Global Medical REIT Inc. (GMRE) Q3 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call highlights strong occupancy projections and strategic asset management, with plans to redeploy capital at positive spreads. Despite a dividend reduction, the focus on growth initiatives and asset recycling is promising. The Q&A reveals management's proactive approach to leverage and asset sales, with potential for significant acquisitions. While some management responses lacked specificity, the overall sentiment is positive due to strong operational metrics and strategic planning.

Key Financial Performance

Same-store NOI growth 2.7% year-over-year. This growth is attributed to improved property performance and positive year-to-date absorption, including successful re-leasing of a major facility in Beaumont, Texas.

Funds from operations (FFO) $14.5 million or $1 per share, a 4% increase year-over-year. The growth is due to improved operational performance.

Adjusted funds from operations (AFFO) $16.2 million or $1.12 per share, a 4% increase year-over-year. This excludes straight-line rent and other noncash/nonrecurring items.

Funds available for distribution (FAD) $39.2 million year-to-date, resulting in a payout ratio of 84%. This metric accounts for CapEx, tenant improvements, and leasing commissions.

Portfolio occupancy rate 95.2% with a remaining lease term of 5.3 years. Positive leasing outcomes and high construction costs limiting new supply contributed to this rate.

CapEx and leasing costs $9.7 million year-to-date. This is within the expected full-year guidance range of $12 million to $14 million.

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Operating Highlights

Market demand for healthcare infrastructure assets: The company highlighted the significant institutional demand for healthcare infrastructure assets, which is a positive indicator for their existing portfolio.

Outpatient medical sector outlook: The company is optimistic about the outpatient medical sector, citing increasing demand for outpatient services, rising construction costs limiting new supply, and reduced competition.

Same-store NOI growth: The portfolio achieved a 2.7% same-store NOI growth, supported by positive absorption and successful re-leasing efforts.

Leasing and occupancy: The portfolio is 95.2% leased with a remaining term of 5.3 years, and occupancy is expected to trend towards 96% by year-end.

Debt management: The company extended its revolver to 2029 and restructured its $350 million Term Loan A into three tranches with maturities up to 2031, improving its weighted average debt term by 3 years.

Cost management: Year-to-date CapEx and leasing costs totaled $9.7 million, aligning with the full-year guidance range of $12 million to $14 million.

Strategic plan development: The company is developing a strategic plan aimed at delivering outsized shareholder returns in the coming years.

Investment strategy: The company is focusing on disciplined capital allocation, pursuing high-conviction ideas funded through asset recycling, and maintaining readiness to act on market opportunities.

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Risk or Challenges

Debt Maturities and Cost of Capital: The company has upcoming debt maturities, which it addressed by recasting the revolver to 2029 and extending the $350 million Term Loan A. However, the current cost of capital limits the ability to pursue new acquisitions, requiring disciplined capital allocation and reliance on asset recycling.

Leasing and Occupancy Risks: While the portfolio is 95.2% leased with a remaining term of 5.3 years, there is a dependency on positive leasing outcomes and constrained new supply to maintain or improve occupancy levels. Any adverse changes in these factors could impact financial performance.

Interest Rate Exposure: The company has entered into forward starting interest rate swaps to hedge the SOFR component of Term Loan A, but rising interest rates or changes in leverage levels could still impact the weighted average effective interest rate and financial stability.

Market Conditions and Capital Markets: The ability to execute on new deals is contingent on favorable capital market conditions. Current market dynamics require the company to remain patient and disciplined, which could delay growth opportunities.

Strategic Execution Risks: The company is in the process of developing a strategic plan to deliver outsized shareholder returns. However, the success of this plan depends on effective execution and favorable market conditions.

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Guidance & Outlook

Debt Maturity and Credit Facility: The company has extended the term of its revolver to October 2029 and its $350 million Term Loan A into three tranches with maturities ranging from October 2029 to April 2031. Forward starting interest rate swaps have been entered to hedge the SOFR component of Term Loan A, resulting in a weighted average effective interest rate of approximately 4.8%. The company is also diversifying its sources of debt capital to include longer-term debt providers such as insurance companies, aiming to improve earnings quality and access to debt capital. These steps are part of the company's journey toward earning an investment-grade credit rating.

Leasing and Occupancy: The company expects occupancy to trend towards 96% by year-end, supported by positive leasing outcomes and constrained new supply due to high construction costs. Year-to-date CapEx and leasing costs are expected to land within the full-year guidance range of $12 million to $14 million.

Investment Pipeline: The company has evaluated $11.5 billion in prospective transactions this year, resulting in a near-term pipeline of almost $500 million in potential deals with first-year cash returns blending to a 7.5% to 8% range. Execution on these deals will be limited to those fundable via asset recycling until capital market conditions improve.

Market Trends and Strategic Positioning: The company is poised to benefit from increasing demand for outpatient services, rising construction costs limiting new supply, and reduced competition. The management team is focused on driving FFO and FAD earnings growth and is prepared to capitalize on market opportunities as they arise.

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Shareholder Return Plan

Funds available for distribution: Year-to-date funds available for distribution totaled $39.2 million, resulting in a payout ratio of 84% in the current annual dividend rate.

Dividend coverage ratio: The company has a sound dividend coverage ratio, supported by extended debt maturities and diversification of debt capital sources.

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Key Q&A

Q: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 an ABR number for that?

A:Management did not provide an exact ABR number. Danica Holley mentioned that the portfolio's performance will remain consistent with the current quarter and there are no surprises or issues.

Q:When you look at sourcing insurance debt, would you have a framework for thinking about timing of when you may pursue that?

A:Mark Decker stated that they aim to pursue it sooner rather than later, as it provides financing options beyond 5 years. However, accessing the market depends on their credit view, and they believe they could be priced as a BBB- credit. If not achievable, they may consider other options like going to agencies.

Q:What drove the occupancy increase during the quarter? Is the year-end occupancy of 96% driving the sequential benefit to FFO in the fourth quarter or something else?

A:The occupancy increase was mainly due to selling the empty facility at Aurora. Sequential Q4 benefits are attributed to lease-ups and the contribution of CHRISTUS, which was fully reflected in the numbers this quarter.

Q: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? What scale could you possibly be a net buyer?

A:Mark Decker mentioned a near-term target leverage of sub-6x. Ideally, they would fund with permanent capital and longer-term debt. If they had access to capital, they could achieve $200 million to $500 million of external growth per year. For now, they aim to deleverage and fund through recycling.

Q:Could you help us understand the quantum of assets you're considering selling and any rough expectations on yields?

A:Mark Decker stated that asset sales depend on type, with yields ranging from low 6s to closer to 7. They aim to redeploy at a positive spread of 100 to 200 basis points.

Q:How big is the disposition pipeline today, and could you execute on near-term capital recycling at a positive spread?

A:The near-term disposition pipeline is $50 to $100 million, with potential for more depending on sales. They aim to manage leverage and earnings while targeting 20% to 40% of the $500 million acquisition pipeline.

Q:Are there other assets in the disposition pool that are underleased or have lease yields meaningfully below where it helps deleverage and reinvest at a positive spread?

A:Underleased assets are less attractive for sale. The best sales are well-leased assets. Selling assets at a gain could help reduce leverage on a gross book basis.

Q:Can you share any central tenants of the strategic plan you are developing?

A:Mark Decker mentioned the plan will focus on capital allocation, balance sheet management, and execution. No major changes in business focus are expected.

Q:How much of the implied fourth quarter guidance is driven by lease-ups, and are there other factors?

A:Lease-ups are a significant driver, but other factors include rent growth, cost management, and interest rate reductions. The credit facility refinancing also contributes to the guidance range.

Q:Is the tenant credit watch list expanding or shrinking, and how are you managing it?

A:The watch list is shrinking, with Steward and Prospect being the main issues. Management is monitoring tenants closely and is not aware of any brewing issues.

Q:How are you and the Board thinking about preferred equity in the capital stack?

A:Mark Decker views preferred equity as equity, not debt, and considers it attractive. It is a potential option for funding, especially given the current challenges in the REIT market.

Q:Does the year-end occupancy of 96% assume any sale of vacant property?

A:The 96% occupancy does not assume significant sales of vacant property. It reflects leases underway and expected to be signed by year-end. A small asset sale occurred recently but does not meaningfully impact occupancy.

Q:Should G&A for the fourth quarter be in line with the third quarter?

A:Yes, cash G&A for the fourth quarter is expected to be in line with the third quarter.

Q:How are you thinking about utilizing the buyback, paying down debt, or buying assets?

A:The stock is attractive at current levels, and management is considering selling assets to buy back stock on a leverage-neutral basis. Ideally, they aim to deleverage, buy back stock, and acquire accretive assets.

Q:Is there an opportunity to sell big chunks of assets, or will disposition activity remain granular?

A:Selling big chunks of assets is possible but depends on finding suitable buyers. Larger sales are more complex and impact corporate math.

Q:Are there potential investments outside of traditional MOB, and what are your long-term thoughts on property-level investments?

A:Management is exploring broader healthcare investments beyond traditional MOB. They aim to craft an edge in healthcare and focus on generating free cash flow to fund internal growth.

Q:Review of Unclear Management Responses

A:Management avoided providing a direct answer to the exact ABR number for signed leases yet to commence rent. Additionally, the strategic plan details were not fully disclosed, and responses to some questions, such as the tenant credit watch list and preferred equity, included general statements without specific details.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

GMRE Transcript

Global Medical REIT Inc. (GMRE) Q3 2025 Earnings Call Transcript

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The earnings call presented mixed signals: a dividend reduction and occupancy decline are concerning, but strategic asset recycling and growth initiatives offer potential upside. The Q&A revealed uncertainties in refinancing and asset disposition, while management's lack of clarity on certain issues adds risk. Overall, the balance of positive and negative factors suggests a neutral stock price movement.

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GMRE Slides

Global Medical REIT Q1 2025 slides: EPS improves as portfolio expansion continues

2025-05-07

Global Medical REIT Q2 2025 slides: rental revenue climbs amid strategic acquisitions

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GMRE Report

Global Medical REIT Inc. 10-Q

10-Q

2024-08-07

Global Medical REIT Inc. 10-Q

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2024-05-08

Global Medical REIT Inc. 10-K

10-K

2024-02-28

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