Q3 2019 Earnings Call

Welcome to community, that's scary trials to touch 19, a third quarter earnings release conference calls.

The call today, the company will discuss it's your child's a 19 at CIRCOR. That's when I try resolved. It will also discuss progress made in various aspects of each business.

Following their remarks, the phone lines would be all but my question answer session.

The Companys earnings release, what seems to be <unk> last evening, that's what some people sit on its website www dot the C.H.C.T.

Our E G.

The company wants to emphasize the but some of the information that may be discussing this school based on information as of today amended the six in 2019 and may contain forward looking statements that involve risks and uncertainty.

Actual results may differ materially from those set forth in such statements.

Our discussion these risks and uncertainties you should review the company's disclosures regarding forward looking statements any earnings release as well as its risk factors and that's the eight units SEC filings.

The company undertakes no obligation to update forward looking statements, whether that's the results of new information future developments or otherwise, except as may be required bubble.

During this call the company will discuss GAAP and non-GAAP financial measures.

Every conservation between the two is available in needs earnings release, which is posted on its website.

Well, but keep the boss advised that these conference call expand recorded for playback purposes.

An archive of the cool would've been made available on the company's Investor Relations website for approximately 30 days and his departure of the company.

This call may not be recorded or otherwise it would produce what distribute it with all the companies probably you'll reach information.

No I would love to tender coal, but to do much you want US Chairman Chief Executive Officer, and President of community That's got troughs incorporated.

Thank you operator your morning, Thank you for joining us today for our 2019 third quarter conference call Oh.

Oh go with me today, they are pretty our Chief Financial Officer Page Barton, our Chief operating officer, and land stack, our Chief Accounting Officer.

As is our money process, our earnings announcement and supplemental data report or were released last night and so with an 8-K and our quarterly report on Form 10-Q was also filed last night.

In addition, we filed documents to refresh our ATM program that they will grow over in more detail in his comments.

Before we get in paranormal discussion I would like a corner had a couple of many pages in our supplemental data report.

We have had several questions on how we calculate our weighted average shares. So we added a new page five the that supplemental data report that shows how they are calculated.

In addition, we have added an analysis.

Our named officers compensation on page eight.

Indicating how much of our compensation is performance based.

We believe it is important for our stakeholders to understand the mix between our base salary and incentive compensation and have provided this information because some constituent have not been able to understand how much performance based compensation we have.

Now back to the normal stuff, we were very busy during the third quarter. However, it was basically business as usual.

As you know we haven't active ATM program in place during the third quarter. The company issued 690309 shares of common stock through its ATM program at an average gross sales price of $42.70 per share.

We received net proceeds of approximately $28.5 million at an approximate 3.94% current equity deal.

During the third quarter were acquired three properties with a total of approximately 130000 square feet.

For purchase price of approximately $52.6 million.

These properties were 100% leased with leases rolling through 2034.

And anticipated returns a man to 11%.

So far in the fourth quarter, we have acquired seven properties with a total of approximately 114000 square feet for purchase price of approximately $34.8 million.

These properties are 100% leased with leases running through 2034 and anticipated I know returns of 9.23% to 11%.

We have three additional properties under definitive purchase and sale agreements to be acquired after completion occupancy for an aggregate expected investment of $68 million.

The expected return on these investments should range up to 11%.

Expect things to be completed and close out through mid 2020.

[noise], we continue to have many properties under review and have signed term sheets on several properties with anticipated returns a man to 10%.

We anticipate having enough availability on our revolver to fund our acquisitions and we expect to continue to opportunistically utilize the ATM to strategically access the equity markets.

[noise] occupancy declined slightly during the third quarter as we signed agreements to terminate a couple of tenants leases during the quarter.

As part of our active asset management.

We have had issues with these tenants since we acquired the properties they were in and determined it was better to terminate the leases and seek new tenants.

We continue to say a lot of activity on the leasing for and believe we will see the occupancy level pick up over the next few quarters.

Do a combination of new an extended leases and our acquisitions, we have been able to increase our weighted average remaining lease term to approximately 7.7 years. If you recall. This was approximately 4.3 years at the time of our IPO.

On another fraud, we declared our dividend for the third quarter and raised it to 41.5 cents for sure.

This equates to an annualized dividend of $1.66 cents.

And I continue to be proud to say, we have raised our dividend every quarter since our IPO.

Before I finish my comments I would like to give an update on pilot hospital. The process of transitioning continues to new operators managing Highland and is preparing for the transfer lexingtons unrelated items customary for these types of transactions.

As we indicated in our release, how hospital will actually be the subject of a prepackaged bankruptcy with an anticipated sale to the new operator to expedite and facilitate the transfer of licenses.

We have tried to do this without the bankruptcy, but with [laughter] four of the best the biggest law firms and Nashville involved in the process, we determined that the easiest in quickest way to get it done.

We do not expect our cash flow from having to change as we continue to collect monthly payments roughly equivalent to what we should be collected.

Obviously, there are various contingencies in my slicker, such that the outcome could be different than what we think now but we believe we have addressed the situation as best we can.

I believe that takes care of the Adams I wanted to cover so hand things off today's recovered enough.

Great. Thanks, Tim.

Before jumping into the financial results I wanted to make everyone aware of a couple of items first we have posted our board approved environmental social and governance for E.S.G. guidelines to our website, which is www dot T.H.C.T. Dot Harvey I T under the governance.

Corporate governance tab.

More to come on this topic in the upcoming quarters second as Tim mentioned, we have filed our new form S. Three shelf registration statement as well as the prospectus supplement for the issuance of up to $360 million of common stock through our ATM program as always please refer to.

Through our website or FCC dot Gov for these and other filings referred to on this call.

Now onto the financial results as Tim said, we continue to see positive growth momentum in our business specifically revenue grew from 14.3 million in the second quarter to 16.3 million in the third quarter, representing 14% sequential growth growth for the same period in 2018.

He was 12 revenue rather for the same period in 2018 was 12.6 million representing 29% growth over the same period last year.

Our acquisitions closed relatively early in the quarter. So we picked up most of their impact in our third quarter results that said, giving pro forma effect to these acquisitions is though they claim closed on day one of the quarter total revenue would have increased by slightly over 400000 dollar.

<unk>, resulting in total revenue of approximately 16.7 million for the third quarter.

From an expense perspective property operating expenses increased quarter over quarter from 2.993 million to 3.327 million or 11.2% of which approximately half was related to property tax appeals lost on a handful of properties.

And the remaining increase related to newly acquired properties as well as normal fluctuations in operating expenses on the remaining portfolio.

DNA increased approximately 265000.

Driven primarily by increases in amortization of deferred comp and expenses related to recruiting new employees.

We expect DNA to moderate from this quarter, but continue to increase slightly over our fourth quarter run rate as we grow our property base add new employees and meet FCC requirements of being a large accelerated filer by the end of the year.

Finally, I'm pleased to report that funds from operations for the third quarter of 2019 grew to 8.5 million from 7.4 million in the second quarter were 14.2% sequentially adjusted funds from operations or FFO, which adjusts for straight line rent and stock.

Based compensation totaled 8.9 million were 46 cents per diluted share compared with second quarter 2019 of 7.9 million or 42 cents per diluted share.

And from a pro forma perspective, if all the 2019 third quarter acquisitions occurred on the first day of the third quarter AFFO would have increased by approximately $200000 to a pro forma total of 9.1 million increasing asset, though to 47 cents per share.

Sure.

That's all I have from a numbers perspective, operator, we're ready to start the question and answer session.

[noise], we will now begin the question and answer session to ask a question you May Press Star then one I guess, that's that's fun.

He said I saw your question it's been address.

Your question. Please press Star then too.

This question it sounds Sheila Mcgrath with Evercore ISI. Please go ahead.

I guess good morning, I tend to have the three acquisitions in third quarter, where over 15 million I was wondering if you could give us a little bit more detail on the inpatient rehab facility and Texas and the behavioral <unk> facility for 27, and a half million just competition for the larger assets what kind of.

At least tremor and can bring them.

Good morning favor thanks for the questions.

And both of those acquisitions are part of our programmatic.

Relationships, so basically we haven't seen any competition with them.

We are involved with these operators from the beginning thought process in.

Our involved with the banks as they do the construction financing and then we do the take up after construction completion and occupancy. So I mean, that's part of our programmatic basis and were very you know we continue to be excited about about where we have in that that range and don't think that we're going to see any competition because.

Of the way that we do things and our understanding of what these operators are trying to do yeah. We feel like we're we're giving them a very desirable service in they enjoy it.

So I mean does those those are those properties are leased under 15 year Triple net master leases or so they go through 2034 and they provide very very nice returns to us and have other provisions in them that then.

We like very much.

Okay, Great and then you mentioned in your release, the strategic kind of pipeline, there's 68 million in backlog or do you expect any of those two closed in fourth quarter or do you think the majority will be and I'm 2020.

Yes, we actually already closed one of them in fourth quarter, an adjusted the numbers for that.

But the 68 million they'll be out through the two through the mid 2020, probably one in a and moving to page one in the first quarter, one second quarter. One in third quarter is that kind of had looking now yes. Okay.

Okay and last quick question.

Your cost of both the equity capital and debt capital is compelling just wondering how you're looking at it changing the pipeline any do you will you.

Look too.

Higher barrier markets or just your thoughts philosophy on acquisitions, giving the your attractive cost to capital.

Well I mean, we have we have adjusted what we're doing slightly because having the pipeline of good acquisitions.

It allows us to be pickier on the non programmatic stuff. So so we feel like the programmatic stuff helps us because it provides that bay, but it also helps us because it allows us to be.

Very picky on what we do other than the programmatic. So as it relates to cost of capital, we really don't factor that into how we think about the pipeline or how we think about increasing the size of our acquisitions et cetera, basically the way. We look at it is we want to increase our profit margin in the lower we can push to the cost.

The capital the higher we can push the profit margins. So that that's really what we look at on that side of it.

Okay, great. Thank you.

The next question from a Rob Stevenson with Janney. Please go ahead.

Hi, Thanks, Good morning, guys.

Tim can you talk a little bit about where you're a major pockets of vacancy are what the prospects are for re tenanting that space and if any of them you're thinking about selling at this point in time.

Oh everything we've got extra sell good morning, Rob everything that we've got as I've said before everything that we've asked for sale or is not for sale, but it can be bought we we review staff. We have major leasing efforts on all of it I mean, and when you say major part it's our biggest pocket is.

Is the 30000 square foot building that came out of the gay Mg.

Bankruptcy, which basically we've got kind of as a freebie. So as we as we lease that up it will just and to a two the AFFO and that's a good.

Yeah, that's probably 15% of our overall vacancy.

The rest of its basically small pieces in small places.

And and it's it's yeah, there's a couple of buildings a other than a mg bid.

Tenants move data that havent been successful, releasing but but we continue to to try to lease those and we obviously viewed as an important thing, but again, we we look at having good tenants and quality tenants.

As being as good as anything because I mean, that's the reason that the occupancy tick back down a little bit this quarter was because we reached agreements.

Please turn to 16 18000 square feet to to get those tenants to terminate because we've had issues with him since we bought the buildings. They were in decided it would be easier and better to have better tenants and be rid of votes.

Okay. That's helpful. I mean in terms of the AMG space. I mean is where are you guys in the process. There I mean is that you have significant interest does that needs. Some work you know from a tenant improvements before it can be least any color there.

We've had we've had various people look at it we had we actually had an under a letter of intent and was negotiating a at least for the full thing and one point in time. The answer is when we get at least yes, there'll be some some tenant improvement dollars it will be required, but but we will factor that into the economics, everyone. We do it.

Okay.

Any known are likely move outs or the roughly 10% of your lease revenue that's rolling in the remainder of 19 and 2020 at this point of significance.

[noise].

And not that I would tell us significant theres, probably 10 to 15000, maybe 20000 square feet that we think may or may not renewing or I don't remember the exact number off the cuff my head, but but and it's it's something that you know we're talking to you know probably 30 or 40000 square feet.

The people to lease space. So if it again as part of real estate the way review and if you. If you look at most multi tenanted.

Portfolios, they're going to end up having 8% to 12%.

They can see at any given Dan.

Okay, and then last one from me up your sort of six or seven sorta primary property types any specific ones that represent a disproportionate amount of the card acquisition pipeline that you guys are either looking out or the stuff. That's expected to close between you know now and in early 2020.

Well, we're saying a lot of ER, we have a lot of interest in it and have a lot of confidence in both the inpatient rehab and the site. So I mean, that's that's kind of a disproportionate share of our programmatic stuff at this point in time.

We are working to make sure that we keep our portfolio balanced in line with our investment guidelines.

On those those property types.

And we're turning away from.

What I consider probably pretty good.

Opportunities.

Or maybe looking to scans at an I'll put it that way because they fall in the categories that we may be getting heavy into such as the inpatient rehab in a in the side.

Okay. Thanks, guys appreciate it.

The next question from Alexander Goldfarb Sandler O'neil. Please go ahead.

Oh, Hey, good morning, and congrats Tim on the UK victory last night.

[laughter].

So a good I said a few questions here first you go into your comments on the comp disclosure. Obviously, one thing that you guys. <unk> you know have done which has been almost pioneering the space as the all stock comp.

And that's been one of your hallmarks and definitely been in alignment of interest. So can you just talk a little bit more about what prompted you guys to disclose this and are you getting pressure to change the all stock comp just sort of curious.

I wouldn't call a pressure to change the I'll start combined.

Some constituents.

And I will Oh, sorry proxy advisor constituents.

I understand our compensation strategy. So we put that in to try to to make it clear because if you look at and I guess I'll go into it if you look at our I says reports from the last couple of years. They basically said, we don't have any performance based compensation and were like.

Are you looking at our plans are you looking at our compensation [laughter], we don't understand so so we put that in a number one we're very proud of it number two is we thank everybody needs to understand it and number three we probably havent done as good a job explaining and how it works in.

In history.

Through our history. So so we're trying to make it.

I guess more easily understood by people, who are looking at us and seeing that we are different than others and trying to help them understand that we are different where were different in a good way.

Okay, well I mean, hopefully they got that because I think clearly it's been one of your up benefits that's showing up in the stock price second question is I realize you guys don't do senior housing, but obviously a lot of commentary from that area on oversupply in the products that you target Medical office Hospital et cetera, do you see.

Your risk of people trying to capitalize on the growing demand for whatever the services that are provided in these things and we'll start to see oversupply come to the products that you're targeting or there are things that are very specific about senior housing that you know the economics don't replicate Ted make the same sort of capital draw that would fly.

Your product type with with too much supply.

Okay I'll address that in two different ways number one as it relates to our types of properties, we feel like the the wind is it or is that our back and most of them.

And if you look at sites like through the Manny's reimbursements were cut we lost 50% of the beds.

In America and it turns out there is more of this man or just as crazy as we always were so there's now.

An impetus and big kind of tailwind the supply side of it now.

Is it possible that that will go too far the answer is yes.

That's one reasons why we only do the big inpatient side and see a wednesdays.

Because we feel like that's a.

That's a governor [noise].

On the potential for the increase and the segments, but there's a lot of money right now being done at side from a number of different standpoint.

And then a lot of places is not willing to find exactly I mean, when I say that behavior was one. It's currently gummies behavioral there's a lot of money being done at behavioral all the way from opioids to depression to do long term behavioral issues.

So I mean, we're it's something we're obviously concerned about we're watching them, but we think that we're doing things that protect us.

For the long term inpatient rehab, we think that the tail wind is there because.

The way that it's a lower cost environment than acute care. It provides a specific service and and in any market, there's going to be a need for a certain amount of inpatient rehab beds and and we're trying to make sure that when we do our underwriting we understand how that demand is driven.

And what the population base is and we're working and basically.

Definitely olivine based and stuff that were inpatient rehab stuff that we're doing is brand new state and yard facilities that are you know anybody would wouldn't be proud to have their their parent go to two too.

Yes satisfied were for the rehab medical office buildings, you can read all the stance I mean.

Oh, I'm I've seen Watson numbers indicate that were so under under medical office building that that there's going to bring I forget I forget what the numbers are but but we think in our specific markets that we're in and what we're looking for again, we're looking for the low cost environment looking for the the ease of access for that.

Patient et cetera, we think that yeah. The demand for that's going to be therefore for a long time as it relates to the senior housing.

One of the reasons that we don't do senior housing is because they.

The average age of senior housing stock in America is a lot older than what we normally like to do.

It turns out well we are all getting older.

Nobody really wants to go to either a senior.

A nursing facility or an assisted living facility for that matter.

I understand I don't know that it's been sat there, but I've heard from a couple of different places at the average age of the resident in assisted living facility has moved from 75 years to 85 years and the last 10 years. So what you're seeing is everybody's wanting to stay at home a lot more than they want to go 10 assisted living facility or some other.

Facility.

And our view is is that as Fiveg comes into play and some of the technology comes into play as as you see more an emphasis on keeping people at home from the reimbursement.

Payors.

It's kind of yet even tougher and that senior living environment.

I, probably from a lot more time than you wanted on it but that's kind of our beyond that.

Oh, Okay and at the bottom line it in your portfolio in the assets you on it and the markets that you own as you sit here today, you don't see any of your product being threatened by oversupply you feel comfortable with all of your product and all the markets.

Well, if it's hard for me to say Oh, the products in all of the market, but we so I mean basically you know how we run the company I mean, we view the companies as a mutual fund portfolio and and we bought we buy assets kinda like buying stocks and are there are there. Some that are going to have issues. You know you bye.

On an 11 assets at any time theres going to be a certain number that has issues.

But you work through those re purpose. Some you whatever I mean, it is real estate owned real estate has a value and it's just how you look at it and now you said that I mean again, that's that's why we get paid is because it's real estate and that's what we're supposed to do.

Thank you.

The next question is from Brian .

Riley. Please go ahead.

Sure good morning interest to be clear I'm little confused on this with the Highland Hospital.

Once it comes out the other side of a bankruptcy would you own the property or will they owe the property.

No well on the property.

No it's.

It's all a function of a lot of things, but no we own the property now the lease will be.

So to the bankruptcy then amended and restated on the other side. So that it's basically work what we've said it would be all along so no we will own the property, it's just a matter of getting the.

It's like the quickest way to get the licenses and everything transfer okay. So the leases what goes through not the title at the property.

Correct.

Okay, great. Thanks for that and then you know on your internal watch list and you talked a little bit about some of these tenet issues and and that's good but would you say that you know over the past quarter to the watch list going forward is it stayed the same has increased as a decreased what are you seeing there.

[noise] I mean, I look around the table, but my general view is it's going down so.

I mean, we've we've worked through several issues with tenants are they weren't significant issues and and those that we couldn't work do we basically take them out [laughter]. So my view is is it over the last.

Particularly the last quarter.

We we hired a new senior.

That's president and asset management, who came on board a little bit.

We ended the second quarter, but it's been on full bore now for four months.

He spent a big in basically.

It's been focused on.

Some of these issues and so I feel better about where we are now as it relates to the tenants.

Okay and then just lastly from me on the tenant on the property vacancies that you haven't I think you mentioned that kind of 8% to 10% on multi tenant just standard what is the most successful way you have for filling the tenant vacancies are you using local commercial real estate brokerage how do you go about filling those.

I mean, if [noise] again, that's one of the problems. We don't have a lot of vacancy in any given market. So we can't like no national contract with CB already or JLL or something because we don't get any attention from them. We we initially started out trying to do stuff that way, but but what we've found is.

Is the best way to do it is to find the local broker who knows the health care market in that local market and get them onboard because they're the ones who interact with people in again most of our or again.

I'm trying to think that probably average space that we have to lease in any of our buildings that have vacancy is less than 10000 square feet.

Actually it's probably more like 8000 square feet and on average of any of the building. So it's not it's not you know there's not a lot of significant pockets. If you factor the AMC property out of that Ben number probably comes down to four or 5000 square feet. So I mean, it's it's.

Do you have to deal with it on the local market basis with a local.

Leasing guy he knows that healthcare market.

Alright, great. Thanks, that's helpful.

Thanks, Brian .

Next question is fun drew babin.

Please go ahead.

Hey, good morning.

Good morning.

Quick question I apologize if the answered this was embedded in the response to a one Alex's question.

But one of the things look attractive about inpatient rehab facilities. The limited number of licenses for which it ER. So what do you see although the same services are often.

Replicated or attempted to be replicated in l. tax and other facilities like that [noise] and I guess is it gives you kind of draw that comparison to behavioral health.

Can you maybe talk about kind of what makes a behavioral health. So what do you like the ones you bought a place that offers kind of a superior products to boost the end user a customer.

Well positions in terms of being able to get the right equipment and be properly licensed to provide all the behavioral services.

You talked more about kind of that the stickiness and staying power. Okay facilities, you bought and why they're more attractive real estate than other places where behavioral health services are being provided at other facilities.

[noise] I'm sure. Thanks for the question Andrew.

Basically if you look at and we let me say, it's we've got several different types of behavioral, but I think what you're talking that's probably the big buckets that the 20 $530 million.

Basically those are ones that we've got.

End markets as I said that have COO and CFO in states.

But even if they didn't have seen a wins the the large.

Behavioral facilities, there's very few of them in the country.

Number one because we lost 50% of our beds to the reimbursement issues of the 19 nineties.

But number two is again that they they take a special type of operating knows the market and and and is able to provide the capital do that and the fact that matters is probably less than 10 and the whole country that can do that.

So we feel like it's is protected from number one to see a wind standpoint number two from from the number and the ability of others to build something new and compete and and the kind of gave you feel for like the Highland Hospital. It. It's a it's an acute care behavioral facility.

And the reason we were able to find a new tenant and replace it is because they're close is competition is I think 70, most yeah, so 70 miles away.

And this is basically the only.

Facility in this type in the Charleston, West, Virginia area, which Charleston is the capital in West, Virginia, and if you know it's it's one of the major Metropolitan I mean, it's not it's not considered metropolitan New York standards, but but west Virginia standards, It's very metropolitan [laughter] surveys.

Play, what we focus on or those types of facilities that the that don't have any close competition that due to the economics and the state regulatory regime are not likely to have any any any significant managers, but do have a population base they have.

ER.

The population requirement for this type of facility.

I I don't have you work inside for years, I mean, you want to anyway. So the west Virginia facility or was the successful facility acquired two Oh are our acquired head and it was a not for profit facility that we thought could be improved upon.

Oh attitude issues and we're you know I think the quality of the facility as Tim said.

It was an indication of why we were able to replace.

The the old tenants so quickly.

No.

You know what do we have we have Oh, we do have a good analysis I believe all all manage but the the oh the major tenants.

We have in that area or have been in five for for over a very long time have started a couple other companies have been successful.

No.

Rolling them up to universal or to the old Soc solution. So.

We think they're good operators and that's a key.

To to any.

And they're financially well back so yeah.

Does that does that give you filter that goes yes, I appreciate old color and that is all for me. Thanks.

[noise] last question is from that.

D.A. Davidson. Please go ahead.

Great guys Bank a real quick.

Looking at some of the different and assays from a cap rate perspective, which ones are you kind of finding more attractive right now and you know I guess the flip side of that question is you know which ones might be getting a little pricier, a little ahead of themselves.

Hi, Good morning Mary.

Yep, Thanks, and I mean.

Basically we don't we don't see a lot of cap rate compression M.S.A. based upon what we're looking at a and we know there, but again, we don't do they own campus downtown Urban hospital campuses. So so we're not competing.

With any of our peers.

And again normally if we sense any competition will back off of it in and not.

No I put in a competing bids I mean I don't think.

I don't think we're seeing cap rate issues based upon M.S.A. I mean in some situations, we see cap rate issues because.

Owners, good things in their mind and brokers put in their mind that they send somebody so the property to do whatever appears on the.

Downtown Urban hospital campus at all of a sudden their properties worth as much in which case, we just kind of walk away and say, okay. If you find somebody my advice agreed to sell it to and a lot of cases, they come back to US a few months later, because they haven't been able to do that but but I mean, we're not we're not we're not you know turning eating away.

And because in a particular M&A say is too pricey and we're not we're not diving into particularly am I, saying because stuff looks cheap there.

Right. So when you are walking weights whatever run off reason then it is an M. S. A reason.

Right.

Yeah, Yeah, okay, great. Thanks, so much gosh.

Hi, Thanks.

Yeah I've a question. Please press Star then one.

[noise] is composed kind of question answer session I would like to turn the conference back over to Tim well that's for any closing remarks.

Thanks Francesco.

And we appreciate everybody me on the call today, and asking the questions and showing interest in us and we look forward to a two being back only what do you guys. After the end of the air and see a lot of you all out in L.A. It may rate.

Thanks.

The conference.

Thank you for attending today's presentation you may now disconnect.

[noise].

[noise].