Earnings Call Transcript - XRN Q3 2025

Jamie Barber, General Counsel

Good morning, everyone, and welcome to Global Medical REIT's Third 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. 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 currently comparable GAAP numbers in the company's earnings release and in filings with the SEC. Additional information may 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.

Mark Decker, CEO

Thank you, Jamie. Good morning, everyone, and thank you for joining us today as we share the results of our first full quarter together as a management team. As you review our materials, I hope you'll find growing evidence of our focus on driving shareholder value. We're going to achieve this by delivering internal earnings growth, demonstrating disciplined capital allocation and capital markets acumen, and executing on external growth opportunities when they present themselves. The team was highly productive on each of these fronts during the third quarter. The portfolio performed well, posting 2.7% same-store NOI growth. This is our first quarter reporting on this key metric, and an improved focus on property performance will help our asset management team deliver stronger and more consistent results. On the balance sheet, we were able to address our upcoming debt maturities by recasting the revolver to 2029 and extending our $350 million Term Loan A and dividing the term loan into three distinct loans while extending our weighted average debt term by three years. Thanks again to our lending group and great work by our finance team. In investments, Alfonzo and the team have built a pipeline of highly desirable opportunities, which we will only act upon with a green light from the market. Our current cost of capital dictates that we will remain disciplined, pursuing only our highest conviction ideas and funding those transactions with proceeds from asset recycling, but we hope that will soon change. More broadly, our full team is in the midst of developing a strategic plan to deliver outsized shareholder return in the years ahead. We're excited to share more when we're able to. On the whole, it's been an outstanding first four months as a new team. I'm appreciative to everyone for their pedal-to-the-metal efforts. The journey is just beginning, but I'm ecstatic with our progress so far. Before passing the call to Bob, I'd like to comment on the large outpatient medical transaction recently announced by one of our public sector peers. First, the transaction demonstrates the meaningful institutional demand that exists for health care infrastructure assets, a huge plus for our existing owners. Second, we've been asked by many investors for a read-through on the mark-to-market value of our own real estate, which is a fair question. Answering that question requires agreement on what defines quality. We believe that quality assets are those that deliver cash flows that are predictable, reliable, and growing. By that yardstick, we like our portfolio quite a bit. The GMRE portfolio is 95% leased with over five years of remaining WAULT. Our leases have an embedded annual escalator of 2.1%, and this quarter’s 2.7% same-store print is repeatable and achieved without any carve-outs for redevelopments or assets that we don’t wish to count. We’ll let others speak to what that means in terms of cap rate, but any reasonable assumptions would indicate that we trade at a substantial discount to the fair value of our assets. Bob, can you please run through the numbers?

Robert Kiernan, CFO

Thank you, Mark. During the quarter, we delivered funds from operations of $14.5 million or $1 per share in unit. Adjusted funds from operations, which excludes straight-line rent among other noncash and nonrecurring items, was $16.2 million or $1.12 per share in unit. Each of these metrics grew 4% on a per share basis relative to the prior year equivalent. Year-to-date, funds available for distribution, which accounts for CapEx, tenant improvements, and leasing commissions, totaled $39.2 million, resulting in a payout ratio of 84% in our current annual dividend rate. In October, we amended our credit facility to extend the term of our revolver to October 2029 and to extend the term of our $350 million Term Loan A by breaking it up into three tranches with maturities ranging from October 2029 to April 2031. The amendment also removed the 10 basis point SOFR credit spread from all of our credit facility borrowings. We are extremely pleased with the execution of the facility amendment, and I would like to thank our lending group for their support and confidence. In connection with the credit facility amendment, we entered into forward-starting interest rate swaps to hedge the SOFR component of our Term Loan A through its new maturity dates. Based on the current leverage levels, the weighted average fixed rate on these new swaps will result in a weighted average effective interest rate of approximately 4.8%. It's important to note that our previously existing swaps on Term Loan A will remain in effect until the maturity in April of 2026. As discussed last quarter, we are also looking to expand our sources of debt capital to 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. This diversification, alongside our extended debt maturities and sound dividend coverage ratio, has fortified our balance sheet and marks an important step on our journey toward earning an investment-grade credit rating. Danica?

Danica Holley, COO

Thank you, Bob. The third quarter was a productive one for our asset management team, headlined by same-store NOI growth of 2.7% for our portfolio. This performance was supported by positive year-to-date absorption and the successful re-leasing of our 85,000 square foot facility in Beaumont, Texas that was previously leased to Steward Health. Beyond Beaumont, we're seeing positive leasing outcomes across the portfolio as high construction costs have constrained new supply, enhancing our leverage when negotiating lease renewals. We disposed of two assets during the quarter, including a 50,000 square foot freestanding health system administrative facility located in Aurora, Illinois. Following this disposition, our portfolio exposure to dedicated health system administrative space is reduced to less than 2% of total ABR. As of quarter-end, the GMRE portfolio was 95.2% leased with a remaining term of 5.3 years. We have strong visibility on our near-term leasing pipeline and expect occupancy to trend towards 96% at year-end. CapEx and leasing costs have totaled $9.7 million on a year-to-date basis, putting us in a position to land within our full year guidance range of between $12 million and $14 million. I would now like to turn the call over to Alfonzo to discuss our investments. Alfonzo?

Alfonzo Leon, CIO

Thank you, Danica. On the investments front, we have remained patient on new acquisitions in light of our cost of capital. Still, the team has been busy underwriting deals to keep an active pulse on the market, evaluating $11.5 billion in prospective transactions so far this year. This deal flow has provided us with a near-term pipeline of almost $500 million in potential deals at first year cash returns that blend to a 7.5% to 8% range. For now, execution on those deals will be limited to those which we can fund via asset recycling, but our team remains ready to pounce on this attractive market opportunity once we receive a green light from the capital markets. Mark?

Mark Decker, CEO

Thanks, Alfonzo. I've been involved in the outpatient medical sector since 2001, and I don't think the setup for our niche has ever been better. We're poised to benefit from increasing demand for outpatient services, rising construction costs that limit new supply and competitors that are either out of the game or have lots going on internally. GMRE has the right team and skill set to drive FFO and FAD earnings growth, especially if pricing power continues to come our way. That said, we know that we'll need to keep on executing to earn a currency that enables external growth, and we're ready and excited to do that work. Operator, let's open it up for Q&A.

Operator, Operator

Your first question today will come from Wes Golladay with Baird.

Wesley Golladay, Analyst

I have a question about the positive leasing momentum you mentioned. Can you provide details on the pipeline of leases that you have signed but have not yet started generating rent in the coming quarters? Do you have an annualized base rent figure for that?

Mark Decker, CEO

I don't know that we have an exact ABR number, but Danica, do you want to speak to that?

Danica Holley, COO

Yes. I think in terms of an exact ABR number, I'm not sort of comfortable nailing that exactly down, but I would give you encouragement that the performance of the portfolio will continue to be consistent with what we reported out this quarter and that there's no surprises or any sort of bogeys in there. So I hope you're able to sort of go from that.

Wesley Golladay, Analyst

Okay. Regarding the potential for sourcing insurance debt, do you have a framework for considering the timing of when you might pursue that?

Mark Decker, CEO

Yes, Wes, I mean, honestly, I think it would be to our benefit to have it sooner rather than later. It's just another market and another place where we could get financing, and it allows us to go past five years. So I mean we have urgency around it, but I mean, the trick is it's sort of binary. We're either able to access the market or not, and it comes down to the view of our credit. It's our belief and expectation that the counterparty will price us like kind of a BBB- credit. And so if and when we can get that as we work through it, we will. And if we can't, we'll have to do a few things here and there to get ourselves in position for that, including possibly going to the agencies. But we feel like it's within reach to get that done.

Operator, Operator

And your next question today will come from Juan Sanabria with BMO Capital Markets.

Robin Haneland, Analyst

This is Robin Haneland sitting in for Juan. I was curious what drove the occupancy increase during the quarter? And then on top of that, is it the year-end occupancy of 96% that is driving the sequential benefit to FFO in the fourth quarter or something else?

Mark Decker, CEO

Yes. On the occupancy, I mean, it was mainly just driven by selling the empty facility at Aurora. That's the kind of math of it. And in terms of sequential Q4, it's probably the benefit of CHRISTUS, but I don't know, Bob, do you want to chime in?

Robert Kiernan, CFO

From an occupancy perspective, the fourth quarter will include lease-ups. We expect several lease-ups to occur during this time. Regarding earnings, we anticipate that CHRISTUS will continue to contribute positively to property NOI in the fourth quarter. This will be our first complete quarter with those figures included, and we plan to maintain that trend.

Robin Haneland, Analyst

And then on the acquisition front, how low do you think leverage would have to get for you to look to flip to being a net acquirer? And what scale could you possibly be a net buyer?

Mark Decker, CEO

Yes. I think our near-term target for leverage is below 6x. Ideally, we would like to fund projects with permanent capital, then draw on our line of credit and repay it with that permanent capital and some long-term debt. However, we're not at that point yet. If we had access to capital, we could potentially deploy between $200 million and $500 million in external growth annually, which would be compelling both mathematically and in terms of enhancing the overall quality of the business. For now, our goal is to reduce leverage and fund growth through recycling.

Robin Haneland, Analyst

On the topic of recycling and deleveraging here, could you maybe just help us understand the quantum of assets you're considering selling? And maybe like any rough expectations on yields would be helpful.

Mark Decker, CEO

Yes, it really depends on type, but I'd say we have some things that we think would sell in the low 6s and others that we would put probably closer to 7, and we would be seeking to redeploy that kind of plus 100 to 200 basis points, taking the two ends of those spectrums.

Operator, Operator

And your next question today will come from Austin Wurschmidt with KeyBanc Capital Markets.

Austin Wurschmidt, Analyst

So Mark or Alfonzo, you highlighted the pipeline of acquisition opportunities as much as $500 million that sort of meet that criteria in the 7.5% to 8% cap rate range. I mean, how big is the disposition pipeline today that you think that you could sort of execute on that, maybe the near-term opportunity of capital recycling at a positive spread?

Mark Decker, CEO

I think in the near term, it's probably between 50 to 100, and we could probably do more, but it all depends on getting the right sales. We have a lot of triple net leases that we need to manage to facilitate the sales and purchases we want. Everything we currently have is salable; it's just about managing the leverage, earnings, and other factors. I would say we won't reach that $500 million without some significant changes. My hope is that we could achieve 20% to 40% of that. Pipelines evolve, so if we have something lined up now, we can't proceed unless we have a sale nearly finalized.

Austin Wurschmidt, Analyst

Fair enough. Are there other assets in that disposition pool that are underleased or the lease yield is meaningfully below where it kind of helps both deleverage as well as allows you to reinvest at a positive spread?

Mark Decker, CEO

The more likely scenario is that the underleased assets probably aren't as attractive for sale. So, our best sales will likely be the well-leased, stable items. Additionally, the way our leverage is calculated in our facility is based on a gross book basis. For example, if we purchase an asset for $1 and sell it for $1.15, we would be reducing our leverage slightly on the margin. This situation could work both ways for us. So, while there may be some possibility of it happening, it's more likely that we'll see movement with the fuller assets rather than the opportunistic ones.

Austin Wurschmidt, Analyst

Appreciate it. And then maybe the last one. You mentioned the team is in the early stages of developing the strategic plan. But since you teased out the idea, anything you can share for just the central tenants of the plan at kind of a high level?

Mark Decker, CEO

Yes. I mean, honestly, the central tenants will be unsurprising to you. It will be about capital allocation and balance sheet management and just execution. But yes, I guess I'd rather wait. But I don't think there'll be a huge reveal. We're not going to start getting into the metal stamping business or anything like that, or data centers. We'll be focused on kind of what we would call health care infrastructure.

Operator, Operator

And the next question will come from Rob Stevenson with Janney.

Robert Stevenson, Analyst

Bob, is the implied fourth quarter guidance $1.13 to $1.23? If I'm calculating correctly, considering the $0.10 range you mentioned, you indicated that lease-ups will contribute to fourth quarter earnings. Is that the main factor, or are there other elements at play? It seems like it requires over $700,000 sequentially just to reach the midpoint of that range.

Robert Kiernan, CFO

I believe there are several factors at play, Rob. While the lease-up activity is certainly a part of it, there are many variables to consider. It's challenging to pinpoint any specific one. From a run rate perspective, the current AFFO run rate indicates that the incremental growth may be slightly lower than what you're suggesting is needed to reach that target range. However, we have various opportunities for both rent growth and cost management that could help us achieve that range.

Robert Stevenson, Analyst

Okay. It appears that from the supplemental information, you have $3.37 of 9-month AFFO, and the guidance is between $4.50 and $4.60. My calculations seem off because this looks like a significant increase sequentially, even though you aren't experiencing a major change in occupancy since there isn't much vacancy.

Robert Kiernan, CFO

One additional aspect to consider is interest. With the current rate reductions, we expect to see an increase in our earnings. Additionally, as part of the credit facility refinancing, we are no longer affected by the 10 basis points SOFR credit spread adjustment. This is another factor contributing to our overall performance.

Robert Stevenson, Analyst

Okay. And then I don't know who's best to answer the question, but you guys talk about the tenant credit watch list today. I mean, even if it's not who's on it, but is that watch list expanding, shrinking? How should we be thinking about that at this point in time, given some of the re-tenanting, given a couple of sales, etc.? And how are you guys thinking about that internally?

Mark Decker, CEO

I would say overall, it's shrinking. Our main concerns are Steward and Prospect. We're closely monitoring our tenants as much as possible. That situation was significant for us. Currently, we do not have any issues developing that we are aware of.

Robert Stevenson, Analyst

Okay. And then just one final question from me. Mark, what are your thoughts and the Board's thoughts about preferred equity? Do you view it as expensive debt or quasi-equity? Is it something related to the common equity that you might consider expanding, either by reopening existing issuances or creating a new one to finance it? How do you assess that capital structure, especially if common equity remains at its current level for an extended period?

Mark Decker, CEO

Yes, I'm quite surprised by the current status of the common stock, but I believe we are in a decent position. The REIT market overall is facing significant challenges, and we are among those facing the toughest conditions regarding earnings multiples. However, I favor preferred stock because I view it as equity, and I will defend this perspective vigorously. Since we are not obligated to repay it, I struggle to categorize it as debt. In our capital structure, I believe it could currently be viewed as attractive equity. Therefore, it's certainly something we would contemplate. I would also suggest that those who disagree with this perspective likely do not own our stock at this moment.

Operator, Operator

And the next question will come from Gaurav Mehta with Alliance Global Partners.

Gaurav Mehta, Analyst

I wanted to ask you on your occupancy comments. I think you mentioned 96% by year-end from 95.2% as of this quarter. Does that assume any sale of any vacant property?

Mark Decker, CEO

No.

Gaurav Mehta, Analyst

Okay. And so when you say 96%, does that mean that the tenants are paying the rent? Or is it like you're signing 96% and tenants will probably start paying the rents later?

Mark Decker, CEO

Thank you for the question, Gaurav. These are leases we have in progress, and we're currently negotiating. We expect that the leases will be finalized by the end of the year. Additionally, we did sell a small building, although it won’t significantly impact our occupancy rates. So I take back my earlier statement; we did actually sell a very small asset just yesterday.

Gaurav Mehta, Analyst

Understood. And as a follow-up on the G&A for fourth quarter, should we expect that to be in line with where third quarter was?

Robert Kiernan, CFO

Gaurav, yes, from a cash G&A perspective, we're forecasting in that same type of range and similar on the cash.

Operator, Operator

And your next question today will come from John Massocca with B. Riley.

John Massocca, Analyst

Maybe thinking about the buyback and kind of where your stock is trading today, as you look at dispositions and kind of capital recycling, how are you kind of thinking about utilizing the buyback, paying down debt or actually buying assets? I mean, kind of where are we today maybe within those three options?

Mark Decker, CEO

Yes, that's a good question. The stock is quite appealing at the moment. We're trading at over a 9% implied cap, and we haven't found a portfolio with so much available information for that price, making it an attractive option. Permanent capital is valuable to us, and we intend to preserve it. However, the market seems to be suggesting we should sell assets and repurchase our stock, which we are considering. We previously mentioned our approach to the buyback on a leverage-neutral basis. Ideally, we would like to make progress on all fronts: reduce leverage, buy back some stock, and acquire accretive assets. That summarizes what we're generally aiming for.

John Massocca, Analyst

As we consider the strategic plan, is there an opportunity to sell significant portions of assets within the portfolio? Or should we anticipate that the liquidation activity in the near term will be more incremental, similar to previous quarters?

Mark Decker, CEO

I think it's possible we could sell large portions. It's really about finding a buyer that we feel comfortable with. The larger the deal, the more complicated it becomes because it has a significant impact on our corporate financials. So we need to time it well.

John Massocca, Analyst

And then longer term, particularly as you're thinking about kind of strategy for GMRE, is there potential to do investments maybe outside of the traditional aperture or traditional focus of MOB? What are your kind of big longer-term thoughts on where you want to focus property-level investments?

Mark Decker, CEO

Yes. I mean, I think that's a great question. I think the long term for us, I mean, we're trying to manufacture the best cash flow stream we can. And by that, we mean really FAD and ideally free cash flow generated back to the company to start to fund some internal growth, which we're really able to do for the first time, I think, in the company's history this quarter, albeit a modest amount. And so I think we would look at health care broadly, and we're not, I think, in most people's definition, a pure-play MOB or we're not pure-play medical office already. And I think that's an opportunity. And so yes, we are exploring that. And I'd say thinking where else in health care, we think we could craft an edge. Where I think our sort of strength as an investment team is, and I think this is real, is we have some very thoughtful folks that know the business well and really go deep on underwriting, and those are skills that are transferable.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mark Decker for any closing remarks.

Mark Decker, CEO

I'll just pause on to thank everyone for spending time with us this morning. And hopefully, we'll see you this winter. Thanks so much.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.