Chiron Real Estate Inc. Q4 FY2025 Earnings Call

Greetings, and welcome to the Chiron Real Estate Fourth Quarter 2025 Earnings Call. It is now my pleasure to introduce your host, Jamie Barber. Thank you. You may begin.

Good morning, everyone, and welcome to Chiron Real Estate's Fourth Quarter 2025 Earnings Conference Call. My name is Jamie Barber, and I'm Chiron's General Counsel. On the call today are Mark Decker, Jr., Chief Executive Officer; Bob Kiernan, Chief Financial Officer; Juan de Leon, Chief Investment Officer; and Danica Holley, Chief Operating 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. The 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 current comparable GAAP numbers in the company's earnings release and in filings with the SEC. Additionally, information may be found on the Investor Relations page of the company's website at www.chironre.com. I would now like to turn the call over to Mark.

Good morning, everyone. I'm thrilled to welcome each of you to Chiron's inaugural earnings call. This quarter was a busy one with meaningful achievements across all verticals. Bob will discuss our fourth quarter performance in a moment. But before that, I'd like to use my time to summarize what we intend to achieve as an engaged and reinvigorated organization. Yesterday, we published a full investor presentation outlining how the Chiron team is building for the future. I'll walk us through a subset of those slides this morning, but encourage you to take a moment to review the full deck. We trust that you'll find it to be direct, transparent and thorough. We'll start with a quick mythology note. In Greek lore, our namesake, the venerable centaur Chiron, is the father of medicine and the architect of medical education. We like the imagery and believe his legend aligns well with our new mission statement of delivering value at the intersection of care, capital and real estate. Our team is well positioned to execute on this mission with strong leadership across operations, finance and investments. We have a deep bench of talent beyond the familiar names, and I believe that we can punch above our weight. Before looking at where we're going as Chiron, it's important to acknowledge what we've done as GMRE. From the date of our IPO, GMRE has meaningfully exceeded the total return profile of our closest MOB peers. That's a good thing, and we intend to keep outperforming. What's not good is that medical office has been in a bear market for years. This bear market has had more to do with interest rates than asset performance, but we need to be prepared for a world where 4% 10-year treasuries is the new normal and 2% to 3% rent growth may be sub-inflationary. So we've rewritten our playbook to prioritize earnings growth on top of our stable existing portfolio. We've already made an incredible amount of progress. This progress includes establishing a long-term strategy to guide our decision-making and hold ourselves accountable, as well as a comprehensive review of our existing portfolio. Our findings have informed our decision to reimagine the way we approach asset management, leading to the appointment of Alex Wilburn as Portfolio Manager. Alex is one of our longest tenured team members, most recently serving as a senior investment professional. We're excited for him to apply his capital allocation and market-oriented mind to the portfolio management function and know that he will thrive in his new role. We also took time to think about how our existing portfolio stacks up against the field, drawing a few conclusions. First, it's important to acknowledge the overall return profile of medical office. Rent growth is incredibly consistent but modest due to our fixed rate escalators and long average lease term. This growth is partially offset by the capital and leasing costs. We found that our performance is in line with the sector generally. One key difference is entry price. We believe that if you're going to face limited growth, it's important to realize more yield going in. Second, we believe that the benefit of the health care sector is that you can find great investment opportunities outside of primary markets. When comparing the demographic profile of our assets to that of the United States at large, we found that we're biased towards higher prosperity markets. Third, the vast majority of our portfolio is owned fee simple, meaning that it's not encumbered by a ground lease. This is critical as outpatient medical owners often operate in an environment where their building tenant is their land lessor. This has the predictable effect of reducing your opportunity when negotiating renewals. When the ground owner is your health care system, they often have the ability to dictate leasing outcomes. Finally, rising construction costs and undeniable demographic shifts have given us an outstanding opportunity to push rents in the years to come. We think that an improved emphasis on driving portfolio performance, including a more proactive approach to pruning underperforming assets will put us in a great position to capitalize on this opportunity. Bob and his team have also been working hard in the capital markets to position our balance sheet for offense. I'm proud to share that we now have no debt maturing before 2028, a big change from where we were 6 months ago, and our current maturity schedule is well laddered and manageable. Looking toward the road ahead, it's our ambition to build an organization that can routinely deliver earnings growth in the upper quartile of the equity REIT universe. Doing that has historically meant growing cash flow by 6% per year. This will be a process requiring active management of the existing portfolio and investing more broadly across the health care sector. We've put a lot of thought towards how we're going to approach each of these considerations. Importantly, we are still firm believers in the economic and demographic tailwinds benefiting our existing portfolio. That said, we also believe that these same tailwinds benefit other subsets of health care real estate, namely active adult and seniors housing. Our entire team has spent considerable time thinking through whether we should pursue investments in the senior space, concluding that the answer is an enthusiastic yes. The silver tsunami is just building with the first baby boomers now just entering their 80s. More broadly, the population of Americans aged 70 or older will expand for decades to come. Existing supply is severely constrained and project deliveries are expected to be far short of what is needed to satisfy demand. Once we knew that we wanted to explore seniors, the next question was how. We believe there's an opportunity to assemble a differentiated portfolio of premium newly built active adult and shop investments in the public markets. There's a lot that went into that decision, but I'll highlight a few components. The lack of new supply through COVID and the GFC have led to an average age of 24 years for existing senior housing assets. These facilities were designed for a different generation of residents, and we think that newer assets with great operators will have a competitive advantage. This is especially true in the active adult segment where high-end amenities and programming are the defining component of the resident experience. Second, the cohort of highest income seniors is sizable and growing, providing us with the comfort that demand for premium facilities will prove resilient. And finally, our lack of incumbency and small size provide an advantage. We can focus solely on the products we want and relatively small transactions can significantly influence our outcomes, enabling the potential for stronger growth. It's the early days of the silver tsunami, and there's lots of room on that wave. Our team has a sound understanding of the space and believes our boutique approach to partnership with operators and developers gives us a broad opportunity as we enter these verticals. Many existing owners, operators and developers of senior housing facilities are middle market in nature. So that decision of who to partner with on their business is a monumental one, and there are many considerations beyond who's willing to pay the most. This obvious value proposition has allowed us to build an attractive pipeline, each with a strong return profile and opportunity to build a larger relationship. For now, we'll be thoughtful in limiting investments to those that we can fund through capital recycling, but we're ready for more when that changes. Our announced active adult investment in Minneapolis is a great example of the opportunity available to Chiron. We've taken a 49% interest in the development of a new community with an expected delivery of 2027 and a stabilized double-digit unlevered IRR. This investment was sourced off-market through a relationship with an experienced luxury housing developer that we've transacted with in the past and known for a decade. We believe this relationship provides us with future pipeline of great communities. As mentioned earlier, we're being thoughtful about how we fund these acquisitions, given our current cost of capital. During the quarter, we sold an early vintage medical office for a sales price of $10 million, bearing our team the outsized execution risk and capital required to stabilize a poorly positioned building. We used these proceeds to repurchase stock in a leverage-neutral fashion, which we view to be a sound capital allocation decision. We'll be very conscious of debt levels as we execute our pipeline and have already identified approximately $250 million of prospective dispositions. These dispositions are likely to focus on assets that we believe will demonstrate the overall quality of our book, including a portfolio of IRF assets and the Beaumont Surgical Hospital. We've begun marketing efforts on each and believe that we will realize proceeds meaningfully above our basis, demonstrating our ability to make sound investments. Thank you for allowing me to take you through that. Bob, would you please walk us through some of our quarterly highlights?

Thanks, Mark. Our NAREIT-defined FFO per share and unit was $0.97 for the quarter. Core FFO, which we previously referred to as AFFO, was $1.16 per share and unit. Net debt to adjusted EBITDA REIT was 6.2x for the quarter, a reduction of 0.7x from the prior period, which was driven by our recent preferred equity issuance. Same-store cash NOI, which includes all assets owned by Chiron for at least 15 months, increased 5.4% on a year-over-year basis. Sequential performance was also strong at 2.9%. I'm pleased to share that Chiron will be transitioning to a monthly dividend with no change to the annual $3 per share rate. We believe that the dividend will provide our shareholders with a more frequent income stream while also reducing frictional costs for the company. I'm also pleased to share our initial 2026 core FFO guidance range of $4.30 to $4.45 per share and unit. This range includes $0.36 of anticipated headwinds due to the results of our balance sheet fortification efforts throughout the back half of last year. Notably, this guidance does not reflect any speculative acquisition or disposition activity.

Yes. If you're just joining the call, you need to know that it's been a busy quarter, and we've accomplished a lot, and we're well positioned in the care delivery universe and broadening our aperture to add growth from senior housing to our quality cash flows. The care universe has undeniable tailwinds that make a nimble player like Chiron well positioned to grow quickly through internal and external cash flows, and we're excited for our future and believe strongly in what we're doing. We wouldn't ask you to endorse a strategy that we ourselves are unwilling to invest in. And with that, we look forward to seeing some of you at Citi next week. And operator, we're ready to take questions.

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

Congratulations on laying out the new strategy and thesis. I guess the big question in my mind is just there's obviously a lot of enthusiasm around seniors housing and why do you think Chiron is positioned to execute over and above what some of your peers are doing? And the focus in seniors, is that more assisted independent living? How do you plan to pick the operators, the market focus? So if you could just give us a little sense of kind of what we should expect going forward in seniors and why Chiron is the platform to out-execute some of your peers?

Sure. Juan, thanks. Listen, it's a big universe out there, and operators have lots of options. I think the way that we'll have to compete is by delivering value, as we've articulated sort of as the main mission. But I mean, there's lots of considerations that go into who the real estate partner is going to be. And I think if I'm on the other side of the table, choice is good. And so we're one more choice. We'll have to win the business just like anyone else on the merits of our value proposition. And why do we think we can? I mean, we talk about this a lot around the water cooler. I mean, there's a version of the universe where we're like the smallest, most relevant company in the space. And then there's the real world where we have an unsecured balance sheet and $100 million of EBITDA and a great team with good gray matter. And if I was describing that company to just a normal person, they'd say, it sounds like a pretty good business. It is a good business. And it's possible the public market will appreciate that, and we can use that tool to our advantage or not. But either way, we're going to build a great business.

And the focus on seniors would be on what kind of product side, kind of putting active adults to one side, independent assistance of communities, markets, et cetera, what's the focus, I guess, day 1?

I mean we're really focusing on the operator and the real estate, and we're really looking at independent and assisted, some memory care stay away from skilled.

Okay. And then on the disposition side, the $250 million of assets that you're potentially looking to capital recycle, just you kind of put some yield targets for the investments, but how should we think about the yield associated with those potential sales? And if you could talk maybe about the timing of the selling versus buying and how we should think about kind of the cadence of recycling that capital?

Yes. Well, we can't force anything. So everything takes two good willing parties. But we have launched a joint venture. We like the inpatient rehab facility space. We'd like to express that like of that space by hoping to find a capital partner with us. We have a good track record and a decent sized portfolio in that niche, and we think we can do some interesting things and grow that. And we'd like to do it with a capital partner. So we're out in the market looking for a joint venture. It's possible someone comes and says, we've got to have this at a price that makes it a full sale, but that's not our objective. And I would imagine that happens in the second or third quarter. And then on the MOB sale, we are working with a buyer there, and I would expect we'd announce an LOI on that in the next, I don't know, 60 days and probably have that off the books by the third quarter. That asset has been a real strong contributor to our same-store. So we kind of hate to see it go, but I mean, we just signed a 15-year lease with an A-rated credit, and it's a really good recycling candidate for that reason.

And then just the last question for me. On the White Rock bankruptcy, I guess, have they paid first quarter rents? Or how should we think about the impact to financials at this point in time?

Yes. They have paid and are current on their payments to us. We have a strong basis in that property, which is a 14-acre site just east of Dallas, overlooking the city and a reservoir lake. Our investment is about $105. The operator bought the property out of bankruptcy in 2023, accepting tough terms from their counterparty to improve their financial capacity by eliminating some seller financing. We believe they have a good chance of succeeding. We met with them in December, and this was one of their options. We're working hard to be a collaborative partner and want to see them succeed. If they don't, we will ensure we have a solid alternative ready. It's an evolving situation, and we are in close contact, monitoring it, and doing everything we can to assist them in achieving success.

Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets Inc.

Mark, I was just hoping you could start by discussing when this strategy shift discussions with the executive team and the Board really started to come about.

Sure. We really started in August using a consultant that I've used in the past. We put together kind of the top 10 folks at the company and our Board, and we did a bit of a 360 evaluation where we had people who don't work here tell us what they thought about the business, and we all considered it. And we had really a multi-month process where we kind of beat up lots of different ideas and ultimately laid out a strategy for the Board in December, which they're supportive of and helped collaborate in. And so we've really been at it since August and feel great about where we are relative to our plan in that timeline.

Helpful. And then Bob had highlighted there's no real capital recycling that's assumed in guidance. But I guess, how are you just thinking through the near-term earnings impact from executing the strategy of selling some of these legacy assets and then recycling into that development, which obviously tends to have some downtime from an earnings perspective as well as just being able to compete on the senior side and redeploy that capital at kind of minimizing that spread versus the sales?

Yes. I mean I think the truth is we'd like to get through that period as soon as possible, and we'd like the market to see what we can cook up. So I mean, hopefully, we can get through that sort of valley as fast as we can. But again, we don't get to dictate all the timing. So in terms of earnings impact, I mean, as you can imagine, as we're trying to delever the business and we're selling assets, there definitely could be, there should be, there will be dilution there. But we're really thinking about it like it's our own money and imagining what the best business looks like. And frankly, the returns that are available in the housing space are superior to those in outpatient medical. So we're not, by any means, abandoning outpatient medical, but deals are going to compete on return.

And just one more for me. There's some efficiency and other savings that's outlined in the 2026 guidance. Can you discuss what that includes? And then also as you build out the senior side, I mean, how are you thinking about the asset management side of that business, given as you move along the higher acuity spectrum, the operating intensiveness of that business obviously picks up? So just curious some of the puts and takes from an overhead perspective.

Yes. I'll begin by discussing the outlook and efficiencies in the 2026 guidance. The efficiencies mentioned primarily consist of items that will not occur as frequently in 2026, in contrast to certain items from 2025 that will not carry over into 2026. As Mark pointed out, the time we dedicated to refining our strategy and addressing several one-time items accounted for in our 2025 figures, which will not be repeated in 2026, is the main factor driving this.

Regarding your question about expanding into senior housing, our progress will depend on how quickly we can make investments, which may take longer than anticipated. We are also conscious about our staffing levels. The challenges of operating senior housing properties are well-known, and we hold those complexities in high regard. It is crucial for us to select strong partners whom we trust and can learn from. We acknowledge that we don’t have all the solutions, and we are prepared to learn from our experiences, including making mistakes. While we expect to make more positive decisions than negative, this will be a new line of business for us. Therefore, we are committed to managing our risks by thoroughly vetting our partners.

Our next question comes from the line of Wes Golladay with Baird.

I just want to build off Austin's last question. Maybe on the investment team, is that team for the senior side all built out now or mostly built out?

No, right now we're utilizing our investment team, and Alfonzo is here with us, dressed in senior housing attire. I think we could expand that team as we move forward. However, we already have some established relationships that we're currently working on.

Okay. And then when you look at how you want to approach it, I know it's early innings, but do you have a sense of how many operators you want to work with? Are you going to be more regionally focused? Will you target mainly new, I guess, developments? Would there be any potential for redevelopments? Just trying to get a little bit better sense on how you're approaching it.

Yes, that's a great question. Currently, we are concentrating on regional or single-market operators with a strong track record and primarily newer assets. As mentioned in our prepared remarks, we are focused on newer products as we believe this is where we can potentially differentiate ourselves. To answer your question, we aim to work with as few operators as possible, ensuring they are high-quality. However, if we can grow in size, it would be beneficial to have a group of operators with whom we can exchange ideas. That is our ambition for now.

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

I wanted to ask you on the portfolio allocation as you build your active adult portfolio, how would the allocation look like between medical office and the housing part?

Yes, that's a great question. A lot of that will depend on the opportunities we encounter. We’re not looking to stick to a specific allocation chart; instead, we will be flexible and respond to available opportunities. The active adult sector, particularly the 'modern active adult' segment, is relatively new and still quite niche compared to the larger seniors market. However, we are quite enthusiastic about the active space. So, we'll keep an eye on it. To be honest, I wouldn't want to make any predictions at this point.

Okay. And I guess for the acquisitions, should we expect primarily to be focused on active adult? Or would you be open to medical office as well?

I mean, as we said earlier, like everything competes on return. And today, active adult is winning that competition.

Just curious on the active adult, I think one of the prior callers had a question with regards to how we should be thinking about your entry there. I mean development historically is a drag until the asset leases up, although I recognize the lease-up is a lot shorter than in seniors housing. But are you guys getting a preferred return on the capital you're investing to kind of bridge the gap until the asset can start to cash flow? Or just how are you thinking about that segment of the opportunity set with active adult?

Yes, welcome back, Juan. We're glad to have you and appreciate your curiosity. The answer to your question about the first opportunity in Minneapolis is no, we are not receiving a preferred return. However, that is our goal for the future. The situation was interesting as they were already under construction and preferred a 50-50 arrangement, so we agreed to that. The amount involved was relatively small. We have done something similar at Centerspace with a build-core strategy that included a preferred element, and we would aim to pursue that again here. You can expect to see more of that approach, and we'll be mindful of the overall size and risk of that loan portfolio.

And then the medical office, there was a Steward bankruptcy last year, and you took some vacancy that was an opportunity as you relet that space. So just curious on the update on kind of the opportunity there, and how much has been backfilled? And how that has contributed or could contribute to growth in the core business today?

Yes. The Steward situation has been resolved. It involved the Cruse-Two asset and the Beaumont asset we discussed disposing of, along with one other small lease that is not significant for any major investments. We still have Prospect, which is ongoing. Our East Orange asset has been materially affected by this, so it's something we are still addressing.

Okay...

I'm sorry, Juan, say that again, forgive me.

No, I'm sorry. I was going to ask the Prospect that upside is still to come if you are able to backfill that?

Correct. Yes, that would show up today as negative NOI.

Okay. And then last question for me. Anything on the watch list to call out over and above the White Rock?

In the past, White Rock would have been the primary focus when people inquired about our watch list. We have a strong relationship with their entrepreneurial team and have confidence in their potential for success. However, at the moment, we are not spending significant time on anything beyond that.

And we have reached the end of the question-and-answer session. I'll now turn the call back over to CEO, Mark Decker, for closing comments.

Thanks very much. Well, thanks, everyone, for your time and attention, and we look forward to talking to you next quarter.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. Have a great day.