Q3 2024 Sila Realty Trust Inc Earnings Call - Q&A
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Speaker Change: Good morning and welcome to Celo Realty Trust third quarter 2024 earnings conference call and webcast.
All participants will be in listen-only mode.
Speaker Change: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. I will now turn the conference over to your host, Miles Callahan, Senior Vice President of Capital Markets and Investor Relations for SELA. You may begin.
Miles Callahan: Good morning, and thank you for joining us today to discuss CELA Realty Trust's financial results for the third quarter of 2024. This morning, we issued our third quarter earnings release and earnings supplement, which are available on the investor relations section of our website at investors.celarealtytrust.com.
Miles Callahan: With me today are Michael Seton, President and Chief Executive Officer, Kay Neely, Executive Vice President and Chief Financial Officer, and Chris Flouhouse, Executive Vice President and Chief Investment Officer. We will begin with prepared remarks and then open the call to questions.
Miles Callahan: Before we begin, I would like to remind you that today's comments will include forward-looking statements under federal securities laws.
Miles Callahan: Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate, or other comparable words and phrases.
Miles Callahan: Statements that are not historical facts, such as statements about expected financial performance, are also forward-looking statements. Actual results may differ materially from those contemplated by such forward-looking statements.
Miles Callahan: A discussion of the factors that could cause a material difference in our results compared to these forward-looking statements is contained in our SEC filings.
Miles Callahan: Please note that on today's call, we will be referring to non-GAAP measures.
Miles Callahan: You can find the reconciliation of these historical non-GAAP measures to the most directly comparable GAAP measures in our third quarter earnings release and in our earnings supplement, both of which can be found on the Investor Relations section of our website and in the Form 8K we filed with the SEC this morning.
Speaker Change: With that, I will now turn the call over to our President and Chief Executive Officer, Michael Seton.
Michael Seton: Thank you, Miles. Good morning and welcome to CELA Realty Trust third quarter 2024 earnings call. I would like to thank our shareholders, analysts and all others interested in the company for taking the time to join us today.
Michael Seton: I would first like to thank everyone for your well wishes during and after Hurricane Helene and Hurricane Milton. All of our employees remained safe during the storms, and Seelah's properties in the affected areas in Florida and Georgia experienced no material damage.
Michael Seton: Our thoughts remain with those who are less fortunate, as many communities continue their efforts of cleaning up and rebuilding after the devastation that these storms left behind.
Michael Seton: I will begin with market observations and highlights for the third quarter.
Michael Seton: I will then turn the call over to Chris Flouhouse, our Chief Investment Officer, to discuss our acquisitions, dispositions, and portfolio performance, and have him share some observations on what we are seeing in the acquisition market.
Michael Seton: Kay Neely, our Chief Financial Officer, will then discuss our third quarter financial performance. I will wrap up our prepared remarks with a few closing comments before opening the call to questions.
Thank you for watching. Have a great day.
Speaker Change: We are very excited about the prospects of CELA's investment thesis of investing in high-quality healthcare properties over the continuum of care for years to come.
Speaker Change: The Silver Tsunami is upon us, as all Baby Boomers will be 65 years or older by the year 2030.
Speaker Change: 5,000 people are hitting the 80-year milestone every single day in the United States.
Speaker Change: These demographics mean higher volumes of patients and higher acuity cases for healthcare facilities.
Speaker Change: which we believe translates into higher revenues for healthcare operators and consequently more durable income streams for the healthcare properties which CELA owns and endeavors to acquire.
https://www.kenhub.com
Speaker Change: Construction has been very limited in the market and many new construction projects have been shelved as the economics of such projects don't work based upon construction costs.
Speaker Change: However, we are seeing opportunities to provide bespoke capital solutions in certain circumstances where all of the various factors come together and create a compelling business case for a new facility with Healthcare System Alliance that will serve a specific market demographic.
Speaker Change: By definition, limits on new construction make existing healthcare real estate more valuable, benefiting CELA's existing $2 billion plus portfolio.
Speaker Change: As most of you know, we listed Cielo Realty Trust on the New York Stock Exchange on June 13, 2024.
Speaker Change: As a net lease REIT focused on institutional quality health care properties, we believe we offer REIT investors the best of both worlds.
Speaker Change: Participation in the large and defensive healthcare sector while receiving the benefits of a triple net lease structure including longer lease terms and an appropriately conservative financial profile of the company.
Speaker Change: In the third quarter, we continue to execute our strategy of investing exclusively in high-quality healthcare properties.
Speaker Change: focusing specifically on medical outpatient buildings, inpatient rehab facilities, and surgical and specialty facilities with a thoughtful and disciplined approach.
Speaker Change: At Quarter End, our portfolio was well diversified with 136 properties in 65 markets, primarily in the Smile States across the southern half of the United States.
Speaker Change: By design, our portfolio remains highly diversified geographically and across our targeted healthcare asset types.
Speaker Change: In the third quarter, we reported cash NOI of $40.8 million, and AFFO of $31.7 million, or $0.57 per diluted share.
Speaker Change: This was an increase from the $39.9 million of cash NOI and $30.8 million of AFFO reported during the second quarter of 2024.
Speaker Change: Kay will expand more on our third quarter results and financial trends later in this call.
Speaker Change: It was a busy and productive third quarter overall. We completed several creative transactions, including an acquisition and two dispositions, and renewed and extended the lease terms on numerous leases.
Speaker Change: We also announced a share repurchase program and concluded a tender offer buying approximately $50 million of our outstanding shares at what we believe is a highly accretive price point to the intrinsic value of the company.
Speaker Change: Turning to acquisitions, in late July we acquired a leading inpatient rehabilitation facility in Fort Smith Arkansas for approximately twenty eight point four million dollars.
Speaker Change: This property is in the sweet spot of our investment strategy, being a market-leading facility in a high-growth Sunbelt region, and is 100% leased to a joint venture between one of the nation's leading operators in the rehab space and a leading local hospital system.
Speaker Change: Subsequent to the quarter end on November 5th, 2024, we closed on two mezzanine loans for the development of an inpatient rehabilitation hospital and a behavioral health care facility in Lynchburg, Virginia.
Speaker Change: To date, this brings our total acquisition volume and development loan investments to over $181 million and further expands our already highly diversified high-quality portfolio and builds on our future pipeline opportunities.
Speaker Change: Chris will further discuss the details of these transactions and investment opportunities.
Speaker Change: During the third quarter, we closed on the sale of two vacant properties formerly leased to Genesis Care, leaving only two remaining vacant former Genesis Care properties, which Chris will discuss later in the call.
Speaker Change: Additionally, as previously disclosed, the company owns one property located in Massachusetts, formerly leased to an affiliate of Stewart Healthcare System, which filed for bankruptcy in May of 2024.
Speaker Change: On August 12, 2024, we entered into a contract to sell this property.
Speaker Change: However, on November 4th, 2024, as disclosed in an 8K we filed with the SEC on November 5th, the sales contract was terminated by the prospective buyer.
Speaker Change: It is our intention to either sell or lease the property as expeditiously as possible.
Speaker Change: Even before CELA became a publicly traded company, we have provided shareholders with best-in-class, comprehensive disclosures, financial reporting, and transparent communication.
Speaker Change: We continue to make even further enhancements to our disclosures based on the events taking place at the company and feedback received from the investment community.
for example.
This quarter.
Speaker Change: We expanded our public disclosures on EBITDA coverage ratios to demonstrate the strength of our tenants and guarantors.
Speaker Change: You will find this disclosure in our earnings supplement, which is on the Investor Relations section of our website, and in the Form 8K we filed with the SEC this morning.
Speaker Change: We hope you find the information we provide through our earnings release, earnings supplement, SEC filings, and other forms of communication helpful and easy to understand.
Speaker Change: All told, I am very proud of our team this quarter and year, as we continue to execute on our business plan, both thoughtfully and strategically, and have positioned CELA for a strong close to 2024.
Speaker Change: Now Chris will provide more detail on our portfolio positioning in the healthcare real estate acquisition market.
Chris Flouhouse: Thank you, Michael. At CELA, we leverage our robust investment management and property management teams to maintain ongoing dialogue with our tenants, both through active communication and site visits of each one of our properties.
Chris Flouhouse: This proactive approach allows us to evaluate the health of our tenants, assess property conditions and performance, obtain superior market intelligence, and better understand our tenants' need for future growth.
Chris Flouhouse: Our partnership approach with our tenants positions us well for future opportunities with existing and new tenants.
Chris Flouhouse: Furthermore, our investment management team renewed or extended leases on approximately 134,000 square feet, which was set to expire during the first nine months of the year, representing an approximately 97% renewal rate.
Chris Flouhouse: Our top five markets via BR, Dallas, Oklahoma City, San Antonio, Akron, and Tucson were consistent with last quarter.
Chris Flouhouse: At the end of the third quarter, a robust and diversified portfolio consisted of approximately 5.3 million rentable square feet with an attractive weighted average remaining lease term of 8.3 years, up from 8.2 years last quarter.
Chris Flouhouse: At the end of the third quarter, our portfolio weighted average lease rate decreased by 2% to 95.5%.
Speaker Change: from 97.5% due to the reduction of approximately 181,000 lease square feet related to the company's sole property formerly leased to Stewart that Michael mentioned at the outset of the call.
Speaker Change: We've collected rents from Stewart during the third quarter for the months of July, August, and prorated through September 19, 2024, the date the bankruptcy courts rejected the lease.
Speaker Change: The rejection was welcomed as it allows us to move forward in disposing or reletting of this asset.
Speaker Change: The loss of least square feet from this property was partially offset by the sale of two vacant former Genesis Care assets located in Fort Myers, Florida, which totaled approximately 79,000 square feet.
Speaker Change: 99.9% of our 168 leases are structured as triple net or absolute net leases providing the company with attractive internal growth.
Speaker Change: At the end of the quarter, 83.6% of our portfolio, based on ABR, had an average annual rent escalators of 2.2%, and the remaining 16.4% had base rent increases indexed to the CBI.
Speaker Change: At the end of the third quarter, 68% of ABR from tenants who provided financial reporting at either the tenant or guarantor level maintained a strong EBITDARM coverage ratio of 4.82 times.
Speaker Change: Of the remaining 32% of ABR, approximately two-thirds of the tenants who do not provide financial reporting are associated with investment-grade rated tenants, guarantors, or sponsors.
Speaker Change: Moving to our growth strategy, we continue to find opportunities in the market through both on and off market transactions.
Speaker Change: Our boots-on-the-ground, granular approach to capital allocation and tenant partnerships has resulted in a robust and increasing pipeline in a market where acquisition volumes and competition are down.
Speaker Change: are a low leverage, fortified balance sheet and strong capital position to forge the opportunity to see an outsized level of investment opportunities.
Speaker Change: As Michael mentioned in the third quarter, we acquired an inpatient rehabilitation facility in Fort Smith, Arkansas.
Speaker Change: for $28.4 million, leased to a joint venture between LifePoint Health and Mercy Hospital of Fort Smith, an affiliate of Mercy Health of Missouri, which carries an investment-grade rating.
Additionally, subsequent to quarter end on November 5th
We've closed two mezzanine loans.
Speaker Change: one for the development of approximately 62,000 square foot inpatient rehabilitation facility and one for the development of an approximately 60,000 square foot behavioral hospital.
Speaker Change: These facilities will be located adjacent to one another in Lynchburg, Virginia, and are being constructed by a leading national healthcare developer and one of the largest general contractors in the United States.
Speaker Change: These Mezzanine Loans were structured to maximize risk-adjusted returns for CELA, while also building future acquisition pipeline by providing CELA with the option to purchase each facility at the completion of construction.
Speaker Change: We are actively seeking additional opportunities that we believe will be accretive to our earnings and portfolio construction.
Speaker Change: Turning to dispositions, we closed on the sale of two vacant properties formerly leased to Genesis Care for a gross sales price of $15.5 million.
Speaker Change: We've successfully re-let or sold most of the remaining Genesis Care properties that we owned throughout the bankruptcy, leaving only two remaining vacant former Genesis Care properties in our portfolio, both located in California.
Kay Neely: We are finalizing lease negotiations with a credit tenant at one of the properties and recently entered into a sales contract for the other, which, subject to completion of the buyer's due diligence, is expected to close this year. With that, I'll now turn the call over to Kay.
Thank you, Chris.
Kay Neely: Our gas net income for the third quarter was $11.9 million, or $0.21 per diluted share, compared to $15 million, or $0.26 per diluted share, in the third quarter of last year.
Kay Neely: Our GAAP net income for the first nine months of 2024 was $31.5 million, or $0.55 per diluted share, compared to $33 million, or $0.58 per diluted share, for the first nine months of 2023.
Kay Neely: Our cash NOI for the third quarter was $40.8 million, as compared to $44.2 million in the third quarter of 2023, or a 7.6% decrease.
Kay Neely: This cash NOI reduction results from a combination of dispositions exceeding cash NOI gained from acquisitions.
Kay Neely: the reduced and lost rent associated with the amended master lease with Genesis Care, the steward event previously described, and a decrease in lease termination fee income received.
Kay Neely: These decreases were partially offset by the third quarter 2024 increases at our other same store properties of 2.2% or approximately $765,000 when compared to the third quarter of 2023.
Kay Neely: Cash NOI was $127.6 million for the first nine months of 2024, as compared to $132.1 million for the same period last year, or a 3.4% decrease.
Kay Neely: This is the result of the net effect of an increase in same-store cash NOI of approximately $850,000 and a decrease of non-same-store cash NOI of approximately $5.4 million.
Kay Neely: The increase in same-store cash NOI is primarily due to a one-time severance payment from Genesis Care paid to SELA as consideration of approximately $875,000 for the removal of certain properties from the master lease.
Kay Neely: In addition, there was a 2.3% increase, or approximately $2.4 million,
Kay Neely: and other same-store property cash NOI in the first nine months of 2024 when compared to the same period in 2023, particularly attributable to annual contractual rent escalations.
Kay Neely: This was partially offset by a $2.4 million decline in cash NOI in that period related to the loss of income and higher expenses associated with the Genesis Care and Steward events previously described.
Kay Neely: Non-same-store cash NOI decreased largely due to cash NOI loss from dispositions exceeding cash NOI gained from acquisitions related to the timing of the redeployment of proceeds from dispositions.
Kay Neely: The most notable of these dispositions occurred in December of 2023 when the company sold a significant asset for a sales price of approximately $258.4 million.
Kay Neely: We used the net proceeds of approximately $257 million to acquire $135.7 million of real estate.
Kay Neely: reduced the company's variable rate debt by approximately $72 million in December of 2023, and fund the approximately $50 million modified Dutch auction tender offer that concluded on July 19, 2024, all of which were credited to the company.
Kay Neely: We reported third quarter AFFO of $31.7 million, or $0.57 per diluted share, compared to $34.1 million, or $0.60 per diluted share, in the third quarter of 2023, a decrease of 7.1%.
Kay Neely: In addition to the cash NOI items just discussed, AFFO includes income received from money market accounts.
Kay Neely: which included interest received on $185 million in net cash proceeds after the debt repayment from the sale of the significant asset I mentioned previously.
Kay Neely: Third quarter AFFO also includes lower interest expense compared to the third quarter of last year, primarily due to lower interest rates and lower company borrowings.
Kay Neely: ASFO for the first nine months of 2024 was $100.8 million or $1.77 per diluted share.
Kay Neely: This compares to $100 million, or $1.75 per diluted share, for the first nine months of 2023, an increase of 0.9%. The increase is driven by higher interest income and lower interest expense, more than offsetting the reduction in cash NOI.
Speaker Change: As Michael previously mentioned, we reported sequential increases in both cash NOI and AFFO from the second quarter of 2024 to the third quarter of 2024.
Speaker Change: Although the timing of redeployment of capital and the workout of the Genesis Care and Steward Matters have impacted our third quarter results compared to last year,
Speaker Change: We have made solid progress positioning our portfolio for accretive growth. Importantly, we continue to maintain a strong balance sheet and ample liquidity.
Speaker Change: At quarter end, we were conservatively leveraged with a total net debt of $496.4 million, or 3.5 times EBITDA RE.
Speaker Change: Going forward, we believe a leverage ratio of approximately four to five times net debt to EBITDA RE is an appropriate level for the company. Though at times we may run lower or higher than this level.
Speaker Change: This target leverage level is generally lower than our peers and, we believe, is a testament to the thoughtful and appropriate manner to which we will approach our balance sheet management.
Thank you.
Speaker Change: At quarter end, we had cash, cash equivalents, and availability under our credit facility of approximately $528.6 million, providing us with substantial liquidity to make acquisitions that we believe will enhance the value of our portfolio for the benefit of our shareholders.
Speaker Change: Our outstanding debt was 100% fixed through 11 interest rate swaps, five with an outstanding notional amount of $250 million that mature on December 31st, 2024.
Speaker Change: and six with an outstanding notional amount of $275 million that mature on January 31st, 2028.
Speaker Change: We are actively monitoring broader economic news, reports, and the Federal Reserve's outlook on interest rate cuts.
Speaker Change: as we evaluate new interest rate swaps to replace the notional maturing at the end of 2024.
Speaker Change: On July 19, 2024, we concluded a modified Dutch auction tender offer at the lowest offer price by the company of $22.60 per share.
Speaker Change: We used cash on hand to pay for the approximately $50 million of shares purchased and the associated transaction costs.
Speaker Change: On August 16th, our Board of Directors authorized a share repurchase program of up to the lesser of 1.5 million shares of the company's common stock, or $25 million, for a period of 12 months from the authorization date. At this time, we have not purchased any shares under the program.
Speaker Change: We maintain a conservative dividend payout ratio to provide confidence in the stability of our dividend and to retain capital for future accretive investments.
Speaker Change: In the most recent quarter, our payout ratio was 70.7% of AFFO.
Speaker Change: On October 18th, our Board of Directors authorized a monthly dividend of $0.13 per share, payable on November 15th to stockholders of record on October 31st. This distribution represents an annualized aggregate dividend of $1.60 per share.
Speaker Change: Also on October 18th, the board approved a change in the frequency of the company's distributions from monthly to quarterly, effective in 2025, with the first quarterly distribution to be paid in the first quarter of 2025.
Speaker Change: Adjusting to a quarterly distribution allows management and the Board of Directors to better align distributions with quarterly financial results while also saving the company money associated with the processing and payment of a more frequent monthly distribution.
Speaker Change: I will now turn the call back to Michael for his closing remarks.
Michael Seton: Thank you, Kay. On behalf of the entire CELA team, I would like to welcome our new coverage analysts and any new investors to the company.
Michael Seton: We are grateful for your interest in CELA. We have had many meetings since we listed the company on the New York Stock Exchange in June, and we sincerely appreciate the chance to tell our story. We're looking forward to meeting many more of you at future conferences.
That concludes our prepared remarks. Operator, please begin the Q&A.
Speaker Change: At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star and one to ask a question.
Speaker Change: We'll take our first question from Nate Crossett with BNP. Your line is open.
Hey, good morning.
Speaker Change: I was wondering if you could maybe just talk about the acquisition pipeline currently. I don't know if you can try and size it maybe a bit for us. And, you know, what are you seeing in terms of pricing? And then what's your view, I guess, on the buyback if potential acquisition activity is late?
Robert Stevenson, Miles Callahan, Sila Realty Trust
Speaker Change: Nate, great to hear from you today. Thank you for joining the call.
Let me speak first to
but the overall picture on the acquisition front.
Speaker Change: We're very excited about the opportunities that we're seeing from a volume perspective.
I definitely think from a positioning standpoint.
Speaker Change: taking the company public on the New York Stock Exchange, getting that visibility to the market. Also, telegraphing to the market the leverage of the company and the liquidity that we have has been beneficial for folks.
Speaker Change: brokers, developers, and sellers in the marketplace to be a go-to capital provider in this space.
Speaker Change: What I will do is I'll let Chris address, you know, some more specifics that we're seeing around the acquisition market. And then, Chris, I'll address the aspect as it relates to buyback shares.
Yeah, thank you, Michael.
Chris Flouhouse: As it relates to the acquisition market, we have seen an increasing pickup of volume of just a number of potential transactions that we're able to underwrite.
Chris Flouhouse: This, as we mentioned on the prepared marks, is both on and off market transactions. I would say, you know, really since the Fed, you know, cut rates and actually pivoted while rates have not moved.
Chris Flouhouse: It has gotten sellers to really think about monetizing of an asset.
Chris Flouhouse: You know, we are looking at acquisitions, again, across the continuum of care, you know, really looking at outpatient medical, inpatient rehab, et cetera, and I would say with a bit of a weighting towards outpatient medical in the markets, you know, that where we currently invest in, you know, looking at the Sunbelt.
Chris Flouhouse: in addition to other markets but you know with some emphasis on the Sunbelt but we do feel encouraged about what we see out there you know as it sets up really for 2025.
[inaudible]
Speaker Change: Thank you, Chris. And, Nate, in respect of your question about share buybacks and when it might make sense,
Speaker Change: I think where we sit today is we see greater opportunity on the acquisition front, especially going into 2025.
Speaker Change: where the stock's trading today. Although we're trading at what we believe is a pretty significant discount to our intrinsic value, we obviously executed our modified Dutch tender at a significantly lower rate. So the board did approve a share buyback up to $25 million, and it's something we have as a tool in our back pocket.
I would say from a trading perspective, really
Speaker Change: SEAL has just made its debut and is really just starting to get traction.
Speaker Change: So, as particularly as we get more visibility in front of
Speaker Change: generalist and rededicated investors. We expect to get more traction. We obviously have been added to some indices and expect further ads coming up. So we think this is probably not the right time for it, particularly also in light of the acquisition opportunities that we're seeing.
Okay, that's helpful.
Speaker Change: I had another question just on the new disclosure, the EVA-DARM coverages.
Speaker Change: I was wondering maybe you can just help us unpack what's in that under one times bucket.
Speaker Change: And if there's any potential rent resets there, how should we be thinking about that piece?
Speaker Change: Let me give you color. We did disclose in the supplemental that we filed this morning some more detail as it relates to what percent of ABR figures into these various even-arm coverage buckets.
Speaker Change: And you're obviously asking specifically to those that fall under one times.
Speaker Change: There are 10 properties that fall into that bucket, and that percent of ABR under 1x. And what I would tell you is, at least 50% of those properties are owned or affiliated with large
Speaker Change: some of the largest national health care systems in the country.
Speaker Change: and much of their use in those facilities is for primary care, so primary care is often a loss leader. I would also mention to you, by the way, that nine of those ten properties are medical office buildings.
Thank you.
Speaker Change: So, we feel good about, despite those, at the property level, those assets covering at lower than one times, all of those tenants, by the way, are current on rent.
Speaker Change: So, the paying of rent does not seem to be an issue, they're obviously being otherwise supported, or it just may be a timing based upon the most recent reporting period.
Hopefully that provides you a little bit more color.
Yeah, I mean, you said that five of them were.
Speaker Change: attached to someone like what about the other five I guess?
For more information, visit www.FEMA.gov
Speaker Change: Approximately 50% of the ABR in that bucket, based on ABR.
is
Speaker Change: affiliated or owned by large health care systems. By the way, of the other 50%, a good portion of that is just simply MOB's primary care offerings.
Speaker Change: and you know the primary care business is again oftentimes a referral source to other facilities so serving obviously really the entry point for patient care. So I would tell you overall as we look at the detail around these tenants
Speaker Change: We still feel very good about our ability to receive rent from these tenants.
Okay, that's helpful. I'll leave it there. Thanks.
Thank you, Nate. Thank you.
Speaker Change: Once again that is star one to ask a question. We'll take our next question from Rob Stephenson with Janie. Your line is open. Good morning guys.
Rob Stephenson: At this point, what are you guys thinking is the primary use of the Stoughton facility going to be? Is that still as a healthcare asset? Is that going to be for some sort of alternative use at this point?
Speaker Change: Rob, great to hear from you today. Thank you for joining. The Stoughton facility, I would say we're agnostic as to if there is a buyer, what the buyer uses it for.
Speaker Change: The buyer that we had fall out of contract was going to fashion it into some kind of a residential site and we have been advised...
Speaker Change: by various folks. And by the way, I will mention that we did engage a broker already, even though that contract was just most recently terminated last week. We've already hired a broker, national broker, to market that property, and that broker has already had conversations with folks.
Speaker Change: and is anticipating, in very short order, giving tours of that property.
I would say that...
Speaker Change: It sets itself up to be a continued health care site. It's a large building. However, we've also gotten a lot of feedback, as the other buyer was also interested in it being some kind of a residential site because it's a rather large tract of land.
Speaker Change: So, clearly, if we're leasing it and we're going to own it longer term, we're interested in it being in healthcare.
user.
That being said...
Speaker Change: We're agnostic, of course, as it relates to a buyer buying it and using it for whatever they deem most appropriate.
Speaker Change: So, I would tell you also, I'm fairly optimistic about that being executed on, because we received, even without the hiring of a broker early this year, a number of interested parties who reached out to us proactively.
Speaker Change: This prior buyer came to us along with these other buyers without a broker involved.
Speaker Change: Now, we've hired a broker, obviously, since that has fallen out of contract, and we're going to hit the market pretty hard in terms of blanketing it to determine, you know, who will pay us, of course, the most for that property should it be a sale.
Speaker Change: Was there any issues in the rezoning as residential, and can a new buyer leverage any of the work that the former buyer had done over the couple of months that they had had under contract?
For more information visit www.FEMA.gov
Speaker Change: I won't speak specifically to the zoning, Rob. What I would say, the prior buyer was in conversations with the
Speaker Change: relevant municipal authorities regarding it being residential and based upon the feedback that we got there was a very strong reception to that.
Speaker Change: Okay, that's helpful. Chris, what's the interest or what's the interest rate going to be on the Lynchburg MES loans and when do you expect that entire 17 and a half million will be out the door by?
Chris Flouhouse: Yeah, good question. So it's a, I would characterize it as a mid-teens return for both of the mezzanine loans, again, to a developer that has significant development around, development experience around health care assets and a nationally recognized general contractor. Those draws will begin likely later this month and would continue into the first quarter really next year.
Speaker Change: Okay, and when are those two facilities expected to be completed and occupied? I guess you need to have them occupied before you would acquire them and I guess the other question? Correct.
Speaker Change: So, I guess the first question is, is that a 25, 26 completion? How far out into the future are those completions expected?
Yeah, it would be the first quarter of 2026.
Speaker Change: Okay, and is your ability to purchase that, is that based on a fixed price or an appraisal at that time? What's the mechanism there?
Speaker Change: Yeah, we've pre-negotiated a, you know, a cap rate based on the next 12 months of the NOI, you know, at the time of purchase.
Speaker Change: Okay, that's very helpful. Thank you. And I guess in your mind, you know, given your ability to do stuff like this, what's the relative attractiveness today between making loans and buying assets?
Speaker Change: Yeah, I think this is really a means to, you know, obviously with an operator and system, you know, that we have confidence in and a developer we have confidence in, it's really a way to build our pipeline in the future while having very good risk-adjusted returns along the way. It would not be our expectation that this would be the overwhelming majority part of our, you know, portfolio or capital allocation strategy. And again, this is a creative way to really get to, you know, new assets that, you know, we have confidence in the markets around it.
Speaker Change: All right, that's helpful. And Kay, am I doing the math correctly and that Stewart was about $500,000 of revenue in the third quarter that we need to strip out of the run rate going forward?
Yes, Rob, let me...
about $275,000 for the quarter.
Okay.
Speaker Change: Alright, and then lastly for me, how should we be thinking about pricing today on any swaps that you put in place to replace the ones that are expiring at year end? How significant is the gap today versus what you'd really want to do?
Speaker Change: What we have really seen in the past couple of months is the kind of midterm rates really kind of rising.
Speaker Change: And so when we look at swap rates today, we see something close to 300 BIPs increase on the swaps we have in place for the ones that are maturing at the end of this year. We still have some time to see if those can move, but they have moved up.
Speaker Change: Okay, that's very helpful. Thanks guys, appreciate the time this morning.
Thank you.
Thank you. Thank you. Thank you.
Thank you, Rob. Thank you.
Speaker Change: We'll take our next question from Michael Lewis with Truist Securities. Your line is open.
Michael Lewis: Thank you. So most of my questions were addressed there, but I have one about kind of details back to the MES loan investment.
Michael Lewis: at market or below market or, you know, just kind of a sense on that.
For more information visit www.FEMA.gov
Speaker Change: Michael, great to hear from you today. Thank you for joining. In terms of the overall
Speaker Change: Transaction and I want to clarify something Chris said as well Chris was referring to mid-teens
Speaker Change: pricing for each of these two loans. They're two independent loans.
Speaker Change: for the development, one of the inpatient rehab, the second of a behavioral health care facility. So these will be brand new built subject to very long-term leases with sponsorship from one of the leading operators in the country and each of those respective types of assets along with the dominant health care system in this market that's investment grade rated.
Speaker Change: Those mid-teens returns, by the way, are unlevered, so that's essentially the fees associated with the coupon on the deal in each case paid on the outstandings. So we consider those to be very accretive to the company.
in terms of future purchase price sizes of these assets.
Speaker Change: Roughly speaking, they're each in about the $50-$60 million range, roughly speaking.
Speaker Change: So, as Chris talked about building pipeline, these would be really, call it 2026, you know, call it first half 2026 type purchases if they're executed at that time.
Speaker Change: In respect of the structure of the transaction, I'll also note we've done different types of development, financing, and provided capital for transactions in the past.
Speaker Change: and we've done transactions where there are obligations to purchase and options to purchase. In each of these two transactions, these are options to purchase, not obligations by us.
Speaker Change: So the way we look at that is the loans themselves stand on their own in terms of structure, in terms of security, in terms of returns.
Speaker Change: Moving then to the pricing of the acquisitions, to the extent we decide to exercise those,
Those were negotiated at what we think are
Speaker Change: slightly better than what I would call retail cap rate. So we're getting a little bit better pricing than we would otherwise get as a result of providing part of the capital structure for the development of these transactions. So the option really gives us a chance to look at these opportunities in 2026.
Speaker Change: and say, hey, we like the pricing, we don't like the pricing relative to where market pricing is at that time. I would like to think that it's going to be attractive pricing at that time.
Speaker Change: As we see maybe rates settle by that point in time, it's attractive pricing today, I would tell you, for us, and we would execute at those rates today, but it's hard to predict, of course, what would occur in the future and, you know, a year and a half, two years.
Does that answer your question?
Speaker Change: Yeah, that's perfect. Thank you. And then I'm going to come back to another question that was asked about the steward property. You kind of alluded to a lot of the details about exploring multifamily use and all of that. Could you maybe just be specific about why did that sale fall through? And if so, what was the reason for that? Yeah, that's a great question. I mean,
Speaker Change: And are you owed any compensation for that? Or was that the right under the agreement? And then, you know, I don't, you know, can you share, you know, what it was under contract for, what the price was?
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Speaker Change: Michael, we can't share what it's under, what was under contract for. I can only tell you why the buyer told us it fell through, you know, people may have
Speaker Change: other objectives. But the buyer was in their due diligence period, so they had a refundable deposit up, so it was within their right to terminate that contract during that period of time. They did notify us within that period of time. So SEAL does not do any compensation, other compensation.
Speaker Change: What I would tell you is that it was our understanding that property was going to be some kind of lower income type housing of some kind
Speaker Change: And we don't know exactly the programming for their facility that they were putting there. We're not entirely sure if it was a renovation and expansion of the existing building because they had spent.
Speaker Change: 60 days or whatever the period of time was on it, 60 to 90 days or so on it. So I don't know how far they got. They obviously had taken their architects through and their engineers and the like, but we did have different types of
Speaker Change: buyers interested before from the residential spectrum. And we've also had some interest from the healthcare spectrum based upon the initial broker feedback and the outreach that a broker that we've just hired has made so far. So
Speaker Change: Our impression is that the site is valuable, that it's going to be an opportunity, of course, for someone, if it's us, to lease it. If it's for somebody else to do something else with it, so be it.
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Speaker Change: Okay, great. And then lastly from me, are you able to share the cap rate on the Arkansas acquisition?
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Speaker Change: We don't disclose cap rates on our acquisitions, but it does fit within the range of what we just described.
All right, fair. Thank you.
Great. Thank you for joining, Michael.
Speaker Change: And it appears that we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.
Speaker Change: Thank you, operator. Once again, thank you to our shareholders and members of the research community. We appreciate your interest in CELA and look forward to speaking with you again. Have a great rest of the day.
Speaker Change: That concludes today's teleconference. Thank you for your participation. You may now disconnect.