Community Healthcare Trust Incorporated (NYSE:CHCT) Q1 2024 Earnings Call Transcript

Community Healthcare Trust Incorporated (NYSE:CHCT) Q1 2024 Earnings Call Transcript May 1, 2024

Community Healthcare Trust Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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. It 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 1, 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 in its earnings release, as well as risk factors in 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 : 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 operation 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 with the long-term lease signed on one of our buildings to deliver in- and outpatient behavioral health care 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 square feet for a purchase price of approximately $34.2 million. The properties were 98.6% leased in the aggregate, with lease is running through 2039 and anticipated aggregate annual returns ranging from 9.3% to 9.75%.

Subsequent to March 31, 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% to 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.

William Monroe : 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. And 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 the 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 executive, it 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 the 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. According 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. And on a per diluted common share basis over these periods, AFFO declined from $0.61 to $0.59 per share. And 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: Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

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Q&A Session

Alexander Goldfarb: Hey, morning down there. A few questions. First, Dave, 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 outline deal in the fourth quarter.

Dave Dupuy: 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 in 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 pretty light in terms of building the pipeline in the first quarter.

Alexander Goldfarb: Okay, so then that extends to the second question. You know, we go back to during COVID when rates went to zero and you guys were aggressively outdid and wisely you guys made the decision that you weren’t going to chase rates you know cap rates to zero and you maintain discipline now we’re sort of in another period of volatility. The point of — the company though is to be able to acquire sort of $125 million a year, hopefully grow that pipeline to something above that, especially if the asset base has grown multiples of that. As you guys sit there, do you still think that — 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 in nature just means that it’s sort of a limited pool of assets to go after?

Dave Dupuy: Well, I guess I would say a couple of things related to that Alex, first of all, you’re right. It is a different environment we find ourselves in today. 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. And 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 million to $150 million] (ph) 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 walk – tightrope, we’re walking, but we feel very confident that we can get to that 120 to 150 range.

Alexander Goldfarb: Okay, thank you Dave.

Operator: The next question comes from Rob Stevenson with Janney. Please go ahead.

Rob Stevenson: Good morning, guys. Dave, sorry if I missed this, but the sale that you allude to, the press release, is that one of the Genesis Care vacant assets?

Dave Dupuy: It is.

Rob Stevenson: Okay. And then can you talk about what the current plan is for the other one? Is that also going to likely be a sale or are you getting closer to being able to release that? How should we be thinking about that asset?

Dave Dupuy: That’s actually the good news there is — that’s currently under LOI to be released. So we’re working on a draft lease right now and hopefully that property will get leased here very soon. So [at] (ph) rates that are similar to the rates that we were getting as part of the Genesis Care portfolio. So we’re feeling very good about getting that property released.

Rob Stevenson: Okay. Bill, how meaningful was the drag in the first quarter from the vacant assets on the expense line?

William Monroe: The vacant assets, I mean obviously we have discussed Genesis Care and the properties that were rejected, it’s about a million dollars of total annualized rents and so you know certainly that is a drag. Again as Dave mentioned being able to release the Asheville property we’re excited about, and then the Fort Myers property, having that under contract to sell so that we can recycle that capital will kind of help reduce that drag. But it is something that obviously we have to work through.

Rob Stevenson: But on the expense side, was there, I mean, you’re not able to get the triple net on the expenses for insurance taxes, et cetera. Was that any material amount of drag from that — that goes away if you wind up selling and releasing? We know that the revenues come out of the numbers, but I guess is there any, is there — half a penny, a penny of expenses that goes away when those assets get resolved? Or is it not meaningful?

William Monroe: I don’t expect that it’s meaningful. I don’t have the number right in front of me, but it certainly, it incrementally helps.

Rob Stevenson: Okay. And then I guess it was great to get the — well, I’ve got you build 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?