Community Healthcare Trust Inc (CHCT) 2016 Q2 法說會逐字稿

Welcome to Community Healthcare Trust's 2016 second-quarter earnings release conference call. On the call today, the Company will discuss its 2016 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 12, 2016 and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially and those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Company's disclosure regarding forward-looking statements in its earnings release as well as its risk factors and MD&A and that's 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 also discuss GAAP and non-GAAP financial measures. The 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 comment not be recorded or otherwise reproduced or distributed without the Company's prior written permission.

(Operator Instructions) I would like to turn the call over to Timothy Wallace, Chairman, Chief Executive Officer, and President of Community Healthcare Trust Incorporated.

Thank you. Good morning, everyone, and thank you for joining us today for our second-quarter conference call. With me on the call today as usual, is Page Barnes, our Executive Vice President and Chief Financial Officer.

Once again, we've had a very busy quarter. And as we have previously announced, we acquired three properties during the quarter in three states with a total of approximately 153,400 square feet. For a total purchase price of approximately $33.5 million. These properties were approximately 93.7% leased, with lease expirations ranging out to 2031. As disclosed in the 10-Q, we have four properties under definitive purchase agreements. For an aggregate expected purchase price of approximately $13.4 million. The expected return on these investments range from approximately 9.16% to 9.97%.

As it relates to our pipeline, our properties under review continues to go up. We currently have several properties under signed term sheets. And several more with term sheets being actively negotiated. We continue to improve our relationships with key-provider clients and are encouraged by our efforts. We continue to believe there are a lot of these types of properties. And continue to believe that there's very little competition for them.

In addition to our acquisition activity in the second quarter, we were very active on a number of other fronts. As was discussed last quarter, at the beginning of the second quarter, we completed our first [follow-on] equity offering. The Company sold a total of 5.175 million shares which included the full exercise and the underwriters option, for net proceeds of approximately $86.8 million. Also, as was previously announced, we declared our dividend for the second quarter and raised it to $0.3825 per common share. This equates to an annualized dividend of $1.53 per share. I continue to be proud to say, we have raised our dividend every quarter since our IPO. Also, as we have previously indicated, we would, and as we announced in the release last night, we amended our revolving credit facility increasing the maximum borrowing capacity from $75 million to $150 million and reducing the interest rate downward by 25 basis points. Also, certain financial covenants were adjusted or replaced and the maturity date was pushed out to August 2019.

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

Thanks, Tim. I am pleased to review the Company's financial performance for the second quarter ended June 30, 2016.

Total revenues for the second quarter of 2016 were $6.2 million. Rental and mortgage interest revenues were $5.1 million. The Company closed on the three properties during the quarter including the exercise of our option under our mortgage note. The real estate portfolio was 93% leased. And on a pro forma basis, if all of the 2016 second-quarter acquisitions had occurred on the first day of the second quarter, rental and mortgage interest revenues would have increased by an additional $151,000 to a pro forma total of approximately $5.2 million.

Total expenses for the second quarter of 2016 were approximately $5.5 million. General and administrative expenses for the second quarter were $895,000. And of this amount, transaction expenses totaled $204,000. Depreciation and amortization expense was $3.3 million. And on a pro forma basis, if all of the 2016 second quarter acquisitions occurred on the first day of the second quarter, depreciation and amortization expense would have increased by $269,000 to a pro forma total of just over $3.6 million. The Company reported net income of $508,000 for the second quarter. Funds from operations for the second quarter of 2016 consisted of net income plus $3.3 million in depreciation and amortization for a total of over $3.8 million or $0.32 per diluted common share. Normalized FFO, which adds back acquisition expense and deferred compensation eliminates straight line rent increases the total to over $4 million or $0.34 per diluted common share. Again, on a pro forma basis, adjusting for the data outstanding for the quarter, if all of the 2016 second-quarter acquisitions occurred on the first day of the second quarter normalized FFO would have increased by an additional $151,000 to a pro forma total of approximately $4.2 million and increasing normalized FFO by over $0.01 to $0.35 per share.

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

We will now begin the question-and-answer session.

(Operator Instructions)

The first question comes from Sheila McGrath of Evercore ISI. Please go ahead.

Yes. Good morning. Tim, I was wondering if you could give us some insight how you think about the acquisition pipeline and underwriting now that your cost of capital is so much improved? Would you move your underwriting to be a little bit more aggressive to ramp the pipeline? And also, just in terms of ramping the pipeline, do you think you have to add additional personnel?

Good morning, Sheila. Thanks for the questions. To hit on most of those, the answer is we don't see changing what we have been doing. What we have been doing has been working and has been making money. And the way we view it as our cost of capital goes down, if we are continuing to invest in the cap rates that we are ranging at, then our margin just goes up. And we make more money for the shareholders.

We feel very comfortable as I said from the beginning that we can do $120 million to $150 million a year in acquisitions. We can push that a little bit with the people that we have. We are anticipating as we add more properties over the next year or so, adding a person or two in that process. But not specifically for underwriting or for the acquisition side. Again, we want to maintain a steady-state. In some quarters, we may do $25 million and in some quarters we may do $40 million. But I doubt that you will see us very far from $120 million to $150 million for a year.

Okay. Great. I was just wondering if you could update us. Are there any known lease expirations that are non-renewal in 2016 at this point?

Page, I will let you do that.

We did have one at the end of June. I think we may have discussed before with the last call. It was one that we were working actively to renew. And the hospital company has its own issues and they have delayed renewing until they recruited some doctors to fill the space. They are still interested in the space.

But just to put that in context, that's what [3,000 or 4,000] square foot lease?

Yes. Like 4,000 square feet I believe. It was a small one that --

We are continuing to have leasing activity and renewal activity with all of our existing tenants.

Yes.

All right. Great. Thank you.

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

Good morning, guys. Page, given the expanded line of credit, what do you at this point, given your commitments to the pipeline what you have already closed. What is the dry powder right now in terms of acquisitions that you can do without having to come back to the equity markets?

With the cash on hand, and the availability under the line, we're probably just under $150 million. I would say $140 million as it stands right now.

We have talked about that before. And what our plan is, Rob.

Rob, I'm sorry. That's with our internal limit of 40% net to cap. The credit facility actually would let us take that up higher.

What our game plan on that is, we are going to draw down on the line probably $100 million plus or minus. Which we think will be probably first, second quarter of next year. And then we're going to test the market from both insurance-company standpoint and bank standpoint. Of doing a seven year plus or minus. Six or eight year tenure type of permanent debt fees that would be the first permanent debt fees of capital that we've had on the balance sheet. Pay down the bank line and then be in a position to draw it back up.

The other thing we're going to do, as you will see later this fall, and I have told this all the time to people so that when that happens they won't say what you are doing. We will file a universal shelf filing later this year. And it will say we can raise all kinds of money. All kinds of securities and all kinds of ways with which we won't do. But, basically that will set it up to where we will have a lot easier access to the equity capital markets on a going-forward basis. And be able to do it in smaller bites and bites that makes sense from a capital-funding matching standpoint.

Okay. But I mean at this point, you basically have got almost, at the acquisition pace that you had just identified, you've basically got almost a year before you start really running into the need for substantial amount of equity.

Yes.

Okay. And given the yield on the acquisitions versus where your stocks, your commons being valued today. How do you think about preferreds in the capital structure going forward given the rates that a bunch of sub-billion dollar reits have been able to get recently. How do you and the Board think about that?

I have addressed this previously. We never say never to anything. But we like a simple capital structure. We very much prefer sticking with common stock and with debt. At the appropriate time and the appropriate ways, if it was priced appropriately. And again I'd never say never, but it is not our intent do any preferred at this point in time. I can't predict what the capital markets will be a year from now. When we might start thinking about it.

Okay. And then just lastly, it looks like the portfolio is 93% leased today. In terms of existing vacancy, not on future renewals, but on existing vacancy, what is the pipeline look like to drive that higher?

We sent out three new leases Wednesday. So the great thing about our vacancy it is [vault] vacancy. We only pay for existing NOIs. So when we buy a building with vacancy, we're not paying for it. Anything is just bonus. Go ahead Page.

I think we've getting more traction on that. I want to say that we didn't specifically focus on it. But we've got much more of a focus on it now to do that. We are working with several companies that are regional companies to look at different spaces that we have in our current portfolio.

So I think we will be able to take advantage of that. Right now, it looks like that pipeline is pretty good too.

And from a practical standpoint, my experience shows me at is really hard to keep a portfolio much about 95% occupied. So, we feel like we have a few hundred basis points that we may be able to (inaudible) and try to keep it there. But as you have fluctuations in the portfolio like this, I mean you're going to have 93% to 96% is something that hopefully we will be able to keep. And you will see it maintained over time.

Okay. Thanks guys. Appreciate it.

The next question comes from Alex Goldfarb of Sandler O'Neill. Please go ahead.

Yes. Good morning. Just a few quick questions here. Tim, just given the deal pipeline that you have announced so for the $13.5 million for the quarter. It would seem like assuming that you are in the $25 million to $35 million quarterly run rate it is going to be pretty much to the tail end. So just from a modeling perspective, third quarter will probably not have the normal benefit of the full $25 million to $35 million is that correct? Is that the way we should think about it?

Yes, probably. I think it's because of a combination of vacations. Some here, but some with attorneys, some with sellers. It's kind of been hard to get some people to focus on getting stuff done. We still hope to be able to close that. But you are right, it will probably be tail-end weighted.

Okay and then with that in mind, does that suggest that 4Q would have a lot more deals in it? If you're saying people are out for vacation now? Should we be thinking that 4Q is more towards like a $40 million level or we should think about that being the standard $25 million to $35 million?

Yes. I think the fourth quarter is going to be a very good quarter. But again, I don't want to encourage anybody to get off the $25 million to $35 million consistent. Like I said some quarters may be $20 million, some quarters may be $40 million. The way it is looking right now, with the term sheets that we have signed back down and the activity that we have going out, I am anticipating the tail end of the third quarter and fourth quarter are going to be good periods for us.

Okay. And then Page, on the new line of credit, one of the things you guys had mentioned before is not wanting to increase it, before you had to given the unused facility fees. Do you still have those unused facility fees? Or have they been reduced down? If they are, what is the new rate that we should be assuming?

They made us an offer we couldn't refuse. So we went ahead and did it. [Laughter] It is still the same unused fill but there is different trip points for when it reduces.

Okay. So for modeling purposes we should do the whole $150 million with the old unused (inaudible)?

Yes.

Okay. And then finally, Tim, in your comments on the equity in the shelf. What you are saying is, you want to get to the point where you can [be], whether it's ATM or small little bits into the market. But you're not precluding yourself from, if something happens between now and when do these and you file the shelf of doing issuance. You are not removing your ability to do that. You are just saying ideally this is what we would like to do. That's the way we should read it correct?

That is correct. But you should anticipate sometime in the next couple of months the shelf being filed.

Okay perfect.

We're going to go ahead and file that. And have it ready relatively soon. We wanted to get the bank line down first, and then we were going to focus on getting the shelf filed.

Tim, Page, thank you very much.

Thank you, Alex.

(Operator instructions)

The next question comes from Eric Fleming of SunTrust. Please go ahead.

Yes. A quick question. Looking at the G&A line, it's slightly higher than I was thinking once you back out the acquisition expenses, is there any one-time things in 2Q or is that a higher level that we can expect going forward?

It's probably pretty close. I'm not sure, I hadn't focused on that particularly like that. It's probably pretty close to what a going-forward type of thing is. And with the way our compensation is, it's got the second year of the stock stuff layered in. So that might be some of the difference. We will build up, in essence, the non-cash G&A part of it. As time goes by and we add the years in.

Okay. I can dig a little further on what I got on the stock-comp side.

If you have any questions, we can follow up with that.

Okay. Thanks.

Thanks, Eric.

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

Thanks everybody for being on the call. We appreciate you taking the time and showing the interest in us. And hopefully we can continue having great quarters. Thank you so much. Bye.

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