Community Healthcare Trust Inc (CHCT) 2017 Q4 法說會逐字稿

Good day, and welcome to Community Healthcare Trust 2017 Fourth Quarter and Year-End Earnings Release Conference Call. On the call today, the company will discuss its 2017 fourth quarter and year-end 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 at 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, February 23, 2018, 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 earning 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. Please go ahead.

Thank you. Good morning, everyone. We appreciate you all joining us today for the 2017 fourth quarter and year-end conference call. With me on the call today is Page Barnes, our Executive Vice President and Chief Financial Officer; and Leigh Ann Stach, our Chief Accounting 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 annual report on Form 10-K was also filed last night.

We were extremely busy during the fourth quarter. We acquired 6 properties in 4 states during the quarter with a total of approximately 153,000 square feet for a purchase price of approximately $40.2 million. These properties were 100% leased with leases running through 2032 and anticipated annual returns of 9% to 10.5%.

As it relates to our pipeline, we have 3 properties with fully negotiated purchase and sale agreements for an aggregate expected investment of $16.8 million. The expected return on these investments should range from approximately 9% to 9.6%, and we anticipate that these will close during the first quarter.

As I will discuss in more detail later, we're also anticipating net new investment of about $12.5 million into the exit financing for our bankrupt borrower that's calculated as $23 million commitment, less the $10.5 million mortgage investment we have had for some time. The majority of the net new investment has already been made.

In addition, as we previously disclosed, we have 3 additional properties under definitive purchase and sale agreements to be acquired after completion and occupancy that's for an aggregate expected investment of $40.4 million. The expected return on these investments should range up to approximately 11%. And we anticipate that one of these will close during the first half of 2018 and the other 2 should close in the second half of 2018. These represent 2 of our client relationships that you heard me talk about developing from the beginning.

Our properties under review continue to go up. We currently have term sheets outstanding from multiple potential properties with anticipated returns of 9% to 11%. We anticipate having immense availability on our undrawn term loans and revolver to fund these acquisitions through late 2018.

I think, as everyone is aware, we have been working through our first bankruptcy. The borrower has filed an amended bankruptcy plan, whereby we will provide financing to a newly formed company that will acquire certain assets and liabilities of the borrower and other entities. We believe this plan will be confirmed by the court later this month.

Assuming the plan is confirmed by the court, we will enter into a new note and provide up to $23 million in funding to the newly established company. This will be secured by the ownership interest, cash, accounts receivable, other assets and cash flows of 9 long-term acute care or rehabilitation hospitals. This includes 2 specialty hospitals that were not a party to the bankruptcy, but are being contributed to and will be owned and operated by the new company.

On December 28, in anticipation of the plan, we purchased $11.45 million face value of certain promissory notes secured by cash and accounts receivable of the borrower for $8.75 million from a syndicate of banks. That's a $2.7 million discount to face value. Subsequent to December 31, we acquired $2.2 million of promissory notes secured by the operations of the 2 specialty hospitals that were not included in the bankruptcy, but will be owned and operated by the new entity.

Under the terms of the plan, we will receive the real estate currently secured by the mortgage note receivable through a deed in lieu of foreclosure with a valuation of approximately $4.5 million. We will receive $6.7 million related to the mortgage note and $10.95 million related to the other promissory notes. An additional amount of approximately $5.35 million will be utilized to complete the contemplated transactions.

When everything is said and done, we are anticipating having up to approximately $23 million loan to the new entity, secured by all the ownership interests, cash, accounts receivable and other assets of the 9 hospitals. We anticipate earning approximately 9% interest on the loan. However, based on the terms of the loan, anticipated cash flows and potential for refinancing by the new company, we are anticipating a significant amount of this will be repaid relatively quickly. As I have said before, we view this as just part of real estate, and we have been working to resolve the situation as favorably as possible.

On another front, we declared our dividend for the fourth quarter and raised it to $0.3975 per common share. This equates to an annualized dividend of $1.59 per share, and I continue to be proud to say we have raised our dividend every quarter since our IPO.

During the fourth quarter, I've purchased 45,178 shares of the company's common stock at weighted average daily prices ranging from $0.2668 to $0.2760 pursuant to my 10b5 buying plan. The plan expired on December 31, 2017, and I have not decided yet if I'm going to put another plan in place for this year.

Also, since the company's initial public offering, our named executive officers, Leigh Ann, Page and myself, along with other members of management have elected to utilize all of our compensation to purchase restricted stock. In January, Leigh Ann, Page and myself purchased an aggregate of 35,195 shares of common stock in lieu of cash salary and received an aggregate reward from the company of an additional 35,194 shares for electing 8-year cliff vesting on that stock.

I believe that takes care of all 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 fourth quarter and year ended December 31, 2017.

Total revenues for the fourth quarter of 2017 were slightly less than $11 million versus almost $7.4 million for the same period in 2016. Total revenues for the year 2017 were $37.3 million versus $25.2 million for 2016.

Rental and investment interest revenues were $9.5 million and $32.3 million for the quarter and year, respectively, versus $6.1 million and $20.6 million for the same periods 2016. The real estate portfolio was 91.7% leased at quarter-end. On a pro forma basis, if all 2017 fourth quarter acquisitions had occurred on the first day of the fourth quarter, rental and interest revenues would have increased by an additional $420,000 to a pro forma total of $9.9 million for the quarter.

Total expenses for the fourth quarter of 2017 were approximately $8.4 million versus $6 million for the same period 2016. Total expenses for the year 2017 were just under $30 million versus $21.3 million for 2016. General and administrative expenses for the fourth quarter were $801,000. Depreciation and amortization expense were just under $5 million for the quarter. On a pro forma basis, if all the 2017 fourth quarter acquisitions occurred on the first day of the fourth quarter, depreciation and amortization expenses would have increased by $192,000 to a pro forma total of approximately $5.2 million.

The company reported net income of $1,552,000 for the fourth quarter versus $1,033,000 for the same period 2016. For the year 2017, net income was $3.5 million versus $2.7 million for the year 2016.

Funds from operations, FFO, for the fourth quarter of 2017 consisted of net income plus $5 million in depreciation and amortization for a total of $6.6 million. AFFO adjusted for straight line rents and deferred compensation which had minimum impact, the total remaining at $6.6 million or $0.37 per share diluted versus $4.8 million or $0.38 per share for the same period 2016.

Again, on a pro forma basis, adjusting for the debt outstanding for the entire quarter, if all of the 2017 fourth quarter acquisitions occurred on the first day of the fourth quarter, AFFO would have increased by approximately $248,000 to a pro forma total of just under $6.9 million and increasing AFFO by $0.02 to $0.39 per share.

That's all I have from the numbers standpoint. Operator, I believe, we're ready to start the Q&A session.

(Operator Instructions) The first question comes from Sheila McGrath with Evercore ISI.

Tim, I was wondering, if you could talk about the creative solution for the bankrupt tenant just so we can understand it first from a modeling standpoint. Does the old loan go away? And now there is a new loan and what coupon and everything like that? But also if you could just explain to us strategically how adding more capital to this was the -- help to optimize outcome for shareholders, that'd be great?

Well, one of the things I've been involved in real estate for a long time and before that I was involved in real estate from the public accounting standpoint. And one of the things that I've known for a long time that is, if something goes to bankruptcy, it gets cleaned up a lot of times. It's in so much better shape than it was when it went in that it's essentially better credit. And if you look at what we're doing, we had $10.5 million basically secured by the real estate of one hospital, and we're going to end up with $23 million secured by all the assets of 9 different hospitals. And the company has been able through the bankruptcy process, to shed a lot of debt, it's rid itself of assets that had been lumped, so it's coming out significantly cleaner. It's coming out with cash flows that should be very sustainable and very good. So we feel very good about the position that we are doing. And as I have said from the beginning, we were going to take a very aggressive approach to solving this, and we have, and we feel like we've done it in such a way that our shareholders will not have lost money and will actually be in a position to benefit from it. From a modeling standpoint, the $10.5 million mortgage goes away. It's basically being replaced with the $23 million loan. And the $23 million loan is at 9%. As I said, it equates to basically about $12.5 million of net new investment for the quarter. So that along with the $16.8 million gets us up to the $28 million, $29 million range that is our normal investment for the quarter. Does that cover what you want to cover?

Yes. No, no, no, that's very helpful. There's just a lot of puts and takes to that and that helps on the modeling standpoint. Is there any insight you could give us on to like coverage level on the loan? Just of course, we understand that the company is in much better position now. So that's good news. But is there any kind of EBITDA coverage insight you could give us?

We are anticipating that the EBITDA to interest coverage will be something in the 4 to 5x range. So we think it should be very well covered.

Okay. And is this a short-term financing loan or how should we think about it?

It can be out for, I think, 10 years, but we're anticipating that probably in the next year to 2 years, they're going to pay down a majority of it and that would anticipate probably being out of it in 5 years. Page, would you disagree with that?

No, I agree with that.

Okay. That's super-helpful. And just on the -- Page, I guess, maybe this one's for you. G&A is -- I know you guys don't give specific annual guidance, but is fourth quarter a good run rate for us to assume for the year? Or should we expect like in first quarter, there would be additional expenses associated with this restructuring?

Sheila, we are going to have some additional amortization hit for another year as deferred comp. So the number is definitely going to go up for that.

And as it relates to the bankruptcy issue, I mean, our -- we actually anticipate that the cost-related debt to that will go down because one of the things we have negotiated was coverage of some of our mortgage fees in the final go-round. So obviously, as we grow, we're going to add people. So G&A will naturally go up, but if you did a steady state, it was probably a good quarter. But they said amortization is going to go up, and we're going to -- as we add properties, we're going to add people. So it will go up some this year.

The next question comes from Alexander Goldfarb with Sandler O'Neill.

Just a few things -- so just a few things, Tim. No particular order, but I'll just run through. First, in the K, you'd mentioned that you guys are over at about $600,000 from the mortgage -- bankrupt mortgage holder. So how from -- I guess, to Sheila's point, on the accounting standpoint, is there any impact from that? Like are we going to see a dip in the first quarter? Or is there going to be sort of a catch-up booked once this is settled? Or how does that work for what you are owed in the past -- in accrued?

We're still going to have to work through the numbers, but to the best we could, Alex. We took into consideration the accrued interest when we were negotiating the settlement. I think there might be a little follow-up one way or the other, but we're not anticipating any significant fallout in the first quarter relative to actually getting it settled. Again, you may have something go $100,000 one way or the other, but we don't think there's going to be anything significant.

Okay. And then as part of that 9% coupon on the all in, the $23 million, is some of that the accretion from the notes you bought back at a discount? So is it part -- coupon part accretion or how is that discount to par being handled for -- because presumably you're going to get notes paid back at par, right? Or was the discount the new par?

The discount is the new par. Basically, we're funding the new company up to $23 million and they're utilizing that to pay off the bankrupt bidders' liabilities. And what we agreed to accept related to that was the investment that we had made into it. So when everything is said and done, that'll just go away. There won't be any accretion. It won't be -- we'll get paid out the $8.75 million investment.

Okay. So that $8.75 million is the new level it's not going back to the $11.5 million or whatever?

Right. But in essence, all that just goes away, and we'll have a $23 million note.

Okay. And then you said the bankruptcy is -- the ruling is end of this month, but given we're late in February, did you mean end of February or end of March?

The confirmation hearing is currently set for the 27th of February.

Okay. And then...

Obviously, it won't all happen on the 27th of February, but that's when the judge's gavel hits and says, all right, get it done.

Okay, great. And then, where are these hospitals, the 9 hospitals? Are they all in the same market? Or are they spread across the region? Or where are they?

They're spread across the Southeast, Midwest, I mean, Oklahoma, North Alabama, Louisiana, Vegas, Albuquerque, I mean, it's -- again, it's kind of like the Southeast, Midwest.

Okay. In other words, it's not just like all in one state or one market?

No, no, no.

Okay. And then the final question, and I appreciate your time. You said that you're going to be paid back quickly on these and then you said over 5 years expect to be fully, but the next 1 to 2 paid pack a meaningful amount. You guys target about a $120 million a year of acquisitions, but sounds like there's going to be an offset. So should we expect acquisition activity to ramp up or the payback of this is consistent with your idea that you'll start recycling assets and you would have been selling assets anyway so there is no real change?

I think you'll see that the acquisitions ramp up a little bit. I mean, I don't think -- by doing this, I don't see us as being significantly different than the $120 million to $130 million, $140 million in that range for a year on a net basis. So I mean, we may get paid back $10 million of this over the next 2 years, but it's like $5 million a year, spread over 8 quarters. I mean, it's kind of like or it's $10 million spread over 8 quarters, so it's almost, not a -- it's a blip. So my belief is it will still be $125 million, $130 million on a net basis for the next year or 2.

(Operator Instructions) The next question comes from Rob Stevenson with Janney.

Most of my questions have been answered, but just wanted to get your outlook on the occupancy and the portfolio dipped 40 basis points sequentially to 91 7%. You've got about 10% of the leases in the portfolio rolling this year and next year, so 20% combined. Any known move outs and where do you expect that occupancy to trend over the course of '18, given your current conversations and leasing activity?

We've already got a significant amount of the 2018 and actually some of the 2019 stuff already released. We don't -- we see -- the 91% to 94% range on a going forward basis. If you recall, Rob, when we did the IPO, I think in the next year or 2, there was close to 50% rolls and now it's down to 20%, and a very large amount of our rolls is now out past the 5-year range. So we feel very good. We've been able to increase the weighted average remaining lease term on the portfolio from a little over 4% when we did the IPO to right at 7% now. So we feel very good about that. And we understand everybody was hypersensitive about it when it was 25%, 26% a year at 8% to 10% that's kind of like a normal roll. So we're not at all concerned about it.

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

Thanks, everyone, for coming, getting on the call today, spending the time with us. As usual, we truly appreciate your support and your interest. I think we had a fairly decent 2017, and we're looking forward to a great 2018. So we'll be back and talk to you all in 3 months. Thanks.

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