Community Healthcare Trust Incorporated — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also presents fourth-quarter results and comparative 2016 and 2015 information. The company is a healthcare real estate investment trust (REIT) that owns and acquires properties leased to healthcare providers.
Business context and portfolio
- At year-end, the company reported $399.1 million of healthcare real estate investments across 86 investments, including 85 owned properties and one mortgage note, in 26 states. The owned portfolio totaled over 2.0 million square feet and was 91.7% leased, with a 7.4-year weighted-average remaining lease term.
- Portfolio types included medical office buildings, physician clinics, surgical centers and hospitals, specialty centers, and behavioral facilities. No tenant represented 10% or more of annual revenue.
- Illinois, Ohio, and Florida together generated 36.5% of 2017 revenue, creating geographic concentration.
Financial results and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $37.3 million | $25.2 million |
| Net income | $3.5 million | $2.7 million |
| Diluted earnings per share | $0.19 | $0.24 |
| Funds from operations (FFO) | $21.2 million; $1.41 per diluted share | $15.9 million; $1.41 per diluted share |
| Cash from operating activities | $22.1 million | $14.9 million |
| Cash used in investing activities | $147.6 million | $117.1 million |
| Dividends paid | $24.4 million; $1.565 per share | $17.8 million; $1.525 per share |
| Total assets | $385.8 million | $251.5 million |
| Debt, net of financing costs | $93.4 million | $51.0 million |
| Cash and cash equivalents | $2.1 million | $1.6 million |
- Revenue grew 48.2%, primarily from acquisitions. Rental income rose 63.5% to $31.1 million; mortgage interest declined 37.5% to $1.0 million.
- Total expenses increased 40.5% to $30.0 million, including depreciation and amortization of $17.7 million and property operating expenses of $8.7 million. Interest expense rose to $3.9 million from $1.2 million. Net margin was approximately 9.4% of revenue, versus 10.8% in 2016.
- Net income increased 29.0%, but diluted EPS fell from $0.24 to $0.19 as weighted-average shares increased following equity issuance. FFO per diluted share was unchanged at $1.41.
- Operating cash flow increased, but was below cash dividends paid in 2017. The company says it expects to fund liquidity needs with cash, operating cash flow, its credit facility, and debt or equity offerings; it acknowledges external capital access is not assured.
- At year-end, $34.0 million was outstanding on the revolving facility, with $116.0 million of stated remaining capacity; $60.0 million was outstanding on term loans, with $40.0 million of remaining borrowing capacity. The revolver rate was approximately 3.95%; term loans were fixed through swaps at a weighted average of approximately 4.34%. Debt was 24.8% of book capitalization. The company reported compliance with credit-facility covenants.
Material changes and notable items
- The company acquired 28 properties in 2017 for approximately $133.5 million in cash consideration and invested in or purchased notes. It also completed a July public offering of 4.89 million shares, generating approximately $108.6 million in net proceeds, used partly to repay $58.0 million of revolving debt and partly for investments.
- A borrower on the company’s $10.6 million mortgage note filed for bankruptcy in June 2017; no payments were received during the bankruptcy. The company also bought $11.45 million face value of borrower-related notes for $8.75 million. An amended exit plan contemplated refinancing the notes, an additional $5.35 million company funding commitment, and transfer of the mortgaged property by deed in lieu of foreclosure. Court confirmation and completion remained uncertain at the filing date. The company recorded no impairment based on its then-current estimate of expected cash flows.
- 2017 dividends were $1.565 per share, compared with $1.525 in 2016. A $0.3975 quarterly dividend was declared in February 2018, payable in March.
- The December 2017 Tax Cuts and Jobs Act reduced the corporate tax rate applicable to the company’s taxable REIT subsidiary from 35% to 21% beginning in 2018. The company was still evaluating other effects.
Outlook, risks, and contingencies
- No earnings or FFO guidance was provided. Management described three properties under purchase agreements totaling approximately $16.8 million, with anticipated first-quarter 2018 closings and expected returns of 9.0%–9.6%. Three additional properties, expected to cost approximately $40.4 million after completion and occupancy, were targeted for closings during 2018, with expected aggregate returns up to approximately 11%. Timing and completion were not assured.
- Management expects many leases expiring in 2018 to renew or be re-leased, but 9.1% of annualized lease revenue was associated with 2018 expirations and 10.7% with 2019 expirations. Specialized healthcare space and smaller-market locations may be harder to re-lease.
- Key risks include tenant defaults or weakened finances, healthcare reimbursement and regulatory changes, regional economic concentration, acquisition competition and execution, reliance on external capital, variable-rate borrowing, REIT qualification, and potential uninsured property or environmental losses. Healthcare providers’ regulatory and operating risks may affect their ability to pay rent.
- The company reported no material pending litigation, no off-balance-sheet arrangements reasonably likely to materially affect its financial condition, and no impairment charges in 2017. Its auditor gave an unqualified opinion on the financial statements; management assessed internal control over financial reporting as effective. The auditor did not attest to internal controls because the company qualified for emerging-growth-company exemptions.
Important facts for investors to verify
- Progress and final recovery under the bankrupt borrower’s exit plan, including court approval, the additional funding, note repayment, and deed-in-lieu transfer.
- Whether operating cash flow can support dividends and investment needs, given 2017 operating cash flow was below dividends paid and the company relies on external financing.
- Acquisition closings, realized returns, occupancy, and leasing outcomes—especially for 2018–2019 lease expirations and properties in Illinois, Ohio, and Florida.
- Credit-facility availability, covenant headroom, refinancing requirements, and exposure to interest-rate changes.
- Changes in tenant credit quality, healthcare reimbursement, regulatory requirements, and REIT/tax rules that could affect rent collections or distributions.