Community Healthcare Trust Inc (CHCT) 2015 Q3 法說會逐字稿

Good morning, and welcome to Community Healthcare Trust's 2015 third-quarter earnings release conference call. On the call today the Company will discuss its 2015 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.communityhealthcaretrust.com. 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 13, 2015, 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 in MD&A in 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 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 and form 10-Q both of which are 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. You may begin, sir.

Thanks, Chad. Good morning, everyone, and thank you for joining us today for our third-quarter conference call. With me on the call is a Page Barnes, our executive vice President chief financial officer. It's been a very busy time again. We issued a press release at the beginning of October, that highlighted our activities in the third quarter.

We also posted to our website an investor presentation that Page and I used visiting some investors in October. To reiterate what we said then, we acquired three properties with an aggregate purchase price of approximately $13.1 million and funded an $11 million mortgage with an option to purchase the property securing the mortgage. We expect the returns on these investments to range from approximately 9.3% to 11.3%.

As we disclosed in the 10-Q filed last night, since September 30, we have closed on three more properties, totaling approximately 56,000 square feet for an aggregate purchase price of approximately $14.7 million. These properties are 100% leased with lease expiration dates dating through 2030. The returns on these properties are consistent with our investment criteria.

In addition, we have some properties that should close in the next week or so, including a surgery center in Michigan and a physician clinic in Kansas. We also have several properties either under contract or with signed term sheets such as a group of MOB's in Alabama and an MOB in Ohio, among others. As it relates to our pipeline, our properties under review continue to go up.

This is what I had predicted, because we can now provide assurance of timely closing. We are continuing to develop and improve our relationships with key provider clients and are encouraged by the discussions we are having there.

With Page's background in and understanding of the psychiatric business, we are developing several relationships in that industry segment. In addition, we continue to believe that there are a lot of the properties that we are interested in and continue to believe there is very little competition for them. As was previously announced, we declared our first full quarter dividend of $0.375 per common share on November 6. This equates to an annualized dividend of $1.50 per share.

We remain very busy implementing our information technology plan, ensuring proper policies and procedures are in place, leasing and releasing space. As an example of some of this I got the first look at what our new website would look like earlier this week. Hopefully we'll have that implemented by the end of the year. As part of our information released last night we took our first shot at providing supplemental data. We are viewing this as a work in progress.

I'm sure you'll have some suggestions, and if you do, please forward those via email to Leigh Anne Stach. Alternatively, you can send them to Page or myself, and we will make sure she gets them. My view on this is, and in my previous life, was that if a question was answered or was asked twice, we would put it in the supplemental, so we would like to provide as much information on a supplemental basis that you all find is needed.

All of this is very exciting and satisfying and would not have been possible without your all's assistance. Thank you for all the assistance and support you have provided us, and I believe that takes care of all the items I wanted to cover.

I will hand things off to Page to go over the numbers.

Thanks, Tim. I am pleased to review the company's financial performance for the third quarter ended September 30. Total revenues for the third quarter of 2015 were $3.2 million. Rental revenues were $2.6 million. As previously addressed the company closed on three properties and a mortgage loan during the quarter. The real estate portfolio is over 93% leased.

On a pro forma basis if all of 2015 third-quarter acquisitions had occurred on the first day of the third quarter, rental and mortgage interest revenues would have increased by an additional $399,000 to a pro forma total of $3 million. Total expenses for the third quarter of 2015 were approximately $3.2 million.

G&A expenses were $223,000, of this amount we had a negative transaction expense of $101,000, and while we pride ourselves on being frugal, we're not that good yet. With all the activities surrounding the IPO and the closing of additional properties we had a reclassification of some acquisition expenses which resulted in the negative transaction expense.

Depreciation and amortization expense was $2.2 million for the quarter. On a pro forma basis if all the 2015 third-quarter acquisitions had occurred on the first day of the third quarter, depreciation and amortization expense would have increased by $53,000, to a pro forma total of just under $2.3 million. The company reported a net loss for the third quarter of 2015 of $67,000. Funds from operations, FFO, for the third quarter of 2015 consisted of net income plus $2.2 million in depreciation and amortization, for a total of $2.1 million.

Normalized FFO which adds back the acquisition expenses, decreased that total to $2 million. Again, on a pro forma basis, if all of the 2015 third-quarter acquisitions occurred on the first day of the third quarter, normalized FFO would've increased by an additional $399,000 to a pro forma total of just under $2.4 million. That's all I have from a number standpoint.

Chad, I believe we are ready to start the Q&A.

(Operator Instructions)

Sheila McGrath, Evercore.

Yes. Good morning. I was wondering if you could give us a little bit more insight on the mortgage investment. Do you expect that transaction to be a -- you said that there was a purchase option on it, so do you expect to purchase that asset in the near-term?

Yes, Sheila. This is Tim and good morning.

Yes. We do anticipate purchasing that asset either in the first or second quarter of next year. There were several tax and business issues that the current owner had that they wanted to do it this way, so we were able to structure it to accommodate that.

Okay. Great. And then I was wondering, just in terms of fourth quarter, just because the numbers are so sensitive in terms of how much volume you close, is there any additional insight that you could give us in terms of how much volume you think, based on your outlook right now would close in fourth quarter?

Well, we've already closed close to $15 million, and we've got another $10 million that should close in the next week or so. And the unmet -- I would hope that there is probably another $15 million to $20 million that would close in the fourth quarter. Some of it may be towards the end, and you always -- when you get towards the end of the year you're always into the holidays and being able to get things done. But I would hope another $50 million-$20 million after that.

Okay great and last quick question, just in terms of the outlook on acquisitions, how much volume do you think you could do from this point going forward before you would want to return to the equity markets? How much dry powder do you think?

Well, we are just now -- we will get into the line next week when we close properties. So we're just now getting into the line. So, we've said all along we would draw the line down $50 million to $60 million and see where we are, so we think we can go through the first quarter of next year anyway with our current acquisition trend and be okay, which is the game plan we laid out from the very beginning. Okay. Great. Thank you so much. Thank you, Sheila.

Alex Goldfarb, Sandler O'Neill.

Good morning and look forward to the new website, especially the email alert. So just a few quick questions, following up on Sheila's question, so in the queue, you disclosed that you've already acquired $15 million since the quarter close, and then you've got another $18 million that you expect to close during the quarter.

On the October to press release, you outlined in aggregate about $55 million that you expect to close in the fourth quarter, so can you just walk us through from that October 2 press release that $55 million to the roughly $45 million now that you've outlined, what the dynamics are there and then if some of that is just regular slippage as far as hoping to close in the fourth quarter, now looks like it won't close until the first quarter in which case that may explain the Delta between the $55 million and the $45 million.

I think that's probably it because there's a $10-million acquisition that we were hoping to close in the third quarter that, again, due to tax reasons the owners have pushed off to the first quarter of next year. But we've had -- we have other properties that we're working on that may replace that. I'm still -- it will be -- basically what we've said, and let me walk through the progression again, because it's not quite the same layout as it was in the October 2 release, but we've closed on $15 million.

We got another $10 million, basically, that should close in the next week or two. So that brings us up to $25 million for the quarter. And then, we've got another -- I don't know -- probably $20 million that I think will close, so maybe that is the $45 million, now that I'm sitting there adding it up in my head. It will be somewhere around $45 million, $50 million in the fourth quarter.

Okay but part of what you're saying is there was a $10 million deal that was supposed to close in the third quarter, but because of the seller's tax, whatever, issues it's not going to close until the first quarter?

Yes. It was supposed to close in the fourth quarter, but now it's not going to close until the first quarter. Yes.

Okay. That's helpful, Tim, and then the next question is you have been, and again you affirmed it earlier in October, you've $25 million to $30 million a quarter pace, but then you're also talking about the bigger deal pipeline and more people who are interested in transacting with you. So can you help us balance between the two, as far as should we expect to see that $25 million to $30 million a quarter pace grow, or is it that you now have an ability to be more selective or choose whether it's geography or product type more carefully? If you can just help us between those two?

Well, I feel like we always chose selectively anyway. I don't necessarily mean it that way. What we do have more opportunities, and we could increase the rate if a number of factors fell into place. Number one, the market has to like we were doing, i.e. the stock price has to stay in a range that it makes sense to do that.

We have the ability to do it, the product's out there. So it's more a function of matching up what makes sense from a cost of capital standpoint at a particular time with returns we get. And one of the things that we may do on a going forward basis if the stock price were to be where it was for a little while is to just increase our yield requirement. We've already done that to some extent, and that will probably be more of a -- we'd probably apply more of a price rationing approach at that point and then we would whatever else selectivity you would add to it.

Okay. So it's basically -- so just confirming that you've adjusted your underwriting based on how the stock has reacted.

We haven't to date, but we can, because the stock at one point was down in the $15s, $16s and at that price we affirmatively said we wouldn't issue stock. And in the $18's, we think we can probably do business at a good spread based upon what we're seeing.

Okay.

It's going to depend. I mean, and then we also -- we had the opportunity to look at -- there's been different proposals me to us about joint ventures and other things if that's needed. But again, we look at it as being -- we are investors with everybody else, and we're looking at it as a way to how do we increase our profit on a quarterly basis?

Okay. Yes. Obviously keeping the story simple is preferable, so no JVs is probably preferable. But thank you and see you next week. All right. Thanks.

Rob Stevenson, Janney.

Good morning. Can you talk a little bit about where you stand on your major 2016 lease renewals? There's quite a big amount rolling next year and just wanted to get an update as to where you stand on that.

We have had significant discussions with most of them, and we'll have a lot more visibility by the end of the year. We are very pleased with the way those discussions are going. Page, would you want to add?

No, we would -- we are very pleased with where they are standing -- some of them are just out for signature right now. We've been in negotiations and been pleased with both the rate and in some cases the expansion of space.

Okay. At this point, are there any major leases that you know are not going to renew?

No. I don't know of any.

Okay. All right. Thanks. Appreciate it.

Thanks.

(Operator Instructions)

Sheila McGrath, Evercore.

Yes. Page, I was wondering if you could clarify what you said in your prepared remarks about $100,000 on -- going the other way. I just didn't understand --

Well, we had negative transactions expense of $101,000 and that was due to $152,000 of transaction expense in second-quarter being reclassified and taken out of transactions.

We expensed too much in the second quarter, so we had to recoup it in the third quarter.

Yes.

I see. Okay.

The adjustment was $152,000, which gives us an actual number of $51,000 and would have put our G&A expenses at corporate at about $270,000.

Okay.

Which is pretty consistent with what we -- what we did.

I see. So if we adjust and get back to a $270,000 is that a pretty good quarterly G&A run rate?

That's a little lighter than we indicated.

Yes. Probably on a going forward basis, $300,000 to $325,000 is probably better.

Yes.

Okay. And then, just in the release, you said the returns are 9% to 11%, did you mean the initial return on cost? Or was that IRR number?

That's cash on cash return.

Initially.

Initially.

Okay. Sorry. And then on the 11%, it seems too good to be true or something. Was there -- is there really a short term expiration, or how are you able to uncover such a high-yielding transaction?

Just relationships and on that particular property, we think we're going to be a provider of capital to that company, and they look forward to the partnership. Yes.

I mean, that's really -- Page is kind of a downplaying it, but it's his relationship. That's a small psych hospital that's got great coverage and it's a relationship that Page has developed. And again with his background and understanding of the industry we feel like that gives us an advantage over anybody else in the area right now.

Okay. And then, last question, just on that original IPO assets, I know you drew back on some. Are there any IPO assets remaining that are still under consideration that you think would -- are still possibly in the pipeline?

There is still one. I mean, do you want to address it?

Yes. It's the Cambridge -- the Cambridge, Maryland facility that was a psych hospital also. And we've had conversations -- continued conversations with the Adventists, and we look for a resolution of that in the first quarter of next year. And that's what they've indicated to us, and we'll just to see if that -- where we can close that one. But I remain very optimistic on that.

Okay. Great. Thank you.

Thank you.

Mike Hussey, Mid-Continent capital.

Can I just ask you, Page, to clarify something for me I may have misheard? Can you hear me?

Yes. Yes.

You were giving the pro forma normalized FFO, and you said if you adjusted for a full quarter's worth of these additional properties, it would add approximately $399,000 to that $2.043 million figure. Is that correct?

That is correct.

Okay and then my second question is at the time of your IPO I think you said you were expecting a long run average debt to cap ratio of about 30%. Is that correct?

That is -- yes. That is where we would hope to settle.

So my question is, considering that there is no debt on the balance sheet as of the end of the third quarter, why are we even talking about questions or potentially issuing equity whether the stock is in the $18s or the $16s?

Because people ask us. I mean, we're going to obviously borrow money on the line. We've got $75 million on our line that's totally undrawn at this time, and we'll draw the first time in the next week or so as we close the next two properties.

Right.

But I mean the only reason we talked about it is because people ask is, what are you going to do and we're not sure until we get there.

Right. But my point is that who really cares if you've got attractive properties to acquire and you've got the dry powder in terms of untapped debt, whether the stock is at $16 at the time you're looking at these acquisitions or at $19? I mean, is that really relevant?

Not -- again -- it isn't to us the way that we run our business in the short term. It obviously is in the long-term if the stock were to stay down in that range. For that period of time.

I get that -- I think we're saying the same thing, which is basically it's not going to stop you from making an attractive acquisition in the short run.

No, you're exactly right. We're saying the same thing on that.

Okay, all right. Just wanted to clarify. Thank you.

Eric Fleming, SunTrust.

Hello. Just wanted to dig a little deeper on the pipeline and comparing it back to that early October release that you had. So back in the October release you said there was $24.8 million in definitive agreements, and you've closed $14.7 million of it. And then, you've got this additional $18.4 million that you're saying is now in a definitive purchase agreement that you expect to close in Q4.

What I'm trying to dig into is what's that additional non-- what additional do you have in that in non-binding term sheets out there going back to that. I don't think there's that $10 million Delta. I think it's just the way you disclosed earlier like you said is different than what you're providing now. And can you provide that number in terms of what the turn key pipeline is?

Off the top of my head, I can't and -- I can't off the top of my head, Eric. But our pipeline is very good and, again, we hope to close $45 million, $50 million in the fourth quarter and, again, it's not from a lack of looking at properties and finding properties that we would stop growing. I mean, it's -- there's a lot of it out there, and we're continuing to see it.

And actually, we are seeing larger transactions now than what we'll probably end up doing. I mean, were getting shown now $20 million, $30 million, $40 million acquisition opportunities with -- hang on. I'm being given something to look at. The current term sheet signed is like $21 million.

Okay. And just talking about like getting bigger deals coming into your pipeline is that -- I mean, is it - you've always talked about you're happier doing ten $10 million deals versus one $100 million deal.

We do not want to do a $100 million deal. We probably do not want to do a $40 million deal. We might do a $20 million deal.

Okay. Sounds good. Thanks.

Amit Nihalani, Oppenheimer.

Hi. Good morning.

Good morning.

Good morning. In regards to your pipeline, are you seeing one type of medical asset more representative than another?

I think we're seeing just about everything. I mean, we're seeing things -- we're looking at things that we haven't even thought about from the standpoint of industry segment, so I think we are seeing a very broad range and there's not a concentration -- Not a concentration. We are seeing a little more psych as our relationships have gone out. We are seeing more surgery centers. They are a smaller amount but we're -- per property, generally, but that's a segment that we really like, and we've got a bit of a reputation for doing those deals now. And so we like those and -- but otherwise, it's still very diversified mix that we're looking at.

Got it. Got it. That's it for me. Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Timothy Wallace for any closing remarks.

Again, we appreciate everybody on the phone today, and we appreciate your assistance and support and if you have any additional comments on the supplemental data, which I'm sure you will, please let us know. And we'll -- again, we view that as a work in progress that we'll continue to update and hopefully, be able to provide you all the information you need. Again, thanks for being with us, and we'll see you next quarter.

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