Q4 2021 Community Healthcare Trust Inc Earnings Call
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Welcome to community Healthcare Trust 2021, our fourth quarter earnings release conference call on the call today. The company will discuss its 2021 fourth quarter financial results. It will also discuss progress made in various aspects of its business.
Following the remarks, the phone lines will be opened for a question and answer session.
The company's earnings release was distributed last evening and has also been posted on its website www Dot C. H C T Dot REIT.
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 16th 2022 and may contain forward looking statements that involve risks 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 release as well as its risk factors and MD&A and it's S. E C 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 as the 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 permission.
Now I would like to turn the call over to Tim Wallace CEO of community Healthcare Trust incorporated. Please go ahead.
Thank you Gary Good morning, everyone and thank you for joining us today for 2021 fourth quarter Conference call.
On the call with me today is Dave Dupuy, our Chief Financial Officer, Leigh Ann Stach, Our Chief Accounting Officer, and Timothy Mayer, our executive Vice President asset management.
As is our normal process our earnings announcement and supplemental data report were released last night and filed with an 8-K and our annual report on Form 10-K was also filed last night.
The fourth quarter was busy from an operation standpoint and.
Little slow from an acquisition standpoint.
We have five different properties are significant portions of them that are undergoing redevelopment or significant renovations with long term tenants in place when the renovations or redevelopment is done.
Our occupancy is up over 90% and we have seen a pickup in leasing activity. We are encouraged by the activity we see on the part of health care providers.
Our asset managers have been busy attempting to control expenses, while maintaining tenant satisfaction.
Our weighted average remaining lease term was relatively stable and just less than eight years.
During the fourth quarter, we acquired three properties with a total of approximately 55000 square feet for purchase price of approximately $9 8 million. These properties were approximately 94% leased with leases running through 2030 and anticipated annual returns of approximately nine three to $9 99.
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For the year, we acquired 13 properties with a total of approximately 329000 square feet for purchase price of approximately $88 4 million.
Which in the aggregate were approximately 98, 3% leased with leases running through 2036 and anticipated annual returns of approximately nine point over eight to 10, 8% to 8%.
In addition, during 2021, we invest in $2014 4 million in notes receivable with anticipated returns of approximately 12%, bringing our total investments for the year to $102 7 million.
The company has three properties under definitive purchase agreements for an aggregate expected purchase price of approximately $11 7 million in expected returns of approximately nine 1% to 936%.
The company is currently performing due diligence and expects to close these properties in the next few months.
We also have the signed definitive purchase and sale agreements for four properties, we 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 half of 2022 and the other three through 2022 and into 2023.
In addition, we still have the same 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.
On another front, we declared our dividend for the fourth quarter and raised it to $43 75 per common share.
This equates to an annualized dividend of $1 75 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, everybody.
I am pleased to report that total revenue for 2021 was $96 million compared to $75 7 million for 2020.
Representing 19, 7% growth over the prior year. Meanwhile, total revenue for the fourth quarter of 2021 was approximately $23 2 million versus $20 1 million for the same period in 2020, representing 15, 5% growth over the fourth quarter of 2020.
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While quarter over quarter revenue was flat.
And on a pro forma basis, if all the 2021 fourth quarter acquisitions had occurred on the first day of the quarter total revenue would have increased by an additional two 222000 to a pro forma total of $23 5 million in the fourth quarter.
From an expense perspective property operating expenses increased year over year from $13 6 million in 2020 to $15 2 million in 2021 or 11, 3%.
During the fourth quarter property operating expenses remained flat at $3 5 million in 2021 compared with the same period in 2020.
Sequentially.
Property operating expenses decreased from $4 1 million in the third quarter to $3 5 million in the fourth quarter.
The decrease in property operating expenses quarter over quarter as a result of property tax true ups on some of our buildings in the third quarter that did not repeat in the fourth quarter as well as normal fluctuations in property operating expenses that occur quarter over quarter.
For the year G&A increase from $8 8 million in 2020 to $12 1 million in 2021 or 38, 2% and.
In the fourth quarter G&A increased from $2 5 million in 2020 to $3 2 million in 2021, or 26, 9% while remaining flat sequentially.
For the year, however, cash G&A increased from approximately four <unk> million in 2000 $20 million to $4 million 948000 in 2021 or 23, 7%.
While in the fourth quarter cash G&A increase from approximately $1 1 million in 2020 to $1 2 million in 2021, or five 9%, while decreasing three 7% quarter over quarter.
Increases in G&A were driven by compensation expenses related to new employees stock issuances and increases in amortization of deferred compensation, including a compressed amortization schedule for some of our ineos.
Please refer to page eight in the supplemental information report as included with our 8-K filing and posted to our website for more details on our cash versus noncash.
G&A expenses.
Interest expense increased year over year from $8 6 million in 2020 to $10 5 million in 2021, or 2022, 3%, while remaining flat quarter over quarter the.
The increase in interest expense for the year related to our March 19, 2021, refinancing, where we added $50 million of incremental term loan debt, which also moved us into a higher pricing tier and our bank grid for the year, our net debt to total capitalization remained concern.
<unk> at 39%.
Our net income increased from $19 1 million in 2020 to $22 5 million in 2021 were 17, 9% for.
For the fourth quarter net income grew from $5 2 million in 2020 to $6 1 million in 2021, or 16, 7% and sequentially net income grew from $5 4 million to $6 1 million or 14, 2%.
Finally, I am pleased to report that funds from operations or <unk> for the fourth quarter grew from $12 2 million or <unk> 53 per diluted share in 2020 to $13 8 million or <unk> 57 per diluted share in 2021.
And on an annual basis, <unk> increased from $45 million or $2 <unk> per diluted share in 2020 to $52 9 million or $2 20 per diluted share or <unk> 17, representing per share <unk> growth of eight 4%.
Adjusted funds from operations, <unk>, which adjust for straight line rent and stock based compensation increased from $12 9 million or <unk> 56 per 56 per diluted share in the fourth quarter of 2020 to $14 9 million or <unk> 61 per diluted.
Share in the fourth quarter of 2021.
And on an annual basis <unk> increased from $46 6 million or $2 10 per diluted share to $56 5 million or $2 35 per diluted share or <unk> 25, representing.
Representing per share <unk> growth of 11, 9%.
From a pro forma perspective, if all of the fourth quarter acquisitions occurred on the first day of the quarter <unk> would have increased by approximately 145000 to a pro forma total of $15 million, increasing fourth quarter <unk> to <unk> 62 per share.
That's all I have from a numbers perspective, Gary I think we're ready to start the question and answer session.
We will now begin the question and answer session to.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question is from Sheila Mcgrath with Evercore ISI. Please go ahead.
Yes, good morning.
Tim you mentioned in your prepared remarks and in the presentation.
<unk> partnership with the dialysis.
Entity.
That still is the term sheet just wondering what has happened for that to be final and final contract and are you pretty close on that.
They've actually been gone through a private equity raise.
They anticipate will close by the end of the first quarter. So we're hopeful that right after that will be.
Documenting some some actual proper.
Properties, so it's not that there's anything wrong with it.
They are strengthening their balance sheet and the ability to grow and we're happy for them to do it.
Okay, Great and then on your <unk>.
LNG by every metric is very conservative what is your view on introducing a little bit more debt to the.
Equation this year and what is the kind of leverage metrics that you'd prefer to operate under.
But we've said from the beginning.
Our preferred long term debt.
Capital is in the 30% to 35% range and we are on the low end of that we did last year and a $50 million term.
Thanks to our credit facility.
In the fourth quarter, we did not access the equity markets through the ATM, So we've kind of blip.
The revolver grew a little bit.
But again.
Long term view is still to be in that 30% to 35% range.
That's where we feel very comfortable.
Okay, great. Thank you.
Thanks Sheila.
The next question is from Alexander Goldfarb with Sandler O'neill. Please go ahead.
Hey, good morning, good morning down there.
Hey, how are you so two questions first.
Obviously, everyone is talking about inflation and then certainly for real estate how.
Landlords are getting pricing power in certain areas retail apartments for example.
As you look across the asset target assets that you.
Seek to own do you see the same dynamic where inflation is accelerating market rent growth or the rents that you will get on renewal or are the properties driven by different dynamics, where the inflation doesn't necessarily translate directly to rent growth.
Yes, I think inflation is our health care properties R. R.
Shielded.
From inflation kind of both ways.
Lower inflation or higher inflation.
And what I mean by that is the majority of our properties have have bumps, but theyre not inflation base.
<unk>.
When we're going to renew properties.
We're also fighting against right now the inflation that the provider is feeling from the standpoint of the labor rate.
In the supply chain.
Cost that they're experiencing so.
My overall view is inflation is.
Basically.
Or a neutral.
It's not a positive is not a negative.
From our standpoint and.
I'll look at Tim producers.
Do you have any additional comments as it relates to what we're seeing from a leasing standpoint.
No I think thats accurate and because.
Health systems and other large operators have had pressures as you've mentioned and then.
But.
The flip side, we have seen some CPI increases that were pretty substantial and some that are subject to caps.
On both the.
Ceilings and floors, which is <unk>.
Tendered.
Okay. Okay and then the second question is Tim you mentioned about fourth quarter being a little slower on the transactions you mentioned auditing 2 million completed last year.
The company has grown almost five times or more so than that since you guys went IPO, which obviously is a credit to your to your investment approach, but the target remains sort of in that 125 ish range.
So what are your thoughts on on increasing that not increasing it fivefold, but maybe adding another may be growing it by $50 million, we're growing it somewhat just too.
Complement the overall growth in the company.
In addition.
Asian to growing several other aspects to the company and exchanged I mean, one is.
Our cost of capital has gone down substantially again.
If you look at what we do we try to manage the difference between our portfolio yield and our weighted average cost of capital and when we started the company our weighted average cost of capital.
That spread was not much.
And the weighted average cost of capital has gone down rather substantially so we can produce.
Higher margin and a higher <unk> rate on a lower volume.
Then we could then we may have news to us trying to manage to <unk> growth and <unk> growth and we want to do that.
On a on a basis that makes sense to us and that we feel comfortable with so.
I've said always this is a lumpy business, sometimes will be on the low end of our investment range sometime will be on the high end of our investment range.
But we feel very comfortable that we can produce.
<unk> and <unk> growth.
Sure.
As above the healthcare REIT average.
With what our current business plan is.
So long.
There will come a time when instead of a $125 50 and it'll be 135.
<unk> hundred 60, or 140 to 170, but I don't see it changing significantly from that as long as we're able to produce the margins and the profit that we can.
And we feel like we still built into the portfolio.
We're renovating redeveloped.
Releasing some of these spaces, we feel like Theres a lot of profit that we can bring out of the existing portfolio that obviously adds to that also so we don't feel a lot of pressure.
Bump it up if we bumped it up we're going to have to reducer.
Our target investment range from the standpoint of return and so we just don't see a need for that right now.
Okay. Thank you Tim.
Thanks.
The next question is from Kyle Mangas with B Riley FBR. Please go ahead.
Good morning, this is Kyle on for Brian .
I was curious if you could provide a little bit more detail on the four properties, you're pointing to acquire for $94 million.
Are they all about the same size and then I think you mentioned that you expect to close on one in the first half of this year.
Yes.
Basically all of the same size its one of our clients and they use the southwest Airlines approach.
It's an inpatient rehab.
Hospital operator.
You walk into we currently have three other properties in our portfolio one in temple, Texas, one in loans and one in Bentonville, Arkansas for Rogers, Arkansas, and you walk into one of the facilities and it looks exactly the same as the other ones.
Even down to the artwork on the wall.
So.
We're doing more properties with them and they currently have them under construction.
The first one has been slowed down a little bit because of the supply chain issues.
The construction industry has experienced.
But the next two I think are doing relatively well because they are in.
Climates that.
That construction through winter.
The first one.
To close <unk> in Cincinnati in the next two are in Texas.
Okay. Thanks for that detail and then on the occupancy front.
At 90% for the year, which is pretty much the highest we've seen over the past couple of years do you think thats pretty sustainable or should we expect that maybe taper off as we move through 2022.
No.
I hope to see that increase we see a lot of leasing activity that we've seen a lot of interest from.
Health care providers <unk> been very subdued on the leasing front for the last couple of years from an expansion standpoint, but but we're seeing a lot of activity. So we've got several large blocks now that are that are under significant discussion and pricing of tenant improvements.
<unk>.
Analysis of fit us et cetera, So we're very hopeful to see that.
Occupancy rate increase.
Okay. Thank you that's all for me.
Thank you, Brian we said hi.
The next question excuse me. The next question is from David Toti with Colliers. Please go ahead.
Good morning, guys just a quick question.
Going back to the inflation issue.
Do you underwrite to increasing your cost of capital in the next 12 months or so.
Secondly, does that impact your investing strategy if the yield on the assets that youre looking at arent moving your spreads obviously collapsing to some extent are you underwriting that.
Dynamic or do you think that you can.
Maintain that spread effectively.
We underwrite.
We do anticipate interest rates to rise.
We don't underwrite inflation, but in our cost of capital, but we do anticipate interest rates to rise I mean, it's a fairly small piece of our.
Of our capital base.
But we do anticipate interest rates or as we do underwrite that and we think that we can fairly well maintain the overall portfolio yield to the cost of capital.
Over the near to mid term.
Okay, and then if it does if it does begin to compress is there a point at which the strategy has impacted in any sense of the external growth.
Efforts.
Become reduced to some extent.
Well.
Yes.
It's hard to imagine.
Being impacted that much.
I mean, our current our current portfolio yield is over 9% and our current weighted average cost of capital is what they've had in a quarter and a half something like that right. So I mean, it's something of a drastic would have to push the cost of capital up to significantly impact us and the only thing I'll add.
If it gets to where it impacts us.
He has significantly impacted the other healthcare Reits.
So I would anticipate at that point in time that cap rates.
Would rise.
Great. Thank you.
Thank you.
The next question is a follow up from Sheila Mcgrath with Evercore ISI. Please go ahead.
Yes.
I noticed that the occupancy.
Hit, 90% as well and I was just curious if you could comment on renewal rate.
Portfolio.
Does that trended and how is that trending recently.
Yeah.
When you say renewal rate are you talking about.
Rental rates are you talking about the percent.
Okay.
<unk> ability of renewals of the tenants staying in place.
I think we've been in the 90% I think renewals I'm looking at him. He is looking in that he's shaking his head.
We've been in the 90% basically for for the life of the company and we think we're still there.
Yes, I agree with that and we had a strong quarter of not just renewals, but expansion of existing tenants along with those renewals.
And since you mentioned it Tim.
On average is to increase the kind of the inflation that you bump.
Upon exploration that you're pumping the new leases.
Yes, that's generally and I mean, we don't we don't try to we're not one who says we can push a rating of 5%.
Generally as I've said from the beginning we think that we're fairly provider friendly and want to maintain the provider relations.
We're basically in the 1% to 3% range generally.
With renewals.
Okay, Great and then just on G&A and maybe this one's for Dave but.
So the step up was because of.
Partially because of that.
The new amortization schedule.
That new amortization schedule in place for all four quarters, and if theres any kind of points that you could give us to how to think about both cash and.
Stock gene G&A in 2022 any guidance.
Type items that would be helpful.
Yes, what I can tell you Sheila is.
It has slowly increased the noncash amortization ramp up quarter over quarter and will probably for the next two and a half years or so.
As we get over the hump.
Terms of the.
Any of those that have the compressed schedule and so that's one of the reasons why we've made an effort to two segment in our supplemental the cash versus non cash because we truly think the cash is the right thing to measure and when you look at the cash basis.
That we put on page eight, especially as a percentage of revenue it's been trending down over the last three quarters. So we certainly like those trends, but yes.
We are not disclosing the specifics with regard to the to the amount of that.
Amortization increase but expect it on a noncash basis to continue to increase for the next two and a half years until we get over that hump.
Okay, great. Thank you.
Sure.
The next question is from Michael Lewis with <unk> Securities. Please go ahead.
Alright, thank you.
All of what I'll call a work from home distraction. So I apologize if you already addressed this.
First.
On your third quarter release.
I think you had said in the press release that you had already acquired one property for $3 $5 million in <unk> and you had another $12 million networks that were under purchase agreement is expected to close in the quarter you did a little less volume than that I was just curious if that was just a timing issue or if something that was under a purchase agreement to sell out.
Hey, good morning, Michael.
We'll let you go with that.
Okay.
Extraction.
And actually we haven't covered that question.
The difference is one property.
As we were doing our due diligence we found out that there was a problem with one of the tenants.
And basically the.
The existing owner nice kick that tenant out but says he has another tenant to replace them.
So we've kind of put it into a holding pattern because we're not buying it.
<unk>.
If you can't replace it with a good quality tenant and he says we can with it.
Hospital system as soon as opposed to a new tenant.
So if he does that we will close on it all the due diligence is done at this point with the exception of this so it would be a very quick close between police and.
And if it does we'll close it if it doesn't we won't.
Alright, and Theres no Theres no cost to you. If you if you don't close on that.
No.
Okay and then.
My other question.
I think you have a handful of properties with tenant purchase options that are now exercisable.
What's your expectation for those are those are those attractive for the tenant exercise do you think youll have some properties that get called.
We really don't anticipate that we've got and as of 12 31, I forget we had we had eight.
In <unk>.
Kevin.
And we've actually negotiated three of those away.
In the first quarter, so I think that's only for ethane.
That new and.
We're not anticipating that those are going to get cold.
You never know, but that's.
The anticipation right now.
And when you say negotiated away what does that mean.
We signed lease amendments that takes the.
That purchase option.
Okay, Alright, Thats all I had thank you.
Thank you.
Again, if you have a question. Please press Star then one the next question is a follow up from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, Tim just one more follow up.
I think in the opening comments you mentioned opex.
<unk>, but I think that Dave mentioned.
Operating expenses were flat just sort of curious.
My impression is that the tenants, it's basically a pass through so except for like some vacancy or whatever it was over the first year. You guys are really sheltered from any operating expense real estate tax increases right or were there. Some other leakage that we should think about as inflation.
Seeped through different costs.
And actually what I said was in my statements was that the asset managers, we're working hard to keep operating expenses low and maintain tenant satisfaction, which I think they've done a great job.
But.
To answer directly your question, we've got 10% vacancy in the portfolio, so operating expenses related to that 10%.
Doesn't get paid tenants.
And then we do have a small percentage of either modified grows our gross leases in the portfolio.
We acquired we don't we don't.
Right those leases.
If it's an acquisition in the leases in place we do have some of those.
So there could be some leakage there.
Okay.
Helpful. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Tim Wallace for any closing remarks.
I think that covers it we appreciate everybody's interest and spending time with US This morning, and we'll see you again in three months. Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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