Community Healthcare Trust Incorporated — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Community Healthcare Trust is a healthcare REIT that owns and leases properties to healthcare providers. At quarter-end, it held 124 properties across 33 states, with approximately 2.7 million square feet; the portfolio was 89.5% leased.
Financial performance and position
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $17.94 | $13.44; up 33.4% |
| Operating income | $6.34 | $3.34; up 90.2% |
| Net income | $4.10 | $1.45; up 182.8% |
| Net income per diluted share | $0.18 | $0.06 |
| FFO per diluted share | $0.48 | $0.37 |
| Cash from operating activities | $10.25 | $7.33 |
| Cash and cash equivalents | $3.33 | $1.73 at Dec. 31, 2019 |
| Debt, net | $203.28 | $194.24 at Dec. 31, 2019 |
| Total assets / stockholders’ equity | $596.75 / $367.78 | $562.53 / $353.41 at Dec. 31, 2019 |
Operating margin was approximately 35.4%, versus 24.8% a year earlier; net margin was approximately 22.9%, versus 10.8%. These margins are calculated from reported revenue and income. Investing activities used $35.51 million, principally for acquisitions; financing activities provided $26.84 million. Cash, cash equivalents and restricted cash together totaled $3.61 million at quarter-end.
The company reported a $8.62 million other comprehensive loss, primarily from a decline in the fair value of cash-flow hedges. The related derivative liability was $13.43 million; management estimated a further $3.4 million would be reclassified from accumulated OCI to interest expense over the next 12 months. This hedge valuation change is distinct from reported net income.
Changes and capital allocation
- Revenue growth was mainly attributable to acquisitions; real estate investments increased to $641.9 million from $478.4 million a year earlier.
- During Q1, the company acquired six properties for approximately $37.0 million in total purchase price ($36.4 million cash consideration). They were 98.2% leased at acquisition.
- Debt increased by approximately $9.0 million during the quarter through revolver borrowings. The company had $24.0 million outstanding on its $150 million revolving facility and approximately $126 million of remaining capacity. Its $175 million of term loans were fully drawn and hedged at a weighted-average fixed rate of approximately 4.569%.
- Debt to total capitalization was 31.1%; the company reported compliance with its credit-facility financial covenants at March 31. Its stated financing policy generally limits debt to 40% of total capitalization.
- The company issued 610,786 shares through its ATM program for net proceeds of approximately $26.9 million. It paid $9.0 million in dividends; the Q1 dividend was $0.4175 per share.
Outlook, risks and notable items
- COVID-19: Management said healthcare tenants had varying effects, including lower elective procedures and patient visits for some providers. The company entered into or was negotiating rent-deferral agreements with several tenants, generally deferring two to three months of base rent while tenants continued paying operating expenses. Repayment was generally expected from insurance or CARES Act program proceeds, with remaining balances paid in installments in Q3 and Q4 2020. Collection and the pandemic’s ultimate financial impact remain uncertain.
- Acquisitions: Subsequent to quarter-end, the company acquired a fully leased property for approximately $3.9 million and expected to fund $1.5 million in tenant improvements. It also reported four properties under definitive agreements for approximately $9.9 million, expected to close in Q2 2020, and three more, expected to be acquired after completion and occupancy for approximately $68.0 million through the first half of 2021. Closings were not assured.
- Highland Hospital: Highland Hospital and related entities filed for bankruptcy on March 29, 2020. The company agreed to provide up to $3.65 million of debtor-in-possession financing and had a net investment of $550,000 in a note secured by hospital assets. Management did not anticipate a material adverse long-term effect but could not assure the timing or completion of the transition.
- Dividend and guidance: On May 4, the board declared a $0.42-per-share dividend, payable May 29, equivalent to an annualized $1.68. The filing provides no formal earnings or financial guidance. Management stated that liquidity sources were believed adequate, while noting that future capital availability and terms could not be assured.
- Key risks: COVID-19-related tenant distress, deferred-rent nonpayment, reduced healthcare activity, impaired access to debt or equity capital, acquisition delays, tenant bankruptcies, and refinancing risk. The company also had $21.4 million of notes receivable from a borrower secured by assets and ownership interests in healthcare facilities.
Important facts for investors to verify
- How many tenants received rent deferrals, the amounts deferred, and subsequent repayment and collection performance.
- Whether healthcare utilization and tenant operating cash flows recovered, and any resulting occupancy or lease changes.
- Progress and funding for the acquisition pipeline, including the post-quarter acquisition and planned tenant improvements.
- Highland Hospital’s bankruptcy, debtor-in-possession financing exposure, and timing of the new lease and asset transfer.
- Liquidity, revolver availability, covenant compliance, debt maturities, and the effect of derivative liabilities and hedge reclassifications.
- Dividend coverage from operating cash flow and FFO, noting that FFO is a supplemental measure and is not equivalent to cash available for distributions.