Community Healthcare Trust Inc (CHCT) 2017 Q2 法說會逐字稿

Good day, and 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. (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 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 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 Timothy Wallace, Chairman, Chief Executive Officer and President of Community Healthcare Trust Incorporated.

Thanks, Kay, 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 5 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 2 weeks of the quarter, causing our revenue and FFO to be lighter than expected. And what I will mention -- not to infringe 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 costs to be higher than most people had anticipated. Second, as most of you know, we had some disagreements with ISFS, or ISIS, as I call them sometimes, over their analysis of our board, our compensation and the change-in-control provision in our incentive plans. By the time we got through all of that, paid the proxy solicitor filing fees, attorney's fees, et cetera, ISF ended up costing us almost $0.01 per share this quarter.

And finally, we have some operating expense recovery fluctuations related mainly to properties acquired in the last year, going through their first reconciliation. If you remember, we had the same type of fluctuation last year in the second quarter. However, this year, it had less of an effect than last year since the new properties were a 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 6 properties with fully-negotiated purchase and sale agreements for an aggregate expected investment of up to $65 million. We continue to have other term sheets signed, and some people will try to compare that to the 72, but 65 of those are now 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 science, and another way of looking at these quarter end closings is that we're pulling some forward from the next quarter. Our properties under review continues to go up. We currently have signed term sheets from 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 underwriter's option to purchase additional shares. The company received net proceeds of approximately $108.9 million after deducting the underwriting discount and offering expenses. The 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 totaled 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 out 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 $0.01 a quarter per share. We view this as just another part of real estate, and we'll 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 to an annualized dividend of $1.57 per share, and I continue to be proud to say that 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 future, it allows borrowings up to a total of $450 million. The term loans drawn to-date consist of $30 million of 5-year and $30 million of 7-year, and the company entered into an interest rate swap agreement to fix 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 $190 million available under our credit facility.

Finally, as previously announced, I have a 10b5 (sic) [10b5-1] program to acquire shares in 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 lesser 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 of the items I wanted to cover, so I'll 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, 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 of the 2017 second quarter acquisitions had occurred on the first day of the second quarter, rental and mortgage interest revenues would have increased by an 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 adjusts for straight line rents, deferred compensation increases 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, an increase in AFFO of about $0.04 to $0.42 per share.

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

(Operator Instructions) The first question comes from Alexander Goldfarb of Sandler O'Neill.

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 have made all their payments?

Exactly. They were current through June 30. They declared bankruptcy on June 23.

Okay, and then they are continuing to pay?

They did not pay in July.

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

Yes. But it's prohibited to make payments out of bankruptcy right now in -- while motions are being filed.

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

We are still pursuing and anticipating collecting it. I'm not sure, what today from a modeling standpoint to do, but we are exercising all of our options, and they have actually filled 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 to tell you so far.

Okay. And then just as far as what your adviser is just saying for timing, if you -- to basically get at the asset, take it over. What is the timing for that? What's the process?

I think, 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 1 month or 1.5 months before we really know exactly what the timing looks like.

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

Well, on the surface under a purchase and sales and it'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 1 month behind or things that are on our watch list, but I mean, we don't have anything significant -- Page, what? I think...

3 to 5.

3 to 5 out of the 200 that's on the watch list.

Yes, yes.

The next question is from Rob Stevenson of Janney.

This bankruptcy is the same that got disclosed in the perspectives about the mortgage note, right? AMG?

Yes.

Okay. And so I guess, the question -- the one question I have for you guys is, what fundamentally changed between when you guys underwrote it and when, basically, I guess, in late June, when they went into bankruptcy? Was it something structural? Was it something -- what was the difference operationalwise that caused them to have to go into bankruptcy between the time that you underwrote it and were comfortable with the credit and June?

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, to all obligations to their creditors. I mean, from everything looking at it, they were cash flow positive, the management team was in our offices back in -- was it February?

February. End of February.

End of February, and told us they had made $8 million to $9 million of EBITDA last year. So this were -- the operation's underlying our credit was going to be $1 million or $2 million cash flow positive this year. So I mean, everybody is kind of scratching their heads as to what -- we don't know what. Management's trying to say is that it was due to changes in the LTAC reimbursement. But all of that, 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 filed bankruptcy on June 23, and were current on everybody's obligations through June 30.

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

That's for sure. There is one that we're negotiating with, but it's not a significant lease. We've had good leasing. We've had good leasing activity as (inaudible) we put out in our update. In the second quarter, we had 48,000 square feet of renewals and new leases and 28,000 of expirations or terminations. So leasing has been positive so far.

The next question is from Sheila McGrath of Evercore.

Yes. Tim, just on the leasing, you have -- did have good -- it looked 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?

First, I'll give you a few comments, and you probably going to have a lot more details than I can. But I think, basically, what we're saying is, is I think that over 90% are renewing, basically, on a historical basis prior to our acquisitions, and that's what we've experienced since we acquired it. And I am unaware of any time that we gave free rent, but we do in some cases, do some TI , but it takes a lot.

Yes. And Sheila, there is some things we're trying to do. We've been successful in converting some modified growth leases to triple that. And where we give, if there is any significant TI over a just few dollars, it gets built into our rights. So we get a return on that.

Okay. Great. And then on the ISF proxy cost. Did that flow through the G&A line item? Is that right?

Yes.

Okay. And then 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?

Well, in -- you know, we've said for some time, after we did this equity raise, that we didn't anticipate coming back to the equity market, probably, till late '18 at the earliest, maybe '19 -- first part of '19. And so we were going to go down the -- we're going to finish investing the money that we got in the last equity raise, we'll draw down on the 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 likelihood, will be under an ATM program.

Okay. Great. And then on the acquisition volume for third quarter. I understand it'll be back-end 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 the $30 million a quarter?

I'm more comfortable keeping it at $30 million a quarter. And this was kind of an outlier, because we had a couple of opportunities that we were able to take advantage of. To some extent, I started to tell our everybody I need this $30 million for this quarter and $35 million for next quarter, and then anything else will be gravy. But we do anticipate closing all of this in the third quarter. So again, my view is, let's keep things at $30 million to maybe $35 million a quarter and, again, we're very comfortable in doing that, and over time, we'll probably see that increase as we are able to look at larger properties and more -- the pipeline is just increasing as, again, as people understand what we're doing and that we do what we say we'll do and we'll close, and (inaudible). We're seeing a lot more properties, and actually, I would say, this is only upper end scale of the properties. So...

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?

We actually have added 3 people in accounting in the first half of the year. We may add 1 more this year. So I think probably the second quarter is pretty representative of this business. Some things going back and forth in it, but I would say that, that's a fairly comfortable place.

(Operator Instructions) The next question comes from Eric Fleming of SunTrust.

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

It will -- there will 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 we're going through the first reconciliation with where we chose 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 more properties that have less of that possibility also. So...

Okay. And just a quick -- on the pipeline, the $65 million, how many properties did you say were in there?

6.

6? Okay.

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.

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

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