U.S. Markets closed

Edited Transcript of CHCT earnings conference call or presentation 7-Nov-18 3:00pm GMT

Q3 2018 Community Healthcare Trust Inc Earnings Call

Franklin Nov 14, 2018 (Thomson StreetEvents) -- Edited Transcript of Community Healthcare Trust Inc earnings conference call or presentation Wednesday, November 7, 2018 at 3:00:00pm 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

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

* Daniel Santos

Sandler O'Neill + Partners, L.P., Research Division - VP

* Matthew David Boone

B. Riley FBR, Inc., Research Division - Associate

* Sheila Kathleen McGrath

Evercore ISI Institutional Equities, Research Division - Senior MD

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

Presentation

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

Operator [1]

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

Welcome to the Community Healthcare Trust 2018 Third Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2018 third quarter financial results. It will also discuss progress made in various aspects of this 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, November 7, 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 obligations to update forward-looking statements, whether as a 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 earning 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 a 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 Inc. Sir, please go ahead.

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

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

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

Thank you. Good morning, and thank you for joining us today for our 2018 third quarter conference call. I'm actually out in San Francisco at the Nareit REITworld conference. But on the call with me today, back in Franklin, 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 quarterly report on Form 10-Q was also filed last night.

As we announced last quarter, we entered into a sales agency agreement and have put in place an ATM program for up to $100 million. During the third quarter, the company issued, through its ATM program, 234,000 shares of common stock at an average gross sales price of $31.17 per share and received net proceeds of approximately $7.1 million at an approximate 5.27% current equity yield.

During the quarter, we acquired 2 properties with a total of approximately 37,000 square feet for a purchase price of approximately $6.7 million. These properties were 93.4% leased with leases running through 2023 and anticipated annual returns of 9% to 9.23%.

As it relates to our pipeline, we have 11 properties with fully negotiated purchase and sale agreements for an aggregate expected investment of approximately $24 million. The expected return on these investments should range from approximately 9% to 9.5%, and we anticipate that they will be closing during the fourth quarter. Actually, several of them are supposed to close today, and we anticipate most of them, if not all, closing before Thanksgiving.

In addition, we continue to have 5 additional properties under definitive purchase and sale agreements to be acquired after completion and occupancy for an aggregate expected investment of $103 million. The expected return on these investments should range from 9.4% to 11%, and we anticipate 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 to continue to opportunistically utilize the ATM to strategically access the equity markets.

On the leasing front, during the first 9 months of the year, we had expiring or terminating leases related to approximately 73,000 square feet and leased extended or renewed leases relating to approximately 167,000 square feet. Occupancy was stable during the quarter. However, 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 third quarter and raised it to $0.405 per common share. This equates to an annualized dividend of $1.62 per share. And I continue to be proud to say we have raised our dividend every quarter since our IPO.

As some of you all have already noted, we're a little light this quarter in FFO, mainly driven by a little light in acquisitions. We do not feel that this is driven by some overall change in the market. We have almost $130 million of acquisitions to close over the next 13 months already under contract.

While I hesitate to say there is seasonality to our acquisitions, if you look back over the last 3 years, the third quarter is always light. A lot of this is driven unusually by vacations, not just our vacations but the sellers' vacations, their attorneys' vacations, our attorneys' vacation, et cetera, because everyone takes their vacations at different times. Since most of our sellers are doctors with solo practice attorneys, if they or their attorney goes on vacation, the process basically stops until they get back. As I always say, acquisition is a lumpy business.

In addition, I think some of the things happening on a macro basis -- interest rate hikes, midterm elections, et cetera -- have also slowed doctors' decision-making process. However, since we have $24 million of properties that should close before Thanksgiving, we do not think anything has fundamentally changed in our model or methodology. We are running a marathon, not a sprint, and we are still confident we are on the right track. The company paid annual bonuses in August, and substantially all of them were taken in stock, which should indicate our level of confidence. 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]

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

Thank you, Tim. I am pleased to review the company's financial performance for the third quarter ended September 30, 2018. Total revenues for the third quarter of 2018 were $12.6 million versus $9.4 million for the same period in 2017. Rental and interest revenues were $10.9 million for the quarter versus $8.3 million for the same period in 2017. The real estate portfolio's occupancy remained stable at 89.3% leased.

On a pro forma basis, if all the 2018 third quarter acquisitions had occurred on the first day of the quarter, rental and interest revenues would have increased by an additional $96,000 to a pro forma total of $11 million for the quarter.

Total expenses for the third quarter of 2018 were approximately $9 million versus $7.8 million for the same period in 2017. General and administrative expenses for the third quarter were $1,395,000. Depreciation and amortization expense was slightly over $4.9 million for the quarter. On a pro forma basis, if all the 2018 third quarter acquisitions occurred on the first day of the third quarter, depreciation and amortization expense would have increased by $67,000 to a pro forma total of approximately $5 million.

The company reported net income of $1,999,000 for the third quarter versus $579,000 for the same period in 2017. Funds from operations, FFO, for the third quarter of 2018 consisted of net income plus $4.9 million in depreciation and amortization, for a total of over $6.9 million. AFFO, which adjusts for straight line rents and deferred compensation, increases the total to over $7.2 million or $0.40 per share diluted versus $5.5 million or $0.31 per share for the same period in 2017.

Again, on a pro forma basis, adjusting for the debt outstanding for the entire quarter, if all the 2018 third quarter acquisitions occurred on the first day of the third quarter, AFFO would have increased by approximately $63,000 to a pro forma total of a little over -- a little under $7.3 million and increasing AFFO by $0.01 to $0.41 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) The first question is from the line of Daniel Santos with Sandler O'Neill.

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

Daniel Santos, Sandler O'Neill + Partners, L.P., Research Division - VP [2]

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

So my first question is on the acquisition cadence. Obviously, in the past, you've indicated that $35 million per quarter is sort of a reasonable run rate with the understanding that some quarters would be lighter than others. Obviously, this quarter was a bit lighter than we had expected. Are you still comfortable with that $35 million per quarter or $140 million for the year?

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

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

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

Daniel, and thanks for joining us today and for the question. We feel fairly comfortable with that because again for -- in the next 13 months, we've got $130 million already on the books to close. So $140 million doesn't sound like it's going to be too hard for 2019. This year has been a little bit of an aberration for a number of reasons, but again we don't see anything that's changed the fundamentals of what we're doing or how we're doing it.

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

Daniel Santos, Sandler O'Neill + Partners, L.P., Research Division - VP [4]

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

Got it. That's helpful. Just along those same lines, thinking about aligning the street's expectations to closings in the quarter. Obviously, in the past, you've issued a post-quarter sort of activity update. Is that something you're considering maybe going back to just -- so that there isn't as much of a mismatch quarter-over-quarter?

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

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

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

Yes, we have considered it. There's been several issues involved with that. But yes, it's something that we probably will start doing again.

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

Daniel Santos, Sandler O'Neill + Partners, L.P., Research Division - VP [6]

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

And just one last quick one for me. As you're thinking about the pipeline, I know you talked about $130 million over the next 13 months. Are there any financing deals in the pipeline that you are considering? Or is it -- are these just straight-out acquisitions?

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

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

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

These are straight-out acquisitions.

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

Operator [8]

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

The next question is from the line of Sheila McGrath with Evercore.

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

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

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

Tim, of the backlog of $130 million, how much of that, or it might be all of it, is with your strategic kind of partners where it's kind of programmatic acquisitions?

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

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

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

A little over $100 million. We're still going to do other types of acquisitions, but we feel like doing those adds a base and some transparency to the future pipeline that we haven't been able to have before. So we like doing that and would like to continue to do that and have an increase a little bit. But we're still doing other acquisitions.

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

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

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

Okay. And then on those partnerships. Can you just remind us how many strategic relationships you have so far and what types of properties are in those -- that $130 million?

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

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

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

In the $130 million? Actually, I'm assuming these off the top of my head. There are probably 5 relationships that we call client relationships, one is a dialysis company, one is an inpatient rehab, one is inpatient geri psych, one is an inpatient general psych. I may be forgetting some, but included in the acquisitions too are some new ones that we're trying to develop with an I-Care company. We think that is a good place for us to be as the consolidation occurs in I-Care. Let's see. I don't remember what the others are, but that's basically what makes up our current client list, and we're trying to, as I said, continue to increase those.

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

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

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

And for modeling purposes, should we figure the closings are more to the back half of 2019 or across the year?

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

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

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

Page has done more work with scheduling those out. I think it's pretty much scheduled out through the year. But Page, how are those shaping up currently?

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

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

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

They should be through the first 3 quarters of the year. The effect of the last one probably would be more fourth quarter than third quarter.

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

Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [16]

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

Okay. Perfect. And then just, Tim, any thoughts on cap rates either from your perspective or sellers' with the changing interest rate environment?

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

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [17]

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

Well, that's one of the things I think has slowed things down some because we've kind of pushed on cap rates to push them up. Sellers don't believe interest rates really have an effect on cap rates right now, but we're telling them it does. So we're being able to try to push some of that, but we are still closing stuff in the low 9s. We have yet done anything below 9%, so...

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

Operator [18]

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

The next question is from the line of Matt Boone with B. Riley FBR.

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

Matthew David Boone, B. Riley FBR, Inc., Research Division - Associate [19]

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

So looking at your acquisition pipeline in 2018 and 2019, can you provide us with some color as to how those assets compare to the broader market from a pricing perspective?

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

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [20]

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

I'm not sure I really understand...

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

Matthew David Boone, B. Riley FBR, Inc., Research Division - Associate [21]

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

Sure. So like, how the cap rates that you're acquiring, those assets, at versus where the broader market currently stands.

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

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

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

What we try to do is have relationships and deal with health care providers that have a goal. I mean, we -- and we call them our serial entrepreneurs. Because like the dialysis company that we deal with has already done 3 of them, this is his fourth company, so 2 presenting as 1 to DaVita. And the same thing can be said with the inpatient rehab, they sold the previous company to what ended up being Encompass. And the psych company, the inpatient psych company, has done 2. This is his third one. He sold one to [Fac Solutions] back when and one to Universal Health. So basically, what we're dealing with is serial entrepreneurs who have a goal of building their company as quickly as possible so that they can sell it and get a big lick at that point in time. So we make things a lot easier for them if we come in and say, "Okay, we're going to use standardized paperwork. We're going to do standardized due diligence. We're going to have all of this done upfront." And for that, we get additional cap rate for that. And from their standpoint, it's great because they don't have to go finance each one of them individually, and it helps them get from 0 EBITDA to $50 million or $20 million of EBITDA to $100 million quicker. And if they can get there quicker, then obviously that's better from their investor and their investment standpoint. Does that make sense?

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

Matthew David Boone, B. Riley FBR, Inc., Research Division - Associate [23]

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

That does. And just kind of following up on that. As we head into 2019, are you guys still seeing a multitude of opportunities? Or how should we be thinking about the 2019 pipeline building going forward?

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

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

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

I would still anticipate we're going to do regular acquisitions. I don't want to raise the guidance of $130 million to $140 million, but it makes it a lot nicer when we go into the year with $100 million already on the books. And actually, we're already having discussion about our first project for 2020. So we feel very comfortable going into next year both from a property -- what we see from properties that are available and people that we're doing business with, et cetera, and from the same point of having the firepower and the liquidity to do that with what we've got available under our revolver and now the access to the capital markets through the ATM that makes it a lot more granular and lets us match fund a lot closer.

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

Operator [25]

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

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Wallace for any closing remarks.

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

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [26]

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

Thank you, operator. And again, we appreciate everybody taking the time to be on the conference call with us. And probably see a lot of you all later in today or tomorrow out here at Nareit. And with that, we conclude it, and appreciate your interest.

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

Operator [27]

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

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