Community Healthcare Trust Incorporated — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report; selected fourth-quarter results are also summarized below. CHCT is a healthcare real estate investment trust (REIT) that owns properties leased to healthcare providers.
Business context and portfolio
- At year-end, the company owned 118 properties in 32 states, with approximately 2.6 million square feet and $602.9 million of gross real estate investments. The portfolio was 89.8% leased, with a 7.7-year weighted-average remaining lease term.
- During 2019, CHCT acquired 15 properties for approximately $152.0 million, including $150.0 million in cash consideration. Acquired properties were 99.5% leased at acquisition.
- No tenant represented 10% or more of revenue. Properties in Texas, Illinois and Ohio generated 40.7% of 2019 revenue combined, creating geographic concentration.
Financial results and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $60.8 million | $48.6 million | +25.3% |
| Operating expenses | $42.2 million | $35.1 million | +20.1% |
| Income before interest, tax and other items | $18.7 million | $13.4 million | +38.9% |
| Net income | $8.4 million | $4.4 million | +90.2% |
| Diluted net income per share | $0.37 | $0.19 | Higher |
| FFO | $32.1 million | $27.4 million | +16.9% |
| Diluted FFO per share | $1.67 | $1.53 | Higher |
| Cash from operating activities | $32.4 million | $24.4 million | Higher |
- Revenue growth primarily reflected acquisitions: 2019 acquisitions contributed about $8.5 million, and 2018 acquisitions contributed an additional $4.3 million year over year. Operating margin before interest, tax and other items was approximately 30.7% of revenue.
- Interest expense rose 47.7% to $9.3 million, primarily due to higher term-loan borrowings. General and administrative costs increased 37.0% to $7.7 million, including higher compensation, occupancy and public-company compliance costs.
- Cash used in investing activities was $153.2 million, primarily for acquisitions. Cash provided by financing activities was $120.4 million, including $106.8 million of net ATM equity proceeds. Cash, cash equivalents and restricted cash totaled $2.0 million at year-end.
- Reported debt, net of financing costs, was $194.2 million; principal outstanding included $190.0 million under the credit facility and a $5.2 million mortgage note. Debt-to-total-capitalization was 31.1%. The company had $135 million of unused revolving capacity and reported compliance with credit-facility covenants.
- The $175 million of term loans was fixed through interest-rate swaps at a weighted-average rate of approximately 4.57%; the $15 million revolving balance was variable-rate, at approximately 3.45% at year-end.
- Dividends paid were $1.645 per share, up from $1.605. FFO per diluted share was $1.67. The board declared a $0.4175 quarterly dividend in February 2020.
Changes, outlook and unusual items
- Fourth-quarter 2019 revenue was $16.8 million and net income was $2.2 million, compared with $12.2 million revenue and a $1.9 million net loss in fourth-quarter 2018. The prior-year quarter included a $5.0 million impairment of a mezzanine note. Fourth-quarter 2019 included a $1.3 million impairment of the related deferred tax asset, reversing the prior-year tax benefit.
- Management reported no material long-term cash-flow or net-income impact expected from the Highland Hospital transition. Highland was expected to file a pre-packaged bankruptcy in early 2020 to facilitate a sale and license transfer; CHCT may provide liquidity secured by hospital assets if needed. Completion and timing were not assured.
- Subsequent to year-end, CHCT acquired three properties for approximately $11.7 million. It also reported two properties under purchase agreement for $6.3 million and four properties to be acquired after completion and occupancy for $73.4 million; expected returns were approximately 9.4%–11.0%. These transactions remained subject to conditions and could be funded with operating cash, credit-facility borrowings, or debt or equity offerings.
- No formal earnings or FFO guidance was provided. Management expects to continue acquisitions and believes available liquidity and capital sources are adequate, while noting that external financing may not be available on acceptable terms.
- Key risks include tenant defaults or non-renewals, healthcare reimbursement and regulatory changes, specialized-space re-leasing challenges, geographic concentration, acquisition competition, access to capital, interest rates and REIT qualification. The company also noted LIBOR transition risk for credit-facility contracts.
Investor facts to verify
- Track occupancy, rent collections, lease renewals and the 2020–2021 expirations, which represented 9.0% and 6.1% of annualized lease revenue, respectively.
- Assess Highland Hospital’s bankruptcy, sale, license transfer, lease commencement and any liquidity support actually required.
- Review the execution, occupancy and funding of the announced acquisition pipeline, including potential additional debt or equity issuance and dilution.
- Compare cash flow available for dividends with the $31.9 million of dividends paid, and monitor dividend coverage as the portfolio expands.
- Monitor the $23.5 million of notes receivable to a healthcare operator, secured by assets and ownership interests in eight facilities and bearing 9% interest, along with borrower performance and collateral value.
- Review interest-rate exposure, swap values and credit-facility maturities/covenants. The filing reports an approximately $4.8 million swap liability and $1.1 million expected to be reclassified to interest expense over the next 12 months.
Audit: The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The auditor identified sale-and-leaseback accounting judgments as a critical audit matter.