Community Healthcare (NYSE:CHCT) Trust Incorporated (CHCT) has presented its financial achievements for the first quarter of 2024, highlighting strategic property acquisitions and a solid growth trajectory. The company reported a notable increase in occupancy rates and an uptick in total revenue, alongside the execution of a disciplined acquisition strategy amidst a challenging capital cost environment. CHCT's commitment to maintaining a modest financial policy was emphasized, with plans to manage its credit facilities and debt maturities effectively.
Key Takeaways
- CHCT's occupancy increased to 92.3%, with a significant lease signed for a behavioral health care facility.
- Acquired four properties totaling 165,000 square feet for $34.2 million; agreements in place for seven more properties with a projected investment of $169.5 million.
- Declared a dividend of $0.46 per share, with an annualized rate of $1.84.
- Q1 total revenue reached $29.3 million, a 7.9% year-over-year growth, with FFO at $14 million and AFFO at $15.7 million.
- Acquisition target set at $120 million to $150 million annually, despite fewer opportunities in Q1 due to market conditions.
- The company is cautious about acquisitions, emphasizing quality and yield against high capital costs.
- Plans to convert revolver borrowings into a new term loan, with a focus on a modest financial policy.
- Anticipates changes in G&A expenses due to new compensation plans, with an expected impact similar to Q1.
Company Outlook
- CHCT is confident in its ability to meet its yearly property acquisition goal while balancing capital costs.
- The company expects to close on one property in Q4 of 2024, with the remaining acquisitions planned through 2027.
- It has sufficient credit facilities and banking relationships to fund acquisitions and may strategically access equity markets through the ATM.
Bearish Highlights
- The company acknowledged the fewer acquisition opportunities in Q1 due to sellers waiting for rate cuts.
- The sale of Genesis Care vacant assets and the expected release of another property impacted expenses by approximately $1 million.
Bullish Highlights
- CHCT remains disciplined in its acquisition approach, focusing on the quality and yield of properties.
- The company's financial strategy includes maintaining a modest policy and managing debt effectively.
Misses
- There were no specific misses mentioned in the earnings call summary provided.
Q&A Highlights
- Dave Dupuy and William Monroe discussed the company's financial strategies, including managing their credit facilities and upcoming debt maturities.
- They addressed the potential impact of G&A expenses on AFFO due to the new compensation plan.
- The representatives expressed optimism about the future interest rate environment and the company's ability to navigate it effectively.
Community Healthcare Trust Incorporated (CHCT) has demonstrated a commitment to growth and prudent financial management in its first quarter of 2024. The company's strategic acquisitions, increased occupancy rates, and solid revenue growth are indicative of its strong position in the healthcare real estate sector. CHCT's careful approach to managing its capital structure and acquisition strategy positions it well for future success, despite the current high cost of capital. The company's representatives have expressed confidence in achieving acquisition targets and maintaining a robust financial policy, ensuring the continued trust of its investors and stakeholders.
InvestingPro Insights
Community Healthcare Trust Incorporated (CHCT) has shown resilience and strategic acumen in its Q1 2024 performance, leveraging its strong position in the healthcare real estate sector. The company's financials are underpinned by several key metrics and InvestingPro Tips that highlight its potential for growth and stability.
InvestingPro Data indicates a robust market capitalization of $660.03M, signaling investor confidence in CHCT's market presence. The P/E ratio stands at 41.77, which, while indicating a high earnings multiple, is complemented by a significant dividend yield of 6.94%, showcasing CHCT's commitment to returning value to shareholders.
The company's revenue growth over the last twelve months as of Q1 2023 was 15.53%, demonstrating a solid upward trajectory in earnings. This growth is paired with a gross profit margin of 81.64%, reflecting CHCT's efficiency in generating income from its operations.
InvestingPro Tips further enrich the narrative of CHCT's financial health. The company has raised its dividend for 9 consecutive years, which speaks to its dedication to providing consistent shareholder value. Additionally, net income is expected to grow this year, providing a positive outlook for investors.
For those considering an investment in Community Healthcare Trust Incorporated, there are 7 additional InvestingPro Tips available, offering deeper insights into CHCT's financial standing and future prospects. Interested readers can explore these tips and more at: https://www.investing.com/pro/CHCT.
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Full transcript - Community Healthcare Trust Inc (CHCT) Q1 2024:
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.
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?
William Monroe: There is a lot of movement from quarter-to-quarter, however we would expect there's some seasonality in the first quarter, but as we look at the changes to the compensation plan, those amortization schedules are over 36 months for kind of the long-term incentive awards. So those will remain, the cash salary will remain. So we typically see some movement in the second quarter versus the first quarter, but 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, 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. 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 similar to the impact of executive cash salaries this quarter, we would expect that 50% cash bonus to have an incremental impact AFFO of about $0.01 per quarter, right? Kind of $260,000, similar to what we announced here in the first quarter.
Rob Stevenson: 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 going to wind up running higher than that because of the way these comp programs work with GAAP.
William Monroe: That's right. It is -- while executive compensation will be lower -- compensation is not the same as GAAP expense, and so there is a significant amount of kind of non-cash compensation and amortization that we will continue to have going forward.
Rob Stevenson: All right. That's helpful. And then Dave, One last one for me. When you're talking about the development assets that are closing in ‘25, ‘26, ‘27, Why is it as far out as ‘27? Did some new development get added to the pipeline or was there some sort of significant delay? Seems awfully far out into the future. I respect that even a high-rise Manhattan development could be completed by ‘27 at this point. So just curious what's taking that one in the -- and I don't know when -- if the ‘26 one is a back half of ’26, but for you know sort of more suburban assets it seems like an awfully long cycle there.
Dave Dupuy: 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 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 push back on some, 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 the deals, it typically takes at least a couple of years. And 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 have these two new facilities that we literally just signed up a net one new for that pipeline.
Rob Stevenson: Okay, that's helpful. Thank you guys. Appreciate the time this morning.
Dave Dupuy: Thanks, Rob.
Operator: [Operator Instructions] The next question comes from Jim Kammert with Evercore. Please go ahead.
Jim Kammert: Good morning, folks. It 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 leases? And were there any material increments or diminution to the leases? I presume they're pretty much assumed as they were, but any color there would be helpful.
Dave Dupuy: 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 Genesis Care. As you look at those new buyers, 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, receive adequate assurance as part of the bankruptcy process from Genesis Care on these assignments and look forward to working with these new tenants and feel good about those new tenants in those facilities. The two remaining properties that Genesis Care assumed after exiting from bankruptcy. Again, Genesis Care is in a much different leverage position than they were entering bankruptcy. And so again, receive adequate assurance around the new Genesis Care and look forward to working with them as well.
William Monroe: And Jim, we're actively working on lease extensions with these new tenants. And what I would say is, look, these leases had uncapped CPIs. And there's going to be a handful of leases that will probably for additional term -- will probably lower to make them more market because during COVID, those [lease rates] (ph) 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: 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 just plain devil's advocate looking where the stock and consensus implied cap rates around [8, 9] (ph) on the equity. I mean, presumably you could sell a number of your assets well inside of that. Just what's the philosophy there of asset sales versus equity just to try to think through your process, please?
Dave Dupuy: Yeah, the way – I appreciate the questions. The way we think about raising capital in this environment is still number one front-end of the revolver and raised into opportunistically raised 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. As Bill already mentioned, we expect to close on the sale of those assets held-for-sale and later in the second or third quarter, which is going to 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 when you sell a property, you're basically trading AFFO to de-lever. 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 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 the second half of the year, we may evaluate doing more.
Jim Kammert: Terrific. Thanks for your time. Thank you.
Dave Dupuy: Thanks, Jim.
Operator: The next question comes from Alex Fagan with Baird. Please go ahead.
Alex Fagan: 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?
William Monroe: Yeah, we are focused on kind of a modest financial policy and keeping our debt to total capitalization at modest levels. It was at 38% at March 31st. Right now we have $61 million available on our revolver, kind of as of [3/31] (ph). The next maturity is not until March of 2026, so we have a nice runway until there are any near term maturities. What we have historically done is both to turn out those revolver borrowings into a new term one, 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, we think that -- maybe we'll be in a lower interest rate environment, but that would kind of be the natural time that our revolver would look to be turned out.
Alex Fagan: That is helpful, thank you. Second one for me, and sorry if I missed this, but what are the expectations for the cash G&A and total G&A going forward throughout the year?
William Monroe: 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 outline that in our supplemental. The only 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 a $0.01 towards AFFO or $260,000.
Alex Fagan: Got it. That's helpful. That's it for me. Thank you.
William Monroe: Thanks, Alex.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to David Dupuy for any closing remarks.
Dave: Okay, thank you very much and thank you everybody for joining us today. I look forward to seeing everybody at NAREIT coming up in June.
Dupuy: Okay, thank you very much and thank you everybody for joining us today. I look forward to seeing everybody at NAREIT coming up in June.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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