Community Healthcare Trust Incorporated — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts are in millions of dollars unless stated otherwise. The company is a healthcare-focused REIT leasing properties to healthcare providers, primarily in non-urban markets. Results versus 2015 are affected by the company’s May 2015 IPO and subsequent portfolio expansion.
Business context and portfolio
- At June 30, 2016, the company reported investments of approximately $205.0 million across 47 owned properties and one mortgage note, in 18 states, totaling about 1.1 million square feet.
- The portfolio was approximately 93.0% leased. Leases generally run through 2031; annualized rent expirations were 7.2% for the remainder of 2016 and 12.2% for 2017.
- During the first half, the company acquired seven properties. Second-quarter acquisitions totaled about $33.5 million, including conversion of a $12.5 million mortgage note into property ownership.
Financial performance and position
| Metric | Q2 2016 | Six months 2016 | Comparable 2015 |
|---|---|---|---|
| Revenue | $6.196 | $11.362 | $0.836 for each period |
| Net income (loss) | $0.508 | $0.624 | $(1.509) for each period |
| Basic/diluted EPS | $0.04 | $0.06 | $(0.42) / $(0.80) |
| FFO / diluted FFO per share | $3.838 / $0.32 | $6.768 / $0.69 | $(0.932) / $(0.26) for each period |
| Operating cash flow | Not separately stated | $6.936 | $(0.233) |
- Q2 net margin was approximately 8.2%; first-half net margin was approximately 5.5%. Depreciation and amortization was $3.332 million in Q2 and $6.147 million in the first half.
- First-half revenue growth reflected more properties and mortgage interest income. Q2 revenue comprised $4.530 million rental income, $1.105 million tenant reimbursements and $0.561 million mortgage interest.
- First-half investing cash outflow was $59.345 million; financing cash inflow was $61.311 million. Cash increased by $8.902 million to $10.920 million.
- Total assets were $207.613 million, versus $142.803 million at year-end 2015. Total liabilities were $6.146 million, and no revolving-facility borrowings were outstanding at June 30; the company had repaid $17.0 million during the half.
- At June 30, the original revolving facility had $75 million capacity and no outstanding balance. On August 10, after quarter-end, it was amended to $150 million capacity, with potential accordion capacity up to $275 million. The amendment extended maturity to August 9, 2019, reduced pricing by 25 basis points, and incurred $0.55 million in fees.
- Dividends declared were $0.38 per share in Q2 and $0.7575 per share in the first half. A $0.3825 quarterly dividend was declared August 4, equivalent to an annualized $1.53 per share.
Material changes and management commentary
- Revenue increased substantially from the 2015 comparison, while the company moved from a net loss to net income. The comparison is not like-for-like: 2015 included only a partial period of operations following the IPO, and the portfolio expanded materially.
- First-half G&A was $1.701 million versus $1.603 million; management cited lower transaction costs than in the comparable period, partly offset by costs of operating the expanded company. Q2 property operating expense included a $0.3 million reduction from contingent purchase-price adjustments; the first-half reduction was about $0.5 million.
- Management said liquidity needs are expected to be met through cash on hand, operating cash flow and debt or equity financing, but noted those funding sources may not always be available on acceptable terms. The company’s stated financing policy limits debt to 40% of total book capitalization.
- Four properties were under definitive purchase agreements, with expected aggregate price of about $13.4 million and expected returns of 9.16%–9.97%; closing timing and completion were not assured.
- Management expects lease expirations of approximately 10%–20% annually over time and believes many tenants will renew; it expects to re-lease nonrenewed space in most cases without significant rental-income loss. These are expectations, not guarantees.
Risks, contingencies and other items
- One acquisition included contingent consideration of up to $0.5 million; the company recorded an estimated liability of approximately $0.487 million. Total acquisition-related contingent liabilities were approximately $1.2 million at June 30, with measurement periods extending through April 2017.
- The company had one mortgage note outstanding at June 30, with $11.0 million principal, maturing September 30, 2026. It is interest-only through September 2016, after which principal and interest payments are due.
- The company had no hedging activity as of June 30 and is exposed to interest-rate movements on future borrowings. It reported compliance with facility covenants.
- The filing identifies no pending or threatened litigation expected to have a material adverse effect and no material off-balance-sheet arrangements. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- The company is a REIT and must distribute at least 90% of REIT taxable income to maintain that status. Its ability to pay dividends depends on cash generation and making accretive investments.
- No formal earnings or operating guidance is provided. Management was evaluating the impact of newly issued accounting standards on leases, revenue recognition and credit losses.
Important facts for investors to verify
- Whether reported portfolio occupancy and tenant collections remain strong, particularly as leases expire in 2016–2017.
- Whether the four pending acquisitions close at the stated prices and expected returns, and whether acquisition growth translates into sustainable operating cash flow and FFO.
- How the amended credit facility’s variable rates, covenants, unused-capacity fees and $0.55 million amendment cost affect future financing costs and liquidity.
- Whether contingent consideration estimates, including the approximately $0.487 million acquisition liability, change as contingencies are resolved.
- Dividend coverage from recurring cash flow, considering the REIT distribution requirement and the company’s ongoing acquisition and capital needs.