Community Healthcare Trust Incorporated — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The company is a healthcare REIT focused on properties leased to healthcare providers, primarily in non-urban markets. At quarter-end, it reported investments of approximately $293.2 million across 68 properties and a mortgage note, in 24 states.
Financial results and position
| Metric | Q1 2017 | Q1 2016 / prior period |
|---|---|---|
| Total revenue | $8.007 million | $5.166 million |
| Net income | $913,000 | $116,000 |
| Net income per diluted share | $0.07 | $0.02 |
| FFO / diluted FFO per share | $4.834 million / $0.38 | $2.929 million / $0.39 |
| Operating cash flow | $4.555 million | $2.586 million |
| Cash and cash equivalents | $2.044 million | $1.568 million at Dec. 31, 2016 |
| Total assets | $277.773 million | $251.529 million at Dec. 31, 2016 |
| Debt, net | $81.235 million | $51.000 million at Dec. 31, 2016 |
| Dividends declared per common share | $0.3875 | $0.3775 |
Revenue grew about 55% year over year, led by rental income, which increased to $6.618 million from $3.673 million. Tenant reimbursements were $1.128 million, while mortgage interest declined to $261,000 from $536,000. Net income margin was approximately 11.4%, versus 2.2% a year earlier. Property operating expenses were $1.738 million, depreciation and amortization $3.924 million, and interest expense $597,000. The filing does not present a conventional operating-margin measure.
Investing activities used $29.235 million, mainly for acquisitions; financing activities provided $25.156 million. The company ended the quarter with $2.044 million of cash. Its reported debt-to-total-book-capitalization ratio was approximately 29.9%, below its stated 40% financing-policy limit.
Material changes and developments
- Q1 results were significantly affected by portfolio growth: investments in real estate and mortgage notes were approximately $293.2 million at March 31, 2017, versus $183.0 million a year earlier. The company acquired ten properties totaling about 145,000 square feet for approximately $28.5 million, plus an adjacent property for $0.9 million.
- The company entered a new credit facility on March 29, 2017: a $150 million revolver and $100 million in term loans, with an accordion allowing total borrowings up to $450 million. At quarter-end, $22 million was drawn on the revolver and $60 million on term loans; stated remaining capacity was $128 million and $40 million, respectively.
- Two interest-rate swaps covered $60 million of term-loan notional. The swaps fixed term-loan rates in a range of 4.147%–4.535%. The quarter included a $152,000 accumulated other comprehensive loss related to cash-flow hedges; approximately $482,000 was expected to be reclassified to interest expense over the following 12 months.
- FFO increased, but diluted FFO per share declined to $0.38 from $0.39, while the quarterly dividend declared rose to $0.3875 per share. The quarter’s declared dividend therefore slightly exceeded FFO per share.
Outlook, risks and other notable items
- Management said liquidity needs are expected to be met through cash on hand, operating cash flow, debt and equity financing, but noted funding may not be available on acceptable terms or in sufficient amounts. No formal earnings or acquisition guidance was provided.
- At March 31, the portfolio was approximately 92.2% leased. About 10.8% of annualized rent was scheduled to expire during the remainder of 2017; management expects renewals but acknowledges re-leasing risk. Leases generally run five to seven years for physician and other healthcare-provider tenants.
- Three properties were under definitive purchase agreements for an expected aggregate price of approximately $15.3 million, with an expected return of approximately 9.0%; closing and timing were not assured. Through May 9, the company had also acquired six fully leased properties for approximately $4.1 million, funded with revolver proceeds.
- Key risks include tenant credit and collections, healthcare-industry and real-estate conditions, interest-rate movements, refinancing and capital-market access, and swap-counterparty performance or hedge effectiveness. Bad-debt expense was $67,000, related to several tenants. Management reported compliance with credit-facility financial covenants and no material off-balance-sheet arrangements.
- The company reported no pending or threatened litigation expected to have a material adverse effect. Its board declared a $0.39-per-share quarterly dividend on May 4, payable June 2, 2017.
Investor verification points
- Review acquisition-level occupancy, lease terms, tenant credit quality, and the 2017 lease-expiration exposure.
- Assess dividend sustainability against recurring cash flow and FFO, noting Q1 FFO per share was below the dividend declared per share.
- Verify debt availability, covenant headroom, floating-rate exposure, and the actual effect of the swaps on borrowing costs.
- Track receivables and bad debts, including whether tenant payment issues persist, and confirm the expected acquisitions close on stated terms.