Q1 2025 Sila Realty Trust Inc Earnings Call
Good morning, and welcome to feeling Realty trusts first quarter 2025 earnings conference call and webcast. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star followed by.
Zero.
Speaker Change: Now I'll turn the conference over to your host miles Callahan Senior Vice President capital markets and Investor Relations for sealing.
You may begin.
Speaker Change: Good morning, and welcome to Cielo Realty Trust's first quarter 2025 earnings Conference call Yesterday evening, we issued our earnings release and supplement which are available on the Investor Relations section of our website at investors <unk> CLO Realty Trust's Dot com.
Speaker Change: With me today are Michael <unk>, President and Chief Executive Officer, <unk>, <unk> Executive Vice President and Chief Financial Officer, and Chris flow House, Executive Vice President and Chief Investment Officer.
Speaker Change: Before we begin I would like to remind you that today's comments will include forward looking statements under federal Securities laws forward looking statements are identified by words, such as will be intend believe expect anticipate or other comparable words and phrases statements that are not historical facts such as statements about expected fine.
Speaker Change: Performance are also forward looking statements actual results may differ materially from those contemplated by such forward looking statements a discussion of the factors that could cause a material difference in our results compared to those forward looking statements is contained in our SEC filings. Please.
Speaker Change: Please note that on today's call, we will be referring to non-GAAP measures you can find the reconciliation of these historical non-GAAP measures to the most directly comparable GAAP measures in our first quarter earnings release in our earnings supplement both of which can be found on the Investor Relations section of our website and in the form 8-K, we filed with the SEC with that.
Michael: I'll now turn the call over to our President and Chief Executive Officer, Michael <unk>.
Thank you miles and good morning to everyone. Thank you for taking the time to join our call today I will begin by thanking our team for delivering another quarter of solid results. Our results are a testament to the hard work and dedication that continues to drive our success and reinforce the long term value proposition of CLS.
Michael: So.
Michael: Our in place tenancy remains strong as evidenced by high tenant and guarantor EBITDAR coverage ratios.
Michael: Pooled with long lease terms and annual contractual lease escalations, our balance sheet continues to reflect ample liquidity and very modest leverage positioning, which pleases us is most companies contend with the shifting economic landscape.
Michael: Thus far in 2025, we continue to maintain our prudent get active investment approach recently closing on two acquisitions that meet all of our investment criteria and fit strategically into our portfolio construction.
Michael: I realize that appeals to many of us that the economic World Order has changed since our last earnings call in February.
Michael: <unk> surrounding tariffs labor and other inflationary pressures and the distinct possibility of a recession has taken a toll on the global markets and may have significant consequences on the future of many businesses.
Michael: While confusion and uncertainty our upfront and no. One we believe that cielo will continue to offer investors a differentiated opportunity to invest in the REIT space.
Michael: <unk> is focused on acquiring and owning healthcare properties should provide a greater degree of confidence to investors and many other real estate asset classes. The bottomline is that healthcare is non discretionary and healthcare real estate is a vital part of societal infrastructure we.
Michael: We invest in high quality necessity based healthcare properties in markets with growing demand, which are critical to the communities in which they operate.
Michael: This growth is being driven by the shift towards lower cost patient centric settings, and an aging population with increasingly complex medical needs, both of which generate increasing and continuing health care spending which should benefit our tenancy.
Michael: Our triple net lease structure provides a significant advantage for our stockholders by allowing for more predictable income streams with major capital costs of owning real estate residing not with us as a responsibility, but rather with our tenants.
Michael: Our weighted average remaining lease term of more than nine five years with average annual contractual rent escalations of two 2% enables predictable long term revenues, which grow each year.
Michael: Seal is lease structures and characteristics are the bedrock of the company stability.
Michael: And we believe position us as a safe haven compared to many other investment opportunities.
Michael: Despite the current economic backdrop, we continue to demonstrate success further building our portfolio.
Michael: Our two most recent acquisitions are emblematic of our target acquisition market, both being newly constructed highly utilized lower costs patient care settings with investment grade rated health system affiliations.
Michael: One last remaining point and using a metaphor.
Michael: We have a tidal wave of support of our investment thesis of deploying capital in healthcare.
Michael: Silver tsunami is upon us and should drive the success of our tenants for decades to come by.
Michael: By 2030, just five years away the entire baby Boomer generation will have reached retirement age increasing the U S population sure seniors to $70 million from 61 million people in 2024, while the number of Americans 100 years of age or older is projected to quadruple over.
Michael: For the next three decades.
Michael: 2030 seniors are expected to increase total outpatient healthcare spending by 31% to nearly two trillion.
Michael: This demographic shift we will continually increase patient volumes and the acuity of cases supporting stronger operator revenues and consequently, more durable income for <unk> current portfolio and future healthcare acquisition opportunities.
Michael: We have carefully built this company with both the intention and discipline needed for enduring success.
Michael: There is much noise in the marketplace, which can make it difficult for some to focus we remain as clear eyed and vigilant as ever with laser like attention on making the best possible decisions for the long term value of CLS shareholders.
Speaker Change: I will now turn the teekay to discuss our financial performance.
Speaker Change: Thank you Michael and good morning, everyone.
Speaker Change: Im pleased to report that <unk> delivered solid results in the first quarter further strengthening our financial profile as we started the new year.
Speaker Change: As Michael alluded to we are intensely focused on maintaining a strong financial position, which is fundamental to both safety and the growth of the portfolio.
Speaker Change: Cash NOI for the first quarter of 2025 was $41 2 million.
Speaker Change: Compared to $41 million in the fourth quarter of last year or an approximately 50 basis point increase.
Speaker Change: This increase was driven by scheduled contractual lease escalations and the acquisition of our Knoxville healthcare facility in March.
Speaker Change: These increases were partially offset by slightly higher carrying costs associated with our vacant Stoughton asset.
Speaker Change: Compared to the first quarter 2024, cash NOI decreased 12, 3%, primarily driven by $6 $1 million of nonrecurring termination and severance fees received during the first quarter of 2024 as well as the bankruptcies of Steward health care and Genesis care. This was.
Speaker Change: Partially offset by other same store cash NOI increases of two 1% and acquisitions made since the beginning of 2024.
Speaker Change: <unk> was $29 4 million or <unk> 53 per diluted share during the first quarter compared to $32 million or <unk> 54 per diluted share during the fourth quarter of last year.
Speaker Change: The decrease in <unk> was largely driven by an increase in interest expense relating to the new interest rate swaps entered into at year end 2024. As a reminder, we replaced five swaps that were scheduled to expire in December 2024, with an aggregate notional amount of 250.
Speaker Change: And a weighted average fixed rate of <unk>, 93% with four new swaps at the same aggregate notional amount and a new weighted average fixed rate of 376%. The <unk> decrease was partially offset by a decrease in G&A expenses, excluding stock based compensation and <unk>.
Speaker Change: Evren, which are not included in the calculation of <unk> due to prior year fourth quarter bonuses, partially offset by an increase in professional fees related to our first integrated audit since our public listing last year.
Speaker Change: Compared to the first quarter of last year <unk> decreased 23, 1% largely driven by the previously discussed cash NOI and interest expense impacts.
Speaker Change: Actually offset by lower G&A.
Speaker Change: Our <unk> payout ratio for the first quarter was 76, 4%, which should provide further confidence in our ability to maintain a strong and stable dividend for our shareholders at quarter end, we were conservatively leveraged with total net debt of $526 5 million or three five times net debt to EBITDA.
Speaker Change: We continue to believe a leverage ratio of approximately $4 five to five five times net debt to EBITDA Ari is an appropriate level for us, though at times, we may run lower or higher than this level. This target leverage level is generally lower than our peers, which we believe reflects the disciplined and thoughtful approach we take towards balance sheet.
Speaker Change: Management, particularly.
Speaker Change: As we navigate a current uncertain macroeconomic environment.
Speaker Change: We believe maintaining a strong balance sheet with low to moderate leverage ample liquidity and financial flexibility is fundamental to being a resilient and sustainable rate at.
Speaker Change: At quarter end, we had over $598 million in liquidity, providing us with substantial dry powder to continue to make accretive acquisitions for the foreseeable future.
Speaker Change: Much of that liquidity stems from our new $600 million revolving line of credit, which we entered into in February 2025, replacing our prior $500 million revolving line of credit.
Speaker Change: The successful recast of the revolver, which was oversubscribed by approximately 70% allowed us to increase the initial size of the facility by $100 million.
Speaker Change: This extra liquidity help strengthen <unk> financial profile, providing breathing room, while we navigate macroeconomic volatility as well as providing additional optionality to execute on our growth objectives in the coming years.
Speaker Change: At quarter end, we had only $32 million outstanding on our revolving line of credit.
Speaker Change: At the end of the quarter 73, 3% of ABR from tenants, who provide financial reporting at either the tenant or a guarantor level, maintaining strong EBITDAR coverage ratio of five three times.
Speaker Change: The 26, 7% of total ABR, representing non reporting obligations.
Speaker Change: More than half are associated with investment grade rated tenants guarantors or sponsors.
Speaker Change: While we continue to maintain a proactive approach to evaluating our financial strength and credit quality of our tenant base. It is simply too early to accurately determine the impacts from pending tariffs and evolving health care policy.
Speaker Change: <unk> even in current conditions, we believe that our tenants are well positioned to absorb the impact without experiencing significant disruption are.
Speaker Change: Our high EBITDAR coverage ratios provide a comfortable margin and we know Medicaid in particular makes up a minority share of the payors at each of our property subtypes.
Chris: We continue to actively monitor the current macroeconomic landscape. We believe <unk> is in an enviable position as it pertains to our corporate financial profile and the strength of our portfolio in health care partners I will now turn the call over to Chris to share details on our portfolio activity.
Chris: Thank you Jay we had another successful start to the year on both the acquisitions and operations front in March and April we completed two acquisitions totaling approximately $59 million.
Chris: Check all the boxes of our disciplined investment criteria quality properties with established operators in markets that have growing demand for essential health care services.
Chris: These acquisitions are purpose built highly utilized inpatient rehabilitation facilities in Knoxville, Tennessee in Dover, Delaware and expanding our footprint into two new states.
Chris: Knoxville Health care facility as a modern specialty on patient rehabilitation facility to our portfolio. While steel is expansion into the Knoxville market supports our desire to continue to scale within the sunbelt. This property fully leased to a joint venture between University of Tennessee Medical Center to Nova healthcare and life point.
Chris: Is located within a prominent regional health Park that acts as a center of gravity with dentists community with tenancy anchored by quality healthcare system partners.
Chris: The Dover Health care facility located in the capital of Delaware is fully leased to a joint venture, including investment grade rated health Medical Center and post acute medical the facility has consistently maintained high census, the census, opening while the market benefits from high barriers to entry, including protection afforded by the state.
Chris: Delaware's certificate of public review licensure process.
Chris: Given the consistent demand at the property since opening we believe theres an opportunity to expand the facility beyond what is currently operating today.
Chris: While we have had recent success in the acquisition market, where we remain acutely aware of the uncertain macroeconomic situation, which Michael described earlier.
Chris: Action market undoubtedly operates better when there's certainty around the operating landscape and interest rates. Currently there is certainty around very little so far we've experienced a strong pipeline of opportunities and we're still actively building and executing on deals within the pipeline. However that does not mean things will stay that way.
Chris: <unk>.
Chris: And the real estate World private markets close to public markets, which in a rapidly changing capital markets environment could lead to a cooling off although very little as certain today you can trust that Sheila will continue on as a prudent and disciplined capital allocator and we will be sure that our acquisition activity continues to be accretive to earnings.
Chris: <unk> to growth and to the quality of the portfolio.
Chris: We continue to closely monitor the previously disclosed bankruptcy of the tenant at our Savannah Health care facility anchored by landmark, which represents 6% of our portfolio of annualized March 2025 contractual base rent as of today.
Chris: And rejected all payments due to Sheila had been made in fall <unk>.
Chris: Turning to leasing activity at the end of the first quarter. Our portfolio consisted of approximately $5 3 million rentable square feet with an attractive weighted average remaining lease term of nine seven years. While we are currently in discussions with tenants for all leases expiring in 2025, we renewed or extended leases on approximately 122000.
Chris: Square feet in the quarter driven by the extension of our Lubbock healthcare facility, which represented 102000 square feet.
Speaker Change: Additionally, we maintained our weighted average annual contracted rent increases of two 2%, which continues to highlight the long term growth and return opportunity of our portfolio at quarter end. We remained at 96% leased unchanged for the last quarter I'll now turn the call back to Michael for closing comments.
Michael: Chris before we move onto Q&A I want to once again extend my sincere thanks to the entire team at cielo their hard work and dedication continue to drive our success on.
Speaker Change: On behalf of our leadership team and board of directors, we deeply appreciate the support of our shareholders and we will do everything in our power to ensure that <unk> remains a sound investment opportunity for both existing and future shareholders. This concludes our prepared remarks operator, please begin the Q&A.
Michael: Hey.
Michael: Thank you ladies and gentlemen, we will now begin the question answer session should you have a question. Please press the star followed by the one on your Touchtone phone, you'll hear a prompt that your hand has been raised should you wish to decline from the polling process. Please press the star followed by the two.
Michael: If you are using a speaker phone please lift the handset before pressing any case one moment. Please for your first question.
Michael Lewis: Your first question comes from Michael Lewis Truest Security. Please go ahead.
Michael: Great. Thank you.
Speaker Change: Could you maybe talk a little about the start and property and I know last quarter, you talked about it could be a new leaf it could be a sale maybe.
Michael: Maybe update us on timing et cetera.
Michael Lewis: Sure Michael.
Michael: Michael Good morning, and thank you for joining the call.
Michael: As it relates to Stoughton as we had previously mentioned to you and others. We engaged a broker late last year. If you really hit the market in the first quarter of this year to solicit bids for the sale or lease of the property.
Michael: As it relate we had a couple of.
Michael: Parties healthcare users interested in leasing the property and I would say that more robust interest.
Michael: Has been from the.
Michael: The sales side really for multifamily use of the property, which sits on a large parcel that would of course involved I would tell you that the approach of these multifamily developers who bid on the property of which we've had several bids.
Michael: Would involve essentially a teardown of these existing structure, which is a fairly large structure.
Michael: We.
Michael: Ultimately.
Michael: As well in these bids determined that the process that.
Michael: These multifamily bidders were going to take was to essentially have a traditional due diligence period.
Michael: Hard on property.
Michael: I would tell you a protracted process isn't related to the close as they pursued entitlement and that was generally consistent across the beds at the property.
Michael: We went back to the market and did solicit some cash bids and received some interest and I think can her remarks referred to the write down of that property, which really reflects the as is cash bids.
Michael: That particular property.
Michael: What we are exploring now at this point because the carry cost of our consideration, but also maximizing value is.
Michael: Essentially.
Strategies to reduce the carrying costs that we've indicated before.
Michael: Quite high reducing them quite substantially.
Michael: And pursuing potentially an alternative where.
Michael: Goodbye, we can close the gap on our closing process.
Michael: Sure.
Michael: Our multifamily buyer of that property. So let me put a finer point on that and say that it could potentially involve.
Michael: Demolition of the existing structure and working with someone in some format.
Michael: Pursuant title them into the property, we think ultimately that's good when you think about the figures.
Michael: Alton.
Michael: Essentially significantly more money.
Michael: And what we have written down the property to at this point.
Michael: To pursue such a process, which we think can be accomplished in summer.
Michael: Somewhere around 12 to 18 months.
Michael: Okay, great. Thank you for that.
Michael: Have you funded anything on the two Mezz loan investments that you announced last quarter is there any update on those.
Michael: Yes, we have funded.
Michael: Balance as it relates to the mezzanine loan associated with the inpatient rehab facility. We have not funded the equity requirement is higher on the inpatient behavioral facility yet we do expect both of those loans to be fully funded in Q3 of this year.
Speaker Change: Okay got it and then it was a small amount, but I noticed that 271000 incur.
Speaker Change: The increase in the credit loss reserve is that related to what he was talking about with landmark or was that something else.
Michael Lewis: Hey could you address that yes, Michael.
Michael Lewis: The credit loss reserve also known as the seasonal reserve is a required reserve in the vast majority of cases, when you have loans receivable and so that reserve is something that's assessed it.
Michael Lewis: It's very much a qualitative judgment type assessment every quarter.
Michael Lewis: For the loans at the end of last year that it was immaterial, but you do even in an unfunded scenario you have to have some kind of reserve put up.
Michael Lewis: That's simply required under GAAP, so that is related to.
Michael Lewis: The two methods.
Michael Lewis: Okay got it.
Michael Lewis: And then lastly.
Michael Lewis: For me, maybe more of a bigger picture question I wanted to ask about the.
Michael Lewis: The investment pipeline, but also.
Michael Lewis: The.
Michael Lewis: Does the cost of equity impact your acquisition pace at all in other words, you have borrowing capacity of well below target leverage.
Michael Lewis: But maybe you're not in a hurry to get to your target leverage while your stock trades below NAV or or maybe the stock prices irrelevant right now to your investment decision I don't know so maybe its two questions right about the investment pipeline and then thoughts about like I said, if the stock price impacts your decision at all.
Michael Lewis: I think it's a great question and you identified.
Michael Lewis: With the second part of your question is something we think about quite frequently as it relates to the investment pipeline first what I would tell you is.
Michael Lewis: We're seeing opportunities as we've demonstrated already to this year acquiring $59 million worth of property as you know we've talk generally speaking about.
Michael Lewis: And sort of normalized conditions and I'm not sure. If these are the most normal conditions under which any company is operating in the current economic landscape, but normal conditions acquiring based upon the current size of the company.
Michael Lewis: Maybe between 150 and $250 million.
Michael Lewis: Real estate.
Michael Lewis: Again, we have a good start to the year of $59 million. So we felt pretty good about this year, what I would say though is.
Michael Lewis: The opportunities that we're seeing are with a range of the kind of cash cap rate guidance, we've given you before.
Michael Lewis: Quality of the transactions, we're seeing is quite high and the reason I would tell you that we're seeing that in the market generally is probably seeing that in the sales market is because.
Michael Lewis: Theirs.
Michael Lewis: There's not a plethora of buyers I would tell you is in the market in our particular space, we see still a lot of private buyers not a ton of.
Michael Lewis: Publicly traded Reits.
Michael Lewis: <unk> the healthcare real estate space does have a lot of <unk>.
Michael Lewis: Private funds in it and sovereign wealth funds, who are buyers. So we see those as our competitors.
Michael Lewis: But if someone has a lesser property to bring to market I think largely they're not going to probably get a lot of interest in this market because again liquidity in the market just generally speaking it sounds of course, what we saw in call. It.
Michael Lewis: And the $18 19 type peers as it relates to our stock price I think it's <unk>.
Michael Lewis: First and foremost in our minds.
Michael Lewis: Because we are very conscious of.
Michael Lewis: Nothing to acquisitive until such time, we also see the right trajectory.
Michael Lewis: Up as it relates to our share price, where we can raise equity capital so yes to be blunt we.
Michael Lewis: We don't see ourselves leveraging too.
Michael Lewis: High point of the ranges that we've given.
Michael Lewis: Until such time that we see.
Michael Lewis: Our stock price recover.
Michael Lewis: So we see a methodical approach.
Michael Lewis: C a.
Michael Lewis: An approach, where we're leaning in but its going to be cautious as well because again over the next the remainder of 2025 of course, we don't really know what it will bring.
Michael Lewis: Okay. Thank you very much.
Michael Lewis: Thank you Michael.
Speaker Change: Your next question comes from Rob Stevenson from Janney. Please go ahead.
Rob Stevenson: Hey, good morning, guys.
Speaker Change: Chris.
Speaker Change: The acquisitions like Knoxville, or Dover Wheres your minimum yield today, given the sort of backdrop that you're operating under.
Speaker Change: Talked about and Michael's questions about.
Speaker Change: Cost of equity turbulence in the marketplace I mean, where are you guys sort of at this point to deploy capital where does it yields need to be even for quality deal.
Speaker Change: Yes no.
Speaker Change: Thanks for the question and thanks for joining today as we've previously stated we see opportunities in that six 5% cap rate area to seven 5% cap rate area. It does it does depend on obviously the property type.
Speaker Change: Quality of the sponsorship as well as the term those are all things that we think about when we're balancing what we view would be the best risk adjusted.
Speaker Change: Investment for our company and shareholders.
Speaker Change: Okay, and then the percentage of ABR with EBITDAR coverage below one times went from one 8% last quarter down all the way to 50 basis points, what drove that substantial improvement.
Speaker Change: What drove ultimately that improvement was.
Speaker Change: Essentially some properties moving up.
Speaker Change: In terms of their coverage levels now we have as a half a percent of ABR versus what we had before two properties and three tenants and of those three tenants or of that ABR that set 0.5% portfolio ABR <unk>.
Speaker Change: 60% of that is investment grade rated and by the way one of those tenants.
Speaker Change: Dental tenant.
Speaker Change: They had some shifting of doctors, we've been in touch with that tenant.
Speaker Change: And as we all know everybody needs to go to the dentist.
Speaker Change: On a regular basis. So we have no concerns as it relates to those who are paying.
Speaker Change: Who have coverage below one times by the way, they're all current on rent.
Michael Lewis: Michael that 130 that you talked about that moved up.
Speaker Change: <unk> wise or coverage wise was that largely one tenant or was that.
Michael Lewis: Several tenants that wound up seeing.
Michael Lewis: Improvement it was one tenant who moved up about one 3% of ABR you referenced yes, Okay, and then lastly, obviously.
Michael Lewis: If you bake.
Michael Lewis: Smaller mid size acquisition, you have got the line of credit, but if you wanted to do something more permanent.
Michael Lewis: Or longer lasting like a term loan et cetera, where is your borrowing cost today, whether or not it's floating and then swapping to fixed or just looking at just fixed rate debt out of the chute. How do you think about where your incremental cost of debt is.
Michael Lewis: You elect to do something other than a line of credit.
Michael Lewis: Well right now all of our debt is bank debt. So we have two term loans and our revolving line of credit. We're currently borrowing at.
Michael Lewis: $5 five 7% on a revolver, which is so far plus a spread of 125 basis points.
Michael Lewis: Our intention as we grow over time is to look to other sources of debt capital.
Michael Lewis: To get longer duration debt longer duration fixed rate debt, which is a good match for our long.
Michael Lewis: Weighted average remaining lease term fixed rate.
Michael Lewis: Income with known escalators.
Michael Lewis: That is not something that is imminent for us given where our current maturities on our debt. We don't have anything maturing in the near term.
Michael Lewis: And as we look at those borrowing rates they would be higher than bank debt borrowing rates at this time, but of course, we want to have there is tight.
Michael Lewis: Types of debt capital.
Michael Lewis: And our capital stack them and not just the bank debts. So over time, whether we move into the private placement market.
Michael Lewis: Priced.
Michael Lewis: Pricing for that can be you know.
Michael Lewis: 200 Bips.
Michael Lewis: Over the 10 year roughly is what we're seeing in the market today for that for a company like ours, but again, that's something that's more in the future for us. So we really still look at the revolver for our cost of debt.
Michael Lewis: Okay. Thanks, guys appreciate the time.
Michael Lewis: Okay.
Michael Lewis: Okay.
Michael Lewis: Thank you Rob.
Speaker Change: There are no further questions at this time I will now turn the call over to Michael <unk>. Please continue.
Speaker Change: Thank you again to our shareholders and members of the research community for joining US today I Hope you all have an outstanding day.
Speaker Change: Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect your lines.
Speaker Change: [noise].