Q4 2020 Community Healthcare Trust Inc Earnings Call

Welcome to community healthcare Trust's 2024th quarter earnings release Conference call.

On the call today, the company will discuss its 2024th quarter financial results and also discuss progress made in various aspects of the business.

Following their remarks, the phone lines will be opened for a question and answer session.

Company's earnings release was attributed playoffs evening and has also been posted on its website www Dot C. H C. T Dot R E T.

The company wants to emphasize that some of the information that may be discussed on this call will be based on information as of today February 17th 2021 and may contain forward looking statements that involve risk and uncertainty.

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

For a discussion of these risks and uncertainties.

To review the Companys disclosure regarding forward looking statements in its earnings release as well as its risk factors and MD&A and it's S. E C filings.

Company undertakes no obligations to update forward looking statements.

Whether as a result of new information future developments or otherwise, except as may be required by law.

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

A reconciliation between the two is available when its earnings release, which is posted on the website.

Call participants are advised that the conference is being recorded for playback purposes.

Kind of the call will be made available on the company's Investor Relations website for approximately 30 days and its property of the company.

Call me and I'll be recorded or otherwise reproduced or distributed went off the company's prior written permission.

I'd like to turn the call over to Mr. Tim Wallace CEO of too many healthcare Trust incorporated.

Good morning, and thank you for joining us today for our 2024th quarter and year end conference call on the call.

With me today is Dave Dupuy, our Chief Financial Officer, and Lance Berry, our Chief Accounting Officer.

As is our normal process our earnings announcement and supplemental data report were released last night and filed with an 8-K and our quarterly report.

CT on form 10-K was also filed last night.

We had a busy quarter, both from an operation standpoint, and from an acquisition standpoint.

Now the obligatory COVID-19 discussion.

Healthcare providers have been impacted by the COVID-19, pandemic, some sort of a reduced number of procedures and patient visits. However, most of our tenants operations are basically back to pre pandemic levels as of December 31, The company had remaining rent deferral agreements with two tenants representing less than 100.

<unk> thousand dollars.

Our receivables are in the best shape, they have been in the company's history.

Asset management group has done a great job related to COVID-19.

Two more normal items.

As you know we have an active ATM program in place during the fourth quarter. The company issued 480592 shares of stock through its ATM program at an average gross sales price of $47 65 per share.

We received net proceeds of approximately $22 4 million.

And an approximate 3.64% current equity yield.

During the fourth quarter, we acquired 10 properties with a total of approximately 216000 square feet for a purchase price of approximately $67 $9 million.

These properties were 100% leased.

With leases running through 2039.

And anticipated annual returns of 9.45% to 9.9%.

This brings our acquisitions for the year.

Approximately $127 2 million.

So far this quarter through February 16, the company has acquired four properties totaling approximately 80000 square feet for an aggregate purchase price of approximately $17 8 million.

Upon acquisition of the properties are 100% leased with lease explorations through 2036.

In addition, the company provided a $6 million term loan to a $4 million revolving line of credit to the tenant on two of the properties.

The company has three properties under definitive purchase agreements for an aggregate expected purchase price of approximately $46 $4 million and expected aggregate returns of approximately $9, 1% to 943%.

The company is currently performing due diligence and expects to close these properties either late in the first quarter or early in the second quarter.

We continue to have many properties under review and have term sheets out on several properties with anticipated returns of 9% to 10%.

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

Our weighted average remaining lease terms smoothed over eight years for the firsthand at almost eight one years.

Occupancy.

<unk> was basically flat for the quarter as leasing activity was somewhat muted due to the challenges caused by COVID-19.

However, we are encouraged by the activity, we see on the part of healthcare providers.

On another front, we declared our dividend for the fourth quarter and raised it to 40 to 75 cents per common share.

This equates to an annualized dividend of $1 71 per share and I continue to be proud to say, we have raised our dividend every quarter since our IPO.

I believe that takes care of the items I wanted to cover so I'll hand things off to Dave to cover the numbers.

Thanks, Tim and good morning, everyone.

Despite the headwinds associated with the pandemic, we continue to see strong growth in our business I am pleased to report that total revenue for 2020 was $75 $7 million compared to $60 8 million for 2019, representing 24, 4% growth over the prior year.

Meanwhile, total revenue for the fourth quarter of 2020 was approximately $20 1 million versus the $16 8 million for the same period in 2019, representing 20% growth over the fourth quarter of 2019.

And on a pro forma basis, if the 2024th quarter acquisitions had occurred on the first day of the fourth quarter total revenue would have increased by an additional 333000 to a pro forma total of $20 5 million in the fourth quarter.

From an expense perspective property operating expenses increased year over year from $12 2 million in 2019 to $13 6 million in 2020.

Or 11, 3% and.

And during the fourth quarter property operating expenses grew from $2 8 million in 2019 to $3 5 million in 2020 or 22, 7%.

The increase in property operating expenses is in line with the growth we are experiencing and total revenue period over period.

For the year G&A increased from $7 7 million in 2019 to $8 8 million in 2020 or 13, 6%.

And in the fourth quarter G&A increased from $2 1 million in 2019 to $2 5 million in 2020 or 16, 9%.

Increases in G&A were driven primarily by increases in amortization of deferred compensation and new employee related costs, we had in 2020.

Interest expense declined year over year from $9 3 million in 2019 to $8 6 million in 2020 or seven 3%.

The decrease in interest expense related to the effects of the fed cuts and cut in rates during the pandemic, coupled with our improved leverage profile, resulting in a more attractive pricing tier under our bank facilities and.

And notably for the year, our debt to total capitalization was 28, 5% a very conservative level.

Our net income increased from $8 4 million in 2019 to $19 1 million in 2020 or 127, 8% for the quarter net income grew from $2 2 million in 2019 to $5 2 million in 2020 or 137% if.

If you adjusted for the deferred income tax expense recognized in the fourth quarter of 2019, the annual and quarterly net income growth would have been 94, 5% and 44, 2% respectively.

We attribute these strong results to the operating leverage we are developing in our platform.

Finally, I am pleased to report that funds from operations for the fourth quarter grew from $9 5 million or <unk> 47 per diluted share in 2019, total $12 2 million or <unk> 53 per diluted share in 2020 adjusted funds from operations <unk>.

<unk>, which adjusts for straight line rent and stock based compensation increased from $9 9 million or <unk> 49 per diluted share in the fourth quarter of 2019 to $12 9 million or <unk> 56 per share in the fourth quarter of 2020.

And from a pro forma perspective, if all of the fourth quarter acquisitions occurred on the first day of the fourth quarter <unk> would have increased by approximately 298000 to a pro forma total of $13 2 million, increasing <unk> at 57 a share.

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

Yes.

Now I'll begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

It would draw your question. Please press Star then two.

At this time, we'll pause momentarily to assemble the roster.

First question comes from Alexander Goldfarb of Piper Sandler. Please go ahead.

Hey, good morning, Good morning, Tim and David first of all good morning.

Hey, Good morning, I, you know Tim It came from me to say Thats actually congratulate you publicly but.

340% total return.

The chart that you have in the in the supplemental is pretty impressive so kudos to you and your team on that Ah I.

I do have two questions to ask first is can you just give a bit more color on the property that you bought where you've made a loan to the tenant on two property per term loan and then the line of credit are basically a little bit more color around this.

And whether or not this is something more of a specific nature or is this something that increasingly we're going to see with some other acquisitions that you guys have plans.

Sure.

For the question Alex.

Its not something Youre going to say generally this is a kind of a special situation. We had several properties two or three properties with this tenant we like the management team we like what they are doing they were growing before the pandemic.

Several projects in process, when the pandemic hit and it and they're one area in our portfolio that that got hit a little bit geriatric psyche is what they are.

And so basically we looked at where they are at this point all their staff has been vaccinated most of the population in tenant population and the potential patient population have been vaccinated.

So we think theyre going to come out extremely well and they are in kind of a different situation because they've outgrown their small bank, but not quite to the big bank stage.

We saw this as.

An opportunity to be a win win for them for us because we're making some excellent returns on it and.

And.

If you look at the overall company based upon the numbers, it's probably a little over one times levered.

So we like situations, where you can do stuff.

One to two times Levered and you make.

Returns like what we anticipate making so.

So, but it's not a it's not something you're going to see every day and it is a and is a really unique.

Situations.

But more to that point what are the returns and then it does seem like you have been willing from time to time to step in to use your balance sheet to great tenants through so one what are the returns then it does seem like it is sort of part of your Arsenal.

You do that you do use from time to time.

Well I don't know that I would kind of that part of the Arsenal.

It is something that we do I mean, we try to manage it I mean, one of the one of the things that made us feel comfortable doing this is.

AMG refinance so we've got in there.

<unk> said for a while but they pay they pay debt loan down to $15 million and put it on self amortizing and Theres no prepayment. So so we've got that okay.

Kind of sitting there the terms on this and then forget exactly but I think it's a 9% current pay with a 3%.

Accrual.

And and amortize as if they don't pay it off early with the anticipation is they will end up getting a bank loan and a year or two and paying it out, but I think and amortize it over five years or something thats right. So.

So it's self amortizing over five years.

Sure.

But we anticipate it will be paid off in a year or two.

Okay. Okay, and then question, let me say, let me say day, it's the only thing they have drawn is the term and.

150000, yes, I mean, a couple of.

150000 on the rollover and we don't anticipate the revolver ever being significantly draw.

Okay and then the second question is.

Just with with Covid It would seem like Theres a huge everything we read the press you know.

Huge need for mental health substance abuse and all of that are you seeing whether it's existing properties or with your pre sales with your developer partners are you seeing growth in that area for investment or is that something that gets a lot of press headlines, but as far as the translating to a business opportunity for you guys not really seeing.

It yet.

And the problem with behavioral is.

It's such a wide.

Description.

Because it covers everything from autism to opioid too.

Geriatric side, which is what we were just talking about with this client with this tenant.

Two inpatient acute psych and answering the question is it was growing before.

<unk>.

Because of several things.

It was it was way under bedded through the Ninety's as reimbursements were cut and then the bids have been coming back in.

Obamacare basically said if you had shortly.

Short term acute care benefits you had to have.

Exact benefits.

So it's been coming back for some time and Theres been a lot of money thrown at different areas of behaviors such as the definitive milestone.

Billions of dollars that the opioid.

Situation over the last few years and our biggest problem is trying to sort through and see which which ones are really valid which ones have long term legs.

Et cetera, but I will say it is dependent <unk>.

Has multiplied debt.

And all of our <unk> facilities are doing well from that standpoint.

And we have seen a lot of slack opportunities over the last 12 to 18 months.

Okay. Thank you Tim.

Thanks, Alex.

Thank you next question is from Sheila Mcgrath with Evercore. Please go ahead.

Hi, yes, good morning.

Yes.

Dave debt balance sheet is.

Very strong operating at net debt to EBITDA in the threes.

Just wondering what your target leverage level is and do you envision bringing that up a little bit higher this year.

Our target leverage levels haven't changed since we came public and basically what we said then that long term, we wanted to be 30% to 35% of our capital.

The capital will be to be debt was 65% to 70% being equity.

It is on the low side now.

And.

You should not be surprised if you see us raise raised the amount of debt.

Say that we're going to significantly change the percentage as it relates to the overall, but you shouldnt be surprised if you see the amount increase as we increase our overall balance sheet.

Okay, Great and then just a little bit more clarity on the 42 million.

Closings.

This year.

Thank you.

You said, probably first quarter, just give us a little bit more insight on potential timing if those are almost complete.

Yeah.

Our best estimate right now.

There is a.

Okay.

There are several parties in the transaction that's happening in one of the parties wanted to close on the first of the month. So it will.

Either probably close on March one or April one.

And we're not in control of that at this point, we think hopefully March one but.

It could be April one.

Okay.

Okay and last question from me.

Great.

<unk> track record of bumping the dividend every quarter since the IPO now your payout ratios.

Pretty conservative I guess, you are retaining some cash flow from investments just curious if you if you.

Plan on being consistent with the modest increase every quarter or since the payout is conservative if you would.

Entertain a larger dividend increase.

Okay.

Obviously, that's up to the board, but I will say it. This last board meeting that that topic did come into the discussion.

And if we meet our internal projections for the next year then there is a good likelihood.

We will bump the size of that increase on a quarterly basis, but we want to always maintain a conservative approach to our payout ratio.

And make sure that there is plenty of cash to pay the dividend.

Okay, great. Thank you.

Thanks Sheila.

Thank you next question is from Nate Crossett of <unk>. Please go ahead.

Hey, good morning, guys.

On a net.

Hey.

Maybe you can just help us size the acquisition pipeline outside of what you've already announced kind of what what's the size of the deal funnel right now.

Then just had a question on pricing and yields.

<unk> been consistently above nine for the last several years are you seeing anything that would change.

Change that kind of targeted range this year.

You should know is enough by now to know that we're boring as company around so we don't change much.

Our target go for acquisitions still a $120 million to $150 million a year.

We've always said, it's lumpy sometimes its lumpy early in the year, sometimes its lumpy late in the year.

But our goal is to shoot for $120 million to $150 million.

In any given year, maybe it's $160 million, but thats kind of our sweet spot and what we would like to say everybody to model in.

As it relates to returns we have never done anything below a 9% return and don't anticipate doing anything below 9% return.

So that kind of covers that looks like I said, we're boring we don't change a lot.

Well, Mr. <unk> is doing well sell buying is good.

What about cash.

Tenant concentrations help that Oliver I think 11% average is nine.

Is there a certain.

The threshold on the upper bound that you don't want adult blogs.

And would that impact <unk>.

Willing to acquire.

We have investment guidelines that have been in place since the beginning that kind of puts us in.

<unk> keeps us in in between the ditches both.

Geographic diversification tenant diversification and industry segment diversification.

And basically what that says is no tenant will ever be over 20%.

We don't like.

Actually we don't like tennis being double digits.

U S health with us.

It's been a good client.

They are very good operator.

And the big lumps and I think the last deal we did with them was $30 million, So theyre big lump so.

They ended up being over over 11%.

We try to manage that well.

We don't want to turn down good good projects from good clients, but sometimes we do that just to manage.

Debt that tenant diversification so.

I'd say, 11% is about as high as Youll see happen in the portfolio.

Hopefully yes.

But again theyre good tenants, so it's really hard to turn them down sometimes.

Mhm.

Okay. That's helpful. And then maybe just one last one lease explorations for this year.

Those spreads.

Are we assuming SUV kind of flattish share what.

Our debt discussions I guess going with those tenants.

Yes, I mean, we've always said that we have.

Feel like basically.

If you look at the portfolio, we're plus or minus.

Right.

And that's still the way, we feel and that's the way that we see most of the renewals happening is basically.

A market type of rate.

Maybe.

Presenting to have inflation based increase.

So we're not going to you're not going to CSA that we've got 5% renewal.

Increases or anything like that.

Okay. That's helpful. Thank you.

Thanks, Nick.

Thank you next question comes from Gaurav Mehta of National Securities. Please go ahead.

Yes, hi, good morning.

A question on the on the vacancy that you have in your portfolio I was hoping if you could talk about where some of the largest mckenzie in your portfolio and then is there any opportunity to from.

Some of that up.

Is there any opportunity to one.

Two to maybe increase the occupancy in your portfolio.

Okay.

We just had a lease lease property every day I mean, our asset management group is on that.

Last year due to the pandemic.

Leasing was pretty tough because healthcare providers didn't have enough bandwidth.

The focus on operating their business much less leasing space.

The.

Asset managers tell me that debt.

We're having a lot more success talking to and getting interest in healthcare providers and leasing additional space already this year. So we're hopeful that we'll see a pickup in.

And in leasing.

But I think overall.

If you look at our occupancy on a year to year basis. If you consider that we just came through the pandemic and what all that is done to a lot of People's Occupancies, we look pretty good.

Okay. Thank you that's all I had.

Alright. Thanks.

Thank you next question is from Amanda Sweitzer of Baird. Please go ahead.

Thanks, Good morning, guys.

I wanted to start on some of your recent transaction activity can you just provide some additional detail on the Genesis care portfolio acquisition.

How did that transaction come about and then do you see any additional portfolio acquisition opportunities in the near term.

Good morning, Matt.

We don't generally look for portfolio acquisitions, because generally we find that.

There is Stefan day that we don't necessarily like.

This was kind of unique.

Situation.

One I don't know if you know that much about the history of Genesis care, but basically it was 20 <unk> century oncology. They went through a bankruptcy then with their management shakeup.

Genesis care is an Australian healthcare company back.

KKR KKR.

And it is putting I think $300 million into the platform to expand it.

It provided some unique step the chief operating officer of Genesis care.

Actually that lives in Franklin here.

So we've been able to have some personal dialogue.

With him and where.

Hopeful of trying to develop them into a client.

But it is kind of a unique situation.

And we're not looking to do.

Earlier SaaS transactions.

That's helpful and kind of what I figured.

And then secondly, a bit more of a hypothetical question, but just with some of the increase in M&A and liquidity in the market broadly do you expect to see some of your tenants get acquired this year and potentially result in an increase in credit quality are there any other way its kind of the increased investment in the healthcare sector may benefit you.

Actually <unk> been seeing that.

A lot of a lot of the non for profits have been consolidating over the last 12 to 18 months and it's been kind of quiet, but a lot of thats been happening, but yes, we do anticipate.

Acquisitions, there's a lot there's a lot of activity now in the market.

And several of the different areas that we're involved in and we knew anticipate debt and a lot of our investments several of our investments, particularly with our clients with the anticipation that day.

It would happen at some point in time some of it's happening sooner than we would have thought, but but others will happen over time, we believe.

Thanks Thats it from me I appreciate the time.

Thanks Amanda.

Thank you next question is from Rob Stevenson of Janney. Please go ahead.

Hey, guys Tim.

Tim back to your diversification.

Commentary the acute inpatient behavioral facilities now roughly 20% of annualized rent do you have an upper boundary where you'd want to take that exposure in the aggregate.

And it's at a point where.

I will say this I won't say that we wouldn't do anything else right now, but it would have to be very nice property with very good terms first of all do at NAV.

We're kind of a never say never but it's it's it's hitting them net range, but what I will pass sales.

He is we're also very active in other sectors right now and our pipeline is such that as we as we move through that pipeline I think youll see that come down.

Okay. That's helpful. And then Dave how are you thinking about incremental G&A that you need to handle acquisition volume and generally run the company over the next year I mean any material increases expected over 2020 levels.

I think that's one of the powers, we're seeing in the platform as we've gotten to a certain size yes.

Yes, we're going to have to add incrementally to our accounting staff from there are other folks within our asset management team that we'll want to selectively.

Add to the to the team, but the reality of it is we really don't have big needs in order to incrementally grow the business and the platform and so.

As I think what Youll continue to see as G&A not growing as fast as it has historically and especially relative to our revenue growth. So that's what I would that's how I would guide you in.

One thing I'd like to point out on that day, because I just recently had a had a email discussion with.

All of our analysts zone, it but I'd like to remind everybody that if you look we put it in the supplemental NAV the 55% of our G&A in the fourth quarter was amortization of stock based compensation and thats not deferred compensation, there's never a cash effect from that.

Net compensation.

The stock the shares are already in our outstanding shares number.

And do that calculation.

So basically.

That's one of the reasons why we think that <unk> in our situation is by far the best measure because debt that stock based compensation will never have a cash effect and is already counted.

And the outstanding shares.

Okay, and then Dave I mean, just close the loop in terms of the additions that you may need this year, maybe early next year are those.

More along the lines of your sort of median employee pay from the supplemental or is there going to be any sort of higher compensation.

<unk> individuals' that youll need to bring in.

No I think I think what you'd find over the next year it sort of it's sort of track along with our median employee.

Okay helpful guys. Thanks.

Thank you thanks Ron.

Again, if you have a question. Please press Star then one.

Next question from Bryan Mayer B Riley FBR. Please go ahead.

Good morning, just two questions.

One on occupancy I know it only went down about 20 bps in the quarter, but when we go back and look at the transcript for the third quarter earnings call. I think you mentioned that you thought it would pop back up in the fourth quarter and considering that the property you bought in the fourth quarter were 100% leased we were little surprised with the occupancy.

<unk> is there any color you can share with us there.

Basically.

When we were talking and with the third quarter call things had started to loosen up a little bit, but then we had a surge in the pandemic surge in the virus and all of a sudden.

<unk> pulled back in so I mean, it was it was definitely an environmental type effect.

And again overall, we feel very comfortable with where the occupancy is in.

Our our leases that we have to re lease or.

At like 5% for this year are the lowest in our history.

From a from an annual releasing need standpoint, so we.

We feel like we've kind of playing down on it and the asset management group is very focused.

Leasing stuff as long as we can keep providers focused on it.

Great and then as it relates to all of the press out there with people moving from here in the northeast.

In Florida, and other low tax states has that changed your view on where you want to look at assets at all or is it still status quo.

Yeah.

Not sure at this point, how much debt is an actuality and how much debt is in reality.

Uh huh.

Basically the price needing something to talk about.

So far we haven't seen that much I mean, it's very early in the process.

But.

To make it significant it would have to be a lot of people doing it.

And so far we haven't seen that and we have a good mixture where in 33 states NAV I think it is.

From mostly in the Midwest to the southeast of the southwest.

If you look I think Florida, Ohio, Texas.

Our some of our biggest states and so I would anticipate probably something very similar continuing.

Well, having sold my New Jersey have been heading south like many of my friends and colleagues and I can assure you that it is real.

Well good day Monday.

Down except for right now.

Right now, we're like 15 degrees and therefore inches of snow on the ground.

[laughter].

Sure.

Thanks, Dan.

It may be Florida.

This.

A question and answer session I would like to turn the conference back over to Tim Wallace for closing remarks.

Thanks, Nick and we'd like to thank everybody on the call for spending time with us and being interested in thanks for the continued support and we will cut per unit quarter. Thanks.

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

Yeah.

Okay.