Q2 2023 Community Healthcare Trust Incorporated Earnings Call
Welcome to community Healthcare Trust's 2023 second quarter earnings release Conference call.
On the call today, the company will discuss its 2023 second quarter financial results.
He 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 August 2nd 2023 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 release as well as its risk factors and M. D. N. A N 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 in its earnings release, which is posted on its website.
The parties excuse me 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.
<unk> may not be recorded or otherwise reproduced or distributed without the company's prior written permission now I would like to turn the conference over to Dave Dupuy CEO of community Healthcare Trust.
Great. Thanks, Jason and good morning, Thank you for joining us today for our 2023 second quarter Conference call.
On the call with me today is Bill Monroe, our new Chief Financial Officer, Leigh Ann Stach, Our Chief Accounting Officer, and Jim Meier, our EVP of asset management.
As previously disclosed Bill joined C. H C T for true Securities on June 1st and its been its first full week on the job meeting many of our analysts investors and bankers at the NAREIT REIT Week Conference in New York City.
We are excited to welcome bill to the team where he brings a wealth of experience from his days as managing director responsible for both health care services and health care REIT investment banking and truest.
Our earnings announcement and supplemental data report were released last night and filed with an 8-K or quarterly report on Form 10-Q was filed last night.
In addition, an updated investor presentation was posted to our website last night.
Before I discuss more normal topics I wanted to provide more details on a couple of items, we disclosed in our 10-Q.
First one of our tenants Genesis care filed voluntary petition for reorganization under chapter 11 of the U S bankruptcy code on June 1st.
Genesis care, which operates 440 cancer care clinics globally has secured commitments for debtor in possession financing to support its business operations, while exploring the separation of its U S business from its businesses in Australia, Spain, and the U K.
On June 27, 2023, the U S bankruptcy court approved Genesis cares request to reject certain unexpired real property leases, including one lease of approximately 11000 square feet with THC T in Asheville North Carolina.
At June 30th 2023, Genesis care was the sole tenant in seven of our properties and a tenant in two of our multi tenanted properties, representing approximately three 1% of our gross real estate properties were approximately 119000 square feet.
Other than the one rejected Liza Nashville, Genesis care has met substantially all of its lease payment obligations to the company through July 2023.
We have engaged counsel to monitor the Genesis care bankruptcy progress and any additional potential impacts to the company.
Second.
We incurred property damage due to vandalism and a vacant property in Houston, Texas, which was covered by our insurance policies. We.
We estimate the amount of the casualty loss was approximately $1 6 million and received insurance proceeds totaling $2 3 million.
Resulting in a net casualty gain of approximately 700000.
Now back to our core business. The second quarter was busy from an operation standpoint, but slowed slightly from an acquisition perspective as a couple of acquisitions anticipated to close in the second quarter slipped into the third quarter.
Occupancy increased slightly from 91.6 to 91, 7% and we continue to see good leasing activity.
Our weighted average remaining lease term declined slightly from seven four to seven one years.
During the quarter, we acquired three properties and one land parcel with a total of approximately 76000 square feet for a purchase price of $15 $7 million.
The properties were 98, 3% leased with leases running through 2033.
And anticipated annual returns of approximately 9.1 to nine 7%.
Subsequent to June 30th we acquired three medical office buildings, and one inpatient rehab facility in two separate transactions for a purchase price of $35 $6 million.
<unk> were 100% leased with leases running through 2038.
And I am proud to announce that with the closing of these new acquisitions, we have surpassed $1 billion in gross real estate properties. This is an important achievement in our company's history and a milestone we celebrated with our team over the last week.
We're not resting on our past success. However, as the company has three properties under definitive purchase agreements for an aggregate expected purchase price of $16 1 million in expected returns of approximately 9.2 to 10, 3%.
The company is currently performing due diligence and expects to close these properties in the third quarter.
Also the company has eight properties to be acquired after completion and occupancy for an aggregate expected investment of 190 $91 million. The expected return on these investments should range from nine one to $9 seven 5%.
We currently expect to close on one of these properties in late 2023.
And the remaining throughout 2024 and 2025.
We continue to have many properties under review and have term sheets out on several properties with indicative returns of 9% to 10%.
We anticipate having enough availability on our credit facilities and through our bank relationships to fund our acquisitions and we expect to continue to opportunistically utilize the ATM to strategically access the equity markets.
Also we declared our dividend for the second quarter and raised it to $45 25 per common share.
This equates to an annualized dividend of $1 81 per share and we are proud to have raised our dividend every quarter since our IPO.
That takes care of the items I wanted to cover so I'll hand things off to bill to discuss the numbers.
Thank you, Dave and let me first say how excited I am to be joining the community healthcare Trust's team.
In my prior role as a healthcare investment banker covering this sector. It was always an honor to work alongside Tim Wallace, you and the entire CH D T T.
I look forward to helping build upon our company's foundation as Chief Financial Officer.
I will now provide more details on our second quarter financial performance I'm pleased to report that total revenue grew from $24 million in the second quarter of 2022 to $27 $8 million in the second quarter of 2023.
Representing 15, 6% annual growth over the same period last year.
When compared to $27 $2 million of total revenue in the first quarter of 2023, we achieved two 3% total revenue growth quarter over quarter.
And on a pro forma basis, if the acquisitions, we completed during the second quarter of 2023 had occurred on the first day of the second quarter. Our total revenue would have increased by an additional $308000 to a pro forma total of $28 $1 million in the second quarter.
From an expense perspective property operating expenses declined by approximately $100000 quarter over quarter to $4 $8 million.
General and administrative expenses decreased from $16 $2 million in the first quarter of 2023 to $3 $8 million in the second quarter of 2023.
$12 $4 million decrease quarter over quarter was driven primarily by the accelerated amortization of stock based compensation totaling $11.8 million recognized in the first quarter. Upon the passing of our former CEO and president as well as a reduction in the second quarter as deferred compensation amortization.
Due to the above mentioned accelerated amortization in the first quarter.
Offset partially by a one time increase in employer Medicare taxes paid in the second quarter from divesting of our former CEO and president shares in.
Interest expense increased from $4 million in the first quarter of 2023 to $4 $1 million in the second quarter of 2023 due to a small increase in borrowings under our revolving credit facility to fund acquisitions as well as higher interest rates under our revolving credit facility.
Moving to funds from operations <unk> grew from $2 $2 million in the first quarter of 2023 to $15 $9 million in the second quarter of 2023.
On a per diluted common share basis over these periods.
<unk> grew from nine to 62 per share, but it is important to remember first quarter F. F. O was negatively impacted by the $11 $8 million or <unk> 47 per share of noncash amortization expenses related to the passing of our former CEO and president, whereas our second quarter <unk> includes a <unk>.
700000, or three cents per share net casualty gain from insurance proceeds.
Received related to one property that was vandalized as Dave mentioned earlier.
Adjusted funds from operations, or <unk>, which adjusts for straight line rent and stock based compensation and the net casualty gain in the second quarter totaled $16 million in the second quarter of 2023, which compares to $15 million in the second quarter of 2022 or 7% growth year over year.
On a per diluted common share basis <unk> increased from 62 in the second quarter of 2022 to <unk> 63 in the second quarter of 2023.
<unk> for the first quarter of 2023 was $15 $6 million. So our <unk> grew by two 8% quarter over quarter.
And finally on a pro forma basis, if the acquisitions, we completed during the second quarter of 2023 had occurred on the first day of the second quarter <unk> would have increased by approximately 169000 to a pro forma total of $16 $2 million or <unk> 63 per diluted common share.
That concludes our prepared remarks, Jason we are now ready to begin the question and answer session.
Thank you we will now 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 to withdraw your question. Please press Star then two at this time, we'll pause momentarily to assemble our roster.
Our first question comes from Alex Alexander Goldfarb from Piper Sandler. Please go ahead.
Hey, good morning, and Bill welcome to sitting on the public side of every land so a fun.
Sometimes for Ya.
Just a question Dave certainly appreciate the upfront disclosure on the Genesis.
Selling maybe just a little bit more color I mean, clearly one rejection additive I think you said you have seven or eight total yes. It seems pretty good. So first has genesis are they completely through the rejection period, and then to 11000 square feet not a big space, but yes, they will have to ask the perfunctory yes.
What are your thoughts on backfill.
Hey, Alex Thanks for the question sure as it relates to Genesis care, you know, they're still they still have the opportunity to reject leases as our understanding in that.
It can happen all the way up to.
When the deadline for submission of bids actually occurs.
So.
That deadline, just so and this is all publicly available information submission of bids is September 22nd.
And ultimately.
We should hear that first week in October who the actually winning bidder is if the schedule is laid out holds so you know as it relates to the nine leases. We have in place. This is one of nine in fact, we're actually already talking to Genesis care about an early termination of this lease.
And we're having discussions with potential tenants, who could backfill the space and so those.
Obviously because of the Genesis care bankruptcy, we've got a lease rejection claim although no we're not expecting to get much from that but.
Ultimately, we're just in dialogue with potential tenants, we think it's an attractive space and so our plan would either be to re lease it or or explore potentially explore selling it if that makes more sense. So.
Okay. So just so Dave just so I understand and forgive me they outright rejected one so not paying on one theyre still paying on these other eight but those are right. There is a potential that other operators will buy those through the bankruptcy auction process.
And that's a reasonably.
You know once we get to I think at the end of September when that bid period stops I think he said.
Then you'll you'll know definitively if what they're keeping what other operators bought or if in fact.
Others are sold but overall you feel pretty comfortable if you get any more that you know there is sufficient demand that the downtime would be minimal.
Yeah, I mean, we're doing work right now the asset management team is looking at those local markets.
Evaluating what the market rents are we feel for that type of medical use we feel like we've got competitive rates and so we're.
We're doing those market studies now so that we're prepared when the actual bid winning better comms and we can evaluate whether we want to move forward under their structure or whether we want to look and potentially evaluate another tenant to.
To fill those spaces, but you know.
It's our thought that you know given the provision of health care that had an immediate most of these spaces that theres going to be there is going to be a buyer and that buyer is going to want these spaces. So we're not anticipating any additional rejections, but obviously that could happen in a bankruptcy process. So we're monitoring that.
As we go forward, okay switching topics the vandalism not something that we typically see in in REIT land I mean outside of a few years ago. When there were some of the riot. So is this something like urban unrest related or was this a disgruntled employee like a.
A million six for one of your Prime I mean, your properties are tend to be sorted out in the outer suburbs not not in the inner city. So just a little bit more color and is this something that you think could occur at other facilities.
Yeah.
This is unusual look I think that our eight years. This is by far the you know the.
Most.
The biggest sort of vandalism issue that we've had you know you are a little bit more at risk for that type of vandalism.
You know when the facility is vacant versus when it is occupied and this was a vacant facility.
It is now held for sale, we intend to sell the facility.
It's frankly, it's one of our IPO properties, it's been empty for.
A couple of years and so it's I don't think it's anything you know I think it is just one of those bad like Titan type of things that happened to us in.
But we are very focus whenever we have an empty building, we have a process of putting up security cameras and making sure that there is sufficient security for that space to prevent this type of thing are these.
These these vandals just work very sophisticated in their approach and and and and did a significant amount of damage to the building.
Good luck. Thank you.
Thanks, Alex <unk> questions.
The next question comes from Rob Stevenson from Janney. Please go ahead.
Good morning, guys.
A question on the Genesis stuff is competitors that might be interested in that business I mean, where are they sort of in.
In that type of business on our rent coverage basis are they materially better than where Genesis is was genesis for the at the assets that you guys have about average in that space.
Should we be thinking about that in terms of the potential for credit upgrade credit neutral credit downgrade from an acquisition of the U S business there.
My my thought process here is it would be credit neutral to a credit improvement.
A lot of Genesis cares problems stemmed from the fact that the hold co level they way over Levered the business and so a lot of the issue that we're seeing with Genesis care is the reality of putting a lot of debt on the business and that that more than likely wasn't hedged creating significant issues for the.
The operating companies to amortize and pay off that debt. So.
We don't we don't think that.
The underlying assets are as much a problem is the actually the original capital structure. So and there are a number of regional cancer operators a lot of those are not for profit companies.
That I think are very stable very good credit tenants and so our view is this would be neutral to an improvement related to.
Two credit, but keep in mind I think a lot of the problems that Genesis care, just just relates to the capital structure that they put on the parent.
Okay. That's helpful. And then how extensive beyond Genesis is your credit watch list or sort of week 10, or do you want to characterize it.
We tenant list et cetera.
And anybody else of concern at this point in terms of not paying rent.
You know, we always Rob have a list of watch list that we watch and talk about as a team on a monthly basis.
And you know have.
Ever since I've been here, so theres always going to be anywhere from six to 12 tenants that for a variety of reasons, we're working with them and dealing with potential issues, but we're not seeing anything you know how did the ordinary or unusual in that watch list and how it's evolved over the last six.
Six to 12 months, it's been a you know with some we have issues we deal with those issues and then you know.
There's there's another tenant.
That will well focus on after resolving the issues of the tenant that we dealt with before so we've got to watch list, we manage and work that watch list very very closely.
But look we've got I don't know roughly 250 tenants and at any one time it wouldn't be surprising to have a eight to 10 of those that we're working through.
Okay. That's helpful and then last one for me.
When you guys look at financing the acquisition pipeline.
What's the cost for incremental debt. These days is there any debt available through term loans et cetera that would be cheaper than I think the revolvers now probably up to 7% or so with where sofer's gone.
Rob you're right that is how we look at our marginal cost of debt right now with where daily. So far is in revolver rates. Obviously, we benefit as you look at our overall cost of debt capital. The hedges that we have in place and so on a total weighted average cost of debt, it's more like four 4%.
But we are cognizant as we think about our marginal borrowing cost that it is that six it was six 8% at 630.
We continue to monitor markets and look at different options I think right now the support we have from our lenders and obviously the returns we're able to generate from our properties.
With our capital structure, but we will continue to evaluate that.
Okay. Thanks.
Again, if you have a question Rob I'm, sorry, again, if you have a question. Please press Star then one.
Our next question comes from Wes Golladay from Baird. Please go ahead.
Hey, Good morning, guys I just had a question on the Genesis that was rejected did anything stand out to you is it just too much competition to the sub market with the rent level to high coverage low just trying to get a oh I guess a feel for how isolated this one would be assuming a successful re org.
Yeah, I mean, all I can tell you is like I said, we were actually already working with them on a termination related to this particular space I think they had just determined that this was not a market that they wanted to you know to operate in a they may not have had.
You know.
His deep.
Our group in this market to compete effectively.
This is this is adjacent to the mission hospital affiliated with HCA and the only thing I can guess is perhaps HCA had a.
<unk> had a radiation oncology presence that this this group was not affiliated with but but again I think.
This is an isolated situation. It's it's good real estate. So we feel good about being able to release it but we don't view this as something that's indicative of the rest of our portfolio for sure.
Got it and then when you look at the acquisition pipeline, we're hearing a lot of sectors, where there's just not a lot of competition, it's really down year over year are you seeing the same thing.
I guess, what's driving the volume that you're seeing now is that more volume is at a higher close rate a little of everything is kind of a little bit of a snapshot of the competitive landscape today versus maybe a year ago.
Yeah listen I think we've got a little bit of a tailwind in our business from an acquisition standpoint, West I mean.
Think about.
Our goal has always been to drive that high single digit cap rate and back when money was free during COVID-19. It was really tough to find those.
Attractive real estate acquisition opportunities in those in that yield framework today, we're seeing a much different case, where all of a sudden that those high single digit cap rates are are really market and.
And the other thing we're seeing too because historically based on the size of the assets that we were acquiring.
No.
To the extent, we did have any acquisition. It was there any competition. It was very little competition, but it was usually 10 40.
Exchange buyers and those buyers really are having difficulty getting any of their any of their deals financed and so anyway I wouldn't I wouldn't point to one thing, but I think in general we're seeing.
More opportunities for the type of real estate that we like and less competition.
For those acquisition opportunities so.
It's been it's been a nice thanks overall tailwind to the business.
Got it and then if I can squeeze in one more is that Capex is up a little bit year over year is that a function of the leasing that you're doing and then do you have an outlook for the second half of the year.
Yeah, we don't we don't provide any sort of <unk>.
Guidance with regard to Capex, but yeah, I think some of that additional capex, it's a variety of things I think.
Obviously, we're looking to make improvements in some of our facilities and often we'll do that around some of the redevelopment projects that we have on the books and so I think youre seeing a little bit of additional capex as it relates to some of those those redevelopment projects by the way are around long term.
Some leases and in general where we're looking to get our yield on top of a good portion of that Capex. So.
So anyway, I would say it's that.
And just kind of the complexion of our assets.
Today and so.
Anyway.
We were not going to provide any any guidance related to it but I think it's kind of you know.
Yeah.
Some of those issues that I just outlined.
Okay and a quick follow up on that so you do have some redevelopment going on and I assume that comes when the facility opens. So you may have some I guess pent up in OE come in May be entering Q4 came from the spend that you did in the first half is that a fair assessment.
I think that's right I think that's right those those projects are coming in over time, but yeah. It's we hope that those will will come online. We've had one of those projects come online in June and we expect to have other ones come online throughout the rest of the year.
Great. Thanks for the time everyone.
Thank you.
The next question comes from Jim Cameron from Evercore. Please go ahead.
Good morning, Thank you hate to dwell on Genesis, but.
Educate me I apologize in the event a new tenant takes over new operator, they don't have any ability to tweak the existing ongoing lease terms between yourselves and then do they there's no way for them to cram down.
Our new leased kind of parameter on you.
No.
Theres no ability for them to do that Jim.
Great Great and then again on the same topic, but I'm sure. Your team has been out there looking at the other eight locations with Genesis.
Would you characterize sort of the utilization I know you you seem confident in there.
Quality of the real estate location, but you know our Ah patients coming into these properties at a viable.
Cancer treatment I'm, just trying to get a sense of.
What's happening at the operational level, if you have any color on that.
Yeah, we actually our asset management team, specifically made sure that we went out and did some some visuals on each of the buildings and.
Yes, they are.
Whether where they're providing a healthcare it appears as though they're open for business as usual so.
We take obviously, we take comfort associated with that.
That's helpful. Thank you very much.
Thanks, Jim.
This concludes our question and answer session I would like to turn the conference back over to Dave Dupuy for any closing remarks.
Thanks, Jason and thanks to everybody for their support and look forward to talking to everybody next time.
Have a good week. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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Okay.
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