Q2 2019 Earnings Call
Well I come to community have guests drops or 2019 second quarter earnings release conference call.
On the call today, the company would discuss its 2090 in the second quarter financial results.
It would also discuss progress made in various aspects of its business.
Following their remarks, the four lots would be open for a question and answer session.
The company's earnings release was distributed last evening and has also been posted on its website.
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The company wants to emphasize that some of the information that may be discussing D. school would be based on information as of today August 7th Attorney 19, and May contain forward looking statements that involve risk and uncertainty.
Actual results may differ materially from those set forth in such statements.
For a discussion of these risks and uncertainties you should review the company's disclosure regarding forward looking statements in its earnings release as well as the risks factors and M.D. and.
Okay, and he's S.P.C. findings.
The company undertakes no obligation to update forward looking statements, whether as the resolved some new information future developments or otherwise, except as maybe required by law.
During this call the company will discuss D.A.P. no G.A.P. financial measures.
Maybe can finish and between the two is available in needs earnings release, which is posted on its website.
Call participants are advised that this conference call is being recorded for playback purposes.
An archive of the call we'd be made available on the company's Investor Relations website for approximately 30 days and is the property of the company.
This call may not be recorded or otherwise reproduced or distributed without the companys prior written permission.
Now I would like to turn the conference over to too much of one of those chairman and Chief Executive Officer, and President of community. That's got dropped incorporated.
[noise]. Thank you operator, and good morning, everyone. Thank you for joining us today for 2019 second quarter Conference call.
On the call with me today is they do free our new Chief Financial Officer State pays Barnes, our Chief operating officer, and Lamb, our Chief Accounting Officer.
As is our normal process, our earnings announcement and supplemental data report.
Were released last night.
Well with an 8-K.
And our quarterly report on Form 10-Q was also filed last night.
We were busy during the second quarter. However, it was basically business as usual.
[noise] as you know we have an active ATM program in place during the first during the second quarter. The company issued through its ATM program, almost a half a million shares of common stock.
And an average gross sales price of $37.85 per share.
We received net proceeds of approximately 18.5 million and an approximate 4.38% current equity you.
[noise] during the quarter, we acquired three properties.
With a total of approximately 110000 square feet for a purchase price of approximately $31.9 million.
These properties were 97.1% leased.
Well at least is running through 2034.
And anticipated annual returns of 9.26% to 9.39%.
[noise] so far this quarter, we have acquired three properties with a total of approximately 130000 square feet for a purchase price of approximately $52.6 million.
These properties are 100% leased.
Again with leases running through 2034 and anticipated annual returns of 9.02% to 11%.
We have bought properties on a definitive purchase and sale agreements for an aggregate expected investment at $15.8 million expected return on these investments should range from 9.2% to 10.1%.
In addition, we have four additional properties under definitive purchase and sale agreement to be acquired after completion and occupancy for an aggregate expected investment of $87 million. The expected return on these investments should range up to 11%.
We expect to be used to be completed and closed out through mid 2020.
We continue to have many properties under review.
And are working on several term sheets with anticipated returns of 9% to 10%.
At this point I'd like to throw a note of caution.
As we are having a good year from an acquisition standpoint, but I would caution anybody from increasing their acquisition targets for us our our internal targets are still the $120 million to $130 million.
It will be lumpy last year was a little bit light this year will be a little bit heavier. In addition, our yields that we.
Look for are still 9% are lower so.
Again, we would caution.
Modeling anything over that slightly over 9% return on the yield.
We anticipate having enough availability on our revolver to fund our acquisitions and we expect to continue to opportunistically utilize the ATM to strategically access the equity markets.
[noise] occupancy increased slightly during the quarter and we continue to see a lot of activity on the leasing front.
We believe we will continue to see the occupancy level pick up over the next several quarters.
On another front, we declared our dividend for the first [laughter] second quarter and raised it to 41.25 cents per common share.
This equates to an annualized dividend of $1.65 cents per share and I continue to be proud to say, we have raised our dividend every quarter since our IPO.
Before I finish my comments I'd like to give an update on pilings hospital.
The process of transitioning continues and the new operators managing islands, the new operators in the process of preparing for the transfer of licenses.
And related items customary for these types of transactions.
We do not expect the cash flow from Highlands change, we continue to collect monthly payments roughly equivalent to what we should be collecting.
Obviously, there are various contingencies that might still occur such that the outcome could be different than what we think now but we believe we have addressed the situation as best we can.
I believe that takes care of the items I wanted to cover so for the first time I will hand things off today to cover the numbers.
Thanks, Tim and thanks to you page lean in the rest of the CHC team for making me feel so welcome over the last three months I'm really excited to be part of this growing and dynamic company.
Now onto the financial results.
As Tim discussed we continue to see positive growth momentum in the business. Specifically total revenue grew from 13.4 million in the first quarter 2000 $19 million to $14.3 million in the second quarter, representing 6.5% sequential growth revenue for the same period in 2018 was 12.4 million representing 15.4% growth over the same period last year.
On a pro forma basis, if all the second quarter acquisitions had occurred on the first day of the quarter total revenue would have increased by approximately $280000, resulting in total revenue of 14.7 million for the second quarter.
As Tim said, the real estate portfolio was over 90% leased 90.1% leased in the second quarter compared with 88.9% the prior quarter.
In addition weighted average lease terms grew from 6.9 years to 7.2 years, reflecting in part our continued success in re leasing and extending lease terms for the portfolio.
From an expense perspective property operating expenses were down slightly quarter over quarter from 3.075 million to 2.993 million or 2.7%.
Mostly due to higher seasonal costs in the first quarter.
DNA remained flat quarter over quarter, despite adding two key corporate positions Chief operating officer page Barnes his new role and VP of internal audit.
Page of course is always elected to take a 100% of his compensation and deferred stock, notably each of the new team members, including myself has elected to take a 100% of their compensation and deferred stock as well.
I'm pleased to report that funds from operations FF, though for the second quarter of 2019 grew to 7.4 million from $6.7 million in the first quarter or 10% sequentially.
Adjusted funds from operations for at that though which adjust for straight line rents and stock based compensation totaled 7.9 million or 42 cents per diluted share compared with the first quarter 2019 at 7.2 million or 40 cents per diluted share.
Finally on a pro forma basis, if all of the 2019 second quarter acquisitions occurred on the first day of the second quarter at that though would have increased by approximately $140000 to a pro forma total of just under 8 million.
Increasing asset, though to 43 cents a share.
That's all I have from a numbers perspective, operator, we are ready to start the question and answer session.
We will now begin the question and answer session to ask a question you May Press Star then one on your touch Simpson.
Incident on your question has been addressed.
So your question is best Davinci.
His question.
Is from Alexander Goldfarb with Sandler O'neill. Please go ahead.
Oh, Hey.
Good morning, good morning down there.
Just a few questions first of all hi, Tim appreciate your comments on that.
Tempering expectations that you would go above your acquisition targets, but just curious you did 18 million of ATM, but you closed 32 million in the quarter with another 53 subsequent and obviously you've got more teed up so just curious why sort of the relative small ATM issuance in the in the second quarter and then for the balance of the year. How are you thinking about ATM versus.
You have increasing on the debt side.
Good morning.
Good morning, and thanks, Thanks for thanks for being on the call.
We basically are looking at the ATM as a way of accessing the capital markets to make sure that we stay within our.
Our overall capital structure requirements.
So were we did 18 and a half million in the second quarter. There was a significant increase over the first quarter, we basically still view. The ATM is is a new.
Capital raising capability and were trying to determine exactly how much we can rely on it and how much how much can be raised in the quarter.
Yes on a going forward basis.
What we're anticipating news, probably raising 60% to 70% of our acquisitions.
And this is over time, this isn't a quarter to quarter basis, but over time, 60% to 70% of our acquisitions through the ATM, which if we do a $120 million a year in acquisitions, you're talking about probably somewhere around $90 million a year through the ATM or.
21 of them work out to 22, and a half million or so.
Quarter and.
Through the ATM. So so as long as we can do something like that and we don't feel like were impacting the stock significantly.
Something and then.
Pellet $20 million to $30 million per quarter range is probably what were going to look at doing.
Through the ATM.
Okay, and then earlier in the year you had you had talked about the restructured hospital from last year that they may possibly yes.
Pay you basically by you guys out and be free and clear and that part of why you're increasing acquisitions was two.
Overcome this where do we stand with that operator that portfolio are they do you anticipate getting that back or does it look like they're going to stay in which.
But we're well I mean, and we're in active discussions with them.
Kind of what's happening with and and obviously now that were into it for a while I mean, we feel a lot more comfortable with it there their operations.
Annualized EBITDA for 2018, we're probably paying close to 10 million on an annualized yes, and thats the year that came out of bankruptcy.
So our loan of $23 million, which is all the debt that they have.
Puts them at a little over two times Levered with that we're currently getting a 9% yield they're current on all their interest payments are ahead on their their principal payments.
So were six months ago nine months ago, we were more anxious for them to pay it off right now we're fairly comfortable.
With that and with the return we're getting although we think sometime in the next six months to year, they're going to want to pay it off because it is a 9% return so.
A.
So long way of answering the question is we're not sure when they're going to paying off where we are a lot more comfortable now.
Holding in longer than than than what we were and.
Our enjoying the return off of it right now.
Right, but I guess it from a modeling perspective, we should think about you know sometime in the next year that tenant that operator is going to pay them off so you're going to lose those earnings is that fair to think about it that way.
Yes, I would.
I mean, because I continue to think sometime in the next year they'll do that.
Whether that third quarter, our second quarter third quarter. This year second quarter next year, you know we.
We don't know.
Okay. Thank you.
Yes.
Next question is from me too costly to with Berger. Please go ahead.
Hey, Thanks. Good morning, guys. I think you may have touched on this a bit on the last call but.
Maybe you can just remind us how you're able to get the investment yields you do as you know is the highest of the net lease Reits. We track. So I mean are these yields is it a function of your relationships in the health care industry or is it.
Just a few alternatives some of these health care tenants have.
Because we've seen cap rates compress I know one of the other net lease sectors.
It's a combination of our relationships that we have in our understanding of what these health care providers are trying to do in growing their company.
And the way that we're able to get some of these returns are is that weve integrated our process with with the construction financing with utilizing our bank space put together a program.
For these operators basically they were our banks will finance the construction of multiple sites and we will take what will be the takeout of it will will sign a purchase and sale agreement to acquire the property. Once it's completed with regard to you Bob.
And so basically what these these operators are doing and we call them. Our serial entrepreneurs. The site that were working with is done is twice before and sold it to the large public companies.
The inpatient rehab and then then it before until it too.
Hello, So it ended up at health, So ER encompass now.
So basically what we do is we make the process is very easy for them to do multiple properties.
You know, we underwrite the bank underwrites, we feel very comfortable because we've got somebody else in there.
With us.
Because the banks responsible for it until it gets completed an occupied.
So it is in essence, a way for them to grow faster without having to go out and individually financing to these facilities and and their goal is to get to a certain EBITDA level to where they can sell to a big company and from our standpoint. This is that much better from our standpoint, because at that point and then we got a big step up in credit.
So that makes sense.
Yeah. That's helpful. And then I think you mentioned that you're trying to extend some lease terms on renewals.
So I'm just wondering is that having any impact on.
Renewal rates or the yields on the new.
Leases extending out further.
You know each lease is different.
It is a different negotiation we.
And it's again, a 12 year lease you probably give a better lace rate can you do if you get a three year lease. So I mean, this kind of a natural part of the lease functioning I mean, what we always try to do is target to make sure we get at least a return on the assets that we were looking for when we bought the asset.
So we have we don't feel like we've seen significant degradation, but again.
When you when you when you sign longer term leases and you see that again as Dave pointed out the word weighted average remaining lease term go up.
The way that it has since we did the IPO and you're probably giving up some lease rate in that process.
Okay. That's helpful.
And then just on the acquisition like the definitive agreements for the acquisitions do you guys ever give any color on what those property types are.
Wow, So I don't think we've ever disclose them until we until we actually but.
Okay. That's it for me thanks, guys.
Thanks.
The next question is from Rob Stevenson with Janney. Please go ahead.
Hi, good morning, guys.
Tim what was the blended yield on the second quarter acquisitions or the one that you get the ones that you guys have closed in the third quarter already.
The blended yield in the second quarter was probably mm three ish patients.
And.
And the ones that are already closed this quarter is probably close to 10.
Okay.
But are you seeing.
No no no I could ask all the acquisitions I mean.
In your in your thinking and everything you know now than a quarter from that standpoint.
Okay, because I was going to say is there anything about the product mix or the location that drove that sort of higher the that the trends versus the night.
Well so far in the second quarter then.
To add to the three acquisitions had been off of the relationships. So those tend to be to be higher.
Okay, and then any known Nonrenewals or I guess, probably more likely downsizing in terms of space and the remaining 2019 or 2020 lease expirations at this point.
I'm sure. The answer is yes, and we were working on leases.
On an everyday basis.
And my gut reaction is probably 10 to 20000 square feet in there that we've got to.
To find new tenants for.
But again, you know out of a portfolio, two and a half million square feet that.
Not a whole lot to deal with.
Okay, and then last one for me Dave.
Imagine, adding another position plus pages, new role is the 900000 of noncash comp and follow a fully loaded run rate going forward or is there a upward adjustment for a partial period, there that we need to be aware of going forward in the third quarter.
Yes, there is a partial adjustment that will will continue over the upcoming quarters. So.
We can we can give you some additional color on that.
Going forward.
Okay, I don't I don't have the specifics in front of me right now, but we can we can circle back.
Okay. Thanks.
The next question is can do that then.
Please go ahead.
Hi, good morning.
Hi, Andrew.
Follow up to a new question.
The the tenants that you work with and their expansion plans and where do you get the yield are you too is there any specific type of credit.
Whether its dialysis centers or imaging centers or anything that sort of leading the charge and maybe expanding the most aggressively.
Across the nation right now I know the trends, probably ebb and flow but.
Are you seeing disproportionate interest from any one type of kind of.
Well and I'll address this in a couple of different ways because.
We're saying, we're seeing interest from a number of different sides, but.
Probably.
The psych and inpatient rehab are the biggest impact because those are the biggest numbers per facility.
We are talking with and working with eye care centers. There is a lot of consolidation going on.
After now with an eye care centers.
And a lot of the single specialty stuff I mean, we've seen we've talked oral surgeons.
There's a lot of private equity back.
Single specialty type consolidations that are going on there that we're talking to we don't have anything definitive.
From a programmatic standpoint with them right now, but we do see that is something that is.
Good for us.
The issue with those are those tend to be a lot smaller facilities and to really make it worthwhile we've got to be talking about.
Six or eight or 10 of them for it to really make a lot of sense for us to get into a programmatic stance with them.
Thanks, that's helpful and one more for me.
You could see number went up for the quarter I think that was probably going forward somebody on the acquisitions that were made wouldn't too dependent worst it looks like there was a.
A property that went dark.
I'm a per geography lesson here, but gallenberger medical mall in Georgia went dark I was just wondering if you could talk about kind of that property and you know are there any plans in place to potentially re tenant that.
And just as a sort of a regular away.
Business interruption that would tend to happen in diversified portfolio or.
This or maybe anything else kind of behind that.
But.
I don't believe the Monica is our.
I mean, I think there's still two or three tenants that are in the long ago. The learning the regional hospitals are going to shut down and bought back.
University system area when it is but basically the university system is looking at leasing the entire vacancy in that building right now.
As part of the expansion there.
Medical schools in nursing school et cetera.
Okay.
Good to hear that so I'm all for me. Thank you.
All right.
The next question is Sheila Mcgrath with Evercore. Please go ahead.
I guess good morning.
On the Highlands Hospital I was just wondering if you could clarify the accounting treatment right now you're booking 300000, a month when the license transfers how will that change how you're recognizing income from that property.
Good morning, Sheila.
Actually it won't change at all.
I don't think I'm going to wait and see I mean, we're trading that is right now it's being treated as we're in a transition agreement and we have a signed lease with the new operator with basically the same amount as rent under it so when it transfers.
Is the accounting for change well I'd say that.
At that point in time, there probably would be some straight line rent it has to be calculated and included in the.
In the calculations, but other than that.
And I'm not aware of anything.
That would change.
Okay, perfect and do you think that the on track that the license transfer will happen this year.
No Sir.
[laughter].
Yes, I don't look with that in the category of if you can predict interest rates you can predict when the when the bureaucrats in West Virginia will do something.
[laughter].
Okay great.
And then a couple other questions on capital expenditure as part of the appeal on CHC T is their low.
I just wondered if the if you guys have a rule of thumb, how we should think about them because we usually look at AFFO on straight lining and then we also make an adjustment for capex. So if you could just give us.
Some insight on.
Capex, meaning like T I M.
Leasing commissions.
But kind of what we've said in the past I think is probably some.
Probably the way to think about it would be 10 to 15 cents a square foot per year of the portfolio. Some of it 2 million square feet. So think about it is as a quarter billion dollars a year on and some years that maybe like some years out of the heavy and that's that.
Thats, what I will call them non revenue generating.
Because there's other things and we have had.
Quite a bit of nationally stood at one ongoing facility like this where we're putting.
Hospitals inside of some of our multi tenanted buildings and when we do that the team has been expensive, but we get paid additional rent.
Relating to that we invest in and so we look at that basically is like buying into the building.
So, but there is no way that doesn't get broken out in the numbers or anything so.
Substantial amount of the team that you've seen run through our segments over the last.
12 to 18 months and that you'll see over the next 12 months will be that type of expenditure.
Okay. That's great and then on the 87 million in the Programatic kind of pipeline you guide to expect that through 2020.
It are there more on transactions from that pipeline Selmo fall into 19, though.
We think probably one or two will fall into 19 in one or two or two to three I guess would be the appropriate way to do it we would fall into it took 20.
Okay.
And then just big picture.
Your cost of equity and debt is compelling versus your acquisition yields.
Does that capital advantage.
Make you broaden the acquisition pipeline to other markets or other target opportunities with that might have it lower initial yields or do you think the opportunity set.
In the kind of 9% plus is still ample.
And we continue to think that the 9% plus opportunities are ample.
We we look to optimize and expand our margin, which we calculate as our margin is the difference between what we invest in and the.
The cost of our capital.
So we try to optimize it and maximize that and basically we think like investors because we are investors all of us sitting at this table get our compensation to start. So our goal is to do what is necessary to increase the value of the stock increased the value of the cash flow on a going forward basis. So I don't see us changing what we've done is worth it seems to work we think there's enough out there too.
To continue doing in to us.
The returns are compelling when we can raise the equity at the rate that we can and the debt that we can and this is where we can.
Great actually one last question on DNA, if you look at the first half of the year.
Do you expect that that's a good run rate or do you anticipate having to make some additional hires as you grow.
Well I'm I'm going to I don't want to I don't want to break for the total these guys to do but but one of the things that is interesting is.
And we've already started experiencing some of it because we added the vice president of an internal audit.
With the increase in the stock price.
The market care when over what was.
Keeping us as an emerging growth company weve been an emerging growth company since we since we came out.
But now we want to be 100% Sarbanes Oxley compliant by the end of the year, we had planned on it.
Obviously than we had planned on it as being the end of 2020 and at the end of 2019.
So we are going to.
Increase in spending there will be an increase in DNA related is that probably a penny or two.
Over here.
And but thats.
I guess the way I view that as kind of like the price of success.
So we're going to be doing that so you probably ought to.
In a little bit of an increase in the DNA.
Okay. Thank you.
The last question is from Barry, Oxford, We any Davidson. Please go ahead.
Great. Thanks, guys. So just to kind of build I know you talked about the facility types and the types are growing but is there any particular facilities types. Its offering should have better going in yields right now when you're kind of you know you know scan bridging the United States.
[noise] good morning, Mary No actually I mean, we we continue to see what we looked at it before I mean again, one of the things I said earlier that the behavioral and inpatient rehab is tends to skew things a little bit I know C or percentages of our portfolio going up because you remember $18 million to $30 million apiece.
So it takes a lot of the $5 million.
Doctors' offices to make up for that difference, we continue to see a lot of opportunity in the bread and butter says we continue to see a lot of opportunity in the programmatic stuff.
So we haven't we haven't Blacklion anything we have highlighted in anything we feel good about.
What we say.
And just.
Kind of follow follow through on regions EM essays or regions are there any one particular interface or regions that are offering more attractive going in yields versus others or is it just more as you already indicated a one off basis.
Yes, I don't think we've seen.
What part of the country means significantly different from the yield I mean, and maybe that's just because everybody now knows what we look for and what we're what we're.
The types of the quality the yields et cetera that we're looking for him and.
I haven't seen anything different really from a regional standpoint, sometimes you hit pockets or you know where you get into people here that you're buying other sephora NIPT kinda comes to your door, we've got a little bit of that going on and Pennsylvania right now.
So you'll see us.
We're going to increase some of our exposure to Pennsylvania, because we bought some stuff and then it's kinda like Dr. friends found out about it. So then they come in and we do more.
Just because it's kind of in the areas and it's and it's easy to add so, but but as it relates to.
Overall, I think is that much of a change.
Okay, great. Thanks, so much.
Thanks Bert.
Again and show a question. Please press the Star then one.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Tim Wallace.
Thank you operator, and we'd like to thank everybody on the call today for the continued support that you show to us.
Interest that you jump on the call with us.
And we look forward to a to get up the old again in three months. Thanks, so much.
The conference call has now concluded. Thank you for attending today's presentation you may now disconnect.