Q3 2024 Community Healthcare Trust Inc Earnings Call
Speaker Change: i
Speaker Change: Although we are not yet receiving rent and interest from the tenant the operators consulting team as stabilized hospital staffing reduced costs and improved processes and controls.
Speaker Change: As a result, we are seeing improved census in October.
Speaker Change: Although we do not yet know the timing or amounts that tenant may be able to pay we continue to pursue multiple parallel paths to begin receiving rent and interest payments as soon as possible.
Speaker Change: We remain in active dialogue with the operator and its consultants and we will continue to evaluate all options available to us.
Speaker Change: Under our leases.
Speaker Change: As for the other components of the business.
Speaker Change: Our occupancy decreased from 92, 6% to 91, 3% during the quarter related to a couple of lease terminations and expirations.
Speaker Change: We continue to see good leasing activity in the portfolio.
Speaker Change: In addition, we have five properties are significant portions of them that are undergoing redevelopment or significant renovations with long term tenants in place when the renovation or redevelopment is completed we expect three of these projects to commence their leases during the first quarter of 2025.
Speaker Change: Our weighted average remaining lease term decreased slightly from seven one years to six eight years.
Speaker Change: And during the quarter, we acquired one physician clinic for a purchase price of approximately $6 2 million and an expected return of approximately nine 3%.
Speaker Change: The property is 100% leased with leases with a lease expiration in 2027.
Speaker Change: We have four properties under definitive purchase agreements for an aggregate expected purchase price of $8 $8 million.
Speaker Change: The company is expected returns on these investments range from $9 two nine to nine 5%.
We expect to close on these properties in the fourth quarter of 2024.
Speaker Change: Also the company has signed a definitive purchase and sale agreements for seven properties to be acquired after completion and occupancy.
Speaker Change: For an aggregate expected investment of $169 5 million.
Speaker Change: The expected return on these investments should range from nine 1% to 975%.
Anticipating closing on these <unk>.
Speaker Change: <unk> throughout 2025, 26 and 27.
Speaker Change: Despite having access to our ATM last quarter, we did not sell equity at our currently depressed share price.
Speaker Change: Given the low share price, we are actively evaluating capital recycling opportunities and we would anticipate having sufficient capital from selected asset sales coupled with our increased revolver capacity to fund near term acquisitions.
Speaker Change: Going forward, we will evaluate the best uses of our capital, including if authorized potential share repurchases, all while maintaining modest leverage levels.
Speaker Change: To wrap up we declared our dividend for the third quarter and raised it to $46 five per common share. This equates to an annualized dividend of $1 86 per share and we are proud to have raised our dividend every quarter since our IPO.
Speaker Change: That takes care of the items I wanted to cover so I will hand things off to bill to discuss the numbers.
Thank you before I turn to our third quarter financials, I will expand on the successful closing of our credit facility refinancing two weeks ago that Dave highlighted during his remarks.
Bill: The purpose of the transaction was a routine extension of upcoming debt maturities, but with strong support from 11 existing banks and one new bank, we were able to upsize our revolver, while also reducing its pricing.
Bill: The result is a new five year $400 million revolver with current drawn pricing set so firm plus 170 basis points or approximately six 5% today.
Bill: While our new Upsized revolver provides us with approximately $200 million of available borrowing capacity currently we believe in the importance of continuing our modest leverage profile.
Bill: And so we do not plan to use this borrowing capacity the sustained increased leverage but it does give us enhanced flexibility to execute upon our capital allocation plans as it relates to the timing of closing acquisitions, completing dispositions for capital recycling purposes, and issuing equity depending on share price.
Bill: Yeah.
Speaker Change: I will now provide more details on our third quarter financial performance.
Speaker Change: Total revenue grew from $28 $7 million in the third quarter of 2023 to $29 6 million in the third quarter of 2024, representing three 1% annual growth over the same period last year.
Speaker Change: When compared to our 27 $5 million of total revenue in the second quarter of 2024. It is important to remember that we had approximately $1 $7 million of out of period adjustments in the second quarter of 2024 related to the reversal of rent and interest from the geriatric psychiatric hospital.
Speaker Change: Uh huh.
Speaker Change: Normalizing for those out of period adjustments total revenue growth quarter over quarter was approximately 1%.
Speaker Change: From an expense perspective property operating expenses increased by approximately $414000 quarter over quarter to $6 million, primarily as a result of seasonal increases in HVAC repairs and utilities expense.
Speaker Change: By the hot summer months.
Speaker Change: General and administrative expenses increased slightly from $4 $8 million in the second quarter of 2024 to $4 9 million in the third quarter of 2024.
Speaker Change: Interest expense increased from $6 million in the second quarter of 2004 to $6 3 million in the third quarter of 2024 due to the increase in borrowings under our revolving credit facility to fund acquisitions and Capex.
Speaker Change: Moving to funds from operations <unk> was $12 8 million in the third quarter of 2024.
Speaker Change: On a quarter over quarter basis, <unk> increased by $1 2 million from $11 6 million in the second quarter of 2024.
Speaker Change: And on a per diluted common share basis over these periods.
Though increased from 43 to <unk> 48 per share.
Speaker Change: Adjusted funds from operations, or <unk>, which adjusts for straight line rent and stock based compensation totaled $14 6 million in the third quarter of 2024 on a quarter over quarter basis, <unk> increased from $14 $3 million in the second quarter of 2024.
Speaker Change: For diluted common share basis over these periods.
Speaker Change: <unk> increased from 53 to <unk> 55 per share.
Speaker Change: Finally, I'll highlight again that our dividend remains well covered with our current payout ratio of only 85%.
MJ: That concludes our prepared remarks MJ, we are now ready to begin the question and answer session.
Speaker Change: Thank you to ask a question. Please press star one on your telephone keypad.
Speaker Change: Youre using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: You withdraw your question you May Press Star then two.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: Today's first question comes from Connor Mitchell with Piper Sandler. Please go ahead.
Connor Mitchell: Hey, good morning, Thanks for taking my question.
Connor Mitchell: I touched on it a bit but just wondering if you could provide a little bit more any more color on the.
Speaker Change: The geriatric tenant.
Speaker Change: Tenant issue that popped up in the prior quarter.
Speaker Change: Just if you guys expect any any leases to maybe open how do you feel about back filling them.
Speaker Change: And your confidence level and.
Speaker Change: And getting any return from the the loan that was outstanding.
Speaker Change: Any additional color you might be able to provide at this time.
Speaker Change: Hey, Connor.
Speaker Change: Thanks for the question.
Speaker Change: No.
Speaker Change: It's as I said in my prepared remarks, we've the consultants have done a lot of work over the last several months and I think one of the things. We're excited about is they've been able to focus on the key resource referral sources to repair relationships and.
Speaker Change: And improve admissions and census, and as everybody knows is we've talked about.
Speaker Change: These calls in and previously that sustained level of sensus will translate into consistent rent and interest payments to <unk>. So.
Speaker Change: We feel good about the trends that we're seeing in business.
Speaker Change: As I mentioned also on the call we're looking at multiple parallel paths.
Speaker Change: There had been a number of inbound sort of interest in these.
Speaker Change: <unk> from other operators.
And what I can tell you is the combination of performance of.
Speaker Change: The operator, coupled with inbound interest I think we're going to have.
Speaker Change: Opportunities to get this resolved as we mentioned on our last call.
Speaker Change: And.
Speaker Change: A couple of quarters, but being able to predict the amount of rent and interest in the timing of those rent that rent and interest today as is.
It's a little tricky, because we haven't gotten rent and interest from the company yet.
Speaker Change: But we do expect based on the census that we're seeing and continued.
Speaker Change: Yes.
Speaker Change: Strong occupancy that they will be in a position to do that.
Speaker Change: Yeah, Yeah of course, and then maybe just a follow up.
Speaker Change: Just if there's any other other tenants that might have popped up on the watch list kind of says this issue has occurred.
Speaker Change: And then just a reminder, you guys could give US a reminder of any.
Speaker Change: Any other outstanding loans to tenants as well I think I remember there were two for maybe an aggregate of five or $6 billion, but.
Speaker Change: Just a reminder on that as well please thank you.
Speaker Change: Yeah. Thanks, there are no you know we have.
Speaker Change: Yes.
Speaker Change: 15% to 20 watchlist tenants and those change month over month, depending on what's going on in the portfolio I can tell you that there are no other of our top 10 tenants that are currently on our watch list.
Speaker Change: And as it relates to your question on the loans outstanding.
Speaker Change: The loans have been pretty consistent we've got $2 $2 million loan too.
Speaker Change: Outstanding to an operator behavioral health facilities, we've got.
Speaker Change: Little over $4 million outstanding to another operator, and then we've got one other small $2 million loan too.
Speaker Change: Operator.
Speaker Change: In patient rehab facilities, so very very modest loan levels at this point.
Speaker Change: Okay. Appreciate the color there and then maybe just switching gears.
Speaker Change: As you guys think about putting capital to work and you mentioned.
Speaker Change: The Upsized revolver.
Speaker Change: Lower stock price right now.
Speaker Change: Just curious would you guys think about maybe looking at more development projects like the dialysis clinic discussed and.
Speaker Change: Maybe that's just a source of again, putting capital to work.
Speaker Change: Without having to really think about your leverage profile.
Speaker Change: Or the stock.
Speaker Change: Position at the moment.
Speaker Change: Yes.
Speaker Change: One of the things I mentioned in the opening remarks.
Speaker Change: We generally do an update on our redevelopment projects, we have five of those ongoing right now.
Speaker Change: And as you alluded to those projects.
Speaker Change: Our almost like embedded acquisitions in the portfolio three of those projects, we expect to come online during the first quarter.
Speaker Change: Which we think is a good thing and sort of.
Speaker Change: We expect to generate similar returns on these projects as we do on our acquisitions and so that's something we're focused on yes, we do have the dialysis.
Speaker Change: LOI in place and to the extent there in the market.
Speaker Change: We continue to have dialogue with them and we would look to do something with them from a development standpoint, I will say specifically on that operator that most of their activity has been.
Speaker Change: <unk> of operating companies that Hasnt had real estate associated with it. So there haven't been it's not that they haven't been active.
Speaker Change: Acquisitions that they've done haven't had a real estate component and so we haven't been able to do anything as it relates to that.
To that term sheet so.
Speaker Change: But yes, we are continue to focus on the portfolio, we think investing in our real estate can provide us some good returns internally and as I mentioned also we're going to we're going to look at capital recycling opportunities selectively.
Speaker Change: For non core assets and use that as a way to to.
Speaker Change: To continue to fund growth.
Speaker Change: Again, our goal is not to over lever the business, although we have plenty of capacity on our revolver to fund acquisitions as well.
Speaker Change: Okay. Thank you.
Speaker Change: Thanks Connor.
Speaker Change: Next question is from Rob Stevenson with Janney. Please go ahead.
Rob Stevenson: Hey, good morning, guys.
Rob Stevenson: Dave the $3 2 million on the <unk>.
Rob Stevenson: Jerry Patrick tenant is that just rent or is that rent and the interest on the notes.
Speaker Change: That's just rent.
Speaker Change: And how much is the interest on the notes when you add on to that what's the sort of total that they should be paying you per year that youre not getting.
Speaker Change: On an annual basis would be about $6 million is kind of about $1 million and a half per quarter.
Speaker Change: Okay.
Speaker Change: And then can you remind me when the last four months of payment was for this tenant.
Okay.
Speaker Change: I think we got partial payments back in January and February.
Speaker Change: Okay.
Speaker Change: So the last full month would've been sometime in 'twenty three.
Yes, that's probably right. Okay, and then the three leases the three redevelopment projects that you expect to come online in the first quarter. How material is the AVR off of that how should we be thinking about that in terms of possible earnings impact.
Speaker Change: Rob we haven't disclosed that and part of that.
Speaker Change: So historically, that's not something we disclose but it's going to be.
Speaker Change: It's going to be a meaningful pickup for us.
Speaker Change: Yeah I think.
Speaker Change: Expect that to be kind of a tailwind into the first quarter and some of it is just the timing we expect that those three projects will come online, but it's going to come online throughout the quarter and not all at the beginning but you could think of it in terms of about $750000 plus.
Speaker Change: Yes.
Speaker Change: The annual rent.
Speaker Change: Okay. That's helpful. That's very helpful.
Speaker Change: And then you'd mentioned dispositions do you currently have anything under contract for sale or anything you anticipate closing by year end.
We do.
Speaker Change: Yes.
Speaker Change: We have a small facility, it's very very small so it's not material, but we have one facility that's under contract.
Speaker Change: For about $650000 and we would expect to close that by year end.
Speaker Change: And then the last one for me I think the.
Speaker Change: That pipeline that you guys have the seven properties for $169 5 million one of those was previously expected to close in the fourth quarter.
Speaker Change: Now it looks like it's going to be 25 was that a push out on your and was that a delay in construction <unk> occupancy.
Speaker Change: What sort of pushed that out from the fourth quarter.
Speaker Change: Hey, Rob It's bill it was the pushback on their side just as they were getting.
Speaker Change: Approvals in Medicare accreditation and being in Florida, and some of the Hurricanes that have come through there things are moving a little bit slower. So the property did well through the hurricanes, but the.
Speaker Change: The approval process has slowed down a little bit so instead of being in the fourth quarter. We now estimate that kind of mid to late first quarter next year.
Speaker Change: Okay and do you have any ability on your end to delay the timing of the close on that stuff.
Speaker Change: No not on Rins.
Speaker Change: Okay.
Speaker Change: Alright, Thats all for me Thanks, guys I appreciate the time this morning.
Speaker Change: Thanks, Rob.
Speaker Change: Okay.
Speaker Change: Thank you. The next question comes from Michael Lewis with <unk> Securities. Please go ahead.
Michael Lewis: Great. Thank you.
Michael Lewis: So you addressed the movement in the leased percentage it sounds like that.
Speaker Change: She come back a bit.
Michael Lewis: Did you collect material lease termination fee income in the third quarter.
Michael I appreciate the question so nearly all of the reduction in occupancy quarter over quarter related to one property, which has been on cash basis and not paying rent for the last year, we did negotiated lease termination with that tenant.
Which is going to be paid over four years and there is some incentives for that tenant to prepay us so they're going to be paying as payment monthly payments plus interest too.
Michael Lewis: And ultimately we're going to get that building re leased and get a new long term tenant in there. So we think this is a good outcome for us and so yes to answer. Your question. There was some lease termination fees and there will be ongoing lease termination fees paid monthly based on this termination agreement.
Speaker Change: Okay and then.
Speaker Change: We noticed that life point last quarter was listed at six properties, representing 10, 7% of your total are at.
Speaker Change: This quarter it looks like five properties only eight 7% of your total rent is this related to a life point property, what we just talked about or kind of what happened in the numbers there.
Speaker Change: Yes.
Speaker Change: Different different properties.
Speaker Change: Life point on their side entered into a joint venture where.
Speaker Change: They are they are no longer the primary tenant in that property and so same rent same terms, but a change in ownership of the operations and so a reduction in our life point.
Speaker Change: Concentration.
Speaker Change: Okay.
Speaker Change: And then just lastly for me you talked about some dispositions anything you could say.
What types of facilities, you'll be looking to sell what what the cap rates might be are you selling off the bottom of the portfolio or are you going to be selling sort of stuff that's more.
Speaker Change: Representative of the portfolio just anything you can say about that.
Speaker Change: Yes, so I mean, I think broadly speaking Michael we're looking at a couple of areas for recycling first as you mentioned, we do have a group of buildings, probably less than 10 that may not be a long term fit for the portfolio, but these buildings tend to be smaller and less attractive markets theyre not going to raise a significant amount.
Speaker Change: <unk> of capital, but we do have a much larger group of <unk>.
Speaker Change: Strong performing properties and we could sell those very selectively at very attractive cap rates and we're currently exploring sales of both of those broad groups.
Speaker Change: Look we our ultimate goal is to.
Speaker Change: Is to grow <unk> per share and so we would be very.
Speaker Change: Rifle shot and strategic about selling any of those.
Speaker Change: Facilities, where we might be able to to do.
Get it.
Speaker Change: Gain from the sales and make sure that those gains are.
Speaker Change: Reinvested into the business based on the acquisition pipeline that we have in place and so.
Speaker Change: Look we don't want to raise ATM shares at this at our current share price and so we're looking at this as an alternative until.
We get the share price, where we want it and we can start issuing shares on a more regular way basis.
Speaker Change: Yes, I guess you are a company that's never bought anything below I think this is still true we never bought anything below 9%.
Speaker Change: Cap rates. So I just I was just wondering you know the difference between the cost of equity or the cost of equity and the cost of.
Speaker Change: Selling properties.
Speaker Change: What that spread is but yes.
Speaker Change: It depends on the property I guess.
Speaker Change: Yes, no it depends on the property.
Speaker Change: We.
Speaker Change: We believe that there is a huge disconnect in terms of the actual value of individual properties based is it.
Speaker Change: It relates to where our stock is currently trading and so.
Speaker Change: But we feel very confident that we could we could do some very attractive strategic selective asset sales at very very good cap rates and use those to invest in the higher yielding assets that we do on a regular way basis.
Speaker Change: Okay, great. Thank you very much.
Speaker Change: Thanks for the question.
Speaker Change: Okay.
Speaker Change: Thank you. The next question is from Jim <unk> with Evercore. Please go ahead.
Speaker Change: Hi, good morning, Thank you.
Speaker Change: Just to finish on that last topic, David if we could I mean can we talk about maybe 200 or 250 basis point type spread between implied cap rate on the equity today and do you think realistic disposition cap rates.
Speaker Change: I'd say that that's a good range for sure.
Speaker Change: Okay. That's helpful and then a more qualitatively like you did a tremendous job on expanding your line of credit extending at all of those good attribute just if you reflect.
Speaker Change: What attracted the lenders the lender group what attributes do you think they were underwriting if you will that that allowed you to pull this together I'm just curious how how they looked at TCT.
Speaker Change: Yes, well I'll start and bill jump in but.
Speaker Change: Bill did a great job.
Speaker Change: I think the banks look at it our diversified portfolio and the performance of the portfolio overall, they see a strong dividend coverage.
Speaker Change: See modest leverage they see overall, we've got a portfolio of almost 200 buildings, we've got maybe 10 or 11 of those buildings that.
Speaker Change: Aren't performing the way, we'd want but by and large the portfolio is performing well and so from a credit perspective that modest leverage history of performance and frankly, our track record of being able to work through tenant issues in getting those successfully resolved I think gave the bank group a great deal of confidence.
Speaker Change: And the overall position and strength of Thet that bill jump in yeah, I would agree with all of those and look.
Speaker Change: Having good timing never hurts right I mean, we are in the interest rate environment, where interest rates are starting to decline. Obviously, we will benefit from that banks will benefit from that and so as Dave talked about I think our history of modest leverage in diversification and performance are all strong and we timed the trans.
Speaker Change: Well also.
Speaker Change: Thank you for the color.
Speaker Change: Thank you. The next question is from Barry, Oxford with Collier. Please go ahead.
Great. Thanks, guys real.
Barry Oxford: Real quick you mentioned in your opening comments that.
Barry Oxford: None of your top 10 tenants were on the watch list.
Barry Oxford: Tenants that you are kind of on the watch list or are concerned about is there.
Barry Oxford: A particular property type.
Barry Oxford: That is.
Barry Oxford: Is causing that.
Barry Oxford: Or is it just look it's more one off situations. Barry then it is related.
Barry Oxford: Related to a particular health care.
Speaker Change: Yes, Barry Thanks for the question appreciate that but it is definitely the latter.
Speaker Change: Yes.
Speaker Change: It's tends to be idiosyncratic situations tenant by tenant.
Speaker Change: Situations that we run into and its not nothing broadly we are seeing in any specific sector that we would we would call he needs attention too.
Barry Oxford: Perfect. Thanks, guys appreciate it.
Okay.
Speaker Change: Thanks Barry.
Speaker Change: Thank you. This concludes our question and answer session I would now like to turn the call back over to management for any closing remarks.
Speaker Change: Well, thanks, everybody for the good questions and everyone's interest in the business and we look forward to talking to you again very soon.
Speaker Change: The conference has now concluded. Thank you for your participation you may now disconnect your lines.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: [music].