Chiron Real Estate Inc. Q2 FY2025 Earnings Call

Good day, everyone, and welcome to today's Global Medical REIT's Second Quarter 2025 Earnings Call. Please note, this call may be recorded, and I will. It is now my pleasure to turn the conference over to Jamie Barber, Global Medical REIT's General Counsel. Please go ahead.

Good morning, everyone, and welcome to Global Medical REIT's Second Quarter 2025 Earnings Conference Call. My name is Jamie Barber, and I'm Global Medical REIT's General Counsel. On the call today are Mark Decker, Jr., Chief Executive Officer; Alfonzo Leon, Chief Investment Officer; Danica Holley, Chief Operating Officer; and Bob Kiernan, Chief Financial Officer. Statements or comments made on this conference call may be forward-looking statements. Forward-looking statements may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. Company's actual results may differ significantly from those projected or suggested from any forward-looking statements due to a variety of factors, which are discussed in detail in our SEC filings. Additionally, on this call, the company may refer to certain non-GAAP financial measures. 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 also 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 Mark.

Thank you, Jamie. Welcome, everyone, and thanks for joining us today. It's my pleasure to provide our quarterly update as the new CEO of Global Medical REIT. To begin, I have a few thank you. First, I'd like to thank the Board for placing their confidence in me to lead our business into the next chapter. I'd also like to thank Jeff Busch for his work as the company's founder. Jeff built a strong foundation that we will take to the next level. And finally, I want to thank our talented team here for their hard work, grace and efforts to keep things moving during the transition that started in January when we announced the CEO transition plan. I'm excited to work together with them to reimagine our business and unlock new opportunities for growth and value creation, and they are excited to get back in gear. So it's a great time for our company. I will now turn the call over to Danica Holley, our Chief Operating Officer. Danica?

Thank you, Mark. As many of you are aware, earlier this year, we successfully re-tenant our Beaumont, Texas facility with CHRISTUS Health as our new tenant. I'm pleased to announce that as of May, CHRISTUS is fully operating in the facility and is paying rent. This is a huge success story given the status of the previous tenant, Steward Health Care, and an example of our team's ability to navigate obstacles to a successful conclusion. More broadly on the portfolio, as of June 30, 2025, our occupancy stood at 94.5%, which is down from the first quarter, primarily due to the expiration of the lease at our 50,000 square foot Aurora, Illinois property and the rejection of the master lease at our 60,000 square foot East Orange, New Jersey property related to the Prospect Medical bankruptcy. We touched on both of these in prior calls, but I'd like to offer a little more color. In Aurora, this was a health care administrative building adjacent to one of the system's new outpatient facilities. We purchased this building pre-COVID with an expectation that the system would expand and unfortunately, COVID changed the system's utilization of the administrative space. We are currently looking to sell or re-tenant this facility. On the flip side, after almost 2 years of negative cash flows, the developments at East Orange are positive. We now have control over the space, which is 40% occupied and are working directly with former subtenants and prospective tenants, including the new adjacent hospital operator. We expect this property to recover to stabilized occupancy of over 90% in the next 24 to 36 months. Turning to our leasing activity, we expect total occupancy to end the year over 95%, which includes 150,000 square feet of new leases, 130,000 of which are complete. Regarding CapEx and leasing commissions, year-to-date spend is $5.2 million, and our guidance for the full year is between $12 million to $14 million. So we are well positioned. I would now like to turn the call over to Alfonzo to discuss our investments. Alfonzo?

Thank you, Danica. During the quarter, we completed the acquisition of a five-property portfolio of outpatient medical real estate, which brings our total acquisition volume for 2024 and 2025 to approximately $150 million at a blended going-in cash yield of 8.5%. While we are ecstatic about the cash yields, we are even more excited about our ability to find differentiated investment opportunities. First and foremost, we were able to achieve portfolio discounts with our execution capabilities, including our balance sheet strength when lending for portfolios was unavailable. On the real estate side, we were able to achieve wide discounts to replacement cost, and we believe in-place rents are more than 30% below market, which will allow us to grow future rents at faster than market rates while still providing a significant value proposition to our tenants. Based on our proprietary data, portfolio volumes, which averaged $300 million per quarter from 2022 to 2024, spiked in the second quarter of 2025 to $2.1 billion, over 7x recent levels, and we expect this level of activity to continue due to the large activity in 2020 and 2021 by levered short-term owners. We are excited to compete in this market because in our experience, a flood of opportunities like this offers inefficiencies that we can benefit from with our proven middle market expertise, track record and reputation as a great counterpart. With that, I'd like to turn the call over to Bob.

Thank you, Alfonzo. As we look at the remainder of 2025, our highest priority on the balance sheet front is to renew the portions of our credit facility that are coming due in 2026, namely the Revolver and our $350 million Term Loan. We are in active discussions with our lending group regarding renewal and expect to complete the renewal during the fourth quarter of 2025. We value the strong relationships we have with our current bank lending group. And over time, we are looking to expand our lender relationships to potentially include longer-term debt providers such as insurance companies. By diversifying our lender and tenor mix, we will improve the quality of our earnings and broaden our access to debt capital. As reported earlier this year, the company lowered its second quarter 2025 dividend from $0.21 per share to $0.15 per share. We view this as the rightsizing of our dividend as our dividend coverage went from 110% during the first quarter of 2025 to 79% during the second quarter of 2025 on a FAD basis. And as you'll see in our supplemental, when we say FAD, we are talking about our cash flow after all capital expenditures and leasing commissions. Additionally, the dividend reduction is expected to generate approximately $17 million per year that can be allocated to our best ideas. Given the dearth of the equity capital markets in recent years, we are looking at alternative sources for growth. The rightsizing of our dividend is the most important action we took in this regard, and we will continue asset recycling. We have identified several assets that are candidates for capital recycling. Our portfolio contains organic growth opportunities that can sustain us until the equity capital markets open up again and look forward to what is to come under Mark's leadership. With that, I'll turn the call back over to Mark for final comments.

Thanks, Bob. I'm happy to say I know many of those on this call, but for those who don't know me, I have almost 30 years of capital markets real estate and leadership experience, nearly 20 years in investment banking, building teams to serve middle market real estate companies that were undergoing some growth and/or transition and 7 years in the C-suite at Centerspace, mostly as CEO. Centerspace was another smaller public real estate company that needed to meaningfully reposition their business. If nothing else, that makes me experienced and hopefully a little wise. I sought out this role because I love the work of delivering results and communicating clearly to our three key audiences: our team, our customers and the capital markets. If we can do this, be formidable in our niche, post results and communicate well, we'll be in a great spot. So that's why I'm here and happy to be underway. It's early days for me, but you can expect that we will fully review our portfolio with an eye towards identifying opportunities. We'll also be working to take our 100% unsecured balance sheet and turning it into more of a competitive advantage with the establishment of a long debt maturity lateral. And we'll be looking inwards to our team to see how and where we can improve, all with the goal of owning the middle market health care real estate space, providing great results to our business owners and growth for our team. Lastly, I hope you'll notice our supplemental in this call; we're seeking to be more transparent and easy to evaluate and understand, starting with improved clarity of our disclosure. We understand these are table stakes as a smaller public company. If you have suggestions, as it says, we're all ears. Please call or send an email with your suggestions. Thank you for listening. And operator, please open the call for Q&A.

Our first question will come from Austin Wurschmidt with KeyBanc Capital Markets.

Welcome to the call, Mark. There was a little bit of a technical issue. So sorry if I missed this. But I guess, Mark, could you just lay out kind of what the immediate strategic priorities are for you and that you think that the company could be doing differently on a go-forward basis?

Sure. Yes. Thanks, Austin. That was not me playing saxophone. But can you hear me okay? Immediate strategic priorities are to come together on a strategy with the team and the Board. We have a bunch of good ingredients, I think, in the business as we sit today, and I think we can organize those a little bit more thoughtfully. Obviously, we want to get the refinancing of the line and the Term Loan A done. We feel really good about where we are on that, but nothing is done until it's done. And then we're going to be looking at some capital recycling. So those are the immediate priorities.

I appreciate that. And then I think, Bob, you kind of outlined continued asset recycling and that you've identified some assets. Could you just give us a sense of what types of assets these are from an occupancy perspective or whether there's a capital need and where you think you can sell assets as it sounds like there's a little bit of a pickup in liquidity in the transaction market.

Yes, I'll take that one. I think the ideal candidates would be the lowest yielding or best priced assets. For instance, properties with long-term leases and high-quality tenants would likely be the first to go. On the other hand, we are currently reviewing our portfolio, and if there are any assets that we don't see as viable long-term, we will work to dispose of those as well. So far, I haven’t noticed a lot in that category. Thus, our focus is on capital recycling, possibly some deleveraging, and enhancing cash flows while leveraging the current demand for high-quality assets.

So where do you think you can ultimately reinvest those proceeds? Alfonzo, I think you referenced sourcing assets at wide discounts, replacement costs with really attractive mark-to-market opportunities. Are those out there? And what does that spread look like on a going-in basis? I'll leave it at that.

Sure. There is a range of cap rates in the market. Higher quality assets are trading in the low and sometimes under 6 percent. However, most of the market is trading in the mid-6 to high 6 range. There are also a significant number of deals trading above 7 percent, and selectively, some are above mid-7s. We have traditionally focused on that higher range of cap rates. With the influx of deals coming to market, there are many opportunities available that fit this category.

I'd just add to that. I think we're using the word quality in a way that is market convention. I mean, I think something that's sub-5 that grows at 2% is not as good as something that's 7.5% and grows at 2%. And what I think can be observed based on historical facts is that some of those really tight yields don't actually grow more. And in many instances, your landlord probably has more leverage over you than maybe otherwise. So it's our contention, and I think Alfonzo and his team have done a fantastic job over the last several years of doing this well of finding good properties that yield more, which, in my view, are higher quality and better risk-adjusted returns. So we're going to lean into where we have been because I think it's worked well for us. And then we're going to be working very hard on producing better-than-average per share FFO growth, which we got to put a plan and a formula together to do that. But I think this is an area where kind of the law of small numbers helps us. $15 million is 1% of enterprise value and $720,000 is a penny. So we can get this thing going, I think, without moving heaven and earth. And we are buying in my estimation, and what we just recently purchased the last bit of that portfolio is a fantastic deal in terms of price per pound opportunity for rent upside, great tenancy. So we're going to try to do more like that. Those are hard to find. We don't need to find a ton of them to make a difference.

Our next question comes from Juan Sanabria with BMO Capital Markets.

Just curious what initial thoughts on where leverage is targeted to be, recognizing it sounds like whatever strategic review is more ongoing versus finalized, but just curious on how we should think about leverage over the medium term.

Yes. I mean, I think ideally, we'd like to have a balance sheet that has more capacity for growth. And in my mind, that means stake a ground sub-40% or sub-6x would be a great spot. I think if you look at our pricing grid from the banks, they would say we're nearly but not quite investment grade. I think if you were to talk to the private placement community, they would say we're cuspy, but I think it's more probably size than quantum of debt. So I mean, obviously, we have relatively more debt for a public company and a lot less debt than our private peers would have. I mean, we sleep like babies. We've got great cash flows. We will stretch out our maturity ladder and that will feel better. 4x debt if it expires tomorrow is worse than 9x debt if your weighted average maturity is 7 years from now, we're not at either of those extremes. But we do have a large maturity obviously coming, and we're working on that, and we have all the confidence that, that will be achievable in the near term.

And just a quick follow-up on that. Would that be inclusive of the 6x of preferreds?

Man, I thought we were going to stay off this religious bait for today, but let's go there. Look, preferred, in my opinion, doesn't have a redemption date. So it is more like equity than debt. And I know that not everyone agrees with that. But for the time being and given our small size and cost of capital, the preferred is something we could look at. It'd be a great use of proceeds down the road if we had a cost of capital that made sense. But today, forever is a long time. So if you're going to call it debt, then I'd say you've added to our weighted average maturities. And if you're going to call it equity, then I'd say I agree. But no, my six doesn't include that, but I understand that the equity buyers will think that way, and we're mindful of that.

Fair enough. And just on the occupancy perspective, I think you shared some thoughts, apologies for missing the numbers on kind of how you expect occupancy in the portfolio to trend. And the general trend has been one that we've seen some modest slippage as some leases expired and retention levels just naturally have some chance. But just curious on how we should think about that going forward? Any known large move-outs? And as part of that answer, if you don't mind, with the Beaumont facility, what's the incremental pickup we should be modeling third quarter to second quarter on that asset specifically?

Hi, Juan. On occupancy, I think you can think of us in that 95% and above range. We're consistently seeing trends with our tenants to re-lease at those levels. So I think consistency and occupancy is what you should look for. There will be episodic downturns that are followed by re-leasing. So it can be a little bit bumpy. But overall, I think that's the way to think of it. I'm going to actually turn to Bob to talk about the modeling for how we thought of CHRISTUS.

So for the Beaumont asset, for the second quarter, they fully occupied beginning in mid-May. So in the second quarter, you'll have May and June. So again, there will be a modest pickup in the third quarter from a run rate perspective, all of which is in our guidance.

Our next question comes from Wes Golladay with Baird.

Maybe just sticking with the quarter-to-quarter changes. Will you also have a pickup in reimbursed costs in the third quarter? Or were the move-outs impact that at all? How should we think about unreimbursed costs going forward?

So Wes, there really wasn't anything in particular of note relative to rental revenue versus the reimbursed cost from an overall NOI perspective, the way that the trend was consistent with our forecasting, and there really wasn't anything significant or unusual from the dynamic between reimbursed costs and the rental revenue side.

Okay. And then you mentioned tackling the balance sheet, I think, in the fourth quarter. Were you going to do both, I guess, term loans and private placements? Or is it an and/or? Or how are you thinking about that?

To be determined. For sure, we're going to refi the Term Loan A and the Revolver, and how exactly that gets done isn't set in stone just yet.

Okay. And then G&A for the back half of the year, should it be comparable, I guess, on a quarterly basis to what we saw in the second quarter outside the one-time items?

Yes, that's a good run rate from a general and administrative perspective. We are identifying those outliers from the transition costs, adjusting for both the stock compensation and the cash general and administrative expenses to align them properly.

Our next question comes from Gaurav Mehta with Alliance Global Partners.

I wanted to go back to your comments around asset recycling. Hoping to get some more color on what kind of size of disposition are you guys looking at? And then does the asset recycling depend on you finding the right acquisition targets or would you consider selling and lowering leverage in the near term?

Got it. Our target is between $50 million and $100 million. However, if we don't obtain favorable prices, we may refrain from selling. The way we use the proceeds would likely involve a combination of repaying some debt and making new investments. At the very least, we would pay down debt, which would be a prudent choice, but we likely have other plans as well.

Okay. And then, Mark, as you look at the next chapter for the company as far as acquisitions and the portfolio mix, do you expect any changes in specialty type and provider type? Or do you want to stick with where the portfolio is as far as that mix is concerned?

I'd say we generally like the mix the way it is. I mean it will move around...

I agree. We've always been opportunistic and focused on finding the best value in the market. Medical office buildings are the largest asset type available. However, we have been successful in identifying opportunities and being patient in that area. I expect that the portfolio mix will remain fairly consistent moving forward.

Our next question comes from John Massocca with B. Riley Securities.

So maybe with kind of cost of capital in mind, you talked a little bit about capital recycling as a way to kind of fund future investments. How are you thinking about JVs, either the one you currently have in place or maybe even future different de novo JVs? Just curious your thoughts there.

Yes. Good question. We'd like to grow the Heitman JV, but they're thoughtful and disciplined in investments with strong practice groups that have dominant market share alignment of, I'd say, view of the world. And I think there are other potential capital structures we could look at to write these smaller opportunities and deliver that to people that maybe don't have that skill. So how that takes shape if it takes...

I know it's a bit unfair since it was only established earlier this year, but given the level of activity in the space during the second quarter, is there a particular reason the joint venture hasn't been more active?

No. I mean if there's one deal you like among one, then that one is worth doing, I mean, we have to be disciplined and they are disciplined with us in that regard. So they're picky and we're picky. And when it's right, we'll do it. And if it's not, we don't have any unnatural reason to do anything with Heitman, and they certainly don't either. They're fiduciaries and so are we.

That's fair. And then maybe on a much smaller level, as we think about the East Orange kind of success leasing up there, can you remind us maybe what the impact kind of run rate numbers is going to be from that lease-up? And if there is any impact, what kind of timing you're expecting?

The previous run rate for that building was approximately $1.2 million to $1.3 million in annual base rent. As we discussed, this has affected cash flow over the past few years. Currently, we have increased occupancy to around 40%. As we maintain this level, we anticipate starting to break even on the property and gradually aim to increase occupancy to 80%, 90%, and beyond. For context, the contribution was about $1.2 million, and we are focused on returning to that level.

I believe, John, this is something we've been discussing with investors. Everything I'm sharing is publicly available but requires some effort to piece together. There seems to be a perception that we have a significant earnings boost expected from this refinancing in 2026, and we will indeed refinance at a considerably higher rate. We currently have SOFR locked at 1.35%, while it's at 4.35% now. However, considering we didn't really receive cash flow for most of 2025, we will start to see some direct cash flow from East Orange, and we will also experience the full effects of CHRISTUS. Additionally, the forward curve is looking promising and we have made some acquisitions. I believe our year-over-year FAD and FFO will look quite strong. We're not providing guidance for 2026 at this moment, but I think there's some misunderstanding about our position today.

It appears we have no further questions at this time. I'll turn the program back to Mark for any closing remarks.

Super. Well, we appreciate everyone's time and interest, and have a great day. Thank you.

This concludes today's program. Thank you for your participation, and you may disconnect at any time.