call. Joining me today is our Chief Financial Officer, Mr. Don McClure.

Before handing the call over to Don for his review of the Company's financial results, I'd like to spend a few minutes touching on some highlights from the fourth quarter. We more than doubled our level of closed acquisitions from the third quarter to the fourth quarter, from a dollar standpoint closing on approximately $81 million worth of properties in the fourth quarter, highlighted by the purchase of three rehabilitation hospitals which are leased to HealthSouth Corporation for a purchase price of approximately $68 million.

The close of fourth-quarter acquisitions brought our gross investment in real estate, including approximately $7 million of intangible assets acquired, net of intangibles liabilities, to approximately $207 million at year-end, covering over 665,000 square feet of triple net leased space.

We have so far closed on six more acquisitions during first quarter of 2017 for an aggregate purchase price of approximately $33.5 million and have an additional three transactions under contract, which we've announced previously, for an aggregate purchase price of an additional $75.1 million. We're in the latter stages of normal due diligence on these properties and expect these pending acquisitions to close as soon as possible.

When these pending acquisitions close, our total portfolio, including intangible assets and liabilities acquired, will be approximately $316 million worth of licensed medical treatment facilities. With our portfolio continuing to grow, we look for our adjusted funds flow from operations to continue to improve.

In addition to our success on the acquisition front, I would also like to highlight our recent closing of our upsized syndicated credit facility, led by BMO Harris Bank. Since our first announcement of the original credit facility last December, which provided a total commitment of $75 million plus an accordion feature for an additional $125 million, we have received strong interest from the syndicate members, ultimately allowing us to close on an amended credit facility that provides us with the increased commitment amount of $200 million plus an accordion feature for an additional $50 million.

Now I'd like to turn the call over to Don McClure, our Chief Financial Officer, and he will go through a summary of the financial highlights, and at that point I will return and we'll have closing remarks and we'll be happy to take questions from you all and answer them for you. So, Don, you can please take it from there.

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Don McClure, Global Medical REIT Inc. - CFO [4]

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Thank you, Dave. Now I'll briefly go through the financial highlights of our fourth quarter and full year ended December 31, 2016. I encourage everyone to review our press release from earlier this morning if you have not done so already.

In addition, as stated earlier, we intend to file our annual 2016 Form 10-K this afternoon, which will include details regarding our consolidated financial position and results of operations within the MD&A of financial conditions and results of operations section.

Our fourth-quarter 2016 rental revenue was $3.1 million versus $657,000 during the comparable quarter last year. The year-over-year increase was driven largely by the expansion of our property portfolio, which grew from nine properties a year ago to 31 properties as of December 31, 2016. For the full year ended December 31, rental revenue was $8.2 million versus $2.1 million for the comparable quarter last year, due primarily to the significantly larger size of our portfolio, just noted.

Our total expenses for the current quarter consisted mainly of acquisition fees, G&A, depreciation, and interest expense. This increased from $1.4 million in the fourth quarter last year to $5.1 million in the fourth quarter of the current year.

Our growing medical portfolio was the general driver of increased operating expenses. Specifically, a bulk of the increase resulted from acquisition costs incurred and stock-based compensation expenses recognized during the current quarter. Within our operating expense for the quarter, acquisition fees were the largest line item at $1.6 million, followed by $1.3 million of G&A expense. Stock-based compensation expense for the quarter as included in the G&A number was approximately $800,000. Depreciation expense was roughly $800,000 in the quarter, followed by approximately $700,000 of interest expense and $630,000 of management fees due to our advisor.

Our net loss in the fourth quarter was $1.9 million, which was up from $790,000 for the comparable period last year, partially due to the increase in expenses as discussed above.

For the full year ended December 31, 2016, operating expenses were $14.6 million versus $3.7 million last year. As stated earlier, these expenses consist of acquisition fees, G&A, management fees, depreciation, and interest expense. As was the case in the fourth quarter, the increase in expenses of $10.9 million during the year ended 2016 was driven generally by the significant increase in our portfolio of properties year over year specifically for the reasons discussed related to the quarter.

As a result of this increase in expenses, net loss for the year ended December 31, 2016, was $6.4 million versus $1.6 million for the prior year.

For the fourth quarter of this year, we recorded a net loss of $0.11 per share, basic and diluted. That compares with net loss per share, basic and diluted, in the fourth quarter of 2015 of $3.16. Bear in mind that we had approximately 17.6 million shares outstanding during the current quarter following our IPO that closed on July 1, 2016, compared to 250,000 shares for the comparable quarter last year.

Fourth-quarter 2016 FFO was negative $0.06 per share, while AFFO turned positive during the quarter at $0.06 per share. The increase in AFFO was driven largely by the add back of acquisition costs and stock-based compensation expense. For the full year, FFO was negative $0.43, while AFFO was negative $0.03 per share.

Moving on to our balance sheet, our portfolio of real estate assets at December 31, 2016, included 31 buildings. Those assets are carried on our balance sheet at approximately $207 million, including intangible assets net of intangible liabilities. As of this date -- as of the date of this call, our portfolio consisted of 37 buildings, with an additional three buildings under purchase contract. When these transactions successfully close, we have 40 buildings and gross investment real estate, including intangible assets net of intangible liabilities, of approximately $316 million.

Looking at the liability side of our balance sheet at year-end 2016, we had notes payable to third parties net of debt discounts and related party debt of $66.5 million, including the $27.7 million that was funded from our credit facility as of year-end. As of December 31, 2016, the average term of the Company's debt is 6.04 years, with an average interest rate of 4.29%.

With that, I'll turn things back over to Dave to share some closing comments.

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David Young, Global Medical REIT Inc. - CEO [5]

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Don, thank you very much.

Before we open the call to your questions, I just want to add one last general comment regarding the broader macro outlook for our business. As you all know, changes to the Affordable Care Act are off the table for now. Obviously, we can't predict whether future changes will be considered and, if so, exactly what those changes will look like.

What I can say, though, is that the installed base of medical properties in the United States is enormous, as is the healthcare consumer base. Given these general factors, we expect we'll continue to have ample opportunity to grow our portfolio many times over no matter the outcome of the congressional deliberations.

Additionally, one of our key investment criteria, as you may know, is focus on buying from and leasing to -- only to locally leading and dominant healthcare providers. By doing so, we think those tenant operators are very well positioned to continue operating successfully and growing their businesses profitably under any proposed legislation.

For some additional perspective, I'd also like to point out when we have a tenant sign a lease we typically do so with a very healthy rent coverage ratio. As a result, we expect them to be able to comfortably cover their rent to us under almost any scenario. We are confident that no matter the outcome of the healthcare insurance deliberations on Capitol Hill we will continue to receive our rent payments on time and in full from our tenants.

So given that, thanks again to all of you for joining us on the call today. We appreciate your interest and attention, and with that, Operator, let's open it up at this point to any questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Rob Stevenson, JMS.

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Rob Stevenson, Janney Montgomery Scott - Analyst [2]

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Good morning, guys. After you guys closed the $75 million that you have currently under contract, how much capacity between your debt and equity do you have to make additional acquisitions beyond that $75 million at this point?

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Don McClure, Global Medical REIT Inc. - CFO [3]

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So we closed the year at $27.7 million into the credit facility. The facility is a $200 million facility, so we intend to finance the OCOM, Great Bend, and NOMS portfolio in the facility using those funds, so the net is the excess capacity that we'll acquire over the next quarter.

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David Young, Global Medical REIT Inc. - CEO [4]

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There is an accordion feature on there.

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Rob Stevenson, Janney Montgomery Scott - Analyst [5]

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Okay. And so, it sounds like you guys remain on track for the $400 million of investments by midyear that you guys have talked about previously?

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Don McClure, Global Medical REIT Inc. - CFO [6]

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Yes, yes, so we're still aiming to hit that $400 million in the second half of the year.

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Rob Stevenson, Janney Montgomery Scott - Analyst [7]

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Okay. And then, the Oklahoma City asset, what's the attraction there for you and the allure? It's both high on a price per square foot basis and it's low on a cap rate basis. How should we be thinking about the upside there and sort of how that fits into your portfolio, considering the size of almost $50 million?

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David Young, Global Medical REIT Inc. - CEO [8]

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Rob, that's a good question. Thanks for asking that. This is Dave. That is an extremely strong credit very dominant operator, the details of which are in the 8-K previously filed, but I can recap very briefly.

It's a tripartite joint venture. It's a surgical hospital operated by the dominant orthopedic group in Oklahoma City together with Integris, the leading 501(c)(3) operator in the Oklahoma City area, and also USPI, which is a corporate surgery center operator, syndicator, and developer, a billion-dollar plus Corporation publicly listed. You have three extremely strong credits working together on a highly successful and sustainable medical operation, which has been on the ground for several years and has demonstrated very high profitability, very sustainable profitability, for a long period of time.

So it is overall probably the strongest credit opportunity that we've had to this date and does deserve a better than average cap rate or yield. It is also a very long-term lease. So overall, on a blended basis we're happy to have it in the portfolio. We don't often see super strong credits like that in our arena, but it's a very good transaction.

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Rob Stevenson, Janney Montgomery Scott - Analyst [9]

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How do you feel about the -- as that concentration hits $50 million, it's about a sixth of your asset base when that gets acquired. Should we be thinking about you -- normal is sort of the $5 million, $7 million acquisition. Are there more of these out there that you guys would consider in this going forward or was this just such a special situation, such a strong tenant, that it was at least for now, given your size, it's a one-time exception or should we be thinking about you guys doing more in this sort of chunkiness size range?

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David Young, Global Medical REIT Inc. - CEO [10]

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It's more of the latter, Rob. It's definitely larger than our average transaction. We have done a number in the $20 million range and I think that's probably the mode as far as what's the most common deal size. It's probably $20 million or $22 million or $24 million or whatever.

This is larger, and if it had not been for the strength of the operator, their market share, their profitability, and their credit worthiness, we would not have jumped on a deal that large. We would have deferred on it. So it is an unusually good deal that way.

Also, you know, we're growing at such a fast rate right now I think that $50 million fraction, you look out a couple of quarters from now and it won't be such a large percentage of the portfolio.

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Rob Stevenson, Janney Montgomery Scott - Analyst [11]

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Okay. And then, just last one for me, how are you guys handling the accounting for acquisition costs in 2017? Are you guys early adopting and taking it -- starting to capitalize this year or are you guys pushing that out to 2018?

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Don McClure, Global Medical REIT Inc. - CFO [12]

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We're capitalizing a good deal of the acquisition costs. There are certain accounting rules that require us to expense a portion of those acquisition costs, which were reflected in the financials. In the current year-end financials, there's about $1.6 million in acquisition costs hitting that expense line.

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Rob Stevenson, Janney Montgomery Scott - Analyst [13]

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Okay. But going forward, that should be substantially less if you capitalize the bulk of those cost?

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Don McClure, Global Medical REIT Inc. - CFO [14]

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Yes, it's transaction by transaction, but right now there's about maybe one-fourth of our portfolio that fall into that business combination rules that require us to expense a certain portion and I would say that's about 1% of the acquisition amount.

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Rob Stevenson, Janney Montgomery Scott - Analyst [15]

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Okay. Perfect. I appreciate it, guys.

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David Young, Global Medical REIT Inc. - CEO [16]

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Thank you very much. Appreciate it.

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Operator [17]

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(Operator Instructions). Barry Oxford, D.A. Davidson.

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Barry Oxford, D.A. Davidson & Co. - Analyst [18]

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Great. Thanks, guys. When you think about, piggybacking on Rob's question a little bit, as you get close to maxing out your secured line of credit, would you guys look to do -- maybe enter the preferred market or would your first preference be the common share market?

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David Young, Global Medical REIT Inc. - CEO [19]

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Barry, the general answer to that is it really depends on our share price at the time and the market and so on. We don't want to do anything dilutive. We certainly don't want to penalize shareholders and so on.

We do have additional capacity in the revolver through the accordion feature and our syndicate banks are eager to work with us, and we're really not maximally leveraged, so we do get some there. But it's inevitable at some point in time balance-sheet imperatives are going to require us to add more equity to the Company, but we certainly don't want to do it to any disadvantage to existing shareholders.

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Barry Oxford, D.A. Davidson & Co. - Analyst [20]

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Right. Would it be fair to say that you can take your leverage up to a comfortable level and execute on 2017 plans?

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Don McClure, Global Medical REIT Inc. - CFO [21]

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Yes. So, currently, we do have capacity to leverage up to about 60%. I expect that we push that leverage up to close to 50% to accomplish our third- and fourth-quarter objectives, for sure.

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Barry Oxford, D.A. Davidson & Co. - Analyst [22]

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Right. Right. And then, last question, on 2Q AFFO, would you guys be relatively close to that $0.20 number?

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David Young, Global Medical REIT Inc. - CEO [23]

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Without giving specific guidance, which we're not (multiple speakers)

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Barry Oxford, D.A. Davidson & Co. - Analyst [24]

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Right. That's why I'm saying will you be roughly.

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David Young, Global Medical REIT Inc. - CEO [25]

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I think we like the trend -- the track that we're on. If you look back over the last few quarters and do some extrapolating and look at our rate, our trend, you can do the math for yourself, but it's --

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Don McClure, Global Medical REIT Inc. - CFO [26]

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So, also, I would expect as we acquire specifically HealthSouth, we acquired in the fourth quarter of last year, and the NOI from that acquisition is generating AFFO in the first quarter, so similarly the acquisitions -- the six acquisitions in the first quarter and the pending PSAs will contribute AFFO -- additional AFFO coverage for the second quarter. So, that said, we'll be in the ballpark and we're certainly striving towards those goals.

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David Young, Global Medical REIT Inc. - CEO [27]

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On a run-rate basis, it doesn't scare us.

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Barry Oxford, D.A. Davidson & Co. - Analyst [28]

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Okay. Right, right. Got you, got you. Thanks a lot, guys. Appreciate it.

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Operator [29]

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Craig Kucera, Wunderlich Securities.

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Craig Kucera, Wunderlich Securities, Inc. - Analyst [30]

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Good morning, guys. I appreciate the color on the acquisition pipeline. I guess I'd be interested in hearing if there are any other incremental transactions that you're looking at that we might see in the second quarter or do you think you're probably just going to close on the $75 million you announced?

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David Young, Global Medical REIT Inc. - CEO [31]

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We feel very confident -- well, as confident as we can be in this business, that we're going to successfully close what has been announced and that we're moving ahead with. There's more pipeline behind that. I can't really get specific. We have confidentiality agreements and NDAs on various other projects and we don't announce letters of intent. We really just announce definitive agreements, PSAs, purchase and sale agreements, and so on.

But I can tell you that I'm not disappointed with the amount of opportunity in the market, the intensity of dialogue, the number of people we're talking to who we want to work with. We have a very healthy opportunity pipeline growing.

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Don McClure, Global Medical REIT Inc. - CFO [32]

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I'll add to that real quick. Because this is an annual -- year-end K process, we are in a blackout period as far as signing deals. So, like Dave said, there are quite a bit of LOI discussions occurring, moving into that PSA phase.

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Craig Kucera, Wunderlich Securities, Inc. - Analyst [33]

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Got it. I feel like previously your goal was to get to $400 million by midyear, but it sounds like, based on your color on the call, that maybe that's kind of pushing maybe into third or even fourth quarter or should we still think -- I guess, how should we think about that?

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Don McClure, Global Medical REIT Inc. - CFO [34]

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Right now, the $75 million is under PSA and we're working hard to get those closed as soon as possible, and there's just quite a robust pipeline behind that. So, I do know as far as the earnings announcement we pushed that $75 million into the second quarter.

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Craig Kucera, Wunderlich Securities, Inc. - Analyst [35]

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Okay. And one more from me, I guess I just would be interested in kind of what you're seeing in the marketplace today as you're looking at some of those other transactions. Are you seeing similar kind of mid-seven cap rates or are you seeing any real movement in the market?

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David Young, Global Medical REIT Inc. - CEO [36]

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As you probably know, we focus entirely on single-tenant licensed medical treatment facilities, which are not as sought after by the masses of buyers out there as, for example, multi-tenant medical office space or senior housing or assisted living, so cap rates have not been driven down as competitively in our space as they have in some of the other asset types and so on.

We're not having difficulty finding accretive opportunity. The latest round of purchase and sale agreements and so on, in fact, on a blended basis, are accretive. So I think the days of five and six cap healthcare real estate are probably coming to a close as the economic growth picks up, but our segment again is typically higher than the overall mix of healthcare properties, so we're very pleased with the current yields available to us and I think they are just going to get better over the next couple of years, so we're not disappointed.

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Operator [37]

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Steve Shaw, Compass Point.

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Steve Shaw, Compass Point Research & Trading - Analyst [38]

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Can you talk about the G&A and what we should be looking at as a quarterly run rate for the year?

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Don McClure, Global Medical REIT Inc. - CFO [39]

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Sure. So G&A for the year was about $4.3 million. Of that, audit and legal was about $1.1 million, and then there was marketing and acquisition initiatives, about $875,000. So, I would say about $2 million to $2.5 million for the year in G&A is what we've reflected currently. That will increase incrementally with our acquisitions, but not at the same pace it did over the first six months.

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Steve Shaw, Compass Point Research & Trading - Analyst [40]

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Got it. Thanks.

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Operator [41]

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Thank you. This does conclude the question-and-answer session. I'd like to turn the floor back over to management for any closing comments.

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David Young, Global Medical REIT Inc. - CEO [42]

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Thank you all for your questions. We do appreciate it and we appreciate your following us and focusing on the critical elements of our business. So, thanks again. We look forward to speaking with all of you again on our 2017 first-quarter conference call and we do expect at that point in time we'll have more good news and more enthusiasm and it will be a rewarding experience. Thanks again. Have a great day and talk to you all soon.

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Operator [43]

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This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.