Q1 2023 Community Healthcare Trust Incorporated Earnings Call
Speaker 1: Hmph.
Speaker 2: financial results. It will also discuss progress made in various aspects of its
Speaker 2: Following the remarks, the phone lines will be open for a question and answer session.
Speaker 2: The company's earnings release was distributed last evening and has also been posted on its website www.chct.ret.com
Speaker 2: 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, May 3, 2023, and may contain forward-looking statements that involve risks and uncertainties. The actual results may differ materially from those set forth in such statements.
Speaker 2: 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 in its SEC filings.
Speaker 2: The company undertakes no obligation to update forward-looking statements, whether as the result of new information, future developments, or otherwise, except as may be required by law.
Speaker 2: During this call, the company will discuss GAAP and non-GAAP financial measures.
Speaker 2: A reconciliation between the two is available in its earnings release, which is posted on its website.
Speaker 2: Call participants are advised that this conference call is being recorded for playback purposes.
Speaker 2: 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.
Speaker 2: This call may not be recorded or otherwise reproduced or distributed without the company's prior written permission.
Speaker 2: Now I would like to turn the call over to Dave Dupuy, CEO of Community Healthcare Trust. Please go ahead.
Speaker 3: Great. Thanks, Gary. Good morning and thank you for joining us today for our 2023 first quarter conference call. On the call with me today is Leanne Stack, our Chief Accounting Officer and Tim Meyer, our EVP of Asset Management.
Speaker 3: The CHCT family had an incredibly difficult and emotional quarter with the loss of the family's founder, chairman, and CEO , Tim Wallace.
Speaker 3: Tim was a great leader but also a friend and mentor to me and many others.
Speaker 3: I have received many heartfelt calls, letters, and emails of support from colleagues and friends expressing their sympathy and remembering Tim.
Speaker 3: His presence and leadership will be missed, but he built a top-notch team that I am now fortunate to lead.
Speaker 3: I am grateful for the support I have received from our Board of Directors, employees, and investors, and I look forward to carrying on being mindful of Tim's legacy as the company's new CEO .
Speaker 3: Our earnings announcement and supplemental data report were released last night and filed with an 8K.
Speaker 3: Our quarterly report on Form 10Q was filed last night. In addition, an updated investor presentation was posted to our website last night.
Speaker 3: The extraordinary events of the first quarter required everyone on the team to step up.
Speaker 3: fill the void left by 10.
Speaker 3: I am proud of how our executive, accounting, and asset management teams responded to these challenges while still delivering a good service to our tenants.
Speaker 3: and continued growth for our shareholders.
Speaker 3: We are seeing steady acquisition activity and our acquisition pipeline continues to build.
Speaker 3: Occupancy was stable at 91.6%.
Speaker 3: and we continue to see good leasing activity.
Speaker 3: Our weighted average remaining lease term declined slightly from 7.6 to 7.4 years.
Speaker 3: On another front, one of our clients, Everest Rehabilitation, sold the operations of four of its inpatient rehab hospitals to LifePoint Health in February . And now LifePoint is our new tenant in these four buildings.
Speaker 3: As part of this transaction, LifePoint can acquire future buildings from Everest upon completion. As part of this transaction, LifePoint can acquire future buildings from Everest upon
Speaker 3: Medicare licensure.
Speaker 3: We believe this gives credence to the quality of Everest buildings and operations. The first quarter we acquired seven properties with a total of approximately 162,000 square feet for a purchase price of $23.4 million.
Speaker 3: The properties were 100% leased with leases running through 2031 and anticipated annual returns of approximately 9.2 to 10.6%. The company has four properties under definitive purchase agreements for an agreed aggregate expected purchase price.
Speaker 3: of $19.7 million and expected returns of approximately 9.2 to 9.3 percent.
Speaker 3: The company is currently performing due diligence and expects to close on these properties in the second quarter.
Speaker 3: The company signed three additional purchase and sale agreements with Everest this quarter and now assigned agreements for nine properties to be acquired after completion and occupancy for an aggregate expected investment of $214.5 million.
Speaker 3: The expected return on these investments should range up to 10.25%.
Speaker 3: And we expect to close on these properties throughout 2023, 2024, and 2025.
Speaker 3: We continue to have many properties under review and have term sheets out on several properties with indicative returns of 9 to 10 percent.
Speaker 3: We anticipate having enough availability on our credit facilities and through our banking relationships to fund our acquisitions, and we expect to continue to opportunistically utilize the ATM to strategically access the equity markets.
Speaker 3: Also, we declared our dividend for the fourth quarter and raised it to 45 cents per common share.
Speaker 3: This equates to an annualized dividend of $1.80 per share, and we continue to be proud to say we have raised our dividend every quarter since our IPO.
Speaker 4: from 23.5 million in the first quarter of 22 to 27.2 million in the first quarter of 2023, representing 15.7% growth over the same period last year.
Speaker 4: Revenue for the fourth quarter of 2022 was $25.3 million, representing 7.2% sequential growth. On a pro forma basis, if all of the 2023 first quarter acquisitions had occurred on the first day of the quarter, total revenue would have increased by an additional $383,000.
Speaker 4: So, pro forma total of $27.6 million in the first quarter.
Speaker 4: From an expense perspective, property operating expenses increased quarter over quarter from $4.2 million in the fourth quarter of 2022 to $4.9 million in the first quarter of 2023, or 17.3%.
Speaker 4: The increase in property operating expenses was mainly due to expenses on properties acquired, as well as increases in property taxes and other normal fluctuations occurring from period to period.
Speaker 4: GNA increased from $4.1 million to $16.2 million sequentially. GNA for the first quarter of 2023 included the non-cash accelerated amortization of Mr. Wallace's invested shares totaling $11.8 million.
Speaker 4: GNA increased from $4.1 million to $16.2 million sequentially. GNA for the first quarter of 2023 included the non-cash accelerated amortization of Mr. Wallace's invested shares totaling $11.8 million. This accelerated amortization of Mr. Wallace's invested shares totaling $11.8 million.
Speaker 4: Excluding this accelerated amortization, GNA increased
Speaker 4: 0.3 million, quarter over quarter or 6.2%.
Speaker 4: Increases in GNA were driven primarily by increases in compensation from annual salary increases as well as professional fees associated with the passing of Mr. Wallace. Also, interest expense increased from $3.5 million to $4 million or 15.2% sequentially.
Speaker 4: This increase was due to the credit facility refinancing in December of 2022, in which we added on a net basis 100 million in term loans as well as increases in interest rates.
Speaker 4: Funds from operations, or SSO, for the first quarter of 2023 was $2.2 million, which includes the non-cash accelerated amortization of Mr. Ross' unvisited shares totaling $11.8 million. As compared to SSO of $13.5 million, the total amount of funds was $2.8 million.
Speaker 4: in the first quarter of 2022. On a per-share basis, FFO was $0.09 per diluted share in the first quarter of 2023 with a 56 cents per diluted share in the first quarter of 2022.
Speaker 4: The non-cash amortization of Mr. Wallace's invested shares, recognized in the first quarter of 2023, reduced FFO per diluted share by $0.47.
Speaker 4: Adjusted funds from operations, or AFFO, which adjust for straight-line rent and stock-based compensation, including the accelerated amortization of Mr. Wallace's invested shares, totaled $15.6 million, compared with $14.8 million in the first quarter of 2022, the total amount
Speaker 4: or 5.2% growth year over year.
Speaker 4: On a per share basis, AFFO increased from 61 cents per diluted share in the first quarter of 2022 to 62 cents per diluted share in the first quarter of 2023, or 1.6% growth.
Speaker 4: Finally, FSO for the fourth quarter of 2022 was $15.4 million, representing a 1.2 cent, 2 percent increase on a sequential basis and down on a per share basis by 1 cent per deleted share.
Speaker 4: On a pro forma perspective, if all of the first quarter acquisitions occurred on the first day of the first quarter, ASFO would have increased by approximately $214,000 to a pro forma total of $15.8 million, or about a penny per diluted share.
Speaker 4: That's all I have for the numbers perspective. Operator, we're ready to start the question and answer session.
Speaker 2: We will now begin the question and answer session.
Speaker 2: To ask a question, you may press star then one on your telephone keypad.
Speaker 2: If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker 2: To withdraw your question, please press star then 2.
Speaker 2: At this time, we will pause momentarily to assemble our roster. Our first question is from Rob Stevenson with JANI. Please go ahead. You're welcome.
Speaker 5: Good morning. Dave, how does the breakdown of the nine properties totaling $215 million in completion break down in terms of expected $23, $24, and $25 in terms of taking possession and you guys needing to fund?
Speaker 3: Yeah, so based on the information we have today, and good morning, Rob, thanks for the question. Based on the information we have today, we are expecting two of those facilities to close in this year. And then we're expecting four to close in 2024.
Speaker 5: and the remaining three would close in 2025. Okay, and are any of those outsized? Or are they all sort of roughly call it 20, $25 million assets?
Speaker 3: Yes, they're all in that range consistent with what we've done in the past. Okay.
Speaker 5: All right, and then how do you guys look at the credit quality of LifePoint compared to where Everest used to be?
Speaker 3: Look, I think, you know, LifePoint obviously did a large take private transaction a few years ago. Apollo is their private equity sponsor. My guess is LifePoint over the next 12 to 18 months will be exploring an IPO as Apollo looks to …
Speaker 3: get out of the deal. I think it's a pickup in credit from our perspective. And we think it, like I said in the prepared remarks, we think it really gives credence to the quality of the buildings, frankly the locations, and the operations of Everest. So we think this is a great transaction.
Speaker 3: Obviously for the folks at Everest, it really validates what they're doing, but we also think it validates, you know, our partnership with Everest and we're very excited about it. Okay. And then last one from me. Where are you seeing cap rates trend these days? What was it on the first quarter acquisitions? Looks like that the four properties for 20 million are...
Speaker 3: Usually there's a story associated with those properties such as, you know, shorter dated leases or some other dynamic that might make the cap rate a little bit higher. But, you know, in general we're seeing really consistent...
Speaker 3: trends in that, you know, call it nine and a quarter up to ten and a quarter range. And, you know, from our perspective.
Speaker 3: Those are right down the middle of the fairway for us. And so those are attractive yields and we'll continue to go after those opportunities.
Speaker 5: Okay, so you haven't seen any big ballooning from what's going on with the banks and other capital sources and pricing these days to really expand that much beyond about a 10% cap rate at this point.
Speaker 3: That's right. That's right. And look, we're going to continue to, you know, obviously try to drive the best yield we can. But I think, you know, to the extent people have an asset that would yield north of that 10.5 range, my guess is they...
Speaker 3: you know, they'd look to hold it for a while and not look to sell. But again, we think that nine and a quarter to ten and a quarter is right down the middle of the fairway. Okay, perfect. Thanks. Appreciate the time this morning.
Speaker 5: Great, thank you. The next question is from Alexander Goldfarb with Piper Sandler. Please go ahead. Good morning. Obviously, condolences on Tim. Dave, you've got big shoes to fill.
Speaker 5: I know I appreciate appreciate that Hopefully you you can channel some of Tim snarkiness that way that part can can live on So two questions here first of you know, just
Speaker 5: You know, Tim obviously was long tenured in the business, started the company, and had a lot of relationships out there, especially with the, the, the sort of, you know, cyclical or, or, you know, the serial developers and such. But you guys have a big team, acquisitions team. Do you feel that, you know, the relationships that he had?
Speaker 5: will be maintained or are there some that really were really Tim-centric and you know you guys will need to either work to rebuild, not to rebuild that's a bad word but you know what I mean like bridge the relationship.
Speaker 3: No, listen, Alex, that's a great question. Appreciate it. A couple of things I would say about that. First of all, you know, the entire team was really instrumental and that included myself. It included Paige, who's still actively engaged and working on those types of relationships.
Speaker 3: and it included Tim, but I would say, you know, Tim's focus was a lot more around originating some of the broker transactions and the broker relationships. And so from our perspective, and frankly from my perspective, I was laser focused on making sure that we had
Speaker 3: those broker relationships institutionalized. And I think we've done a good job in doing that and reaching out. And because, you know, obviously the client relationships are very important, but so is the brokered business. And Tim was the one that had most of those relationships. And so I think what we've done over the last three months is do a real good job of reaching out.
Speaker 5: is going back to the banks and the serial developers, and some of the smaller businesses, I guess it's sort of two parts. One, are you seeing any of the developers or small practices that are getting hit because their local bank is pulling back on credit?
Speaker 5: and it's making them harder to proceed with developments? Or is this where this increases the opportunity for you guys to put out more capital? And if that's the case, do you see doing more sort of like MEZ or PREF funding up front versus buying out on the back end?
Speaker 3: You know, we are seeing and hearing anecdotally that, you know, some of the developers out there as well as some of the buyers who, you know, had a deal under control at a cap rate that was, you know, six and a half or seven, all of a sudden that cap rate doesn't make sense and so they're not in a position where they can close on that deal or they...
Speaker 3: that the best opportunity to do that is through client relationships that we develop. So I will tell you we're continuing to push forward. We've talked to many operators in the behavioral space. We've talked to operators in the inpatient rehab space and beyond and we'll continue to have that dialogue. Thanks.
Speaker 3: We think that all of a sudden the capital that we were offering it at 9 to 10%, which appeared expensive a year or so ago, is not so expensive today. And so, you know, the good news is, I guess what I would tell you is we continue to have that dialogue with the potential, you know,
Speaker 3: And most of those are, you know, owners, owner-occupied type of folks and not providing a capital source for developers per se. You know, never say never. We'll look at every opportunity as it presents itself. But in general, we like the idea of working with our banks.
Speaker 3: and getting them to fund the actual deal and then taking it out when that transaction is open and ready for operations. So Dave, to be clear, you guys are not interested in getting into the Mez or Prefs business. You only want to buy completed assets at the back end, correct?
Speaker 5: That's correct. Okay, awesome. Thank you. Thanks, Alex. The next question is from Michael Lewis with SunTrust. Please go ahead. Thank you. So, first of all, you know, it's sad for all of us to have, you know, this first earnings call without him and I especially extend my sympathies to
Speaker 6: everybody on the call who worked with them, you know, on a daily basis more so than I interacted with them.
Speaker 6: I'm not good at these things, but sorry for the loss. My question, first maybe an update on the CFO search to the extent that you can, and I wonder if it's important to you that they be paid in stock, which has been kind of the history of the company. I'm not sure if it's important to you that they be paid in stock, which has been kind of the history of the company.
Speaker 6: and maybe any other structural or strategy changes that the company as a result of Tim's passing.
Speaker 3: Michael, thanks for the question and really appreciate your kind words. And you know, we miss Tim and miss his presence and we appreciate that.
Speaker 3: As for the CFO search, we are very focused on getting that done, as you might imagine. In my spot, juggling both of those roles over the last three months has been challenging. It's a lot of work. So what I can tell you is we're...
Speaker 3: We're having good dialogue with qualified candidates and we think that hopefully those will result in the near term getting somebody on board. As for the compensation question, we've always said as we launch this search, you know, discussing it at the board level. We really do think that there will be a later-than June meeting, when will be a new visitor or once that's done coming, that there will be a host of new request nineteen year olds arriving and no longer be scheduled for gender within the sports etc. As we went through the search process, we noticed that there are issues about276 hundred
Speaker 3: It's very important that we as a firm, I think, maintain kind of our shareholder-centric approach and all of us sitting in this room take 100% of our compensation in stock. But we're not going to let that drive, you know, be the sole driver for
Speaker 3: our CFO search and candidate. So while it's important that, you know, that candidate understands that that's a significant part of what we do and how we operate, we're going to be open to finding the best candidate. And if that means that that person is going to be the best candidate, that means that that person is going to be the best candidate.
Speaker 3: over time or right away take some amount of cash versus stock, we're not going to preclude that candidate from being considered. So I think that answers the questions or at least all I can say about the CFO search. As it relates to our focus as a business.
Speaker 3: And I've said this on our last call when Tim was on medical leave that, you know, Tim has developed a really good roadmap for this business and it's consistent, it's replicatable. We've got a team in place that understands how this works. We think our investors like the way we...
Speaker 3: And so we'll continue to push forward being consistent with some of those guiding principles that Tim set forth for us.
Speaker 6: Great, thanks. And then just one more for me. You've improved the occupancy quite a bit the last couple of years, largely through acquisitions of well-occupied assets. What do you think about, say, the bottom 5 or 10% of your portfolio, stuff that maybe you've owned for a while and it's not up to the quality of what you've been buying more recently or maybe it's underperforming?
Speaker 6: you know, for some other reason, you know, people have already asked about access to capital and what's going on with the local and regional banks. I imagine maybe it's tough to call the bottom 5% maybe because of high cap rates and they're worth more in a portfolio and that sort of thing. But is there any stress, you know, in the portfolio or, you know, any thoughts, like I said, on some of those underperformers? Or do you not, you know, get anything into what you really think is what all available information and we do know and a clear risk to their Lyn wants us to do this.
Speaker 3: You know, I think there's always going to be some level of, you know, buildings that aren't performing where you want them to. I think in general what we've been able, been successful at doing is redeveloping those projects and those buildings in a way that...
Speaker 3: that allows us to get those projects yielding where we want them to yield and get the occupancy up. But what I will say that Michael is, you know, to the extent we've had buildings, you know, empty for more than a year or two, we're going to take a look at the portfolio and if it makes sense.
Speaker 3: you know, recycling that capital. Nothing has been decided at this point, but we will certainly look at it.
Speaker 2: Again, if you have a question, please press star then 1.
Speaker 2: The next question is from Jim Kammert with Evercore ISI. Please go ahead.
Speaker 7: Good morning, thank you. I apologize, did you cover in the prepared remarks that I see in the investor presentation You've also perhaps entered into a development agreement or take out agreement for some dialysis centers.
Speaker 7: And I was just curious if you could provide more color on the timing and a little about the credit profile that to offer.
Speaker 3: Hi, Jim. No, that has been an agreement that we've had outstanding for a while now. Those term sheets have been, that term sheet has been outstanding for a while. And that is with an existing client who we have...
Speaker 3: who is a tenant in a handful of our buildings. We like that tenant a lot. And that tenant actually just a year ago raised some private equity financing that we think really was, you know, again gives credence to their ability to operate dialysis centers. And I think.
Speaker 3: provide some good overall financial footing for the company. So, you know, it's a recognizable private equity firm. And so we're hopeful that that term sheet results in some business. We've looked at a couple of transactions.
Speaker 3: What I will say is most of the focus of the business are just the reality of the deals they've been looking at in terms of acquisition. There has not been owned real estate as part of that. And so as a result, there hasn't been an opportunity for us to do that.
Speaker 3: you know, to get involved on the real estate side, I still think they're going to focus on some development projects, which could involve us in that term sheet. But, you know, private equity is very focused on ramping up growth as quickly as possible, and so they're rightfully looking at acquisitions.
Speaker 3: some better color after that meeting, but that relationship and that term sheet has been in place for a while now.
Speaker 7: My mistake. I was just sort of never agreeing. You're waiting for a resolution. Got it. And then just turning to the operating portfolio if I could, you've got sort of a mounting amount of lease expirations coming next three years. Any color you can provide on sort of expected roll up or roll down. I know you've been kind of flattish. I don't want to put words in your mouth, but in terms of the rent movement, just curious what you're foreseeing coming up.
Speaker 3: on the minerals? You know, I think what our experience has been that in general, it's very market specific. In some of our markets, we've been up. In some of our markets, we've been down a little bit on average.
Speaker 3: our portfolio is right about where market is. And so we don't expect a material roll down relative to these leases. But the leasing team and Tim's team has done a great job at improving occupancy over the last year and a half or so.
Speaker 3: And I don't know, Tim, if you want to add any more specifics. Yeah, I mean, we like where we are from a leasing perspective. We like where the pipeline sits. And, you know, we're going to have some natural flow as some tenants roll off. But, you know, we've been very successful with the plan that we have and what we're executing. So –
Speaker 2: you know, we're very excited about where the pipeline is and what we're seeing from a retention rate perspective as well in the portfolio. Terrific, thank you. This concludes our question and answer session. I would like to turn the conference back over to David Dupuy for any closing remarks. Great, thanks, thanks everybody for the questions. We
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