Community Healthcare Trust Incorporated — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited interim results. The company is a healthcare REIT that owns and leases healthcare properties.
Business context
At quarter-end, the company held investments of approximately $869.5 million in 159 properties across 34 states, totaling about 3.4 million square feet. The portfolio was 90.3% leased, with a weighted-average remaining lease term of approximately 7.8 years. During the first half, leases covering approximately 239,000 square feet expired or were terminated, while approximately 247,000 square feet were leased or renewed.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $24.0 million | $22.7 million | $47.5 million | $44.1 million |
| Net income | $5.6 million | $5.7 million | $11.1 million | $11.0 million |
| Diluted EPS | $0.21 | $0.22 | $0.41 | $0.43 |
| Operating cash flow | Not presented separately | Not presented separately | $29.5 million | $28.1 million |
Q2 rental income rose 5.4% to $23.2 million; total revenue increased 6.0%, while net income declined 2.2%. For the first half, total revenue increased 7.8% and net income increased 0.8%, but diluted EPS fell from $0.43 to $0.41. The company attributed revenue growth mainly to property acquisitions and higher interest income from additional note funding. Expenses also rose: first-half general and administrative expense increased 20.4%, largely due to non-cash restricted-stock compensation, and depreciation and amortization increased 8.5%.
For Q2, management reported FFO of $13.7 million ($0.57 per diluted share) and AFFO of $15.0 million ($0.62 per diluted share), compared with $13.3 million ($0.56) and $13.9 million ($0.58), respectively, in Q2 2021. These are non-GAAP measures and may not be comparable with similarly named measures used by other companies.
At June 30, total assets were $786.0 million, total liabilities $313.1 million, and stockholders’ equity $473.0 million. Debt, net, was $291.7 million, up from $265.6 million at year-end 2021; cash and cash equivalents were $1.7 million, plus $0.7 million of restricted cash. The company had $38.0 million outstanding on its revolving facility and $112.0 million of remaining capacity. Term loans totaled $250.0 million and had a fixed weighted-average rate of approximately 3.79% through swaps; the revolver was floating-rate, with a 2.9% weighted-average rate at quarter-end. Debt to total capitalization, as defined by the company, was 31.9%; the company reported compliance with its credit-facility covenants.
Material changes and cash flows
- First-half acquisitions: three properties for approximately $29.3 million in aggregate purchase price, funded with approximately $28.7 million of cash consideration and credit-facility proceeds. The acquired properties were 100% leased at acquisition.
- First-half operating cash flow was $29.5 million, compared with $28.1 million. Investing activities used $33.8 million, down from $81.9 million, reflecting fewer/lower-value acquisitions and note funding. Financing activities provided $3.8 million, versus $56.2 million in 2021; 2022 included $26.0 million of revolving-credit borrowings and $22.0 million of dividends paid.
- Fair value of cash-flow hedges increased substantially: the company recorded $17.7 million of first-half other comprehensive income, versus $2.1 million in the prior-year period. This non-cash hedge valuation change increased equity; it is not net income. The company estimated that $3.3 million would be reclassified from accumulated other comprehensive income as a reduction to interest expense over the next 12 months.
Outlook, risks and contingencies
No quantified earnings or operating guidance was provided. Management said it expected liquidity needs to be met through cash on hand, operating cash flows, and debt or equity financing, but noted that financing may not be available on acceptable terms or in sufficient amounts. The company expected to close in the second half of 2022 on three properties under definitive agreements for approximately $23.4 million, with expected returns of 9.0%–9.72%. Five additional properties, to be acquired after completion and occupancy, had an expected aggregate price of approximately $117.5 million and expected return of approximately 10.25%; anticipated closings ranged from Q4 2022 to Q4 2023. Timing and completion of these transactions were not assured.
Other potential funding needs included up to approximately $9.4 million of tenant-improvement funding or reimbursement, subject to approval, and approximately $4.3 million of remaining capital-expenditure commitments. The company also disclosed $27.5 million of notes receivable, including loans to healthcare borrowers; it identified certain borrowers as variable-interest entities and stated its maximum exposure was limited to outstanding notes and stated commitments. Five properties, with an aggregate gross investment of approximately $28.1 million, had unexercised tenant purchase options exercisable at quarter-end.
Management cited risks including capital-market volatility, interest rates, refinancing, availability and cost of capital, healthcare-industry developments, competition, acquisition execution, and effects of COVID-19. It reported no pending or threatened litigation expected to have a material adverse effect, no material change in market-risk disclosures, and effective disclosure controls. The board declared a subsequent quarterly dividend of $0.4425 per share, payable August 26, 2022; this equates to an annualized rate of $1.77 per share.
Important facts for investors to verify
- Whether occupancy and leasing activity improve or weaken, and whether tenant performance supports contractual rents and collections.
- Whether the announced acquisition pipeline closes on schedule and at the stated expected returns, and how those purchases are financed.
- Interest-rate exposure, revolving-credit usage, debt maturities and covenant headroom, including the effectiveness and terms of the interest-rate swaps.
- Credit quality and repayment prospects for the $27.5 million of notes receivable, as well as potential funding under borrower commitments.
- Cash available after dividends and planned capital spending, including tenant-improvement and other contractual commitments.