Community Healthcare Trust Inc (CHCT) 2021 Q4 法說會逐字稿

Welcome to Community Healthcare Trust's 2021 Fourth Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2021 fourth 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 on this call will be based on information as of today, February 16, 2022, and may contain forward-looking statements that involve risks 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 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 2 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 Tim Wallace, CEO of Community Healthcare Trust Incorporated. Please go ahead.

Thank you, Gary. Good morning, everyone, and thank you for joining us today for our 2021 fourth quarter conference call. On the call with me today is Dave Dupuy, our Chief Financial Officer; Leigh Ann Stach, our Chief Accounting Officer; and Timothy Meyer, our Executive Vice President, Asset Management.

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.

The fourth quarter was busy from an operation standpoint and a little slow from an acquisition standpoint. We have 5 different 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 done. Our occupancy has edged up over 90%, and we have seen a pickup in leasing activity. We are encouraged by the activity we see on the part of health care providers.

Our asset managers have been busy attempting to control expenses while maintaining tenant satisfaction. Our weighted average remaining lease term was relatively stable at just less than 8 years.

During the fourth quarter, we acquired 3 properties with a total of approximately 55,000 square feet for a purchase price of approximately $9.8 million. These properties were approximately 94% leased with leases running through 2030 and anticipated annual returns of approximately 9.3% to 9.99%.

For the year, we acquired 13 properties with a total of approximately 329,000 square feet for a purchase price of approximately $88.4 million, which in the aggregate were approximately 98.3% leased with leases running through 2036 and anticipated annual returns of approximately 9.03% to 10.83%. In addition, during 2021, we invested $14.4 million in notes receivable with anticipated returns of approximately 12%, bringing our total investments for the year to $102.7 million.

The company has 3 properties under definitive purchase agreements for an aggregate expected purchase price of approximately $11.7 million and expected returns of approximately 9.01% to 9.36%. The company is currently performing due diligence and expects to close these properties in the next few months.

We also have the signed definitive purchase and sale agreements for 4 properties to be acquired after completion and occupancy for an aggregate expected investment of $94 million. The expected return on these investments should range up to 10.25%. We expect to close on one of these properties in the first half of 2022 and the other 3 through 2022 and into 2023. In addition, we still have the signed term sheet for another 10 new properties and up to approximately $60 million of new investment. It is anticipated that these investments will be made over the next approximately 24 months.

We continue to have many properties under review and have term sheets out on several properties with anticipated returns of 9% to 10%. 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.

On another front, we declared our dividend for the fourth quarter and raised it to $0.4375 per common share. This equates to an annualized dividend of $1.75 per share and I continue to be proud to say we have raised our dividend every quarter since our IPO.

I believe that takes care of the items I wanted to cover, so I'll hand things off to Dave to cover the numbers.

Thanks, Tim, and good morning, everybody. I am pleased to report that total revenue for 2021 was $90.6 million compared to $75.7 million for 2020, representing 19.7% growth over the prior year. Meanwhile, total revenue for the fourth quarter of 2021 was approximately $23.2 million versus $20.1 million for the same period in 2020, representing 15.5% growth over the fourth quarter of 2020, while quarter-over-quarter revenue was flat. And on a pro forma basis, if all the 2021 fourth quarter acquisitions had occurred on the first day of the quarter, total revenue would have increased by an additional 2 -- $222,000 to a pro forma total of $23.5 million in the fourth quarter.

From an expense perspective, property operating expenses increased year-over-year from $13.6 million in 2020 to $15.2 million in 2021 or 11.3%. During the fourth quarter, property operating expenses remained flat at $3.5 million in 2021 compared with the same period in 2020. Sequentially, property operating expenses decreased from $4.1 million in the third quarter to $3.5 million in the fourth quarter. The decrease in property operating expenses quarter-over-quarter is a result of property tax true-ups on some of our buildings in the third quarter that did not repeat in the fourth quarter as well as normal fluctuations in property operating expenses that occur quarter-over-quarter.

For the year, G&A increased from $8.8 million in 2020 to $12.1 million in 2021 or 38.2%. In the fourth quarter, G&A increased from $2.5 million in 2020 to $3.2 million in 2021 or 26.9%, while remaining flat sequentially. For the year, however, cash G&A increased from approximately $4.0 million in 2020 to $4,948,000 in 2021 or 23.7%. While in the fourth quarter, cash G&A increased from approximately $1.1 million in 2020 to $1.2 million in 2021 or 5.9%, while decreasing 3.7% quarter-over-quarter.

Increases in G&A were driven by compensation expenses related to new employees, stock issuances and increases in amortization of deferred compensation, including a compressed amortization schedule for some of our NEOs. Please refer to Page 8 in the supplemental information report as included with our 8-K filing and posted to our website for more details on the cash versus noncash G&A expenses.

Interest expense increased year-over-year from $8.6 million in 2020 to $10.5 million in 2021 or 22.3%, while remaining flat quarter-over-quarter. The increase in interest expense for the year related to our March 19, 2021, refinancing, where we added $50 million of incremental term loan debt, which also moved us into a higher pricing tier in our bank grid. For the year, our net debt-to-total capitalization remained conservative at 30.9%.

Our net income increased from $19.1 million in 2020 to $22.5 million in 2021 or 17.9%. For the fourth quarter, net income grew from $5.2 million in 2020 to $6.1 million in 2021 or 16.7%. And sequentially, net income grew from $5.4 million to $6.1 million or 14.2%.

Finally, I'm pleased to report that funds from operations, or FFO, for the fourth quarter grew from $12.2 million or $0.53 per diluted share in 2020 to $13.8 million or $0.57 per diluted share in 2021. And on an annual basis, FFO increased from $45 million or $2.03 per diluted share in 2020 to $52.9 million or $2.20 per diluted share or $0.17 representing per share FFO growth of 8.4%.

Adjusted funds from operations, AFFO, which adjusts for straight-line rent and stock-based compensation increased from $12.9 million or $0.56 per diluted share in the fourth quarter of 2020 to $14.9 million or $0.61 per diluted share in the fourth quarter of 2021. And on an annual basis, AFFO increased from $46.6 million or $2.10 per diluted share to $56.5 million or $2.35 per diluted share or $0.25, representing per share AFFO growth of 11.9%.

From a pro forma perspective, if all of the fourth quarter acquisitions occurred on the first day of the quarter, AFFO would have increased by approximately $145,000 to a pro forma total of $15 million, increasing fourth quarter AFFO to $0.62 per share.

That's all I have from a numbers perspective. Gary, I think we're ready to start the question-and-answer session.

(Operator Instructions) Our first question is from Sheila McGrath with Evercore ISI.

Tim, you mentioned in your prepared remarks and in the presentation, the strategic partnership with a dialysis entity. That still is a term sheet. Just wondering what has to happen for that to be final and a final contract? And are you pretty close on that?

They've actually been going through a private equity raise that we're told they anticipate will close by the end of the first quarter. So we're hopeful that right after that, we'll be documenting some actual properties. So it's not that there's anything wrong with it. It's just they are strengthening their balance sheet and their ability to grow, and we're happy for them to do that.

Okay. Great. And then your balance sheet by every metric is very conservative. What is your view on introducing a little bit more debt to the equation this year? And what is the kind of leverage metrics that you prefer to operate under?

Well, we've said from the beginning that our preferred long-term debt to capital is in the 30% to 35% range. And we are on the low end of that. We did, last year, add the $50 million term piece to our credit facility. And in the fourth quarter, we did not access the equity markets through the ATM. So we've kind of let it -- let the revolver grow a little bit. But again, our long-term view is still to be in that 30% to 35% range, and that's where we feel very comfortable.

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

So 2 questions. First, obviously, everyone is talking about inflation. And then certainly for real estate, how landlords are getting pricing power in certain areas, you got retail, apartments, for example. As you look across the assets, the target assets that you seek to own, do you see the same dynamic where inflation is accelerating market rent growth or the rents that you will get on renewal? Or are the properties driven by different dynamics where the inflation doesn't necessarily translate directly to rent growth?

Yes. I think inflation is -- our health care properties are shielded from inflation kind of both ways, lower inflation or higher inflation. And what I mean by that is the majority of our properties have bumps, but they're not inflation-based. And when we're going to renew properties, we're also fighting against right now the inflation that the provider is feeling from the standpoint of the labor rate and the supply chain costs that they're experiencing. So my overall view is inflation is basically somewhat of a neutral. I mean, it's not a positive, it's not a negative from our standpoint. And I'll look at Tim for just a second to -- do you have any additional comments as it relates to what we're seeing from a leasing standpoint?

No, I think that's accurate. And because health systems and other large operators have had pressures, as you've mentioned, and then -- but on the flip side, we have seen some CPI increases that were pretty substantial and some that are subject to caps on both the ceilings and floors, which is standard.

Right.

Okay. Okay. And then the second question is, Tim, you mentioned about fourth quarter being a little slower on the transactions. You mentioned $102 million completed last year. The company has grown almost 5x or more so than that since you guys went IPO, which obviously is credit to your investment approach. But the target remains sort of in that $125 million-ish range. So what are your thoughts on increasing the -- not increasing at fivefold, but maybe adding another -- maybe growing it by $50 million or growing it somewhat just to complement the overall growth in the company?

Well, in addition to growing in several other aspects to the company that's changed, I mean, one is our cost of capital has gone down substantially. Again, if you look at what we do, we try to manage the difference between our portfolio yield and our weighted average cost of capital. And when we started the company, our weighted average cost of capital, that spread was not much. And the weighted average cost of capital has gone down rather substantially, so we can produce a higher margin and a higher FFO rate on a lower volume than we could then.

So I mean what we manage to is trying to manage to the FFO growth and AFFO growth, and we want to do that on a basis that makes sense to us and that we feel comfortable with. So as I've said always, this is a lumpy business. Sometimes, we'll be on the low end of our investment range. Sometimes, we'll be on the high end of our investment range, but we feel very comfortable that we can produce the FFO and AFFO growth that is above the health care REIT average with what our current business plan is.

I've said all along, there'll come a time when instead of $125 million to $150 million, it will be $135 million to $160 million or $140 million to $170 million. But I don't see it changing significantly from that as long as we're able to produce the margins and the profit that we can, and we feel like we've still built in the portfolio as we're renovating, redeveloping, re-leasing some of these spaces, we feel like there's a lot of profit that we can bring out of the existing portfolio that obviously adds to that also. So we don't feel a lot of pressure to bump it up. If we bumped it up, we'd probably have to reduce our target investment range from a standpoint of return, and we just don't see a need for that right now.

The next question is from Kyle Menges with B. Riley FBR.

This is Kyle on for Bryan. I was curious if you could provide a little bit more detail on the 4 properties you plan to acquire for $94 million. Are they all about the same size? And then I think you mentioned that you expect to close on one in the first half of this year.

Yes. They are basically all the same size. It's one of our clients, and they use the Southwest Airlines approach. They -- it's an in-patient rehab hospital operator. And you walk into -- we currently have 3 of their properties in our portfolio, 1 in Temple, Texas; 1 in Longview; and 1 in Bentonville, Arkansas -- or Rogers, Arkansas. And you walk into one of the facilities, and it looks exactly the same as the other ones and -- even down to the artwork on the wall.

So we're doing more properties with them, and they currently have them under construction. The first one has been slowed down a little bit because of the supply chain issues that the construction industry has experienced. But the next 2, I think, are doing relatively well because they're in climates that allow construction through winter. The first one that we should close on is in Cincinnati and the next 2 are in Texas.

Okay. Thanks for that detail. And then on the occupancy front, you ended at 90% for the year, which is pretty much the highest we've seen over the past couple of years. Do you think that's pretty sustainable? Or should we expect that to maybe taper off as we move through 2022?

No. We hope to see that increase. We see a lot of leasing activity now. We've seen a lot of interest from health care providers. They've been very subdued on the leasing front for the last couple of years from the expansion standpoint, but we're seeing a lot of activity. So we've got several large blocks now that are under significant discussion and pricing of tenant improvements and analysis of fit-up, et cetera. So we're very hopeful to see that occupancy rate increase.

The next question is from David Toti with Colliers.

Just a quick question, kind of going back to the inflation issue, do you underwrite a increase in your cost of capital in the next 12 months or so? And secondly, does that impact your investing strategy? If the yields on the assets that you're looking at aren't moving, your spread is obviously collapsing to some extent. Are you underwriting that dynamic? Or do you think that you can sort of maintain that spread effectively?

We underwrite. We do anticipate interest rates to rise. We don't underwrite inflation, but we -- in our cost to cancel, but we do anticipate interest rates to rise. I mean, it's a fairly small piece of our capital base, but we do anticipate interest rates to rise. We do underwrite that. And we think that we can fairly well maintain the overall portfolio yield to the cost of capital over the near to midterm.

Okay. And then if it does begin to compress, is there a point at which the strategy has impacted in any sense the external growth efforts to become reduced to some extent?

Well, it's hard to imagine it being impacted that much. I mean our current portfolio yield is over 9% and our current weighted average cost of capital is what, Dave, that became 5.25%, 5.5%, something like that.

Yes. Right around that.

So I mean, something drastic would have to push the cost of capital up to significantly impact us. And the only thing I'll say is that if it gets to where it impacts us, I mean, it has significantly impacted the other health care rates along the way. So I would anticipate at that point in time that the cap rates would rise.

The next question is a follow-up from Sheila McGrath with Evercore ISI.

Yes. I noticed that the occupancy did hit 90% as well. And I was just curious if you could comment on renewal rate in your portfolio. What has that trended? And how is that trending recently?

When you say renewal rate, are you talking about the rental rates? Are you talking about the percentages of...

No. Just the percent of probability of renewal of the tenants staying in place.

I think we've been in the 90%, I think, renewals -- I'm looking at Tim now. He's looking down, but he's shaking his head. So we've been in the 90% basically for the life of the company, and we think we're still there. Would you agree?

Yes, I agree with that. We had a strong quarter of not just renewals but expansion of existing tenants along with those renewals.

And since you mentioned it, Tim, what, on average, is the increase? Is it kind of the inflation that you bump upon expiration that you're bumping the new leases?

Yes, that's generally it. I mean we don't try to -- we're not one who says we can push rates 5% and we're generally, as I've said from the beginning, we think that we're fairly provider-friendly and want to maintain the provider relations. So we're basically in the 1% to 3% range generally with renewals.

Okay. Great. And then just on G&A, and maybe this one's for Dave. But -- so the step up was because of -- or partially, it was because of the new amortization schedule. Was that new amortization schedule in place for all 4 quarters? And if there's any kind of points that you could give us to how to think about both cash and stock G&A in 2022? Any guidance-type items, that would be helpful.

Yes. What I can tell you, Sheila, is it has slowly increased, the noncash amortization ramp-up quarter-over-quarter, and will probably for the next 2.5 years or so as we get over the hump in terms of the NEOs that have the compressed schedule. And so that's one of the reasons why we've made an effort to segment, in our supplemental, the cash versus noncash because we truly think that the cash is the right thing to measure.

And when you look at the cash basis that we put on Page 8, especially as a percentage of revenue, it's been trending down over the last 3 quarters. So we certainly like those trends. But yes, it's -- we are not disclosing the specifics with regard to the [terms] of that amortization increase, but expect it on a noncash basis to continue to increase for the next 2.5 years until we get over that hump.

The next question is from Michael Lewis with Truist Securities.

I had a little of what I'll call a work-from-home distraction, so I apologize if you already addressed these. First, on your third quarter release, I think you had said in the press release that you had already acquired 1 property for $3.5 million in 4Q, and you had another $12 million that were under purchase agreements expected to close in the quarter. You did a little less volume than that. I was just curious if that was just a timing issue? Or if something that was under a purchase agreement fell out?

Michael, we'll let you go with the work distraction. And actually, we haven't covered that, this question. The difference is one property that as we were doing our due diligence, we found out that there was a problem with one of the tenants. And basically, the existing owner now has kicked that tenant out, but says he has another tenant to replace them. So we've kind of put it into a holding pattern because we're not buying it if he can't replace it with a good quality tenant. And he says he can with that. It's a hospital system as his supposed new tenant. And so if he does that, we will close on it. All the due diligence is done at this point with the exception of this. So it would be a very quick close if he can get the lease signed. And if he does, we'll close it. If he doesn't, we won't.

I see. And there's no cost to you if you don't close on that?

No.

Okay. And then my other question, I think you have a handful of properties with tenant purchase options that are now exercisable. What's your expectation for those? Are those attractive for the tenant to exercise? Do you think you'll have some properties that get called?

We really don't anticipate that. We've got, as of 12/31, I forget what we had. We had 8, Leigh Ann?

[Around 7].

7? And we've actually negotiated 3 of those away in the first quarter. So now I think it's only 4, I think, that do. And we're not anticipating that those are going to get called. You never know, but that's not the anticipation right now.

I see. And when you say negotiated away, what does that mean?

We send lease amendments that takes the purchase option out.

(Operator Instructions) The next question is a follow-up from Alexander Goldfarb with Piper Sandler.

Tim, just one more follow-up. I think in the opening comments, you mentioned OpEx pressures. But I think then Dave mentioned, operating expenses were flat. Just sort of curious, my impression is that the tenants is basically a pass-through. So except for like some vacancy or whatever was over the first year, you guys are really sheltered from any operating expense or real estate tax increases, right? Or is there some other leakage that we should think about as inflation seeps through different costs?

And actually, what I said was in my statements was that the asset managers were working hard to keep operating expenses low and maintain tenant satisfaction, which I think they've done a great job of. But to answer directly your question, we've got 10% vacancy in the portfolio. So operating expenses related to that 10% doesn't get paid by tenants. And then we do have a small percentage of either modified gross or gross leases in the portfolio that we acquired. We don't write those leases, but if it's an acquisition and the lease is in place, we do have some of those. So there could be some linkage there.

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

I think that covers it. We appreciate everybody's interest and spending time with us this morning, and we'll see you again in 3 months. Thanks.

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