Community Healthcare Trust - Q1 2024
May 1, 2024
Transcript
Operator (participant)
Welcome to the Community Healthcare Trust's 2024 First Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2024 first quarter financial results. We will also discuss progress made in various aspects of its business. 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 1st, 2024, 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 and in its earnings release, as well as 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 two 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 Dave Dupuy, CEO of Community Healthcare Trust. Please go ahead.
Dave Dupuy (CEO)
Great. Thank you, Nick, and good morning, everybody. Thank you for joining us today for our 2024 First Quarter Conference Call. On the call with me today is Bill Monroe, our Chief Financial Officer, Leigh Ann Stach, our Chief Accounting Officer, and Tim Meyer, our EVP of Asset Management. Our earnings announcement and supplemental data report were released last night and furnished on Form 8-K, along with our quarterly report on Form 10-Q. In addition, an updated investor presentation was posted to our website last night. The first quarter was busy, both from an operations standpoint and also from an acquisition perspective. Our occupancy increased from 91.1% to 92.3% during the quarter. A key component for the increased occupancy was the long-term lease signed on one of our buildings to deliver inpatient and outpatient behavioral healthcare services.
This new lease will require redevelopment of the property from its former use, and we expect the property redevelopment to be completed and the lease to commence in 2026. In addition to this project, we have four 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 completed. Our weighted average remaining lease term remains about the same at slightly less than seven years. During the first quarter, we acquired four properties with a total of approximately 165,000 sq ft for a purchase price of approximately $34.2 million. The properties were 98.6% leased in the aggregate, with leases running through 2039 and anticipated aggregate annual returns ranging from 9.3%-9.75%.
Subsequent to March 31st, we acquired a new patient rehabilitation facility for a purchase price of $23.5 million. We entered into a new lease with a lease expiration in 2039 and anticipated annual return of approximately 9.1%. We also have assigned definitive purchase and sale agreements for seven properties to be acquired after completion and occupancy for an aggregate expected investment of $169.5 million. The expected return on these investments should range from 9.1% to 9.75%. We expect to close on one of these properties in the fourth quarter of 2024, with the remaining six properties closing throughout 2025, 2026, and into 2027. We continue to have many properties under review and have term sheets out on properties with indicative returns of 9%-10%.
Given our modest leverage levels, we anticipate having enough availability on our credit facilities and through our banking relationships to fund our acquisitions, and we expect to opportunistically utilize the ATM to strategically access the equity markets. These traditional capital sources, combined with proceeds from selected asset sales, will provide sufficient capital for continued growth at attractive yields throughout 2024. Also, during the first quarter, our board approved and adopted certain changes to executive compensation. These changes were a result of six months of careful consideration of stockholder feedback, the analysis of proxy advisory firm reports, as well as guidance from our independent compensation consultant. I'll let Bill describe our G&A expense in more detail in his section. So to wrap up, we declared our dividend for the first quarter and raised it to $0.46 per common share.
This equates to an annualized dividend of $1.84 per share, and we are very proud to have raised our dividend every quarter since our IPO. That takes care of the items I wanted to cover, so I will hand things off to Bill to discuss the numbers. Thank you, Dave. I will now provide more details on our first quarter financial performance. I'm pleased to report that total revenue grew from $27.2 million in the first quarter of 2023 to $29.3 million in the first quarter of 2024, representing 7.9% annual growth over the same period last year. When we compared to our $29.1 million of total revenue in the fourth quarter of 2023, we achieved 0.7% total revenue growth quarter-over-quarter.
Although our growth was negatively impacted by the timing of our acquisitions, as we closed $27.7 million of acquisitions during the last week of the first quarter. On a pro forma basis, if all $34.2 million of the acquisitions we completed during the first quarter of 2024 had occurred on the first day of the first quarter, our total revenue would have increased by an additional $774,000 to a pro forma total of $30.1 million in the first quarter. From an expense perspective, property operating expenses increased by $193,000 quarter-over-quarter to $5.8 million, primarily as a result of seasonal increases in utilities and snow removal expense at several properties, along with higher repairs and maintenance.
General and administrative expenses increased by $826,000 quarter-over-quarter to $4.6 million. Dave highlighted the executive compensation plan design changes made in January, but let me provide more details on the increases to G&A expense in the first quarter. While total compensation to executives is expected to be less under the new plan, because 50% of executive salaries are taken in cash and the amortization period for the long-term equity incentive awards is shorter under the new plan, executive compensation expense increased by $660,000 during the first quarter. Only $260,000 of the increase was cash compensation, with the remaining $400,000 being non-cash, stock-based compensation.
The remainder of the increases quarter-over-quarter were a combination of employer tax payments due upon the vesting of stock-based awards from 2016 deferrals, and typical first quarter seasonal adjustments due to the timing of annual employee salary increases, employer 401(k) contributions, and employer tax payments. Finally, from an expense perspective, interest expense increased by $43,000 quarter-over-quarter to $5.1 million. Turning to funds from operations, FFO was $14 million in the first quarter of 2024. On a quarter-over-quarter basis, FFO decreased from $14.9 million in the fourth quarter of 2023, and on a per diluted common share basis over these periods, FFO declined from $0.57 to $0.53 per share.
Adjusted Funds From Operations, or AFFO, which adjusts for straight-line rent and stock-based compensation, totaled $15.7 million in the first quarter of 2024, which compares to $15.6 million in the first quarter of 2023, or 0.8% growth year-over-year. On a quarter-over-quarter basis, AFFO decreased by 2.2% from $16.1 million in the fourth quarter of 2023. On a per diluted common share basis over these periods, AFFO declined from $0.61 to $0.59 per share. Finally, on a pro forma basis, if the acquisitions we completed during the first quarter of 2024 had occurred on the first day of the first quarter, AFFO would have increased by approximately $498,000 to a pro forma total of $16.2 million.
That concludes our prepared remarks. Nick, we are now ready to begin the question and answer session.
Operator (participant)
Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. At any time your question has been addressed, and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
Alexander Goldfarb (Managing Director and Senior Research Analyst)
Hey, morning, morning down there. A few questions. First, Dave, you know, just looking at the acquisitions that are outlined in the press release that you also discussed in your opening remarks, are there any acquisitions that we should be modeling for the remainder of the second quarter and third quarter? Or is there going to be a gap in the pipeline until you close that outlined deal in the fourth quarter?
Dave Dupuy (CEO)
Hey, Alex, thanks for the question. I hope all is well. As it relates to the acquisition pipeline, we have seen fewer opportunities in the first quarter, which has impacted near-term pipeline, as you flagged. We have a core group of brokers we work with, and they saw the dip in activity too. Our guess and theirs was that sellers were on the sidelines in the hopes that we would start seeing some rate cuts. Obviously, expectations for cuts have been pushed back to later in the year, if at all. I will say that market sentiment does appear to be changing because our last two investment committee meetings included more interesting opportunities at attractive cap rates.
So we're hopeful that we can start building the pipeline for the third and fourth quarters beyond the inpatient rehab facility that we are expecting to close in the fourth quarter. But it was, it was pretty light in terms of building the pipeline in the first quarter.
Alexander Goldfarb (Managing Director and Senior Research Analyst)
Okay, so then that extends to the second question. You know, we go back to during COVID when, you know, rates went to zero, and you guys were aggressively outbid, and, you know, wisely, you guys made the decision that you weren't going to chase rates, you know, cap rates to zero, and you maintained discipline. Now we're sort of, you know, in, in another period of volatility.
The point of the company, though, is to be able to acquire, you know, sort of $125 million a year, hopefully grow that pipeline to, you know, something above that, especially as the asset base has grown multiples of that. Do you as you guys sit there, do you still think that, you know, that holds true and that you'll be able to grow the pipeline back? Or is it just because of what you're looking for, you know, in nature, just means that it's sort of a limited pool of assets to go after?
Dave Dupuy (CEO)
Well, I guess I would say a couple things related to that, Alex. First of all, you're right, it is a different environment we find ourselves in today. Fresh capital is very precious, and so we're being quite disciplined.
We want to try to maximize, as we always have, but we really are making sure that the acquisitions that we are going after are going to have the quality we're looking for and the yield we're looking for, especially given this higher cost environment. So, look, we have acquired almost $60 million in acquisitions thus far, and so I absolutely think it's achievable that we can get in that $120-$150 range. But we're balancing that with making sure that the acquisitions we're doing are at the right yields and are at the right quality, given the very pricey nature of capital, both debt and equity capital, that we're seeing in today's environment.
So it's a bit of a tight rope we're walking, but we feel very confident that we can get to that 120-150 range.
Alexander Goldfarb (Managing Director and Senior Research Analyst)
Okay. Thank you, Dave.
Dave Dupuy (CEO)
Mm-hmm.
Operator (participant)
The next question comes from Rob Stevenson with Janney. Please go ahead.
Rob Stevenson (Managing Director and Senior Research Analyst of Real Estate)
Hi, good morning, guys. Dave, sorry if I missed this, but the sale that you allude to in the press release, is that one of the GenesisCare vacant assets?
Dave Dupuy (CEO)
It is.
Rob Stevenson (Managing Director and Senior Research Analyst of Real Estate)
Okay. And then, can you talk about what the plan, the current plan is for the other one? Is that, is that also gonna likely be a sale, or is, are you getting closer to being able to release that? How should we be thinking about that asset?
Dave Dupuy (CEO)
That's actually the good news there is that's currently under LOI for to be re-leased. So we're working on a draft lease right now, and hopefully that property will get leased here very soon. So it's and it's at rates that are similar to the rates that we were getting as part of the GenesisCare portfolio. So we're feeling very good about getting that property re-leased.
Rob Stevenson (Managing Director and Senior Research Analyst of Real Estate)
Okay. Bill, how meaningful was the drag in the first quarter from the vacant assets on the expense line?
Bill Monroe (CFO)
The vacant assets? I mean, obviously, you know, we have discussed GenesisCare and the properties that were rejected, you know, is about $1 million of total annualized rent. And so, you know, certainly, that is a drag. Again, as Dave mentioned, being able to re-lease the Asheville property, we're excited about, and then the Fort Myers property, you know, having that under contract to sell, so that we can recycle that capital, will kind of help, you know, reduce that drag, but it is something that obviously we have to work through.
Rob Stevenson (Managing Director and Senior Research Analyst of Real Estate)
But on the expense side, was there... I mean, you're not able to, to get the triple net on the expenses for insurance, you know, taxes, et cetera. Was that any material amount of drag from that, that goes away if you wind up selling and re-leasing? We know that the revenues come out of the numbers, but I guess, is there-
Dave Dupuy (CEO)
Sure.
Rob Stevenson (Managing Director and Senior Research Analyst of Real Estate)
Is there, you know, $0.005, $0.01 of expenses that goes away when those assets get resolved, or is it?
Bill Monroe (CFO)
Uh, we-
Rob Stevenson (Managing Director and Senior Research Analyst of Real Estate)
or is it not meaningful?
Bill Monroe (CFO)
I don't expect that it's meaningful. I don't have the number right in front of me, but it certainly incrementally helps.
Rob Stevenson (Managing Director and Senior Research Analyst of Real Estate)
Okay. And then I guess it was great to get while I've got you, Bill, the G&A sort of breakdown. But I guess the one question I have is: what is the out of that line from the first quarter, what goes away when we look to the second and third and fourth quarters, and what remains in that line item from the various comp stuff?
Bill Monroe (CFO)
There is a lot of, you know, movement from quarter to quarter. You know, however, we would expect, there's some seasonality in the first quarter, but as we look at the changes to the compensation plan, you know, those amortization schedules are over, you know, 36, you know, months for kind of the long-term incentive awards. You know, so those will remain. You know, the cash salary will remain. So, we typically see, you know, some movement in the second quarter versus the first quarter, but, you know, I would not expect it to be a material amount.
The other thing we would highlight as we look at kind of compensation throughout the year is, beginning in the third quarter, you know, we will start accruing for 50% of executive bonuses to be paid in cash as part of the new executive compensation plan approved in January. You know, we waited for that to be enacted to align with the start of a new performance period, which always goes from July 1st to June 30th. So, you know, similar to the impact of executive cash salaries this quarter, you know, we would expect that 50% cash bonus, you know, to have an incremental impact to, you know, AFFO of about $0.01 per quarter, right? Kind of $260,000, similar to what we announced here in the first quarter.
Rob Stevenson (Managing Director and Senior Research Analyst of Real Estate)
Okay. So we shouldn't be expecting the G&A to revert back to sort of the $3.6 million-$3.7 million a quarter that you had in the second through fourth quarters of last year. It's gonna wind up running higher than that because of the way these comp programs work with GAAP.
Bill Monroe (CFO)
That's right. It is, you know-
Rob Stevenson (Managing Director and Senior Research Analyst of Real Estate)
Okay.
Bill Monroe (CFO)
While executive compensation will be lower, you know, compensation is not the same as GAAP expense.
Rob Stevenson (Managing Director and Senior Research Analyst of Real Estate)
Yeah.
Bill Monroe (CFO)
And so, you know, there is a significant amount of kind of non-cash compensation and amortization, you know, that we will continue to have going forward.
Rob Stevenson (Managing Director and Senior Research Analyst of Real Estate)
All right. That's helpful. And then, Dave, one last one for me. When you're talking about the development assets that closing in 2025, 2026, 2027, why is it as far out as 2027? Did some new development get added to the pipeline, or was there some sort of significant delay? Seems awfully far out into the future. You know, I respect that even a high-rise Manhattan development could be completed by 2027 at this point. So just curious as to what's taking that one in the... And I don't know when, you know, if the 2026 one is a back half of 2026, but for, you know, sort of more suburban assets, it seems like an awfully long cycle there.
Dave Dupuy (CEO)
Yeah. No, that's a fair question, Rob. Couple things going on. First of all, there's a net of one new deal that we added to the group this year. It was actually one deal that we were going to do in Florida that we decided not to move forward with. Again, and this gives you a snapshot into the world of these projects, just a significant amount of issues with the site and pushback on some—you know, there were some endangered species, both plant and animal, on the site that resulted in a lot of expense and problems. So one of the Florida projects fell out of the group, and we added two new projects. Both of those are in Texas that are now part of the new group.
So because we just signed those deals, it typically takes, you know, at least a couple of years. And, you know, the reality is, ever since COVID, the projects, getting these projects totally through from beginning to end, there's just been a six to even 12-month add as it relates to getting these projects constructed. Believe me, both our partner as well as us want to get these online as quickly as possible. And so that's what you're seeing. You're seeing the addition of 2027, sort of recognizes that we just had these two new facilities that we literally just signed up, a net one new, for that pipeline.
Rob Stevenson (Managing Director and Senior Research Analyst of Real Estate)
Okay, that's helpful. Thank you, guys. Appreciate the time this morning.
Dave Dupuy (CEO)
Thanks, Rob.
Operator (participant)
Again, if you have a question, please press star, then one. The next question comes from Jim Kammert with Evercore. Please go ahead.
Jim Kammert (Managing Director)
Good morning, folks. Sounds like the whole Genesis situation resolved pretty well here. Can you just provide some qualitative comments regarding sort of the new tenants on the five assets that they were assigned or assumed the leases? And were there any material, increments or diminution to the leases? I presume they're pretty much assumed as, as they were, but any color there would be helpful.
Dave Dupuy (CEO)
Yeah, it certainly was a long bankruptcy process, but we're proud of the outcome and the team's hard work to get all seven of those remaining properties assigned to buyers or assumed by the new GenesisCare. As you look at those new buyers, you know, that were assigned, it was five separate buyers. They include a large oncology provider, a large hospital system, and some local oncology practices. And so, you know, received adequate assurance as part of the bankruptcy process from GenesisCare on these assignments, and you know, look forward to working with these new tenants and feel good about those new tenants in those facilities.
The two remaining properties that GenesisCare assumed after exiting from bankruptcy, you know, again, GenesisCare is in a much different leverage position than they were entering bankruptcy. And so again, received adequate assurance around the new GenesisCare and look forward to working with them as well. And, Jim, we're actively working on lease extensions with these new, you know, tenants. And what I would say is, you know, look, these leases had uncapped CPIs and were there. There's gonna... And there are a handful of the leases that will, probably, you know, for additional term, will probably lower to make them more market, because during COVID, those lease rates went up to way out of market.
But the good news is we've got good operators in those businesses, and we feel like that, they're in a good place right now.
Jim Kammert (Managing Director)
That's very helpful. And then I think, David, you'd mentioned that potentially you'd look at some asset sales and partial funding, obviously, for the accretive new investments. And, you know, just playing devil's advocate, looking at where the stock, I think, consensus implied cap rates around eight-nine on the equity, I mean, presumably you could, you know, sell a number of your assets well inside of that. Just what's the philosophy there, asset sales versus equity? Just to try to think through your process, please.
Dave Dupuy (CEO)
You know, the way... Yeah, no, I appreciate the question, Jim. You know, the way we think about raising capital in this environment is still, you know, number one, fund under the revolver and raise, and two,... opportunistically raise funds through the ATM. And then finally, yeah, asset sales that aren't a great fit with the portfolio is something we can look at too. You know, as Bill already mentioned, we expect to close on the sale of those assets held for sale and, you know, later in the second or third quarter, which is going to, you know, gonna help us from a capital perspective. And we continue to evaluate other assets that may not be a good long-term fit for the portfolio, and we'll opportunistically evaluate a sale if we think it makes sense.
Today, we don't think that that is going to be a primary way in which we can fund growth going forward. We certainly don't want it, because, you know, when you sell a property, you're basically trading AFFO to delever, and that's not something that we're excited about doing. But look, it's always an option, and I agree, if we wanted to, if we wanted to raise capital, in using other means, we certainly have the opportunity to do that at attractive cap rates. So we'll keep an eye on it. And, you know, in the second half of the year, we may evaluate doing more.
Alex Fagan (Equity Research Analyst)
Terrific. Thanks for your time. Thank you.
Dave Dupuy (CEO)
Thanks, Jim.
Operator (participant)
The next question comes from Alex Fagan with Baird. Please go ahead.
Alex Fagan (Equity Research Analyst)
Hey, good morning, and thank you for taking my question. First one for me is, what's kind of the thoughts about raising debt to potentially clear the line of credit, and if there's any timing that you can talk about in raising new debt?
Dave Dupuy (CEO)
Yeah, we, you know, we are focused on kind of a modest financial, you know, policy and keeping our debt to total capitalization at modest levels. It was at 38% at March 31st. You know, right now, we have $61 billion available on our revolver, kind of as of 3/31. You know, the next maturity is not until March of 2026, so we have, you know, a nice runway until there are any near-term maturities. What we have historically done is look to term out those revolver borrowings into a new term loan, which then lets us kind of reset the revolver with less undrawn. I expect that that's what we will do again this time. We're always evaluating debt markets, but it's worked well for us in the past.
And look, I think as we look into later this year or early next year, as we get closer to being about a year out from those March 2026 maturities, you know, we think that, you know, that maybe we'll be in a lower interest rate environment. But, you know, that would kind of be the natural time that, you know, our revolver would look to be termed out.
Alex Fagan (Equity Research Analyst)
Got it. That's helpful. Thank you. Second one for me, and sorry if I missed this, but what are the expectations for the cash GNA and total GNA going forward throughout the year?
Dave Dupuy (CEO)
Yeah, we... I had mentioned earlier, as you look at our first quarter G&A, you know, obviously from a cash and non-cash mix, it's similar to what it's been in the past, and we kind of outlined that in our supplemental. The only, you know, change we would expect as we move throughout the year is, again, beginning in the third quarter, the annual incentive rewards will become under the new compensation plan design as well. And so we would begin accruing for 50% of those executive bonuses to be paid in cash, which would be a similar effect to the 50% of cash salaries in the first quarter. You know, it was about $0.01 towards AFFO or $260,000.
Alex Fagan (Equity Research Analyst)
Got it. That's helpful. That's it for me. Thank you.
Dave Dupuy (CEO)
Thanks, Alex.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to David Dupuy for any closing remarks.
Dave Dupuy (CEO)
Dave, thank you very much, and thank you, everybody, for joining us today. Look forward to seeing everybody at NAREIT coming up in June.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.