Community Healthcare Trust’s (CHCT) CEO Tim Wallace on Q2 2017 Results – Earnings Call Transcript


Community Healthcare Trust (NYSE:CHCT)

Q2 2017 Earnings Conference Call

August 09, 2017 10:00 AM ET

Executives

Tim Wallace – CEO

Page Barnes – CFO

Analysts

Alexander Goldfarb – Sandler O’Neill

Robert Stevenson – Janney Montgomery Scott

Sheila McGrath – Evercore ISI

Eric Fleming – SunTrust Robinson

Operator

Welcome to Community Healthcare Trust 2017 Second Quarter Earnings Release Conference Call.

On the call today, the company will discuss its 2017 second quarter 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, August 9, 2017 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 and 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 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 would like to turn the call over to Timothy Wallace, Chairman, Chief Executive Officer and President of Community Healthcare Trust Incorporated.

Tim Wallace

Thanks, Kate, and good morning everyone, and thank you for joining us today for our 2017 second quarter conference call. With me on the call today is Page Barnes, our Executive Vice President and Chief Financial 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.

Once again we had a very busy quarter. We acquired 10 properties in five states during the quarter with a total of approximately 203,000 square feet for a total purchase price of approximately $36.2 million. These properties were 100% leased with leases running through 2032 with anticipated annual returns of 9% to 9.9%. Over $27 million of the properties did not close until the last two weeks of the quarter causing our revenue and FFO to be larger than expected.

And one among this subject not to impinge on Page’s discussion, but I’d like to point out a few other things that affected second quarter FFO. First, since we completed the term loans and fixed the interest rates at the end of the first quarter and then the acquisitions this quarter were back-end weighted. Our financing costs such as unused fees on the revolver and ticking fees on the undrawn term loans caused our interest cost to be higher than most people had anticipated.

Second, as most of you know, we had some disagreements with ISS or ISS, I call them sometimes, over their analysis of our Board, our compensation and the change in infra-provision in our incentive plan. By the time we get through all of that paid the proxy solicitor filing fees, attorney fees et cetera, ISS ended at costing us almost a penny per share this quarter.

And finally, we had some operating expense recovery fluctuations related mainly to properties acquired in the last year going to either first reconciliation. If you remember, we had the same type of fluctuation last year in the second quarter, however, this year we had less of an effect than last year since the new properties were smaller part of the portfolio. We do not consider any of the above issues as being a continuing negative reflection on the portfolio or corporate operations.

Back to acquisitions, and as it relates to our pipeline, we have six properties with fully negotiated purchase and sale agreements for an aggregate expected investment of up to $65 million. We continued ahead of other term sheet fund, I mean, some people will try to compare that to the 72, but 65 of those now are under purchase and sale agreements. The expected return on these investments should average approximately 9.5% and we anticipate that substantially all of these will close during the third quarter.

However, at this point, they will be back-end weighted also. Managing real estate closings is not an exact fact. And another way of looking at these quarter end closings is that we are pulling some forward from the next quarter. Our properties under review continues to go up. We currently have signed term sheets for multiple potential properties with anticipated returns of 9% to 11%.

In addition to our acquisition activity, I’m sure everyone is aware that on July 26, the company completed a public offering of 4,887,500 shares of common stock, including the full exercise of the underwriters’ option to purchase additional shares. The company received net proceeds of approximately $108.9 million after deducting the underwriting discount and offering expenses. Proceeds were used to repay the outstanding balance on our revolving credit facility with the remaining funds to be used to fund our future investments.

As disclosed during the offering process, we have experienced our first customer bankruptcy as of June 30. They were current on all obligations to us and we have been told with all of their other creditors. We have taken a very aggressive approach in the bankruptcy case and we’ll exercise all available options to keep any losses to a minimum. However, to put this into perspective, if we wrote off everything and never collected another dollar related to this investment, which we definitely do not intend to do, it would equate to a little over a penny a quarter per share.

We view this as just another part of real estate and we work to resolve the situation and find a replacement tenant as soon as possible. On another front, we declared our dividend for the second quarter and raised it to $0.3925 per share. This equates an annualized dividend of $1.57 per share, and I continue to be proud to say we have raised our dividend every quarter since our IPO.

As I mentioned earlier at the end of the first quarter, the company entered into an amended and restated $250 million credit facility. The credit facility provides for $150 million revolving and $100 million in term loans. And through an accordion feature, it allows borrowings up to a total of $450 million. The term loans drawn to-date consist of 30 million of five-year and 30 million of seven-year.

And the company entered into interest rate swap agreements that fixed the interest rates on these term loans, resulting in fixed interest rates of 4.15% and 4.54% respectively. We have $40 million of remaining term loan availability and our full $150 million revolving facility for a total of $190 million available under our credit facility.

Finally, as previously announced, I have 10b5 program to acquire shares of the company’s common stock. The new plan was effective April 3, and under the plan, I will be able to purchase up to the lessor of $2 million or 100,000 shares of the company’s common stock subject to timing, price and trading limitations.

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

Page Barnes

Thanks, Tim. I’m pleased to review the company’s financial performance for the second quarter ended June 30, 2017. Total revenues for the second quarter of 2017 were over $8.9 million versus $6.2 million for the same period in 2016. Rental and mortgage interest revenues were $7.6 million for the quarter versus $5.1 million for the same period in 2016. The real estate portfolio was over 92% leased.

On a pro forma basis, if all the 2017 second quarter acquisitions had occurred on the first day of the second quarter, rental and mortgage interest revenues would have increased by additional $639,000 to a pro forma total of over $8.2 million for the quarter.

Total expenses for the second quarter of 2017 were approximately 7.25 million. General and administrative expenses for the second quarter were 835,000, depreciation and amortization expense were just under 4.3 million for the quarter. On a pro forma basis, if all the 2017 second quarter acquisitions occurred on the first day of the second quarter, depreciation and amortization expense would have increased by over 325,000 to a pro forma total of approximately 4.6 million.

The company reported net income of $466,000 for the second quarter versus just over 500,000 for the same period in 2016. Funds from operations, FFO for the second quarter of 2017 consisted of net income plus $4.3 million in depreciation and amortization for a total of over $4.7 million. AFFO which adjust for straight line rents, deferred compensation, increased the total to over $4.8 million or $0.38 per share diluted versus $4 million or $0.34 per share for the same period in 2016.

Again, on a pro forma basis, adjusting for the debt outstanding for the entire quarter, if all the 2017 second quarter acquisitions occurred on the first day of the second quarter, AFFO would have increased by approximately $549,000 to a pro forma total of over $5.3 million, and increasing AFFO by $0.04 to $0.42 per share.

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

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Alexander Goldfarb of Sandler O’Neill. Please go ahead.

Alexander Goldfarb

Hey, good morning, Tim, and good morning, Page. Just quickly on the bankrupt tenant. You said that they were current on all payments. So they haven’t – they didn’t skip a payment before declaring bankruptcy, they’ve made all their payments?

Tim Wallace

Exactly, they were current through June 30, they declared bankruptcy on June 23.

Alexander Goldfarb

Okay. And then they’re continuing to pay?

Tim Wallace

They did not pay in July.

Alexander Goldfarb

Okay. So they skipped July and they skipped August as well?

Page Barnes

Yes. But it’s prohibited to make payments out of bankruptcy right now and – while motions are being filed.

Alexander Goldfarb

Okay. So then from a modeling perspective, should we be deducting that $0.01 a share for the third quarter?

Tim Wallace

We are still pursuing and anticipating and collecting it. I’m not sure what today from a modeling standpoint the due, but we are exercising all of our options and they have actually till August 23 to make a rejection of the lease that underlies the mortgage. So until we get to the 23rd of August, we probably won’t be able to tell you much more than what we’ve been able to take so far.

Alexander Goldfarb

Okay. And then just – far as what you’re advisors think for timing if you – to basically get out the asset take it over. What is the timing for that? What’s the process?

Tim Wallace

Again, there is some motions that have been held. We took some depositions earlier this week, we’re still very early in the process. So I would say it’s probably another month or month and a half before we really know exactly what the timing looks like.

Alexander Goldfarb

Okay. And just finally, across the rest of your portfolio and also the assets in the 65 million that you have under contract. All the other tenants, both in the current portfolio and then the perspective acquisitions, all the credits looks fine or is there anything that’s giving you a little bit of pause?

Tim Wallace

Well, on the surface under purchase and sale, that’s in the pipeline, all that looks great. I mean we’ve got over 200 tenants now. So I mean, we have – it’s real estate. So we have tenants that are a month behind or things that don’t have watch list. But, I mean, we don’t have anything significant. Page, what –

Page Barnes

Three to five.

Tim Wallace

Three to five out of that 200, that’s on the watch list?

Page Barnes

Yeah, yeah.

Alexander Goldfarb

Okay. That’s helpful. Thank you very much.

Tim Wallace

Thanks, Alex.

Operator

The next question is from Rob Stevenson of Janney. Please go ahead.

Robert Stevenson

Hi, good morning, guys. This bankruptcy is the same that got disclosed in the prospectus about the mortgage note right, AMG?

Tim Wallace

Yes.

Robert Stevenson

Okay. And so I guess the question – the one question I have for you guys is, what fundamentally changed between when you guys under wrote it and when basically I guess in late June when they went into bankruptcy? Was it something structural? Was it something – what’s the – what was the deferred operational wise that caused them to have to go into bankruptcy between the time that you under wrote it, more comfortable with the credit and – at June?

Tim Wallace

That’s part of our problem with this situation is because again, they were current on all obligations to us, all obligations to their main bank lender. And it’s our understanding that all obligations to their creditors. I mean, from everything looking at it, they were cash flow positive, the management team was in our offices bank and what February?

Page Barnes

February, end of February.

Tim Wallace

End of February, and told us they had made $8 million to $9 million of EBITDA, last year, showed us where the operations underlying, our credit was going to be a $1.2 million cash flow positive this year. So, I mean, everybody is kind of scratching their heads as to what we know, what management is trying to say is that, it was due to changes in the LTAC reimbursement.

But all of that, they went through – they went through changes last year in that and still had substantial EBITDA. So to some extent that’s part of everybody’s question is like, okay, so how can you go from – and again, they fell bankruptcy in June 23 and were current on everybody’s obligations through June 30.

Robert Stevenson

Okay. All right. And then on the – with the 7 – with the almost 8% leases expiring in the back half of the year and the 11% of revenue in ’18, any known non-renewals at this point?

Page Barnes

None for sure. There’s one that we are negotiating with, but it’s not a significant lease.

Robert Stevenson

Okay. Thanks guys.

Tim Wallace

We’ve had good leasing. We’ve had good leasing activity, I think as we put out in our update, in the second quarter, we had 48,000 square feet of renewals in new leases and 28,000 of expiration to termination. So leasing has been positive so far.

Robert Stevenson

Okay. Thanks guys. Appreciate it.

Tim Wallace

Thanks, Rob.

Operator

The next question is from Sheila McGrath of Evercore. Please go ahead.

Sheila McGrath

Yes, good morning. Tim, just on the leasing, you have – did have good – it look like positive absorption. Just wondering if you could give us some insight on the probability of renewal, how that’s been shaking out for the tenants, and if you have to give much free rent or TI upon renewal?

Tim Wallace

Page – I’ll give a few comments and he can probably give a lot more detail than I can. But, I think basically what we’re seeing is, I think over 90% are renewing basically on the historical basis, prior to our acquisitions and that’s what we’ve experienced since we acquired it. And I’m unaware of any time that we gave free rent, but we do in some cases, do some TI, but not a lot.

Page Barnes

Yeah, Sheila, there is – sometimes we try to do, we’ve been successful in converting some modified gross leases to triple net. And where we give – if there is any significant TI or just a few dollars, it gets built into a right, so we get a return on that.

Sheila McGrath

Okay, great. And then on the ISS proxy cost, did that – that flow through the G&A line item, is that right?

Tim Wallace

Yes.

Sheila McGrath

Okay. And you did raise a fair amount of capital. We don’t have in our model that you’ll need equity for a while. Just curious, are you going to put an ATM in place? How should we expect things to kind of progress in terms of new capital?

Tim Wallace

It was there for some time, after we did this equity raise, we didn’t anticipate going back to the equity market probably to late ’18, at the earliest maybe ’19, first part of ’19. And so we’re going to drove down on the – we’re going to finish investing the money that we got in the last equity raise, we’ll drove down on revolver and the term loans. And then we will sometime next year put an ATM into place and the next equity that we raise in all likely it will be under an ATM program.

Sheila McGrath

Okay. Great. And then the acquisition volume for third quarter, I understand it will be backend weighted, but it will be kind of or it should be much higher than your typical quarter. Just wondering if for modeling purposes if we should think about the volume on an annual basis, being a little bit bigger than last year, and then going forward, just a little bit of expansion as you get larger. Or do you think we’re better off with this 30 million a quarter?

Tim Wallace

I’m more comfortable keeping in the 30 million a quarter and this was kind of a – kind of an outlier because we had a couple of opportunities that we were able to take advantage of. To some extent, I started the tell or buy side, view this as 30 million for this quarter and 35 million for next quarter. And then anything else would be great, but we do anticipate closing all of this in the third quarter.

So my view is let’s keep things at 30 to – maybe 35 million a quarter and again, we’re very comfortable of doing that and over time, we’ll probably see that increase as we are able to look at larger properties and more and where the pipeline is just increasing. Again, as people understand what we’re doing and that we do what we say we’ll do and we close and I’ll have to say we’re seeing a lot more properties and actually I would say this on the upper end scale of the properties.

Sheila McGrath

Okay, great. Last question on G&A, is there any insight you could give to us on the balance of the year? Was this quarter, pretty representative or should we have some ramp up as the year progresses?

Tim Wallace

We are actually have added three people in accounting in the first half of the year, we may add one more this year. So I think – I think probably the second quarter is pretty representative. There’s things going back and forth in it, but I would say that’s a fairly comfortable place.

Sheila McGrath

Okay. Thanks a lot.

Tim Wallace

Thank you.

Operator

[Operator Instructions] The next question comes from Eric Fleming of SunTrust. Please go ahead.

Eric Fleming

Good morning, guys.

Tim Wallace

Good morning, Eric.

Eric Fleming

On the property operating expense, so it’s – is it just going to be pretty much every year in the second quarter is going to be annual reconciliation, so your operating expenses in 2Q will be materially – will be higher than the rest of the year?

Tim Wallace

It will – there always be some fluctuation in there probably. As we get larger, that fluctuation gets less because it’s mainly with properties that have operating expense recoveries that will go into the first reconciliation with where it shows up. So as we get larger, the fluctuation will be less. And to be honest with you, we’re also trying to buy more and properties that have less of that possibility also.

Eric Fleming

Okay. And just a quick one on the pipeline at $65 million, how many properties still say we have in there?

Tim Wallace

That’s six.

Eric Fleming

Six, okay. That’s all from me. Thanks.

Tim Wallace

Very good. Thanks, Eric.

Operator

There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Tim Wallace for closing remarks.

Tim Wallace

I just like to say thanks everybody. We appreciate your continued support. And for those of you, who helped and participated in the follow-on offering, we appreciate that as always. So thanks for spending the time with us today and we’ll talk to you next quarter.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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Community Healthcare Trust’s (CHCT) CEO Tim Wallace on Q2 2017 Results – Earnings Call Transcript

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