Sila Realty Trust - Earnings Call - Q1 2025

Executive Summary

• Revenue modestly beat consensus while EPS and FFO/share were slightly below: Q1 rental revenue was $48.26M vs S&P Global consensus $46.64M*; diluted EPS was $0.13 vs $0.22*; FFO/share (REIT) was $0.51 vs $0.525*. S&P Global estimates noted with asterisk.
• Cash NOI was $41.18M, up ~0.5% q/q but down y/y due to non-recurring 1Q24 items and Steward bankruptcy; AFFO/share was $0.53 with a 76.4% payout ratio, supporting the maintained $0.40 quarterly dividend.
• Balance sheet/liquidity strengthened: net debt/EBITDAre 3.5x, interest coverage 4.5x, liquidity ~$598.5M; revolver was upsized to $600M in February, enhancing external growth flexibility.
• Management tone: constructive on acquisition pipeline at 6.5–7.5% cap rates, but disciplined given cost of equity/interest rate backdrop; target leverage range reaffirmed at ~4.5–5.5x net debt/EBITDAre.

What Went Well and What Went Wrong

• What Went Well

  • Revenue beat with sequential Cash NOI growth: Q1 revenue $48.26M vs $41.00M 4Q Cash NOI moving to $41.18M in Q1 (+~0.5% q/q) as Knoxville acquisition and rent escalators helped offset vacancies.
  • Strong balance sheet/liquidity: net debt/EBITDAre 3.5x, liquidity ~$598.5M, and new $600M revolver (oversubscribed), supporting accretive growth optionality.
  • Strategic focus reiterated: “We are pleased with our strong start to 2025…” and remain focused on “necessity, purpose-built healthcare real estate” with WALT 9.7 years and 2.2% average annual escalators.

• What Went Wrong

  • Earnings below consensus on interest reset and prior-year comps: EPS $0.13 vs $0.22*; FFO/share $0.51 vs $0.525* as interest expense rose with swap resets; y/y Cash NOI lower due to 1Q24 severance/termination fees and Steward impact.
  • Interest coverage compressed to 4.5x (from 6.4x in Q4), reflecting higher interest costs after year-end swap changes.
  • Vacancy drag persists (Stoughton), with impairment in Q1 and ongoing carry costs pending sale/lease resolution.

Transcript

Speaker 4

Good morning and welcome to Sila Realty Trust's first quarter 2025 earnings conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star followed by zero. I will now turn the conference over to your host, Miles Callahan, Senior Vice President in Capital Markets and Investor Relations for Sila. You may begin.

Speaker 1

Good morning and welcome to Sila Realty Trust's first quarter 2025 earnings conference call. Yesterday evening, we issued our earnings release and supplement, which are available on the Investor Relations section of our website at investors.sila-realtytrust.com. With me today are Michael Seton, President and Chief Executive Officer; Kay Neely, Executive Vice President and Chief Financial Officer; and Chris Flouhouse, Executive Vice President and Chief Investment Officer. Before we begin, I would like to remind you that today's comments will include forward-looking statements under federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate, or other comparable words and phrases. Statements that are not historical facts, such as statements about expected financial performance, are also forward-looking statements. Actual results may differ materially from those contemplated by such forward-looking statements.

A discussion of the factors that could cause a material difference in our results compared to those forward-looking statements is contained in our SEC filings. Please note that on today's call, we will be referring to non-GAAP measures. You can find the reconciliation of these historical non-GAAP measures to the most directly comparable GAAP measures in our first quarter earnings release and our earnings supplement, both of which can be found on the Investor Relations section of our website and in the Form 8-K we file with the SEC. With that, I will now turn the call over to our President and Chief Executive Officer, Michael Seton.

Speaker 2

Thank you, Miles, and good morning to everyone. Thank you for taking the time to join our call today. I will begin by thanking our team for delivering another quarter of solid results. Our results are a testament to the hard work and dedication that continues to drive our success and reinforce the long-term value proposition of Sila's portfolio. Our in-place tenancy remains strong, as evidenced by high tenant and guarantor EBITDA coverage ratios, coupled with long lease terms and annual contractual lease escalations. Our balance sheet continues to reflect ample liquidity and very modest leverage positioning, which pleases us as most companies contend with the shifting economic winds and landscape. Thus far in 2024, we continue to maintain our prudent yet active investment approach, recently closing on two acquisitions that meet all of our investment criteria and fit strategically into our portfolio construction.

I realize that it feels to many of us that the economic world order has changed since our last earnings call in February. Concerns surrounding tariffs, labor, and other inflationary pressures and the distinct possibility of a recession have taken a toll on the global markets and may have significant consequences on the future of many businesses. While confusion and uncertainty are a friend to no one, we believe that Sila will continue to offer investors a differentiated opportunity to invest in the REIT space. Sila's focus on acquiring and owning healthcare properties should provide a greater degree of confidence to investors than many other real estate asset classes. The bottom line is that healthcare is non-discretionary, and healthcare real estate is a vital part of societal infrastructure. We invest in high-quality, necessity-based healthcare properties in markets with growing demand, which are critical to the communities in which they operate.

This growth is being driven by the shift toward lower-cost, patient-centric settings and an aging population with increasingly complex medical needs, both of which generate increasing and continuing healthcare spending, which should benefit our tenancy. Our triple-net lease structure provides a significant advantage for our stockholders by allowing for more predictable income streams, with major capital costs of owning real estate residing not with us as a responsibility, but rather with our tenants. Our weighted average remaining lease term of more than nine and a half years, with average annual contractual rent escalations of 2.2%, enables predictable long-term revenues, which grow each year. Sila's lease structures and characteristics are the bedrock of the company's stability, and we believe position us as a safe haven compared to many other investment opportunities. Despite the current economic backdrop, we continue to demonstrate success, further building our portfolio.

Our two most recent acquisitions are emblematic of our target acquisition market, both being newly constructed, highly utilized, lower-cost, patient-care settings with investment-grade rated health system affiliations. One last remaining point, and using a metaphor, we have a tidal wave of support of our investment thesis of deploying capital in healthcare. The silver tsunami is upon us and should drive the success of our tenants for decades to come. By 2030, just five years away, the entire baby boomer generation will have reached the retirement age, increasing the U.S. population share of seniors to 70 million from 61 million people in 2024, while the number of Americans 100 years of age or older is projected to quadruple over the next three decades. By 2030, seniors are expected to increase total outpatient healthcare spending by 31% to nearly $2 trillion.

This demographic shift will continually increase patient volumes and the acuity of cases, supporting stronger operator revenues and consequently more durable income for Sila's current portfolio and future healthcare acquisition opportunities. We have carefully built this company with both the intention and discipline needed for enduring success. While there is much noise in the marketplace, which can make it difficult for some to focus, we remain as clear-eyed and vigilant as ever, with laser-like attention on making the best possible decisions for the long-term value of Sila shareholders. I will now turn to Kay to discuss our financial performance.

Speaker 3

Thank you, Michael, and good morning, everyone. I am pleased to report that Sila delivered solid results in the first quarter, further strengthening our financial profile as we started the new year. As Michael alluded to, we are intensely focused on maintaining a strong financial position, which is fundamental to both safety and the growth of the portfolio. Cash NOI for the first quarter of 2025 was $41.2 million, compared to $41 million in the fourth quarter of last year, or an approximately 50 basis point increase. This increase was driven by scheduled contractual lease escalations in the acquisition of our Knoxville healthcare facility in March. These increases were partially offset by slightly higher carrying costs associated with our vacant Stoughton asset.

Compared to the first quarter of 2024, cash NOI decreased 12.3%, primarily driven by $6.1 million of non-recurring termination and severance fees received during the first quarter of 2024, as well as the bankruptcies of Stewart Health Care and GenesisCare. This was partially offset by other same-store cash NOI increases of 2.1% and acquisitions made since the beginning of 2024. Our AFFO was $29.4 million, or $0.53 per diluted share during the first quarter, compared to $30.2 million, or $0.54 per diluted share during the fourth quarter of last year. The decrease in AFFO was largely driven by an increase in interest expense relating to the new interest rate swaps entered into at year-end 2024.

As a reminder, we replaced five swaps that were scheduled to expire in December 2024 with an aggregate notional amount of $250 million and a weighted average fixed rate of 0.93%, with four new swaps of the same aggregate notional amount and a new weighted average fixed rate of 3.76%. The AFFO decrease was partially offset by a decrease in G&A expenses, excluding stock-based compensation and severance, which are not included in the calculation of AFFO, due to prior year fourth quarter bonuses, partially offset by an increase in professional fees related to our first integrated audit since our public listing last year. Compared to the first quarter of last year, AFFO decreased 23.1%, largely driven by the previously discussed cash NOI and interest expense impacts, partially offset by lower G&A.

Our AFFO payout ratio for the first quarter was 76.4%, which should provide further confidence in our ability to maintain a strong and stable dividend for our shareholders. At quarter end, we were conservatively leveraged with total net debt of $526.5 million, or 3.5 times net debt to EBITDARE. We continue to believe a leverage ratio of approximately 4.5-5.5 times net debt to EBITDARE is an appropriate level for us, though at times we may run lower or higher than this level. This target leverage level is generally lower than our peers, which we believe reflects the disciplined and thoughtful approach we take towards balance sheet management, particularly as we navigate a current uncertain macroeconomic environment. We believe maintaining a strong balance sheet with low to moderate leverage, ample liquidity, and financial flexibility is fundamental to being a resilient and sustainable REIT.

At quarter end, we had over $598 million in liquidity, providing us with substantial dry powder to continue to make accretive acquisitions for the foreseeable future. Much of that liquidity stems from our new $600 million revolving line of credit, which we entered into in February 2025, replacing our prior $500 million revolving line of credit. The successful recast of the revolver, which was oversubscribed by approximately 70%, allowed us to increase the initial size of the facility by $100 million. This extra liquidity helped strengthen Sila's financial profile, providing breathing room while we navigate macroeconomic volatility, as well as providing additional optionality to execute on our growth objectives in the coming years. At quarter end, we had only $32 million outstanding on our revolving line of credit.

At the end of the quarter, 73.3% of ABR from tenants who provide financial reporting at either the tenant or a guarantor level maintain a strong EBITDA coverage ratio of 5.3 times. Of the 26.7% of total ABR representing non-reporting obligors, more than half are associated with investment-grade rated tenants, guarantors, or sponsors. While we continue to maintain a proactive approach to evaluating the financial strength and credit quality of our tenant base, it is simply too early to accurately determine the impacts from pending tariffs and evolving healthcare policy. However, even in current conditions, we believe that our tenants are well-positioned to absorb the impact without experiencing significant disruption. Our high EBITDA coverage ratios provide a comfortable margin, and we know Medicaid in particular makes up a minority share of the payers at each of our property subtypes.

While we continue to actively monitor the current macroeconomic landscape, we believe Sila is in an enviable position as it pertains to our corporate financial profile and the strength of our portfolio and healthcare partners. I will now turn the call over to Chris to share details on our portfolio activity.

Speaker 5

Thank you, Kay. We had another successful start to the year on both the acquisitions and operations front. In March and April, we completed two acquisitions totaling approximately $59 million that checked all the boxes of our disciplined investment criteria: quality properties with established operators in markets that have growing demand for essential healthcare services. These acquisitions are purpose-built, highly utilized inpatient rehabilitation facilities in Knoxville, Tennessee, and Dover, Delaware, expanding our footprint into two new states. The Knoxville healthcare facility adds a modern specialty inpatient rehabilitation facility to our portfolio, while Sila's expansion into the Knoxville market supports our desire to continue to scale within the Sunbelt.

This property, fully leased to a joint venture between University of Tennessee Medical Center, Tenet Healthcare, and LifePoint Health, is located within a prominent regional health park that acts as a center of gravity within its community, with tenancy anchored by quality healthcare system partners. The Dover healthcare facility, located in the capital of Delaware, is fully leased to a joint venture, including investment-grade rated Bayhealth Medical Center and PAM Health. The facility has consistently maintained high census opening, while the market benefits from high barriers to entry, including protection afforded by the state of Delaware's Certificate of Public Review licensure process. Given the consistent demand at the property since opening, we believe there is an opportunity to expand the facility beyond what it's currently operating today. While we have had recent success in the acquisition market, we remain acutely aware of the uncertain macroeconomic situation, which Michael described earlier.

The transaction market undoubtedly operates better when there's certainty around the operating landscape and interest rates. Currently, there is certainty around very little. So far, we have experienced a strong pipeline of opportunities, and we're still actively building and executing on deals within the pipeline. However, that does not mean things will stay that way. In the real estate world, private markets notoriously lag public markets, which, in a rapidly changing capital markets environment, could lead to a cooling off. Although very little is certain today, you can trust that Sila will continue on as a prudent and disciplined capital allocator, and we will be sure that our acquisition activity continues to be accretive to earnings, to growth, and to the quality of the portfolio.

We continue to closely monitor the previously disclosed bankruptcy of the tenant at our Savannah healthcare facility, anchored by Landmark, which represents 0.6% of our portfolio annualized March 2025 contractual-based rent. As of today, nothing rejected, and all payments due to Sila have been made in full. Turning to leasing activity at the end of the first quarter, our portfolio consisted of approximately 5.3 million rentable sq ft, with an attractive weighted average remaining lease term of 9.7 years. While we are currently in discussions with tenants for all leases expiring in 2025, we renewed or extended leases on approximately 122,000 sq ft in the quarter, driven by the extension of our Lubbock healthcare facility, which represented 102,000 sq ft. Additionally, we maintained our weighted average annual contracted rent increases of 2.2%, which continues to highlight the long-term growth and return opportunity of our portfolio.

At quarter end, we remained at 96% leased unchanged from last quarter. I'll now turn the call back to Michael for closing comments.

Speaker 2

Thank you, Chris. Before we move on to Q&A, I want to once again extend my sincere thanks to the entire team at Sila. Their hard work and dedication continue to drive our success. On behalf of our leadership team and board of directors, we deeply appreciate the support of our shareholders, and we will do everything in our power to ensure that Sila remains a sound investment opportunity for both existing and future shareholders. This concludes our prepared remarks. Operator, please begin the Q&A.

Speaker 4

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Michael Lewis, Truist Securities. Please go ahead.

Speaker 0

Great. Thank you. Could you maybe talk a little about the thought in property? I know last quarter you talked about it could be a new lease, it could be a sale, maybe update us on timing, etc.

Speaker 2

Sure. Michael, good morning, and thank you for joining the call. As it relates to Stoughton, as we had previously mentioned to you and others, we engaged a broker late last year who really hit the market in the first quarter of this year to solicit bids for the sale or lease of the property. As it relates, we had a couple of parties, healthcare users interested in leasing the property, but I would say the more robust interest has been from the sale side, really for multifamily use of the property, which sits on a large parcel. That would, of course, involve—I would tell you that the approach of these multifamily developers who bid on the property, of which we've had several bids, would involve essentially a tear down of the existing structure, which is a fairly large structure.

We ultimately, as well in these bids, determined that the process that these multifamily bidders were going to take was to essentially have a traditional due diligence period, go hard on the property, but have, I would tell you, a protracted process as it related to the close as they pursued entitlement. That was generally consistent across the bids of the property. We went back to the market and did solicit some cash bids and received some interest. I think Kay in her remarks referred to a write-down of that property, which really reflects the as-is cash bids of that particular property. What we are exploring now at this point, because the carry costs are a consideration, but also maximizing value, is potentially strategies to reduce that.

The carry costs that we've indicated before are quite high, reducing them quite substantially, and pursuing potentially an alternative whereby we can close the gap on a closing process for a multifamily buyer of that property. Let me put a finer point on that and say that it could potentially involve demolition of the existing structure and working with someone in some format to pursue entitlement to the property. We think ultimately this could, when you think about the figures, result in essentially significantly more money than what we have written down the property to at this point to pursue such a process, which we think could be accomplished in somewhere around 12-18 months.

Speaker 0

Okay. Great. Thank you for that. Have you funded anything on the two mezz loan investments that you announced last quarter, or is there any update on those?

Speaker 2

Yes, we have funded amounts as it relates to the mezzanine loan associated with the inpatient rehab facility. We have not funded. The equity requirement is higher on the inpatient behavioral facility yet. We do expect both of those loans to be fully funded in Q3 of this year.

Speaker 0

Okay. Got it. And then it was a small amount, but I noticed this $171,000 increase in the credit loss reserve. Is that related to what Kay was talking about with Landmark, or was that something else?

Speaker 2

Kay, could you address that?

Speaker 3

Yes. I'm Michael. The credit loss reserve, also known as the CECL reserve, is a required reserve in the vast majority of cases when you have loans receivable. That reserve is something that's assessed. It's very much a qualitative judgment-type assessment every quarter for the loans. At the end of last year, it was immaterial, but you do, even in an unfunded scenario, have to have some kind of reserve put up that's simply required under GAAP. That is related to the two mezz loans.

Speaker 0

Okay. Got it. Lastly, for me, maybe more of a bigger picture question, I want to ask about the investment pipeline, but also does the cost of equity impact your acquisition pace at all? In other words, you have borrowing capacity, you're well below target leverage, but maybe you're not in a hurry to get to your target leverage while your stock trades below NAV, or maybe the stock price is irrelevant right now to your investment decision. I don't know. Maybe it's two questions, right, about the investment pipeline and then thoughts about, like I said, if the stock price impacts your decisions at all.

Speaker 2

I think it's a great question, and you identified with the second part of your question something we think about quite frequently. As it relates to the investment pipeline first, what I would tell you is we're seeing opportunities, as we've demonstrated already this year, acquiring $59 million worth of property. As you know, we've talked, generally speaking, about in sort of normalized conditions, and I'm not sure these are the most normal conditions under which any company is operating in the current economic landscape, but normal conditions acquiring based upon the current size of the company maybe between $150 million and $250 million of real estate. Again, we have a good start to the year at $59 million, so we feel pretty good about this year.

What I would say, though, is the opportunities that we're seeing are within the range of the kind of cash cap rate guidance we've given you before. The quality of the transactions we're seeing is quite high. The reason I would tell you that we're seeing that in the market generally is probably seeing that in the sales market is because there's not a plethora of buyers, I would tell you, in the market. In our particular space, we see still a lot of private buyers, not a ton of publicly traded REITs as competitors. The healthcare real estate space does have a lot of private funds in it and sovereign wealth funds who are buyers, so we see those as our competitors.

If someone has a lesser property to bring to market, I think largely they're not going to probably get a lot of interest in this market because, again, liquidity in the market, just generally speaking, it's not, of course, what we saw in, call it, in the 2018, 2019 type years. As it relates to our stock price, I think it's first and foremost in our minds because we are very conscious of not being too acquisitive until such time we also see the right trajectory up as it relates to our share price where we can raise equity capital. Yes, to be blunt, we don't see ourselves leveraging to the high point of the ranges that we've given until such time that we see our stock price recover. We see a methodical approach.

We see an approach where we're leaning in, but it's going to be cautious as well because, again, over the remainder of 2025, of course, we don't really know what it will bring.

Speaker 0

Perfect. Thank you very much.

Speaker 2

Thank you, Michael.

Speaker 4

Your next question comes from Rob Stevenson from Janney. Please go ahead.

Speaker 6

Good morning, guys. Chris, on quality acquisitions like Knoxville or Dover, where's your minimum yield today given the sort of backdrop that you're operating under? As you talked about in Michael's questions about cost of equity, turbulence in the marketplace, I mean, where are you guys sort of at this point to deploy capital? Where does the yield need to be even for a quality deal?

Speaker 5

Yeah. No, thanks for the question, and thanks for joining today. As we've previously stated, we see opportunities in that 6.5% cap rate area to 7.5% cap rate area. I think it does depend on, obviously, the property type, the quality of the sponsorship, as well as the term. Those are all things that we think about when we're balancing what we view would be the best risk-adjusted investment for our company and shareholders.

Speaker 6

Okay. The percentage of ABR with EBITDA coverage below one times went from 1.8% last quarter down all the way to 50 basis points. What drove that substantial improvement?

Speaker 2

What drove ultimately that improvement was essentially some properties moving up in terms of their coverage levels. Now we have as a half a percent of ABR versus what we had before, two properties and three tenants. Of those three tenants or of that ABR, that is that 0.5% of portfolio ABR, 60% of that is investment-grade rated. By the way, one of those tenants is a dental tenant, and they had some shifting of doctors. We have been in touch with that tenant. As we all know, everybody needs to go to the dentist on a regular basis. We have no concerns as it relates to those who are paying who have coverage below one times. By the way, they are all current on rent.

Speaker 6

Michael, that 130 that you talked about that moved up quality-wise or coverage-wise, was that largely one tenant, or was that several tenants that wound up seeing improvement?

Speaker 2

It was one tenant who moved up of that 1.3% of ABR you referenced, yes.

Speaker 6

Okay. And then lastly, Kay, obviously, if you make a small or mid-size acquisition, you've got the line of credit. If you wanted to do something more permanent or longer-lasting, like a term loan, etc., where is your borrowing cost today, whether or not it's floating and then swapping to fixed or just looking at just fixed-rate debt out of the chute? How do you think about where your incremental cost of debt is if you elect to do something other than the line of credit?

Speaker 3

Right now, all of our debt is bank debt. We have two term loans and our revolving line of credit. We're currently borrowing at 5.57% on our revolver, which is SOFR plus a spread of 125 basis points. Our intention, as we grow over time, is to look to other sources of debt capital to get longer duration debt, longer duration fixed-rate debt, which is a good match for our long weighted average remaining lease term fixed-rate income with known escalators. That is not something that is imminent for us given where our current maturities are on our debt. We do not have anything maturing in the near term. As we look at those borrowing rates, they would be higher than bank debt borrowing rates at this time.

Of course, we want to have various types of debt capital in our capital stack and not just the bank debt. Over time, whether we move into the private placement market, pricing for that can be 200 basis points over the 10-year, roughly, is what we're seeing in the market today for that for a company like ours. Again, that's something that's more in the future for us. We really still look at the revolver for our cost of debt.

Speaker 6

Okay. Thanks, guys. Appreciate the time.

Speaker 2

Thank you, Rob.

Speaker 4

There are no further questions at this time. I will now turn the call over to Michael Seton. Please continue.

Speaker 2

Thank you again to our shareholders and members of the research community for joining us today. I hope you all have an outstanding day.

Speaker 4

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect your lines.