Community Healthcare Trust Incorporated — Q2 2017 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2017. The healthcare REIT owns and acquires properties leased to healthcare providers, primarily in non-urban markets. At quarter-end, it reported investments of approximately $329.3 million across 78 investments, including one mortgage note; its owned portfolio comprised 77 properties. The portfolio was approximately 92.7% leased.
Financial and operating metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $8.93 million | $6.20 million | $16.94 million | $11.36 million |
| Net income | $466,000 | $508,000 | $1.38 million | $624,000 |
| Diluted EPS | $0.04 | $0.04 | $0.11 | $0.06 |
| FFO | $4.74 million | $3.84 million | $9.58 million | $6.77 million |
| FFO per diluted share | $0.37 | $0.32 | $0.75 | $0.69 |
Q2 net margin, calculated as net income divided by revenue, was approximately 5.2%, compared with 8.2% a year earlier; the six-month figures were approximately 8.1% and 5.5%, respectively. The filing does not present a separate operating-margin measure. Six-month operating cash flow was $8.81 million, versus $6.94 million. Investing cash outflow was $65.18 million and financing cash inflow was $55.63 million.
At June 30, cash was $831,000; debt, net, was $117.25 million; total liabilities were $123.84 million; and total assets were $309.26 million. Debt to total book capitalization was 38.7%, against the company’s stated 40% financing-policy limit. The revolving facility had $58 million drawn and $92 million of capacity; term loans had $60 million drawn and $40 million of remaining capacity. The term-loan rate was fixed under swaps at a weighted average 4.34%; the revolver’s weighted average rate was 3.45%.
Material changes versus prior comparable period
- Q2 revenue rose 44%, chiefly from property acquisitions; net income declined by $42,000. Q2 FFO increased 24%.
- For the first half, revenue increased 49% and net income more than doubled. Acquisitions drove rental growth, while increased depreciation and interest expense offset part of the gains.
- Interest expense rose to $1.21 million in Q2 from $222,000, and to $1.81 million for the half-year from $602,000, reflecting higher borrowing.
- In the first half, the company acquired 20 properties for approximately $64.7 million, plus an adjacent property for $0.9 million intended for future office expansion. Q2 acquisitions included 10 properties, approximately 203,000 square feet, acquired for about $36.2 million and 100% leased in aggregate.
- Six-month dividends declared were $0.7775 per share, versus $0.7575 in 2016. Stockholders’ equity was $185.41 million at June 30, compared with $194.01 million at year-end 2016.
Outlook, commentary, risks, and unusual items
- Management said liquidity and capital sources were adequate for expected needs, relying on cash, operating cash flow, and access to debt and equity markets. It gave no quantitative earnings or acquisition guidance.
- After quarter-end, the company completed a July 26 offering of 4,887,500 shares, receiving approximately $108.9 million net. It used $58 million to repay the revolver; the balance is intended for future investments and general corporate and working-capital purposes. Shares outstanding were 18,008,663 at July 31, versus 13,121,163 at June 30.
- The only mortgage-note borrower filed for bankruptcy on June 23. The note’s net balance was approximately $10.5 million; the borrower was current at June 30, and management believed the note collectible based on available information, while acknowledging recovery was not assured.
- Interest-rate swaps hedging $60 million of term loans had a $436,000 fair-value liability recorded in other comprehensive loss. The company estimated that $404,000 would be reclassified to interest expense over the next 12 months.
- The board declared a quarterly dividend of $0.3925 per share, payable September 1, 2017. Management noted that dividend capacity depends on cash generation and accretive investments; REIT status requires distributions of at least 90% of taxable income.
- Other stated risks include capital-market and interest-rate changes, refinancing and acquisition execution, healthcare-sector developments, tenant and lease risks, and real-estate values. The company reported compliance with credit-facility covenants, no material off-balance-sheet arrangements, and no known litigation expected to materially affect results.
Important facts for investors to verify
- Developments in the borrower’s bankruptcy, collateral value, payment status, and ultimate recovery on the $10.5 million mortgage note.
- Post-offering share dilution and the deployment and returns on the remaining equity proceeds, alongside the resulting reduction in revolving debt.
- Portfolio occupancy, tenant credit quality, lease expirations, and the operating contribution from recent acquisitions.
- Interest costs, hedge valuation and reclassifications, covenant headroom, and capacity to sustain dividends while funding growth.