Q3 2021 Community Healthcare Trust Inc Earnings Call
Welcome to community Healthcare Trust two.
'twenty, one third quarter earnings release conference call on the call today, the company will discuss its 2021 third quarter financial results. It will also discuss progress made in various aspects of its business.
Following the remarks, the phone lines will be open for question and answer session.
The company's earnings release was distributed last evening and has also been posted on its website Www C. H C T Dart REIT becomes.
The company wants to emphasize that some of it some of the information that may be discussed on this call will be based on information as of today November 3rd 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 you should review the company's disclosures regarding forward looking statements in its earnings and its earnings release as well as risk factors in M DNA and its SEC filings.
The company undertakes no obligation to update forward looking statements, whether as a result of new information future developments or otherwise, except as may be required by law.
During this call the company will discuss GAAP and non-GAAP financial measures.
A reconciliation between the two is available in its earnings release, which is posted on its website.
Call participants are advised that this conference call is being recorded for playback purposes, an archive of the call will be made available on the company's Investor Relations website for approximately 30 days and is the property of the company. This call may not be recorded or otherwise reproduced or distributed without the company's prior written prior written permission.
And now I would like to turn the call over to Tim Wallace C E O of community Healthcare Trust incorporated.
Good morning, Thank you for joining us today for our 2021 third quarter conference call.
With me today is Dave Dupuy, our Chief Financial Officer, Leigh Ann Stach, our Chief Accounting Officer.
For the first time timber, our new executive Vice President asset.
Asset management.
And I'd like to take a moment.
Apologize up front, because there could be some issues today, because as a long time.
Atlanta resident in Atlanta Braves fan Dave's head is in the cloud today, and so I want to congratulate Dave is Atlanta Braves on their victory last night before we get started.
As is our normal process our earnings announcement and supplemental data report were released last night and filed with an 8-K and our quarter quarterly report on Form 10-Q was also filed last night.
As has historically been the case in the third quarter was a little slow from both an operations and acquisition standpoint.
And there are a few points I want to cover upfront that hopefully will answer some questions.
We had a couple of out a bunch of items in the property operating expense line item.
First utilities were significantly higher than budget in the third quarter. This is due to the heat wave that covered parts of the country. This summer.
Second property taxes were unusually high because of aggressive stances. Many local municipalities are taking related to reassessment and tax rates, our consultant advised us that we needed to increase our accruals for the year. So several quarters of adjustments were put into the third quarter on several properties.
We anticipate being reimbursed for these for most but not all of these expenses as they work through the operating expense reimbursements over the next few months.
On the G&A front.
We eliminated a position this quarter this should save US a couple of hundred thousand dollars a year going forward.
However, the accounting rules maintenance write off several hundred thousand dollars of deferred compensation.
This is even though there was no change to the legal contractual vesting requirements as we're still holding the stock subject to future vesting.
This also raises another issue related to how the accounting rules make us amortize our deferred compensation.
Several of us are getting closer to having the ability to retire we're having to amortize deferred compensation for several of us over the period of time left until we can retire even though we have no current intention intention and retiring debt.
This acceleration of amortization is forcing us to expense over $1 billion more of deferred compensation this year than the legal contractual related amortization would be.
That number will be more than $1 $5 million next year. This is just another reason we believe that adjusted funds from operation is the best metric to measure because it takes out.
Incineration of straight line rent, which is not cash we can pay dividends with and adds back the deferred compensation, which is cash we can pay dividends with.
As you know we have an active ATM program in place during the first quarter. The company issued 139216 shares of stock through its ATM program. We did that at an average gross sales price of $48 63 per share.
We received net proceeds of approximately $6 6 million and an approximately 363% current equity yield.
During the third quarter, we acquired two properties with a total of approximately 38000 square feet for a purchase price of approximately $9 3 million. These properties were 100% leased with leases running through 2026 and anticipated annual returns of approximately 9.3% to 937%.
Sent.
So far this quarter through November 3rd the company has acquired one property totaling approximately 27200 square feet for purchase price of approximately $3 5 million.
Upon acquisition the property was 83% leased with lease expirations through 2031, and an anticipated annual return of nine 3%.
The company has three properties under definitive purchase agreements for an aggregate expected purchase price of approximately $12 $3 million and expected returns of approximately nine 3% to nine 7%.
Oh.
The company is currently performing due diligence and expect to close on these properties in the fourth quarter.
We also have the signed definitive purchase and sale agreements for four properties, we discussed last quarter.
To be acquired after completion and occupancy for an aggregate expected investment of $94 million. The expected return on these investments should range up to $10 two 5%.
We expect to close on one of these properties in the first quarter of 2022 and the other three through 2022 and into 2023.
In addition, we have the signed term sheet for another 10, new properties and up to approximately $60 million of new investment. It is anticipated that these investments will be made over the next approximately 24 months.
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 term was relatively stable at just slightly less than eight years occupancy is approximately the same as last quarter leasing activity has picked up and we are encouraged by the activity we see on the burden of health care providers.
On another front, we declared our dividend for the <unk> for the third quarter and raised it to $43.05 per common share. This equates to an annualized dividend of $1 74 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 will hand things off to Dave to cover the numbers.
Great. Thanks, Tim Good morning, everyone and go braids.
I am pleased to report that total revenue grew from $19 3 million in the third quarter of 2020 to $23 $3 million in the third quarter of 2021, representing 22% growth over the same period last year.
Revenue for the second quarter of 2021 was $22 $7 million, representing two 5% sequential growth.
On a pro forma basis, if all the 2021 third quarter acquisitions had occurred on the first day of the third quarter total revenue would have increased by an additional 131000 to a pro forma total of $23 4 million in the third quarter.
As Tim mentioned in his comments.
Expenses increased in the third quarter property operating expenses increased quarter over quarter from $3 8 million to $4 1 million or five 4%.
As Tim discussed the increase in property operating expenses is primarily driven by increases in property taxes and utilities expense.
G&A expense for the third quarter increased quarter over quarter from $2 9 million to $3 2 million or 10, 8%.
However, as Tim mentioned previously this increase was inflated in part by the approximately $200000 noncash write off of deferred compensation related to the elimination of a position.
Adjusted for this onetime noncash expense G&A would have increased three 9% quarter over quarter.
On the topic of stock based compensation expense I'd like to highlight a couple of new disclosure items, we are now including in our supplemental materials.
First on page eight in addition to including the mix of G&A between cash and noncash. We are now disclosing those items as a percentage of revenue.
You will note that the cash portion quarter over quarter as range between five and 6% of revenue and it's trended down the last few quarters.
Second on page nine we are disclosing more detail around our amortization of deferred compensation. The table at the bottom of the page shows the gap required deferred stock compensation amortization included in G&A. We also show the amortization based on the legal the actual legal vesting periods to show.
The acceleration of deferred compensation included in G&A.
This acceleration is driven mostly by a legal vesting dates that extend beyond retirement eligibility dates and as Tim mentioned in his comments. This increase in stock based compensation amortization will continue into future years. This is another example of why we believe adjusted funds from operations, which eliminate straight.
Line rent and adds back deferred stock based compensation is the best way to measure our performance.
Finally interest expense increased slightly from $2 7 million to $2 8 million or one 9%. This increase was driven by slightly higher interest rates on our revolver.
I am pleased to report that funds from operations or <unk> for the third quarter of 2021 increased to $13 2 million from $11 6 million in the third quarter of 2020, representing 14% growth over the same period last year.
On a per share basis <unk> increased from 52 per diluted share in the third quarter of 2020 to 55 per diluted share in the third quarter of 2021, an increase of five 8%.
Meanwhile, <unk> for the second quarter of 2021 was $13 3 million remaining essentially flat sequentially.
Adjusted funds from operations, which as stated earlier adjust for straight line rent and stock based compensation totaled $14 3 million in the third quarter of 2021, compared with $12 million in the third quarter of 2020, or 19, 8% growth year over year on a per share basis.
<unk> increased from 53 per diluted share in the third quarter of 2020 to 59 per diluted share in the third quarter of 2021 or 11, 3%.
Finally, <unk> for the second quarter of 2021 was $13 9 million, representing two 9% growth on a sequential basis and.
And from a pro forma perspective, if all third quarter acquisitions occurred on the first day of the third quarter <unk> would have increased by approximately 103000 to a pro forma total of $14 4 million.
That's all I have from a numbers perspective, Danielle we're ready to start with the question and answer session.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
The first question comes from Sheila Mcgrath from Evercore. Please go ahead.
Yes, good morning.
Tim You mentioned in your release are actually in the investor deck the term sheet.
Dialysis.
Partner I, just wonder if that's closer to being a finalized deal and are there any other discussions with other partners beyond that.
Relationship.
Yes.
Is it closer to being a finalized deal yes.
That one is going to come in.
Pieces, though unlike the.
The inpatient rehab facilities, where we were able to do basically all of those purchase and sale agreements almost simultaneously.
This is going to come in pieces over the next 24 months, so I mean, theres not going to be all of a sudden.
That are out there or at least that's not my anticipation I shouldn't say theres not going to be that's not my anticipation.
And the answer is yes, we are continuing to have several discussions.
Page was out yesterday with one dave's going to balanced with another one next week and we've got several of those.
But we're trying to tee up and bring to fruition.
Okay, Great and then.
Is the head of asset management is that position the new one at the company and is that just driven by the bigger size of the company.
A little more detail on that.
Tim has been with US now for a couple of years. He was the senior Vice President.
Give him a promotion to executive Vice President and kind of in recognition.
<unk>.
It is it is a bigger part of what we're doing there.
We grew.
The asset management piece is.
As a significant piece of what we're doing.
Okay and my last question.
A month into the fourth quarter, you mentioned $12 million slated to close just wonder are there any other transactions in the works that could potentially hit in fourth quarter.
Well, we've already closed three five so with the 12.2 or whatever it is it brings the total for the fourth quarter up to $15 seven that we see and we think is very probable.
There is one other possibility of stuff, but I'm not going to say that thats.
<unk>.
Several people have question on how much we have invested but with the notes and and the announced.
Purchase and sale agreements and what we've closed already that would put us at about $108 million for the year, which is a little bit shy of the $120 million, but it's not totally sure.
It's in the range of what we what we say and as I say, it's a lumpy business.
Okay, great. Thank you.
Thanks Sheila.
The next question comes from Alexander Goldfarb from Piper Sandler. Please go ahead.
Hey.
Good morning down there and Dave Congratulations to you in Atlanta, especially with.
What happened earlier this year must be sweet to celebrate baseball bat.
So Tim.
Yes, just going back to the stock obviously since your IPO the all stock comp has been a.
Hallmark of you guys and has been.
Definitely something that is separated you from peers and create a tremendous alignment of interest but in fairness.
Hard to think of it not as an expense because Dave and others, who worked for you as well as yourself.
The stock is comp if you didn't have that you'd have to pay cash so.
NAREIT <unk> was that has flaws, but at least a ticketing system metric.
Alex.
Alex Let me address that for just a second because sure sure.
Fault and that concept is yes, if you look at it just like that it is an experience. However.
It's not a cash expense that affects dividend and we are already getting being for it because we have stock outstanding. So it's already the stock is diluting the shares so by looking at both the start diluting shares and.
Amortizing that into experiences like a double hit.
Living in New York with double taxation.
<unk>.
I can sympathize, but let.
The first question is.
Dave as we look to the fourth quarter and you mentioned that there were some items on the expense side do you expect to be reimbursed, scoring time. The results of this one time accelerated 200000 on the G&A. What do you think is an appropriate run rate like as we think about our model how should we be adjusting the operating.
Expenses in the G&A for the fourth quarter compared to the third quarter given that it seems like there were some outsized items that really hit third quarter.
Yes, I would say the 200000 is obviously the key thing that we called out here because that was an elimination of a position and it truly inflated G&A.
G&A.
I think if you just look at the trends I think in general the cash portion of G&A has been trending a little bit down, but that 5% to 6% cash portion I think is a good proxy for what we've been seeing over the last several quarters and then.
As we pointed out in the additional disclosures on page nine you kind of see how the.
Acceleration of amortization is impacting us from a noncash perspective, so I think the combination of those two things should give you a good sense of where we'll be.
The 200000 out of the third quarter for that when you look at that right.
And then <unk>.
Reimbursement side.
In the property operating expense side that fluctuates, a little bit quarter over quarter. It so.
It went up a little bit.
Could it go down a little bit it might it's just.
Basically timing differences between when we have to pay expenses and when we get the dollars from the tenants. So.
I don't have a crystal ball, so I can't give you a specific answer but I think what youll see if you look at it over the long term those go up and down.
3% to 5% quarter over quarter and its and its.
Ultimately, we feel good about those expenses getting reimbursed.
And then secondly on that.
Alex for model standpoint, what I would look at is like the last four quarters of property operating expenses on a per square foot basis or something because.
The reason, we called out the property taxes and utilities. This quarter is because there was such an outsized increase in the property operating expense.
Sure.
One item and it's not obvious where the reconcile where reimbursements or.
We'll be because thats all combine in rental income so.
We wanted to make sure people understood comments.
Kind of some onetime items in the property operating expenses it should get reimbursed.
Okay and then the second question, Tim is and I understand the accounting and the impact but given that you guys are bigger and you have the amazing disciplined in acquisitions and I think you've said before you could buy more you still maintain that 9% at what point would it make sense to increase instead of that targeted 120 to $1 30.
Maybe go to something like a $1 40 to 150, so step it up a little bit obviously, not not blowing it out but stepping it up a little bit to help offset some of the accelerated comp expense given the retirement.
Mandates of SaaS, B et cetera. So is that something that you would see as possible maybe stepping up the acquisition pace a little bit.
Well, let me say this.
The accounting has been doing what we've been doing and we have been producing.
I think pretty pretty good numbers.
For the last couple of years three years five years since inception.
We've been producing good numbers in the accounting has been building over the last.
I guess two or three years.
We've been having to start amortizing stuff quicker.
Quicker.
Yes.
We're not.
Now to feed the Beast right, we don't have fixed targets.
What we can I mean, if you look at if you look at.
Our acquisitions over time, they run anywhere from I think $88 million to $160 million something.
And.
We will acquire things that we're comfortable with that we think can reduce that.
On the income that we're looking for.
And it will be accretive I mean, our goal is to have.
Gross profit increases.
And look to get the the spread between our investments and our weighted average cost of capital a larger as opposed to adding assets to the balance sheet.
Okay. Thank you.
Okay.
The next question comes from Michael Lewis from <unk>. Please go ahead.
Thank you New York Nets fan here, but I think.
Thanks, Dave.
As an employee of Suntrust not sure if any were required to be.
Happy for the brands as well.
Yes.
My first question is about the.
Term sheet on the $60 million of dialysis centers.
I guess it begs the question whats the typical close rate when you get to term sheet and.
I know you put this stuff that's under term sheet in the slide deck and not the press release is that related to the to the uncertainty of the transaction or anything else.
That's been our history Michael from from day, one we don't think term sheets, we don't view as is.
As likely as signed purchase and sale agreements.
And the close.
Purchase and sale agreement I think there is like one in the last five years that we haven't closed them.
On term sheets.
Not quite that good but it's it's pretty good I mean, if we get to a point, where we signed a term sheet.
Only something on the other side it probably is going or something that shows up in due diligence that we're not anticipating would keep us from from closing, but it is less likely than a signed purchase and sale agreement, which is why from a historical standpoint.
We've included the purchase and sale agreements with things and then looking at land and make sure I get this right things that we file with the SEC as opposed to things that we provided to the SEC.
So the slide deck is something that is provided.
And.
Sure.
The other stuff is stuff that we filed with the SEC.
Okay I understand.
Second Tim you correctly pointed out that we failed to consider the no investments that you've made year to date. When we suggested that you were a little bit behind your investment pace.
Those are included in the supplemental but not in the property acquisitions table of course.
Could you maybe talk a little bit about no investments the types of returns and deals but the potential is to do more of those I think the other operating interest line is running at over $3 million a year now.
So could you just talk a little bit about those types of investments.
Alright, well there with existing.
Those are typically with existing tenants or clients.
We basically have two of those relationships now.
<unk>.
We look at and we decide that they're good businesses that will do loans to for for various reasons.
But but I guess.
Both of them are right around $13 million Ethernet and so theres, a total of $26 million.
They generally generate.
10% to 12% returns I'm looking today to make sure I get this right, 10% to 12% returns.
And we.
We anticipate that there'll be outstanding for three.
Three to five years.
Alright, I think thats right okay.
Okay. So do you anticipate.
Any more of those deals or that would just be like a one off as they come up.
It's not something that we market.
But it's not something that we shy away from it if we think it makes sense.
On an overall relationship basis and.
<unk>.
Good for them good for us.
Okay.
Okay.
And then just lastly.
On these deals that are set to close upon occupancy between the beginning of 'twenty, two and the beginning of 'twenty three.
They're nice for us for analysts and investors I guess, because we have good visibility on the amount and the timing there.
You provide a yield expectation.
Which is high.
So.
Maybe talk about the risk return of those and if there are similar opportunities.
To do things like that and kind of a forward basis. Once they are completed.
Can that become kind of a programmatic thing I know these four have been kind of out there for a little while DC, if theres any potential paths to those types of investments.
Well actually before or with a client that we had already done.
<unk> three with.
For risks.
And those got finished in.
Actually sold a couple of them.
Kind of beforehand, and made a big profit on it.
They are.
Basically what we call them with our serial entrepreneurs.
And so it's people that have management.
Management teams that have already.
And our company.
Two a larger entity and.
Basically we're looking at once they once they get them completed.
<unk>.
And we are anticipating.
I would say I used to say, we are anticipating that within five years, they will sell the company, but but now almost have to say within a couple of months they may sell the properties.
So and today in today's environment.
It's a very quick thing.
But again it's.
Risk reward.
We're functioning a little bit like a mezzanine piece.
To them.
By doing this.
It's them, where they want to be a lot quicker because basically.
With.
The one client.
We've done four before when we started to do these the next four is basically just copied the PSA copy all the documents change the names and the addresses in.
Get them done.
So it's a lot easier on them they have a lot more ability to plan their growth.
Have a lot more ability to plan our growth.
And.
We've got good operating people as they operate in but even better operating people and better credit if they fill the operations.
So we view it as a win win and yes, we're out trying to do several more of those type of relationships.
Okay great.
Thinking about the potential for types of investments and opportunities it sounds like potential for all of the above.
Thanks for that appreciate it.
Okay.
The next question comes from Bryan Maher of B Riley FBR. Please go ahead.
Great. Thanks, good morning.
Yes, a little bit different way on.
Kind of acquisition can you talk a little bit about what youre seeing in the seller expectations I mean, when we look at the housing market.
Zane, where we land how prices keep going up are seller expectations in your world offset going up and that being impacted at all to your view on what's going on with inflation and labor shortages.
Good morning, Brian.
And let me ask a question are you calling from Florida.
No I am actually calling from Lewes, Delaware, our shopping for all my mother in law and the bidding wars are insane.
Right now.
The bidding wars are insane.
Residential housing here in Nashville also.
It's not that in what we're looking for I mean, we've always been a one off type of type of person type of entity looking for one off type transactions.
And theirs.
Different stories behind what different things I mean did that groups can't get along or are there is friction between the ownership group and the physician practice not group or are those issues like that.
We haven't seen.
A lot of pushback.
Cap rates for what we do.
No.
They're all healthcare cap rates are.
Very unusually low and we see some of our peers investing in things that.
That the analysts around the numbers.
Basically reduce the numbers for.
But.
<unk> is our goal is to.
Our view is is that we only invest each dollar ones.
And we're trying to get the best return on it that we can so rather than rather than get into a bidding war fight over property.
We just walk away from it we'd rather not spend our dollars on something with a sub optimal return versus spending our dollars room something with a very good return.
Do you think that or.
Or are you seeing the potential for the increases in prices generally, allowing for use that better rent rollouts. When you do release your properties over the next three years.
Okay.
What I've always said and I think I'm going to stick to that is we don't think that we're significantly over market are significantly under market in any of our any of our leases.
We want anybody to start putting in their models significant increase.
Increases in our rents.
As the rent rolls.
But we do think that as we're going through we will see some upticks and <unk>.
Particularly in certain markets.
But it's a market by market type of situation and there are some markets out there that are soft there are some markets out there that are.
But a very strong.
Rent standpoint.
Okay. Thanks, that's all I have.
Thanks, Brian.
As a reminder, if you have a question please press star one.
The next question comes from Rob Stevenson of Janney. Please go ahead.
Good morning, guys, Tim any of the 2022 lease expirations of consequence of known move out at this point.
I don't think there are of any consequence.
We probably have 10 to 20000 square feet that maybe move outs.
Looking at <unk> to see if he's.
You had any thoughts on that but.
My gut reaction is.
We've been in contact with most of them.
We've been in contact with all of them I think to the third quarter of next year and are now starting on the fourth quarter.
And we've got a few but I mean, again thats kind of real estate.
People have to move out so you can lease up so.
Nothing that we're significantly concerned about.
Okay, and then the $3 $5 million property you bought here in the fourth quarter is in the low <unk> in terms of percentage leased their ability to lease that up the remaining portion or is the return just high enough that.
83% leased or whatever.
Meets or exceed your hurdle rates, how should we be thinking about a property like that when you buy it or are you buying it to lease it up or are you buying it.
For what it is today.
I never buy a future.
We bought it whatever the cap rate was that we quoted on that property I think we might nine 3% is an actual in place NOI now.
So where banks basically minus 17%.
Building free.
Now the good news is on that building is the reason that it was for sale. There are six factors in a partnership that couldnt get along with each other anymore.
And it's sitting not own a hospital campus, but I think adjacent to a hospital campus and the hospital leases space than it is.
Physician group related to the hospital and we believe that if you get the ownership of the way that it will be something that can be leased up.
Okay Alright.
Alright, Thanks, guys I appreciate the time.
Thanks, Rob.
This concludes our question and answer session I would like to turn the conference back over to Tim Wallace for closing remarks.
Yes.
Well I would like to thank everybody for taking the time to spend with US. This morning, and we look forward to.
Talking with you all again in three months for the end of the year.
Thanks, so much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.