Community Healthcare Trust Inc (CHCT) 2022 Q1 法說會逐字稿

Welcome to Community Healthcare Trust's 2022 First Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2022 first quarter financial results. It will also discuss progress based in various aspects of its businesses. Following the remarks, the phone lines will be opened for a question-and-answer session.

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, May 4, 2022, and may contain forward-looking statements that involve risks and uncertainties.

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. All 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.

Good morning, everyone, and thank you for joining us today for our 2022 First Quarter Conference Call. On the call with me today is Dave Dupuy, our Chief Financial Officer; Leigh Ann Stach, our Chief Accounting Officer; and Tim Meyer, our EVP, 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 quarterly report on Form 10-Q was also filed last night. .

The first quarter was again busy from an operations standpoint and a little slow from an acquisition standpoint. Again, 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 is still right around 90%, and we have seen a continued 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 first quarter, we acquired 2 properties with a total of approximately 30,000 square feet for a purchase price of approximately $5.8 million. These properties were 100% leased with leases running through 2028 and anticipated annual returns of approximately 9% to 9.51%.

The company signed a couple of additional purchase and sale agreements this quarter and now have signed agreements for 6 properties to be acquired after completion and occupancy for an aggregate expected investment of $141 million. The expected return on these investments should range up to 10.25%. We expect to close on one of these properties in the second quarter of 2022 and the other 5 through 2022 and into 2023.

In addition, we still have the same 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.

The exciting update on this client is that they finalized an agreement with a private equity firm and were funded last week, therefore, we are hopeful that they can turn their attention to growth and development. We continue to have many properties under review and have term sheets 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 first quarter and raised it to $0.44 per common share. This equates to an annualized dividend of $1.76 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 will hand things off today to David to cover the numbers.

Great. Thanks Tim, and good morning, everyone. I'm pleased to report that total revenue grew from $21.4 million in the first quarter of 2021 to $23.5 million in the first quarter of 2022, representing 9.7% growth over the same period last year. Revenue for the fourth quarter of 2021 was $23.2 million, representing 1% growth quarter-over-quarter. On a pro forma basis, if all the 2022 first quarter acquisitions had occurred on the first day of the first quarter, total revenue would have increased by an additional $132,000 to a pro forma total of $23.6 million in the first quarter.

From an expense perspective, property operating expenses increased quarter-over-quarter from $3.5 million to $4.1 million or 15.7%. The increase in POE was a result of: one, an increase in property taxes; two, seasonal increases, including snow removal at several properties; and three, normal fluctuations we experienced in property expenses quarter-to-quarter.

G&A increased from $3.2 million to $3.3 million sequentially in the first quarter or 5.1%. Increases in G&A were primarily driven by an increase in deferred compensation expense. Meanwhile, interest expense decreased from $2.8 million to $2.6 million or 5.8%. This decrease was due to capitalized interest expense on a few construction projects that Tim previously mentioned as well as 2 fewer days of interest in the first quarter compared with the fourth quarter.

I'm pleased to report that funds from operations or FFO for the first quarter of '22 grew to $13.5 million from $12.6 million in the first quarter of '21, representing 7.4% growth over the same period last year. On a per share basis, FFO increased from $0.54 per diluted share in the first quarter of '21 to $0.56 per diluted share in the first quarter of '22, an increase of 3.7%. Meanwhile, FFO for the fourth quarter of '21 was $13.8 million representing a 1.7% decrease sequentially.

Adjusted funds from operations, or AFFO, which adjusts for straight-line rent and stock-based compensation totaled $14.8 million compared with the $13.3 million in the first quarter of '21 or 11.4% growth year-over-year. On a per share basis, AFFO increased from $0.57 per diluted share in the first quarter of '21 to $0.61 per diluted share in the first quarter of '22 or 7%.

Finally, AFFO for the fourth quarter of '21 was $14.9 million representing a 0.5% decrease on a sequential basis and flat on a per share basis of $0.61 per diluted share. And from a pro forma perspective, if all of the first quarter acquisitions occurred on the first day of the first quarter, AFFO would have increased by approximately $73,000 to a pro forma total of $14.9 million. That's all I have from a numbers perspective.

Betsy, we're ready to start the Q&A session.

(Operator Instructions) The first question today comes from Alexander Goldfarb with Piper Sandler.

Just a few questions. Tim, can you just talk a little bit more about what's going on in the acquisition environment. In the early years of the company, you guys were -- had pretty healthy quarterly acquisition volumes but that slowed recently. At the same time, you've also built up the presale pipeline, which is a positive. So is it just that in the pipeline of what you guys saw on a quarter-to-quarter basis, there just wasn't as much available? Or was it a function of the stock price trading off that caused you to slow down? Just sort of curious and then what we should expect for sort of quarterly volumes heading forward?

Alex, and thanks for the question. It's a combination of things, actually, because the pipeline makes us want to be pickier because the pipeline is such good assets. You get brand-new assets with 15-year leases at good cap rates, it tends to make us be pickier. And we've actually seen less flow through the system for brokered type deals, off-market type deals for the last couple of quarters. And I think maybe that is some of the cash inflow into private equity that's chasing health care deals, et cetera. Maybe that's catching up with us a little bit.

We've seen, I think, a little bit of a breakthrough over the last couple of weeks, maybe a month and deal flow. And I think that has to do with the interest rate increases because as the tenure rises, then if 10 years are over 30%, then it makes it a lot more difficult to do some of the deals at the lower cap rates, and we've seen that open up a little bit.

Okay. And then the second question is just bigger industry and maybe you tapped on it with the private equity comments. There's the public peer drama with HTA, HR and Welltower. So just sort of curious are portfolios back in vogue? Or is your view of what's going on there, something unique to HTA that you wouldn't expect suddenly a rush of MOB portfolios to start being in the live like to way like apartments or industrial are?

I think it's an interesting study. I took a couple of hours yesterday and read part of the prospectus that HR and HTA, and it read kind of like a novel as to how it went back and forth and where company F came into play in the different ways.

I'm not sure that you can read anything into an overall. I mean what I read into it was that Welltower is so big now, they got to find large ways to make a difference. I mean just buying an asset or 2 doesn't make a difference to Welltower anymore, so they need to buy something big. It was interesting. It was interesting to see that they weren't interested in HTA, but they were interested in HR. And that was an interesting thing because the thing it was for sale, they don't want to buy, but the thing that's not for sale, they do want to buy. So I don't know. I think it will be interesting to see how it plays out. I think it's a bunch of drama. But I don't think it's an overall type of -- I don't think it has any meaningful overall in MOB space.

(Operator Instructions) The next question comes from Michael Lewis with Truist Securities.

I wanted to ask a little more specifically about the investment yield spreads, right? So the 2 pieces to that. Number one, I think on the 2 development deals you announced this quarter, it looked like they were 9.75 yield. I think the first 4 you did similar development deals were 10.25. It might just be obviously specific to the deals. But so I was wondering if there was anything changing on that front? And then also do you think differently about how you use your equity given what's happened to the stock price?

Thanks for the question. And the changes due basically to the deals in particular. There's nothing I don't think you can read into the overall transactions are shrinking of margins. We -- as you know, we on a regular basis, watch our weighted average cost of capital. And of course, as the stock price goes down, our weighted average cost of capital goes up. But we still have a very favorable spread between what our investment criteria is and what our weighted average cost of capital is.

So we can still invest at these levels and have it make good money, it's just a little less on the spread. So we're not shying away from doing investments that we like based upon the stock price at this point. And actually, the stock price would have to go down a lot more before we would be that concerned about it. Obviously, we like the stock price higher when we do it because it means the spread is wider. And as I've said for years, basically, we're in a spread business, and we try to optimize that spread.

Okay. Great. My second question I wanted to ask about the scalability of your G&A because when I look at it over the last few years, as you've grown the company, the percent of G&A as a percent of revenue has actually ticked up a little bit. And part of that, obviously, we love the stock comp with the long-dated vesting. So I don't mean to nitpick that. But the comp for the 3 top executives has doubled in the past 2 years, that includes up 30% this past year. I realize that's mostly incentive-based comp, again, so it's great that you're hitting your goals. But maybe talk about as you grow, what do you think is the opportunity or the ability to kind of scale that G&A?

Well, I think we're probably close to a maximum on the cost. I mean we -- a couple of quarters ago, we went through, we gave additional disclosure in the supplemental data report of what's happening to us. But since some of us are getting close to retirement age, the rules make us amortize stock over the time between now and retirement instead of the 8 years that is the legal vesting. So that's pinching us now on the non-cash portion of G&A.

If you look just at the cash portion of G&A, I think it's been relatively stable to down relative to revenue, and we would anticipate that continuing to happen. And the non-cash will reach a kind of maximum point in the next, I don't know, year or 2, so to that point, it will level off or go down.

Okay. And then if I could just squeeze in one last one. I wanted to ask about how you view the threat of in-home dialysis, right? So a lot of your tenants and your properties, we talk about kind of the need-based nature and no matter what happens if you got to see the doctor, you go and see the doctor. We've talked a little bit about Teladoc and things like that. But dialysis has seemed to be like the most defensive of the property types. Do you see that changing at all? And does it kind of change the way you look at that area specifically?

Most dialysis facilities over the last few years have started incorporating in-home. And if you have in-home dialysis, you still need some office space. So what we see mostly is that a facility will have the in facility dialysis, and then it will also have some space designated for the people who do the at-home and supervise at-home dialysis. So I mean, we see it over the next number of decades is something that's going to be switching from in-facility to in-home.

But generally speaking, if somebody is getting in-facility dialysis now, they're going to stick with it. And we think it's going to be a long lead time to move a lot of people into the in-home. So we see it as a basically a reduction of future need of dialysis facilities but not a reduction of need for the existing dialysis facilities.

The only other thing I would add to that, Michael, is 1 of the reasons we really like the operator that we do a lot of our development projects with as they specifically have a home part of their dialysis business, it's really central to their strategy. And so they're strategically mixing a combination of clinics as well as home dialysis as part of their go-to-market strategy, which candidly, we think is the right approach going forward. There will always be some mix of clinic-based dialysis patients, but you want to be able to capture those. And they're actually working directly with payers on strategizing, partnering with those payers on how to create that best mix. And so that's one of the reasons we really like the operator that we're working with and excited about their growth plans.

The next question comes from Sheila McGrath with Evercore.

I was wondering if you could talk a little bit more about the increased backlog of acquisitions, was that one or more strategic relationships? And any visibility on how this might phase in the $140 million in '22 versus '23?

Sheila, thanks for the question. Yes, I mean, and actually, we should have already closed on one, but due to supply chain issues, and over (inaudible) Butler County, Ohio Inspector, the facility is actually open under a partial CEO but their kitchen isn't operable yet because of an exhaust fan issue. So we're waiting until they get a full CEO before we're closing it, they're actually seeing patients. Now they have patients in the facility. They're just bringing food in instead of using their kitchen. So that one should close relatively soon. And we should close on at least one more in 2022, possibly 2. Again, a lot of it depends on weather and supply chain issues. And then the remainder, 3 or 4 will be basically one in a quarter through the end of '23.

Okay. Great. And then just the stock has been under a little bit of pressure this year with other REITs that use equity to grow. Just your thoughts on your blended cost to capital here and your appetite to use a little bit more leverage, how do you think about that?

Well, we're going to stick to our long-term goal of keeping leverage at 30% to 35% of our capital base. We may -- we've been in the 30% or a little below 30%, for a while we may increase it a little bit, but we're not going to go too much more. And again, even with the stock price where it is now, with our investment spreads, we can make money with where the stock is now. So we're not shying away on making those investments in terms of where the stock is. I don't know what the yield is currently, but I think it's like 4.25% on the equity, current yield. So if we're investing at 9%, 9.5%, we still got a lot of room there to invest.

And the other thing I would just add to that, Sheila, is that's why we like the ATM so much. We can be very strategic, pick our spots in terms of how we raise capital, be very, very disciplined around that. We have essentially, I think, about $140 million of our $150 million revolver available. So we can really be smart in how we tap the equity markets while still keeping our leverage in the profile that our investors have -- are used to. So I think count on us to be nimble as we access the ATM but having a lot of options from a capital perspective.

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

Again, we'd like to thank everybody for your continued interest in Community Healthcare Trust, and we look forward to talking to you on the second quarter conference call, seeing a lot of you all in New York in June at Nareit.

Thanks so much.

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