U.S. Markets closed

Community Healthcare Trust Inc (CHCT) Q4 2018 Earnings Conference Call Transcript

Motley Fool Transcribers, The Motley Fool
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Community Healthcare Trust Inc  (NYSE: CHCT)
Q4 2018 Earnings Conference Call
Feb. 27, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Community Healthcare Trust 2018 Fourth Quarter and Year-End Earnings Release Conference Call. On the call today, the company will discuss its 2018 fourth quarter and year-end financial results. It will also discuss progress made in various aspects of its business. Following the remarks the phone lines will be opened for a question-and-answer session. The company's earnings release was distributed last evening and has also been posted on its website www.chct.reit.

The company wants to emphasize that some of the information that may be discussed in this call will be based on information as of today, February 27, 2019 and may contain forward-looking statements that involve risks and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Company's disclosures regarding forward-looking statements in its earnings release as well as its risk factors and MD&A and its SEC filings. The company undertakes no obligation to update forward-looking statements, whether as a result of new information, future developments or otherwise except as maybe required by law.

During this call, the company will discuss GAAP and non-GAAP financial measures, a reconciliation between the two is available in its earnings release, which is posted on its website. Call participants are advised that this conference call is being recorded for playback purposes. An archive of the call will be made available on the Company's Investor Relations website for approximately 30 days and is the property of the company. This call may not be recorded or otherwise reproduced or distributed without the Company's prior written permission.

Now, I'd like to turn the conference call over to Timothy Wallace, Chairman, Chief Executive Officer and President of Community Healthcare Trust Incorporated.

Timothy G. Wallace -- Chief Executive Officer and President

Thank you, Jamie. Good morning and thank you for joining us today for our 2018 fourth Quarter and year-end conference call. On the call with me today is Page Barnes, our Executive Vice President, Chief Financial Officer and Leigh Ann Stach, our Chief Accounting Officer. As is our normal process, our earnings announcement and supplemental data report were released last night and filed with an 8-K and our Annual Report on Form 10-K was also filed last night.

Before we get into our normal topics, I would like to address the impairment charge and related noise in our financial statements. We acquired our Highlands inpatient behavioral hospital in 2017. We have approximately $30 million invested in Highlands and as a request of the operator that was structured as a $25 million lease investment in a $5 million mezzanine loan. The operator requested this structure because they told us they were intending to refinance the loan at a lower rate than our lease rate.

During the second half of 2018, we started experiencing payment issues with the operator of Highlands. We placed them on close-monitoring regime and had our -- and our original underwriting confirmed when we found that the operations as the facility were still producing significant cash flow and should now have been -- having a problem paying us our interest in rent. In early December, it was discovered that the reason they were payment issues was -- that there was a diversion of funds in violation of our agreements. We moved aggressively to assert our rights under our agreements. We're in the process of transitioning the facility to a new operator. And in that regard we have signed a transition agreement with the old operator.

In addition, we have a signed lease with a new operator subject to a normal transfer of licenses contingency, the Middle East is based on our total investment of a little over $30 million and we expect the lease cash flow from Highlands going forward, to be substantially the same as what it would have been from the lease and the mezzanine loan with the operator.

We are currently collecting monthly payments roughly equivalent to the interest in rent, we should be receiving. For accounting purposes it was determined that we should impaired the loan and not recognized approximately $500,000 of revenue and write-off approximately $200,000 with straight-line rents in the fourth quarter. As I've previously indicated, we are currently receiving monthly payments, we anticipate collecting the amounts previously described that we could not recognize in the mix couple of quarters, and the new lease progressed are repayments roughly equivalent to old interest -- into our old interest in repayments. We believe we have addressed the situation as best we can.

Now on to (inaudible) topics, as you know we have an active ATM program in place. During the fourth quarter, the company issued through its ATM program 100,700 shares of common stock at an average gross sales price of $30.83 per share. We received net proceeds of approximately $3 million at an approximately 5.36% -- 5.36% current equity yield.

During the quarter we acquired 11 properties with a total of approximately 143,000 square feet for a purchase price of approximately $24.1 million. These properties were 96.6% leased, with leases running through to 2028, and anticipated annual returns of 9.04% to 9.51%. So far at this quarter, we have acquired two properties with a total of approximately 83,000 square feet, for a purchase price of approximately $32.7 million. These properties were 100% leased with leases running through 2029 and anticipated annual returns of 9% to 9.3%.

In addition, we continue to have five additional properties under definitive purchase and sale agreements to be acquired after completion in occupancy for an aggregate expected investment of $103 million. The expected return on these investments should range from 9.4% to up 11%. We anticipate one or two of these closing in the second quarter, so we're being told that all of this range we have been having may cause some construction delays with a couple of them. We continue to have many properties under review and we have several term sheets outstanding with anticipated returns of 9% to 10%. We anticipate having enough availability on our revolver to fund our acquisitions. But now that we have it in place, we anticipate to continue to opportunistically utilize the ATM to strategically access the equity markets. Occupancy was stable during the quarter and although we are seeing a lot of activity on the leasing front and believe we will start seeing the occupancy level start increasing in the next few quarters.

On another front, we declared our dividend for the fourth quarter and raised it to $0.4075 per common share. This equates to an annualized dividend of $1.63 per share, and I continue to be proud to say, we have raised our dividend every quarter since our IPO. Something I like to mention every year about this time is that Page, Leigh Ann and myself continue to take all of our compensation in stock and most of our Board and several other executives continued to take significant amount of their compensation in stock.

I will note that starting last year some directors and executives have stock that they can sell and we make sure that happen from time-to-time in small amounts for personal reasons. However, I will point it out that I have no intentions of selling any of my stock. I believe that takes care of all of the items I wanted to cover. So I'll hand things off to Page to cover the numbers.

W. Page Barnes -- Executive Vice President and Chief Financial Officer

Thank you, Tim. I'm pleased to review the Company's financial performance for the fourth quarter and year-ended December 31, 2018. Total revenues for the fourth quarter of 2018 were approximately $12.2 million versus $11 million for the same period in 2017. Total revenues for the year 2018 were $48.6 million versus $37.3 million for 2017. Rental and investment interest revenues were $10.5 million and $42.3 million for the quarter and year respectively, versus $9.5 million and $32.3 million for the same period as 2017. The real estate portfolio was approximately 89% leased.

Our pro forma basis of all the 2018 fourth quarter acquisitions had occurred on the first day of fourth quarter, rental and interest revenues would have increased by an additional $298,000 to a pro forma total of $10.8 million for the quarter. Total expenses for the fourth quarter of 2018 were approximately $9.1 million versus $8.8 million for the same period in 2017. Total expenses for the year 2018 were just under $35.2 million versus just under $30.4 million for 2017.

General and administrative expenses for the fourth quarter were $1,000,547. Depreciation, amortization expense was a little under $5.1 million for the quarter. On a pro forma basis all of 2018 fourth quarter acquisitions occurred on the first day of the fourth quarter, depreciation and amortization expense would have increased by $257,000 to a pro forma total of approximately $5.3 million.

The company reported a net loss of $1,885,000 for the fourth quarter versus net income of $1,552,000 for the same period 2017. For the year 2018 net income was $4.4 million versus $3.5 million for the year 2017. Funds From Operations, FFO for the fourth quarter of 2018 consisted of the net loss plus $5.1 million in depreciation and amortization less the gain from the sale of $295,000 for a total of $2.9 million. Net income and thus AFFO was reduced by (inaudible) rent, we did not recognize. Interest we did not recognize and straight-line rent we reversed, which combined to a little over $0.04 a share.

As we disclosed, we anticipate collecting these amounts over the next quarter or so. In addition, AFFO was reduced by $5 million or $0.28 by the loan impairment, which was partially offset by the tax benefit, which added back $0.074 to FFO. AFFO which adjusts for straight-line rents and deferred compensation, the impairment of the note in the corresponding income tax benefit for the fourth quarter was $7.2 million or $0.41 per share diluted versus $6.6 million or $0.37 per share for the same period, 2017.

AFFO was negatively affected by the Highlands rent and interest not recognized, by about $0.3 per share. Again, on a pro forma basis, adjusting for the debt outstanding for the entire quarter, all of the 24 -- 2018, fourth quarter acquisitions occurred on the first day of the fourth quarter, AFFO would have increased by approximately $165,000 to a pro forma total of just $7.4 million with AFFO remaining at $0.41 per share.

That's all I have from a number standpoint. Operator, I believe we are ready to start the Q&A session.

Questions and Answers:

Operator

(Operator Instructions) Our first question today comes from Sheila McGrath from Evercore ISI. Please go ahead with your question.

Sheila McGrath -- Evercore ISI -- Analyst

Good morning. Tim or Page, I was wondering if you could talk about how this operator situation will reflect in first quarter earnings. Are you getting the transition income the whole time? And also a same topic, how are you able to get a new operator so quickly?

Timothy G. Wallace -- Chief Executive Officer and President

Good morning, Sheila. Yes, the transition agreement is in place. We are receiving payments with the legal fees and all the other stuff related to it, it will probably affect what we are doing, a penny or so in the first quarter, but again we anticipate collecting what we've been doing. The answer to your question, how we were able to do is, because it's a great facility, and in a year and half ago when the old operator acquired the facility, there were several others that have reviewed the facilities. So we actually talked to several site operators that would have been happy to taking it over and we were able to move quickly with one of them.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, great. And then just on the acquisition side of things, it looks like this year is going to shape out to be at least $135 million with what you've closed already and the programmatic acquisitions. I was wondering if you could discuss what's making this year's volume so much bigger than last year? And just any detail you could give us on the two acquisitions, you just closed in February.

Timothy G. Wallace -- Chief Executive Officer and President

And then channelling was, we have anything lean and if we disclosed anything on the details of the acquisitions in February. Basically, one was a multi-hospital with Kindred the operator and Rehab -- excuse me, Kindred the operator and Rehab. With Kindred as the operator in Texas and the other is a physician office with a orthopedic group in Pennsylvania. Both of them have basically 10-year leases on them and as we pointed out, the yields are 9% to 9.3%, something like that and they were closed earlier this month.

Sheila McGrath -- Evercore ISI -- Analyst

And just if you could comment, Tim, on why this year's acquisitions is -- it's so much the volume, so much bigger than last year, if there is any rationale?

Timothy G. Wallace -- Chief Executive Officer and President

Well, I mean, part of it is because we've been working from kind of from the beginning of having this shift -- future pipeline with clients that would provide us some view into the future. So having that as a base and then just filling in around, it makes it a lot simpler than it is actually going out and finding everything every quarter. So we're going to continue to try to develop that out and try to have a future pipeline of stuff, so the ongoing basis, we will have some visibility into what the acquisitions are for the next 12 months to 18 months.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, thank you.

Operator

Our next question comes from Alexander Goldfarb from Sandler O'Neill. Please go ahead with your question.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Hey, good morning. Good Morning down there. A few questions here, first -- all right, good morning, Tim. Just first, going back a little bit, the bankrupt tenant that you did a restructuring of last year. Can you just update, how that's going and I think when you originally talked about that. It sounded like that may, that was an investment that was likely to exit at some point, so just -- if you could update us on that and how that tenants going in and where you stand there?

Timothy G. Wallace -- Chief Executive Officer and President

They we're actually in the office, in the last month or so and going over what they did for last year. Their operations were pretty much performance what we were anticipating from last year. We're anticipating a good year this year. They are looking at converting the company into employee-owned company, to lease up in which case, if they do that then sometime this year, we will get paid off. We are anticipating getting significantly paid down even if they don't do that, but some refinancing that they would do. But our best case is probably sometime in the second half most -- if not all of that loan will get paid off.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay. Okay and then just, Tim, as you look back on your underwriting. Certainly, it's a big positive that you're able to backfill this with the Highland operator so quickly, but one -- any other tenants in your profile giving you pause maybe that you want to talk about that, maybe there is something else growing, but in particular on the Highland tenant and the prior tenant. We just discussed, where there any sort of initial red flags that stood out initially when you did either of these two transactions, where you're like something may not be right, but let's go with it or -- or these -- what just happens to be too coincidental kind of see one this year, one last that just happened to be coincidental and nothing was flagged (Technical Difficulty) et cetera?

Timothy G. Wallace -- Chief Executive Officer and President

Well, that's --there are two entirely different kind of scenarios. The one last year with OPEC with some of the reimbursement that we changed in the OPEC, it created a lot of flux in the OPEC industry and -- these guys took advantage of that to get rid of some of their marginal to the negative operations after reimbursements. In that scenario, we were able to utilize our underwriting capabilities and our structuring capabilities to come out and not lose money and hopefully have a full circle. You're getting paid off this year, well kind of, put an exclamation point on that.

The one in Highlands is -- and the attorneys don't want me play in too much, but it's one where you really scratch your head and ask yourself, what would -- what they were thinking because if they had an asset that was generating significant cash flow above what our interest in rent payments were and our original underwriting said that when we went back and looked at it closely again in December -- November-December timeframe, it's still said that -- it's still said when we're able to negotiate a transaction that we were with the new operator, so you just scratch your head and say, what was the old operator thinking when they were doing that and screwed up themselves by what they did. So and -- and then again, I can't go into the detail of what it was anything, but it's almost inexplicable as to what happened because they had an asset with significant cash flows and now they're not going to have it.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay. Any other tenants on your watchlist?

Timothy G. Wallace -- Chief Executive Officer and President

We got over 300 tenants now. So we always have 300 (ph) tenants at least, but nothing of this size or in nature or concern.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay. And then final question for Page. Page on the weather delays that you guys talked about that may affect some of the pre-sales. Sounds like on the acquisition pipeline, we should be back-end, back half weighting the deals from a cadence perspective, sounds like first quarter is going to be impacted by a penny from the Highlands transaction, but then it sounds like the acquisitions are more back half-weighted. Is that the right way to think about it?

W. Page Barnes -- Executive Vice President and Chief Financial Officer

Yeah, I think that, Tim said that we do expect one or two to close in the second quarter and one is complete, but it's in operating and under the agreement, we gave them 90 days to get up and running. But I think you're correct that the other three will be more back half.

Timothy G. Wallace -- Chief Executive Officer and President

And then when you look at the whole thing that will probably be kind of even when it does, because we did $32 million in February and then we'll do $40 million, $50 million in the second quarter and then the rest they were only probably back in operated in the -- on the second half, but when you look at the whole year, it's probably not that far off.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay, thank you.

Operator

Our next question comes from Michael Lewis from SunTrust. Please go ahead with your question.

Michael Lewis -- SunTrust -- Analyst

Great, thank you. Most of my questions about Highland have been answered now. And I have just one, I understand the -- on the new lease approximating the old rent and mortgage interest, but could you just talk about the collection of the roughly $500,000 that you didn't get paid in 2018, and if there is any risk to that payment. In other words that maybe you don't ever collect that?

Timothy G. Wallace -- Chief Executive Officer and President

Good morning, Michael. Yeah, of course there is risk related to it but in the transition agreement we got laid out pretty tightly how we should get paid in -- it's our belief we are going to be able to collect it. There is receivables, they're collecting, there is the funds are there and the fact the matter is generating on a monthly basis twice as much cash flow and then its a two time recoveries. So there's twice as much cash flow that is, it takes to pay for our rent in interest. So we feel fairly strongly and it will be -- and we will get it, but obviously there are risks that we won't.

Michael Lewis -- SunTrust -- Analyst

Okay, understood. That's helpful. And then, Tim, you mentioned the occupancy should begin to rise, the lease percentage has moved down six quarters in a row now, it looks like you have about 38 leases that are scheduled to expire this year. I mean how should we think about, where you think that lease percentage might go throughout the year. I know you've had some acquisitions and puts and takes, but how should we think about that trending in 2019?

Timothy G. Wallace -- Chief Executive Officer and President

Again, I think you'll see it move up through 2019, we've moved -- we do have a few leases that are coming out, but we have weather in most of the storm, if you go back to and then with the IPO, we had -- it was 26%, 27% of leases rolling in each of the first year or two. And we have come through that and seeing that occupancy dropped to 3%. The majority of which is really related to the AMG property. If it wasn't for that property, it would -- you see it over 90%, I believe. And so we see a lot of activity, most of the stuff we're doing is 100% leased on a going forward basis, so I think you're going to see that moving in.

The other thing is, if you look at other metrics on the leasing front, our weighted average remaining lease term, when we did the IPO four years ago, it was just a little over four years and now it's up -- brought around seven years and we've been able to keep it up around seven years for the last four, six quarters. So, I think if you look at the overall lease metrics. We've been able to improve, so then -- and again I think the occupancy you'll see move up a little bit.

Michael Lewis -- SunTrust -- Analyst

Thanks. And then just lastly for me, did you disclose or could you share the interest rate on the mortgage payable that you assumed?

Timothy G. Wallace -- Chief Executive Officer and President

It was just slightly over 5 all-in.

Michael Lewis -- SunTrust -- Analyst

Thank you.

Operator

Our next question comes from Rob Stevenson of Janney. Please go ahead with your question.

Robert Stevenson -- Janney Montgomery Scott LLC -- Analyst

Hi, good morning, guys. Thanks. So just to follow-up on Michael's question, in terms of the properties that are -- that have vacancy in them now. I mean, is this strategy just to lease them up, or are you also actively looking to sell some of the properties either that are vacant or have vacancy in them?

Timothy G. Wallace -- Chief Executive Officer and President

I wouldn't say that we're actively looking to sell. We do have some people who have made offers and some of the properties that we may in the taking. But we are trying to lease the properties is only one or two that have been significant vacancy that's generated since we acquired the property. A lot of our vacancy is -- we buy vacancy, but we don't pay for it because we only pay for existing NOI. So if we buy a property, this got 15% vacancy we not paying for and it's up 5% potential. So something like that, we obviously are looking to sell that, we're obviously looking to try to lease that up.

Robert Stevenson -- Janney Montgomery Scott LLC -- Analyst

Okay. And then to add the lease question on a different way. I mean, you have 9.6% in your revenue leases rolling this year any known move-outs or downsizings at this point?

Timothy G. Wallace -- Chief Executive Officer and President

Yeah, there are a couple. I mean -- and this real estate. I mean, we have people move-out, we have people move-in. I mean, that -- it's the occupancy has been basically 89% for the last two, three quarters, but we've had some people move-out, we've had some people move-in, so there are some that move-out, and I think probably are -- our stickiness rate is in the 85%, 90% range. But, that means to 10% to 15%, will move-out.

Robert Stevenson -- Janney Montgomery Scott LLC -- Analyst

Okay. And where do you expect new rents versus expiring on the stuff that you're going to release this year, is this relatively flat given the triple net sale -- leases you -- are up slightly down, I mean, how should we be thinking about that?

Timothy G. Wallace -- Chief Executive Officer and President

I think generally speaking again, we've had some ups and down, but on average it's pretty close to the same -- new leases are basically pretty close to the same as the old leases.

Robert Stevenson -- Janney Montgomery Scott LLC -- Analyst

Okay, thanks guys. Appreciate it.

Timothy G. Wallace -- Chief Executive Officer and President

Thanks Rob.

Operator

(Operator Instructions) Our next question comes from Sheila McGrath from Evercore ISI. Please go ahead with your follow-up.

Sheila McGrath -- Evercore ISI -- Analyst

Yes. Tim, I was wondering if you could give us some insight on how G&A should book this year or Page versus last year and do you expect that you're going to be adding employees as you grow significantly this year?

Timothy G. Wallace -- Chief Executive Officer and President

Yeah, I mean, again, we do anticipate that we're going to be adding some people -- we are going to be, some of our executives are getting up to retirement age. Nobody in the room right now, but with some of the other guys are. So we're going to be looking at it switching some at it. So we're going to add some people with probably lower rates and what we've got AM (ph) and we're going to be -- we're going to be looking at adding some net people. Overall, I think probably G&A will be 5%, 10% maybe not significant because again, we're not adding significant FFO level that we're not -- adjusting for otherwise. So --

Sheila McGrath -- Evercore ISI -- Analyst

Okay. And then just, now that you have access to more efficient equity capital via the ATM. Just wonder like big picture, how you could help us think about where you want to manage leverage level into this year.

Timothy G. Wallace -- Chief Executive Officer and President

Well, we've said we are getting in part of our investment guidelines is that we have an internal policy of keeping that below 40% of the book to total cash. And the long-term goal is to have that in the 30%, 35% range. So, you will basically be seeing us access the equity markets in a way to try to maintain our long-term leverage at -- in that 30% to 35% range.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, thank you.

Timothy G. Wallace -- Chief Executive Officer and President

Thanks Sheila.

Operator

Our next question is also a follow-up from Alexander Goldfarb from Sandler O'Neill.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Hello, thank you. Thank you. I just really quick. Tim, just going back to the tenant, use said may do, a buy out there, they are restructured portfolio later this year. If that happens, do you think that you would step up the acquisition pace to that from an earnings perspective. There wouldn't be an impact or would that mean that the 2020 earnings were -- I know, you guys don't give guidance, but if we think about the company as it grows, does that mean that the earnings bar is reset down by that amount. Just trying to think about the mechanics of -- if that's -- and it does by themselves out what happens from an earnings perspective and how you guys are thinking about addressing them?

Timothy G. Wallace -- Chief Executive Officer and President

Well, generally speaking, as you know Alex we've always said we do $120 million and $130 million a year. And basically, what we've done to day plus the $100 million in the pipeline, we've got $135 million for this year. Anyway, we're not going to not acquire stuff, we haven't shut down the acquisition environment for the next nine months. So we -- we still going be looking at acquiring to -- but I don't want anybody and say, now they're going to do $150 million or $160 million because there is the likelihood that the $23 million will get paid off, and in its bank down. So that the answer to your question is, we're kind of anticipating our acquisitions will be a little bit above, more and more this year because of that the pipeline and everything else there and basically it will act as a cushion in the event that the loan does get paid off.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay, that's helpful. Thank you, Tim.

Operator

And ladies and gentlemen, at this time I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Timothy G. Wallace -- Chief Executive Officer and President

Okay. Thank you, Jamie. And we'd like to thank everybody for being on the call today and for -- obviously your continued support and we look forward to talking to you again in three months. Thank you so much.

Operator

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.

Duration: 33 minutes

Call participants:

Timothy G. Wallace -- Chief Executive Officer and President

W. Page Barnes -- Executive Vice President and Chief Financial Officer

Sheila McGrath -- Evercore ISI -- Analyst

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Michael Lewis -- SunTrust -- Analyst

Robert Stevenson -- Janney Montgomery Scott LLC -- Analyst

More CHCT analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

More From The Motley Fool

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.