Community Healthcare Trust Incorporated (NYSE:CHCT) Q4 2022 Earnings Call Transcript

Community Healthcare Trust Incorporated (NYSE:CHCT) Q4 2022 Earnings Call Transcript February 15, 2023

Operator: Welcome to Community Healthcare Trust’s 2022 Fourth Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2022 fourth quarter financial results. It will also discuss progress made in various aspects of its business. Following the remarks, the phone lines will be open for a question-and-answer session. The company’s earnings release was distributed last evening and has also been posted on its website, www.chct.reit. The company wants to emphasize that some of the information that may be discussed on this call will be based on information as of today, February 15, 2023, and may contain forward-looking statements that involve risks and uncertainties. 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 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 Dave Dupuy, Interim CEO of Community Healthcare Trust.

Dave Dupuy: Great. Thank you very much. And good morning. Thank you for joining us today for the 2022 4th quarter conference call. On the call with me today is Leigh Ann Stach, our Chief Accounting Officer; and Tim Meyer, our Executive Vice President of Asset Management. As we disclosed in an 8-K released on Monday, February 13, Tim Wallace is on a medical leave to deal with complications from a peptic ulcer, and the board has asked me to step in as the Interim CEO. I know everyone will join me in wishing Tim a quick recovery. Now to other matters. 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 filed last night. In addition, an updated investor presentation was posted to our website last night as well.

We had a busy fourth quarter both from an operations and an acquisitions perspective. At year-end, our occupancy had risen to 91.7%, and we continue to see good leasing activity. Our weighted average remaining lease term was relatively stable at 7.6 years. We continue to have five properties or significant portions of them that are undergoing redevelopment or significant renovations with long-term tenants in place when the renovations or redevelopment is complete. During the fourth quarter, we acquired 13 properties in four transactions with a total of approximately 241,000 square feet for a purchase price of $50.2 million. The properties were 97.8% leased with leases running through 2034 and anticipated annual returns of approximately 9.26% to 10.21%.

For the year, we acquired 18 properties with a total of 423,000 square feet for an aggregate purchase price of $97.1 million which were approximately 98.9% leased with leases running through 2037 and anticipated annual returns of 9% to 10.25%. Subsequent to December 31, we acquired three properties in two separate transactions totaling 99,000 square feet for an aggregate purchase price of approximately $12.5 million. Upon acquisition, the properties were 100% leased with expirations through 2029. The company has four properties under definitive purchase agreements for an aggregate expected purchase price of $20.1 million and expected returns of approximately 9.2% to 9.5%. The company is currently performing due diligence and expects to close these properties in the next few months.

We also have signed definitive purchase and sale agreements for six properties to be acquired after completion and occupancy for an aggregate expected investment of $141 million. The inspected return on these investments should range up to 10.25%. We expect to close on these properties throughout 2023 and 2024. We continue to have many properties under review and have term sheets out on several properties and anticipated returns of 9% to 10%. On November 2, 2022, the company filed an automatic shelf registration statement on Form S-3 with the SEC. Simultaneously, the company entered into a sales agency agreement with various banks for the sale of up to 500 million of common stock, including the issuance of ATM shares. Also, we declared our dividend for the fourth quarter and raised it to $0.4475 per common share.

This equates to an annualized dividend of $1.79 per share, and we continue to be proud to say we have raised our dividend every quarter since our IPO. Before jumping into the financials, I wanted to highlight our recent refinancing, SOFR transition and swap activity. Given the tightening bank market, we thought it prudent to move forward our refinancing plans, and our banks were very supportive. Although we were seeking $125 million seven-year three-month term loan, the transaction was oversubscribed so we decided to increase to $150 million. The three-month stub period was added to make the maturity towers consistent with our existing term loans, which occur every two years beginning in March of 2026. The proceeds were used to refinance the $50 million term loan due 2024, pay down the revolver and fund acquisitions.

Simultaneous with the refinancing, we transitioned our borrowings from LIBOR to SOFR. Shortly thereafter, we swapped floating rate exposure to fixed through SOFR-based swaps. And finally, in January, we transitioned all our remaining swaps from LIBOR to SOFR. After this refinancing, we anticipate having enough availability on our credit facilities to fund our acquisitions, and we expect to continue to opportunistically utilize the ATM to strategically access the equity markets. Now on to the numbers. I am pleased to report that total revenue for 2022 was $97.7 million compared to $90.6 million for 2021, representing 7.8% growth over the prior year. Meanwhile, total revenue for the fourth quarter of 2022 was approximately $25.3 million versus $23.2 million for the same period in 2021, representing 9% growth over the fourth quarter of 2021, while quarter-over-quarter revenue grew 2.2%.

And on a pro forma basis, if all the 2022 fourth quarter acquisitions had occurred on the first day of the fourth quarter, total revenue would have increased by an additional $1,116 million to a pro forma total of $26.5 million in the fourth quarter. From an expense perspective, property operating expenses increased year-over-year from $15.2 million in 2021 to $16.6 million in 2022 or 9.8%. During the fourth quarter, property operating expenses increased from $3.5 million in 2021 to $4.2 million or 17.6% for the same period in 2022. Sequentially, property operating expense decreased from $4.3 million in the third quarter to $4.2 million in the fourth quarter or 4% due to normal fluctuations in property operating expenses that occur quarter-over-quarter.

And for the year, G&A increased from $12.1 million in 2021 to $14.8 million in 2022 or 22.5%. And the fourth quarter G&A expense — G&A increased from $3.2 million in 2021 to $4.1 million in 2022 or 31.5% and increased 10.3% sequentially. For the year, cash G&A increased from approximately $4.9 million in 2021 to $5.4 million in 2022 or 9.6%. While in the fourth quarter, cash G&A increased from approximately $1.2 million in ’21 to $1.5 million in ’22 or 29.8% while increasing 15.8% quarter-over-quarter. Increases in G&A were driven by compensation expenses related to both new and existing employees, increases in professional fees expense and increases in amortization of deferred compensation from the issue of restricted stock, including a compressed amortization schedule based on retirement eligibility dates.

Please refer to Page 8 in the supplemental information report as included with our 8-K filing for more details on cash versus noncash G&A expenses. Interest expense increased year-over-year from $10.5 million in ’21 to $11.9 million in ’22 or 12.6%. Quarter-over-quarter interest expense increased from $3 million to $3.5 million or 14.4%. The increase in interest expense was driven by an increase in interest rates, borrowings under our credit facility to fund acquisitions and the addition of the new $150 million term loan which closed December 14, 2022. For the year, our net debt to total capitalization remained conservative at 34.8%. Our net income decreased from $22.5 million in ’21 to $22 million in ’22 or 2.1%. For the quarter, net income decreased from $6.1 million in ’21 to $5.2 million in ’22 or 14.3%, and sequentially, net income decreased from $5.7 million to $5.2 million or 7.7%.

For the year, funds from operations, FFO, increased from $52.9 million or $2.20 per diluted share in 2021 to $54.6 million or $2.24 per diluted share or $0.04, representing per share FFO growth of 1.8% for the fourth — 1.8%. For the fourth quarter, FFO decreased from $13.8 million or $0.57 per diluted share in 2021 to $13.6 million or $0.56 per diluted share in 2022. On an annual basis, adjusted funds from operations, which adjusts for straight-line rent and stock-based compensation, grew from $56.5 million or $2.35 per diluted share to $60.6 million or $2.49 per diluted share or $0.14, representing per share AFFO growth of 6%. On a quarterly basis, AFFO increased from $14.9 million or $0.61 per diluted share in the fourth quarter of ’21 to $15.4 million or $0.63 per diluted share in the fourth quarter of 2022.

And from a pro forma perspective, if all the fourth quarter acquisitions occurred on the first day of the fourth quarter, AFFO would have increased by approximately $576,000 to a pro forma total of $16 million, increasing fourth quarter AFFO to $0.65 per share. Kate, I believe we’re ready to start the question-and-answer session.

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Q&A Session

Operator: We will now begin the question-and-answer session. The first question is from Rob Stevenson of Janney. Please go ahead.

Rob Stevenson : Hi, good morning, guys. Dave, any in the ’23 or ’24 lease expirations and known move-out or likely downsize at this point? Or you expect them all to renew in place?

Dave Dupuy : Yeah. Rob, thanks for the question. We’ve got relatively few leases that are expiring in ’23. So — and we think we know pretty well what those — whether those are going to be re-leased. Tim, I don’t know if you’ve got any color on that, but feel free to add.

Tim Meyer : I mean, we’re fairly confident with our lease pipeline that we have today both with renewals and new leases. With the portfolio, there is a natural churn rate that you see with leases that do expire, tenants that do move out. But we’ve been — we’ve seen strength with our retention rate particularly through 2022 and we see that continuing in 2023. So even if tenants do move out, we’re pretty confident in what we can do with leasing that to new tenants.

Dave Dupuy : And Rob, that’s showing up in our occupancy, what we’ve seen in terms of momentum and growing occupancy over the last few quarters.

Rob Stevenson : Okay. And I guess on that standpoint, I mean, what is the outlook? You guys are just a shade under 92% leased as of year-end. In terms of incremental leasing within the portfolio, what’s the outlook for that in terms of what you have visibility on today?

Dave Dupuy : Yeah. I think historically what we’ve messaged, and I don’t think that would change based — even on what we’re seeing, is we think it’s tough for this portfolio to be leased any more than kind of 93%. There’s always going to be a natural piece of vacancy in the portfolio. So I think we’ve got an ability to continue to increase our occupancy and continue to build that. But I think anything beyond 93%, we certainly wouldn’t expect. And so continue to see good leasing activity. And what we’ve always said is when you see good lease activity, you see good leasing. So I think we’re confident that we will continue to post solid leasing results going forward.

Rob Stevenson : Okay. And then the last one for me. Your average property acquisition cost in ’22 was a little under $5 million, and you’re basically right there again with the stuff that you either have closed or have under contract for ’23. Other than the six properties for the $141 million in the pipeline, are there other deals that you guys are starting to look at these days? Are they still in that sort of $5 million-ish on average range? Or are some of these larger deals moving up the scale pipeline?

Dave Dupuy : I think we see a mix. Some of those — I think the average of $5 million, $5 million to $10 million is probably what we consistently see. But occasionally, if it’s the right opportunity, we see $2.5 million or $3 million acquisitions if we feel like it’s a good opportunity for us, and in particular, if there’s repeat business. But look, we’ve seen a mix. We’re continuing to look at a lot of different opportunities out there. But I think that $5 million average, maybe trending a little bit higher, just based on the fact that we’re going to start closing on some of those larger inpatient rehab facilities over the upcoming year, I think that might push that average up just a little bit.

Rob Stevenson : Okay. Thanks, guys. Appreciate the time.

Dave Dupuy : Thanks, Rob.

Operator: The next question is from Alexander Goldfarb of Piper Sandler. Please go ahead.