U.S. Markets closed

Edited Transcript of CHCT earnings conference call or presentation 8-Aug-18 2:00pm GMT

Q2 2018 Community Healthcare Trust Inc Earnings Call

Franklin Aug 22, 2018 (Thomson StreetEvents) -- Edited Transcript of Community Healthcare Trust Inc earnings conference call or presentation Wednesday, August 8, 2018 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Timothy G. Wallace

Community Healthcare Trust Incorporated - Chairman, CEO & President

* William Page Barnes

Community Healthcare Trust Incorporated - Executive VP, CFO & Secretary

================================================================================

Conference Call Participants

================================================================================

* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Eric Joseph Fleming

SunTrust Robinson Humphrey, Inc., Research Division - VP

* Sheila Kathleen McGrath

Evercore ISI Institutional Equities, Research Division - Senior MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to Community Healthcare Trust's 2018 Second Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2018 second quarter financial results. It will also discuss progress made in various aspects of its business. (Operator Instructions) 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, August 8, 2018, 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 disclosures regarding forward-looking statements in its earnings release as well as its Risk Factors and MD&A in its SEC filings. The company undertakes no obligation to update forward-looking statements whether as the result of new information, future developments or otherwise, except as may be required by law.

During this call, the company will discuss GAAP and non-GAAP financial measures. A reconciliation between the 2 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 would like to turn the call over to Timothy Wallace, Chairman, Chief Executive Officer and President of Community Healthcare Trust Incorporated.

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [2]

--------------------------------------------------------------------------------

Good morning, everyone, and thank you for joining us today for our 2018 second quarter conference call. With me on the call today is Page Barnes, our Executive Vice President and 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 quarterly report on Form 10-Q was also filed last night. As you probably also noticed as I have indicated in the past we would, we filed an 8-K and a prospective supplement indicating that we have entered into a sales agency agreement and have put in place an ATM program for up to $100 million in shares.

Once again, we were extremely busy during the quarter. As previously discussed, we funded a new note during the quarter, providing $23 million to a newly established company secured by the ownership interest, cash accounts -- cash, accounts receivable, other assets and cash flows of 9 long-term acute care or rehabilitation hospitals. We anticipate earning approximately 9% on the note. However, based on its terms, anticipated cash flows and potential for refinancing by the new company, we are anticipating a significant amount of this will be repaid relatively quickly.

Also during the quarter and closing out our bankruptcy issue, we received [real] estate that was secured by the original mortgage note to redeem in lieu of foreclosure. It had a valuation of approximately $4.5 million. While this building is vacant, we have a signed term sheet for a single tenant to lease 100% of the building, which is approximately 30,000 square feet.

In addition, during the quarter, we acquired 2 additional properties with a total of approximately 38,000 square feet for a purchase price of approximately $7.4 million. These properties were 100% leased with leases running through 2026 with anticipated annual returns of 9% to 9.3%.

As it relates to our pipeline, we have one property with a fully negotiated purchase and sale agreement for an aggregate expected investment of $3.2 million. The expected return on this investment should range up to approximately 9.25%, and we anticipate that it will close during the third quarter.

In addition, we have 5 additional properties under definitive purchase and sale agreements to be acquired after completion of occupancy for an aggregate expected investment of approximately $103 million. The expected return on these investments should range from 9.4% to 11%, and we anticipate that these will close through the end of 2019.

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 opportunistically utilizing the ATM to strategically access the equity markets.

On the leasing front, during the first 6 months of the year, we had expiring or terminated leasings -- terminating leases related to approximately 58,000 square feet, and we leased extended or renewed leases relating to approximately 109,000 square feet. Occupancy did drop during the quarter, principally related to the 30,000 square foot vacant foreclosed property. However, as mentioned earlier, we have a signed term sheet to lease 100% of the property to a single tenant, so we anticipate occupancy popping back up after we get that lease signed.

On another front, we declared our dividend for the second quarter and raised it to $0.4025 per common share. This equates to an annualized dividend of $1.61 per share, and I continue to be proud to say we have raised our dividend every quarter since our IPO.

I believe that takes care of all the items I wanted to cover. So I will hand things off to Page to cover the numbers.

--------------------------------------------------------------------------------

William Page Barnes, Community Healthcare Trust Incorporated - Executive VP, CFO & Secretary [3]

--------------------------------------------------------------------------------

Thanks, Tim. I'm pleased to review the company's financial performance for the second quarter ended June 30, 2018.

Total revenues for the second quarter of 2018 were $12.4 million versus $8.9 million for the same period in 2017. Rental and interest revenues were $10.8 million for the quarter versus $7.6 million for the same period in 2018 -- 2017. Primarily due to receiving titled AMG property in Lafayette, Louisiana, the real estate portfolio decreased to 89.3% leased. On a pro forma basis, if all the 2018 second quarter acquisitions occurred on the first day of the quarter, rental and interest revenues would have increased by an additional $214,000 to a pro forma total of $11 million for the quarter.

Total expenses for the second quarter of 2018 were approximately $8.6 million versus $7.3 million for the same period 2017. General and administrative expenses for the second quarter were $1,504,000. Depreciation and amortization expense was slightly over $4.6 million for the quarter. On a pro forma basis, if all the 2018 second quarter acquisitions occurred on the first day of the second quarter, depreciation and amortization expense would have increased by $150,000 to a pro forma total of approximately $4.8 million.

The company reported net income of $2,417,000 for the second quarter versus $466,000 for the same period 2017. Funds from operations, FFO, for the second quarter of 2018 consisted of net income plus $4.6 million in depreciation and amortization for a total of over $7 million.

AFFO, which adjusts for straight line rents and deferred compensation, increases the total to just over $7.5 million or $0.42 per share diluted versus $4.8 million or $0.38 per share for the same period 2017. Again, on a pro forma basis, adjusting for the debt outstanding for the entire quarter, if all the 2018 second quarter acquisitions occurred on the first day of the second quarter, AFFO would have increased by approximately $149,000 to a pro forma total of a little under $7.7 million and increasing AFFO by $0.01 to $0.43 per share.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from Alexander Goldfarb with Sandler O'Neill.

--------------------------------------------------------------------------------

Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [2]

--------------------------------------------------------------------------------

So just a few questions first. On the ATM, obviously, good to see you guys have that in place. But just curious, now that you have that, Tim, does that change your acquisition pace, the $25 million to $35 million that you've targeted? And then also, previously, you'd talked about term loans, different types of financing. Has anything changed bigger picture on your capital plans that we should be thinking about?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [3]

--------------------------------------------------------------------------------

On the first question, the answer's no. We still anticipate $25 million to $35 million a quarter. Feel like that's a good run rate. And basically, view the ATM as just being another arrow in the quiver from a capital structure standpoint. We don't see it changing. Long term, we've got 30% to 40% -- 30%, 35% is the goal for debt. That's going to be in place. It's just going to be -- the ATM should be a lot better granular way to match our acquisitions with our equity and capital requirements.

--------------------------------------------------------------------------------

Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [4]

--------------------------------------------------------------------------------

Okay. And then the next thing is the G&A was a little bit higher than we expected and, obviously, now that you have the ATM, you can certainly grow. So are there -- how should we be thinking about -- I think, before you'd mentioned creeping up maybe a few hundred thousand, but how should we be thinking about G&A for this year and next versus where you were in the second quarter?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [5]

--------------------------------------------------------------------------------

The second quarter was somewhat of an anomaly. There were basically 2 significant issues that happened there. We had our first board departure as Alfred Lumsdaine left the board to become CFO at Quorum, and we added Claire Gulmi. In doing that, we had to accelerate Alfred's deferred compensation that he had taken in stock. So that was close to a couple hundred thousand dollars in the second quarter. And then also we had -- it's probably close to a couple hundred thousand dollars of professional fees related to basically closing out the bankruptcy. So we feel like the first quarter run rate is probably a fairly good run rate, and we've got -- again, we had these couple items in the second quarter that were hopefully unique.

--------------------------------------------------------------------------------

Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [6]

--------------------------------------------------------------------------------

Okay. And just a final question. You mentioned about the bankrupt restructuring and about getting repaid early as your anticipation. You've been pretty consistent on that. Now that everything is closed, again, thinking about earnings perspective for this year and next, how much should we be thinking about your note that's due on that 9%? How much should we think about coming back this year versus staying in place? Just want to make sure that, from an earnings perspective, we're thinking about things correctly?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [7]

--------------------------------------------------------------------------------

Right now, I wouldn't anticipate -- from a model standpoint, I don't think I put any repayments in. I think it's very possible we could get $8 million to $10 million repaid by the end of the year. But I don't know that I put that in the model. If we did, we would probably try to accelerate an acquisition that would offset it. So to us, it's kind of like an additional potential funding source in the future, but it's not something that we have planned to be repaid in 6 months or 12 months. We just think that it's likely based upon the terms. And quite frankly, the operations of the facilities, they finished -- the first quarter also had a bankruptcy. They were ahead of their budget. So we feel pretty good about it.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question comes from Sheila McGrath with Evercore.

--------------------------------------------------------------------------------

Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [9]

--------------------------------------------------------------------------------

Tim, I was wondering if you could give us a little bit more detail on -- you mentioned, the -- there's a term sheet out on that vacant building. And how does that rent compare to the prior rent? And then, if you look back at that transaction, which was complex in totality, assuming you get paid back the note, just how does CHCT come out whole or better than whole the way that you went after this transaction?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [10]

--------------------------------------------------------------------------------

I'll knock on wood when I talk about this. But if -- assuming that the term sheet gets signed, we will have rent on it very similar to what we would have had from a cap rate standpoint with the prior mortgage. We will -- basically, it's coming back at $4.5 million valuation, and we will end up putting probably around $1 million in renovations into it. So we'll end up with a $5.5 million valuation, and I'm anticipating that to come into right around a 9% return. On an overall basis, other than -- if we could get all the professional fees back and the management time back, I would say, we came out very well in the transaction. Assuming everything works out like it -- looks like it's going to, it did take a lot of professional fees, and it did take a lot of management time to end it there, but we feel good that we've come through kind of our first test by far, and everything looks pretty good right now.

--------------------------------------------------------------------------------

Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [11]

--------------------------------------------------------------------------------

Okay, that's great. And then on the $103 million under purchase agreement, you mentioned that it's the closings between now and the end of 2019. I was just wondering if you could give us some perspective of how much of that pipeline might be targeted to close in 2018, if any?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [12]

--------------------------------------------------------------------------------

Right now, there's a possibility of late 2018. We think probably most of it by far is going to be in 2019, and we're hoping that it will be spread out over the year so that it won't come in lumps. But there's parts of it that may come in lumps. But we're -- again, we're excited about that and feel like that provides a lot of transparency and looks into the future pipeline and then just takes a few add-on acquisitions, and we're well on our way to having our 2019 already made.

--------------------------------------------------------------------------------

Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [13]

--------------------------------------------------------------------------------

Right. And then, it's all new properties as well, correct?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [14]

--------------------------------------------------------------------------------

Yes, it's all new properties, all 15-year leases.

--------------------------------------------------------------------------------

William Page Barnes, Community Healthcare Trust Incorporated - Executive VP, CFO & Secretary [15]

--------------------------------------------------------------------------------

One renovation.

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [16]

--------------------------------------------------------------------------------

Oh, one is basically fully renovated. It's been an existing property, but it's going through a full renovation right now.

--------------------------------------------------------------------------------

William Page Barnes, Community Healthcare Trust Incorporated - Executive VP, CFO & Secretary [17]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [18]

--------------------------------------------------------------------------------

Okay. And the last question. At your IPO, senior management was largely paid in the company stock. I was just wondering if you could update us on that? Is that still the case? And how much insider ownership is at the company?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [19]

--------------------------------------------------------------------------------

We view that as a very important part of our DNA as a company, and everybody in the room -- Page, Leigh Ann and myself -- have only taken compensation in stock, and we only get cash flow the same way that all of our investors do, and that's through the dividends. There's still a couple other guys that are in the company that still take all of their compensation in stock, but the majority of the executives take a very good level. I'm not sure what that level is anymore, but it's a very good level. But everybody in the room here takes 100% of it. And I think, quite frankly, that is a very important part of what makes us who we are and why investors like us because they know that we are buying into what we're selling. And we get meetings, and we get investors who tell us that, basically, that's why they took the meetings and one of the major reasons why they're doing the investing.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

And our next question comes from Eric Fleming with SunTrust.

--------------------------------------------------------------------------------

Eric Joseph Fleming, SunTrust Robinson Humphrey, Inc., Research Division - VP [21]

--------------------------------------------------------------------------------

Just a question on your -- the $103 million development pipeline. I was hoping you can get more into the details on it. Obviously, a couple quarters ago, it was 3 properties at $40 million. Last quarter it was 4 properties at $70 million-plus. And now we're 5 at $103 million. Is there any kind of details around that kind of who the specific operators, partners are and kind of how that -- those relationships are continuing to grow and last add-on is what's the longer-term outlook on adding more buildings here?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [22]

--------------------------------------------------------------------------------

It's part of -- since the beginning, we've talked about trying to develop the plant relationships with the operators, and we're probably after, what I would call, 5 or 6 clients, we're trying to get, if we have 10, I'd be very pleased. But these, in particular, there's an inpatient rehab operator, it's a new company, but he is -- it's an experienced management team. They sold their previous inpatient rehab company to HealthSouth, now Encompass or I forgot what their current name is, but HealthSouth a few years ago. That's inpatient rehab, and then we've got an inpatient site that's $30 million or so of that pipeline. It's US HealthVest, which we've got one of their facilities in Chicago. This will be our second facility with US HealthVest, and that management team -- this is the third time that management team has done this. I sold one of them to Universal and one of them to Site Solutions. So we're dealing with very -- we call them serial entrepreneurs. We also have a relationship with -- we've closed on one in the first quarter was a dialysis company. This is actually his fourth time around. So we feel very comfortable with the management teams and their experience, and they have significant capital behind them. And quite frankly, we look at it as probably, in 3 to 5 years, they're going to sell them again, and we'll get -- earning the credit, so...

--------------------------------------------------------------------------------

Eric Joseph Fleming, SunTrust Robinson Humphrey, Inc., Research Division - VP [23]

--------------------------------------------------------------------------------

I mean, how big you do think this pipeline could get in terms of just what you're willing to disclose, I guess?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [24]

--------------------------------------------------------------------------------

I would say, if we can get it to $125 million and keep it there, we'd be very pleased.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

And we do have a follow-up question from Sheila McGrath with Evercore.

--------------------------------------------------------------------------------

Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [26]

--------------------------------------------------------------------------------

Yes. Real quick, Tim, on the timing of that proposed new lease. Is that something that will start this year? Or you think from a modeling perspective, we're better off assuming next year?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [27]

--------------------------------------------------------------------------------

To be honest with you, I was hoping to get it some in place by August 1, but...

--------------------------------------------------------------------------------

Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [28]

--------------------------------------------------------------------------------

Oh, that'd be great.

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [29]

--------------------------------------------------------------------------------

That didn't happen, so I'm hesitant to say at this point in time, but I'm hoping they have it in place by the end of the third quarter, anyway.

--------------------------------------------------------------------------------

Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [30]

--------------------------------------------------------------------------------

Okay. So that would mean you would start recognizing rent? Or does it take a while to do the renovation and...

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [31]

--------------------------------------------------------------------------------

No. We would start -- I mean, they start paying some rent from the beginning, and fortunately or unfortunately, GAAP accounting makes it straight line rent. So -- and it's anticipated to be a 16-year lease. So we'd basically take the rental stream over 16 years and straight line, so there'd be immediate rental recognition, although some of it would be basically deferred straight line rent.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

At this time, I'm showing no further questions. So I'd like to turn the conference back to Tim Wallace for any closing remarks.

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [33]

--------------------------------------------------------------------------------

Thanks, Austin. And again, we'd like to thank everybody for helping us, for supporting us, for participating in the call today. And we're looking forward to a great third quarter, and talk to you in 3 months. Thanks.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.