GMRE - NYSE

Good day, and welcome to the Global Medical REIT Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like 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 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.

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 3 distinct loans while extending our weighted average debt term by 3 years. Thanks again to our lending group and great work by our finance team. In investments, Alfonzo and 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 4 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 5 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?

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 3 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, 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?

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 2 assets during the quarter, including 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?

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?

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 Instructions] your first question today will come from Wes Golladay with Baird.

I have a question on the -- you talked about the positive leasing momentum. Can you talk about the pipeline of leases that you have signed but will still need to commence rent over the next few quarters? Would you have like an ABR number for that?

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

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.

Okay. And then when you look at -- you mentioned about maybe sourcing insurance debt. Would you have, I guess, a framework for thinking about timing of when you may pursue that?

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 5 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.

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

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?

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?

From an occupancy perspective, Q4 will have lease-up in it. We've got a number of lease-ups that are projected to come in during the fourth quarter. From an earnings perspective, we'll continue -- I think it is CHRISTUS, from a property NOI perspective, again, continuing that into the fourth quarter. This was our first full quarter with that in the numbers and we'll continue on that path.

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?

Yes. I think, Robin, for how low do we want to leverage, I mean, our overall target leverage, I'd say, in the near term is sub-6x. And ideally, we could be in a spot where we could fund with permanent capital and then put it on our line, take it off with permanent capital and some longer-term debt would be an ideal state. We're not there today. I mean if we had access to capital, I think we could easily put $200 million to $500 million of external growth up per year and that would be mathematically compelling, I think, and as well as just improving the overall quality of the business. But for now, we're going to be kind of -- we're going to get a little bit less levered ideally and then probably be funding from recycling.

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.

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 2 ends of those spectrums.

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

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?

I think near term, it's probably 50 to 100, and we could probably do more -- I mean it all depends, Austin, because we have to get the sale we like. And so it's a lot of triple net leases that we have to kind of pull off to get the sales and the buys we like. But I mean, everything we have, I think, is salable. It's just a question of trying to manage it all together, the leverage, earnings and so forth. But I'd say we won't get at that $500 million in full without some meaningful change. So my guess is -- my hope would be we get 20% to 40% of that done. Pipelines, as you know, evolve. So if we have something nailed down now, we can't move on unless we have a sale pretty close to wind up.

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?

The more likely scenario is, I'd say the underleased ones probably aren't as attractive a sale candidate. So our best sales will be well leased sort of sleep at night type items. And we actually probably will get -- I mean the way our leverage is counted in our facility is actually on a gross book basis. So if we bought something for $1 and we sold it for $1.15 as an example, we'd actually be chipping away a little bit more at our leverage just on the margin. So that would work kind of both ways for us. So yes, I'd say there's a little of that possible but it's more likely the fuller assets, not the opportunistic ones.

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?

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 in kind of what we would call health care infrastructure.

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

Bob, how much -- so the implied fourth quarter guidance is $1.13 to $1.23, if I'm doing my math right. When you're taking a look at that sort of $0.10 range, you talked about lease-ups benefiting fourth quarter earnings, but is that basically the predominant driver? Or is there some other stuff in there? Because that's like $700,000 plus sequentially just to get you to the midpoint of that.

I think it's a combination of things, Rob, but it's certainly -- I mean, it's some elements of the lease-up activity. It's -- there's a number of moving pieces to it. So it's really hard to flag any in particular. But from a run rate perspective, this -- the run rate that we're on from an AFFO perspective, this quarter, the incremental growth, I think the number is maybe a little bit lower than what you're citing in terms of what we need to get towards that range. But we have a number of opportunities from both rent growth and also from a cost side to fall into that range.

Okay. Because I mean, it looks like from the supplemental that you guys are $3.37 of 9-month AFFO and the guidance is $4.50 to $4.60. So my math is failing me here is that it just seemed like a big jump sequentially even if you got -- because you -- it's not like you're going from 80% occupancy to 95% or some sort of huge jump because you don't have that much vacancy.

The one other piece to keep in mind is interest also. I mean with the curve -- with some of the rate reductions that are there, that does have a pickup for us. The credit facility refinancing, we also pick up -- we no longer are subject to the 10 bps SOFR credit spread adjustment. So that's a piece there as well.

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, et cetera? And how are you guys thinking about that internally?

I mean I'd say on the whole, Rob, it's shrinking. Our 2 main issues there, we're obviously Steward and Prospect. And I mean, we're always watching what our tenants are doing obviously to the extent we can. But those -- that was a pretty good size event for us. And for the portfolio, we don't have anything brewing that we're aware of at this time.

Okay. And then just last one for me. Mark, how are you and the Board thinking about preferred? Is that to you guys, is that expensive debt? Is that quasi-equity? Is that something with the common here that you could expand either reopening the existing or a new issuance to fund? How are you thinking about that capital stack, assuming that the -- if the common equity stays here for any prolonged period of time?

Yes. Candidly, I'm amazed at where the common is, but I guess we're in a decent company. The REIT market as a whole is pretty challenged. And among them, we are some of the most challenged as it relates to earnings multiples. But Listen, I like preferred. I think it is equity and I will go to my grave arguing that with anyone. It's -- we don't have to pay it back. So I can't understand how it would be debt. And in our capital stack, I think it's possible today that would be attractive equity. So I mean, I'd say it's definitely something we'd consider. And I would say the people who would argue with us that this said don't probably own our stock right now anyway. So...

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

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?

No.

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?

Those are all -- Gaurav, thanks for the question. It's really -- those are kind of leases that are underway. We're trading paper. So those are situations where we have a line of sight and have belief that it will get -- the lease will get signed by the end of the year. And by the way, I think we did sell one small building, although it wouldn't meaningfully move occupancy. So I retract my firm no. I think we sold a very small asset actually just yesterday. So...

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?

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

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

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 3 options?

Yes. Good question. Look, the stock is really attractive right now. We're trading over a 9% cap on an implied basis and that we can't find a portfolio that we have so much information on for that price. So that's a very attractive option. Obviously, that's permanent capital. It's precious. We have a lot of respect for that and are not trying to shrink it. But if -- but you could say the universe is telling us to sell assets and buy our stock back, and that's certainly under consideration, we'd want to do it. I think we talked about when we announced the buyback on a leverage-neutral basis. And just -- yes, so I guess I'd say that. So I mean, ideally, we could do a little from each delever, buy some stock back, buy some assets that are accretive, that would be ideal. That's what I'd say we're working on generally.

As we think about and this maybe even be part of the strategic plan, I mean, is there an opportunity set to sell big chunks of assets within the portfolio? Or should we expect kind of disposition activity near term to be kind of granular like it has been in quarters past?

I think it's possible we could do big chunks. I mean it's just about getting a buyer you like. And I'd say the bigger it is, just the more complex it is because it really -- it really affects our corporate math. So -- kind of time that well.

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?

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.

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

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.