Community Healthcare Trust Incorporated — Q2 2021 Form 10-Q
Business context and reporting period. The company is a healthcare REIT that owns and acquires properties leased to healthcare providers. This unaudited filing covers the quarter and six months ended June 30, 2021, compared with the corresponding 2020 periods. At quarter-end, its portfolio comprised 149 properties across 33 states, approximately 3.3 million square feet, and was 89.4% leased, with an approximately 8.1-year weighted-average remaining lease term.
Financial performance and position
- Q2 revenue: $22.7 million, up 24.1% year over year; rental income was $22.0 million. Six-month revenue: $44.1 million, up 21.7%.
- Q2 net income: $5.7 million, up 26.2%; diluted EPS was $0.22 versus $0.19. Six-month net income: $11.0 million, up 27.8%; diluted EPS was $0.43 versus $0.37.
- Q2 operating measures: NOI was $18.9 million versus $15.1 million; FFO was $13.3 million ($0.56 per diluted share) versus $11.0 million ($0.51); AFFO was $13.9 million ($0.58 per diluted share) versus $11.4 million ($0.52). These are non-GAAP measures as defined by the company.
- Cash flow: Six-month operating cash flow was $28.1 million versus $23.7 million. Investing used $81.9 million, principally for property acquisitions and notes receivable; financing provided $56.2 million. Cash and restricted cash totaled $5.3 million at June 30.
- Debt and liquidity: Debt, net, was $258.5 million versus $212.4 million at December 31, 2020. The company had $5.0 million drawn and $145.0 million of remaining capacity on its $150 million revolving facility. The reported debt-to-total-capitalization ratio was approximately 31.0%; the company was in compliance with its credit covenants.
- Balance sheet: Total assets were $745.5 million and stockholders’ equity was $457.1 million. The company reported $25.5 million of notes receivable. Its stated maximum exposure to loss on identified borrower VIEs was $25.3 million, limited to outstanding notes.
- Dividends: The company paid $20.8 million during the first half. In July, the board declared a quarterly dividend of $0.4325 per share, equivalent to $1.73 annualized.
Changes versus the prior comparable period
- Management attributed most revenue growth to property acquisitions and interest earned on newly issued notes receivable. The company acquired eight properties in the first half for approximately $69.3 million, with aggregate occupancy of 98.7% at acquisition.
- Q2 property operating costs rose 19.2%, general and administrative costs rose 52.3%, and depreciation and amortization rose 23.2%. Management cited acquisitions and higher compensation-related costs, including stock-based compensation.
- Q2 interest expense increased 25.3%, which management attributed to the March 2021 credit-facility refinancing. The six-month increase was 12.0%.
- The March refinancing repaid the $50 million A-1 term loan and added a $125 million seven-year A-4 term loan. Six-month financing also included $31.8 million of ATM share proceeds; shares outstanding increased from 23.9 million at year-end to 24.7 million at June 30.
Outlook, risks, contingencies, and unusual items
- No earnings or operating guidance was provided. Management said liquidity needs are expected to be met from cash on hand, operating cash flow, debt, and equity sources, but noted that financing may not be available in sufficient amounts or on acceptable terms.
- The company had two properties under definitive purchase agreements for approximately $8.5 million, with expected returns of 9.0%–9.3%, and four future properties expected to cost approximately $94 million, with expected returns of approximately 10.25%. Closing dates and completion remain uncertain. A further $3.7 million acquisition closed after quarter-end.
- A tenant exercised a purchase option on a medical office building held for sale. The company expected a third-quarter 2021 closing and anticipated a gain; the filing does not provide a clear estimate of that gain.
- COVID-19 continues to pose risks to healthcare tenants. Deferrals had been agreed with 18 tenants, representing less than 1% of annualized rent; approximately $34,000 remained to be billed and paid in the rest of 2021.
- Interest-rate exposure is managed with swaps covering $250 million of term loans; the swapped weighted-average rate was approximately 3.95%. The company estimated $4.4 million would be reclassified from accumulated other comprehensive loss into interest expense over the next 12 months. Derivative liabilities were $9.7 million at quarter-end.
- Potential obligations include up to approximately $6.2 million of tenant improvements, approximately $1.1 million of contracted capital expenditures, and ground-lease obligations. Management reported no known pending or threatened litigation expected to have a material adverse effect.
- Forward-looking risks include capital-market access, refinancing, interest rates, economic and healthcare-industry conditions, acquisitions, and pandemic effects. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether portfolio occupancy and tenant rent collections remain stable, particularly given ongoing COVID-19 and healthcare-provider risks.
- Acquisition closings, expected returns, funding sources, and the potential gain and timing of the held-for-sale property disposition.
- Debt maturities, covenant headroom, interest-rate swap exposure, and the availability and cost of revolving, ATM, or other capital.
- Cash-flow coverage of dividends and planned investment, including the effect of share issuance and the company’s non-GAAP FFO/AFFO definitions.
- Repayment and credit quality of the $25.5 million notes receivable, including the additional discretionary funding contemplated for one borrower.