Community Healthcare Trust Inc Q1 FY2022 Earnings Call

Welcome to Community Healthcare Trust 2022 First Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2021 first quarter financial results. It will also discuss progress made in various aspects of its businesses. Following the remarks, the phone lines will be open 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 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 and 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 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 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 operational standpoint and a little slowed from an acquisition standpoint. Again, we have five 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 complete. 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 healthcare 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 under eight years. During the first quarter, we acquired two properties with a total of approximately 30,000 square feet for a purchase price of approximately $5.8 million. These properties were approximately 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 has signed agreements for six 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 five through 2022 and into 2023. In addition, we still have the same term sheet for another ten new properties and up to approximately $60 million in 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 items I wanted to cover. So I'll hand things off to Dave to cover the numbers.

Thanks, Tim, and good morning, everyone. I'm pleased to report the 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 of all the 2022 first quarter acquisitions that 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 experience 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 two 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 2022 grew to $13.5 million from $12.6 million in the first quarter of 2021, 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 2021 to $0.56 per diluted share in the first quarter of 2022, an increase of 3.7%. Meanwhile, FFO for the fourth quarter of 2021 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 $13.3 million in the first quarter of 2021 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 2021 to $0.61 per diluted share in the first quarter of 2022 or 7%. Finally, AFFO for the fourth quarter of 2021 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 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.

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 had pretty healthy quarterly acquisition volumes, but that slowed recently. At the same time, you've also built up that presale pipeline, which is a positive. So is it just that in the pipeline of what you 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?

Good morning, Alex, and thank you for your question. It's a mix of factors influencing our current situation. The strength of our pipeline encourages us to be choosier since it consists of high-quality assets, including brand new assets with 15-year leases and attractive cap rates. However, we've noticed a decline in the volume of brokered and off-market deals over the past few quarters. This could be partly due to cash inflows into private equity that are pursuing healthcare deals, possibly impacting our timing. In the past few weeks, we've observed some improvement in deal flow, which I believe is connected to rising interest rates. As tenures increase, particularly when they exceed 3%, it complicates our ability to engage in deals with lower cap rates, but we are beginning to see some easing in this regard.

And then the second question is just about the bigger industry. Maybe you've touched on it with the private equity comments. There's the public peer drama with HTA, HR, and Welltower. I'm just 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 limelight the 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 found, and it read kind of like a novel as to how it went back and forth. And if company F came into play in the different ways, I'm not sure that you can read anything into it overall. When I read into it, Welltower is so big, they have to find large ways to make a difference. Buying an asset or two doesn't make a difference to Welltower anymore. So they need to buy something big, and that was interesting. It is interesting to see that they weren't interested in HTA, but they were interested in HR. That was an interesting thing because the thing that was for sale, they didn'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 would be interesting to see how it plays out. I think it's a bunch of drama, but I don't think it has any overall meaning for the MOB space.

The next question comes from Michael Lewis with Truist Securities.

I wanted to ask a little more specifically about the investment yield spreads. So the two pieces to that? Number one, I think on the two development deals you announced this quarter, it looked like they were nine and three quarters yield. I think the first four you did similar development deals were 10 and a quarter. It might just be obviously specific to the deals. But 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?

The changes primarily relate to specific deals; there’s nothing significant to infer about the overall transactions or shrinking margins. We consistently monitor our weighted average cost of capital. When the stock price decreases, our weighted average cost of capital increases. However, there remains a favorable gap between our investment criteria and our weighted average cost of capital. Therefore, we can still make investments at current levels and achieve good returns, although the margin is slightly reduced. We are not hesitant to pursue investments we favor based on the stock price at this time, and the stock price would need to decline substantially before we become concerned. Naturally, we prefer a higher stock price since it results in a wider spread. As I have mentioned for many years, we operate in a spread business and aim to optimize that spread.

My second question is about the scalability of your general and administrative expenses. I've noticed that as the company has grown over the last few years, the percentage of G&A relative to revenue has increased slightly. I appreciate the emphasis on stock compensation with long vesting periods, so I'm not criticizing that. However, the compensation for the three highest executives has doubled over the past two years, including a 30% increase this past year, which is primarily incentive-based. It's great to see you're meeting your targets, but could you discuss the opportunities or capacity to scale G&A as you continue to grow?

Well, yeah, I think we're probably close to a maximum customer. A few quarters ago, 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 and instead of the eight years, that is the legal vesting. This is pinching us now on the non-cash portion of G&A. If you look just at the cash portion of G&A, yes, I think it's been relatively stable to down relative to revenue. 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, a year or two. After that point, it will level off or go down.

I wanted to ask about your perspective on the threat of in-home dialysis. Many of your tenants and properties reflect a need-based model, where seeing a doctor is a necessity regardless of circumstances. While we've discussed Teladoc and similar services, dialysis has appeared to be the most resilient property type. Do you think this is changing at all, and does it alter your view on that specific sector?

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. 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 the at-home dialysis. So I mean, we see 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's getting in-facility dialysis now, they're going to stick with it. We think it's going to be a long lead time to move a lot of people into the in-home. We see it as basically a reduction of future need for dialysis facilities, but not a reduction of need for the existing dialysis facilities.

The only other thing I would add to that, Michael, is one of the reasons we really like the operator that we do a lot of our development projects with; they specifically have a home part of their dialysis business. It's really central to their strategy. They are 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. They are actually working directly with payers on strategizing partnering with those payers on how to create that best mix. That is one of the reasons we really like the operator that we're working with and are excited about their growth plans.

Next question comes from Sheila McGrath with Evercore.

I was wondering if you could talk a little more about the increased backlog of acquisitions. Was that due to one or more strategic relationships, and do you have any visibility on how this might phase in the $140 million in 2022 versus 2023?

Yes, I mean, and actually, we should have already closed on one. But due to supply chain issues, and an overzealous Butler County, Ohio inspector, the facility is actually open under a partial COO. Their kitchen isn't operable yet because of an exhaust fan issue. So we're waiting until they get a full approval before we close on it. They're actually seeing patients now; they have patients in the facility, they just bring food in instead of using a kitchen. That one should close relatively soon, and we should close at least one more in 2022, possibly two. Again, a lot of it depends on weather and supply chain issues. The remainder three or four will be basically one a quarter through the end of 2023.

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 of capital here, and your appetite to use a little bit more leverage? How do you think about that?

We plan to maintain our long-term objective of keeping leverage between 30% and 35% of our capital base. We have been around 30% or slightly below for some time and may increase it slightly, but not by much more. Even with the current stock price and our investment spreads, we can still generate profits. We are not hesitant to make investments based on the current stock price. I am not sure what the current yield is, but I believe it is about 4.75% for equity yield. If we are investing at yields of 9% to 9.5%, we still have plenty of room to invest.

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, and be very disciplined around that. We have essentially, I think about $140 million or $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 are used to. 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. We hope to see a lot of you 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.