Community Healthcare Trust Incorporated — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The company is a healthcare REIT that owns and acquires properties leased to healthcare providers. At quarter-end, it reported approximately $413.3 million invested in 89 properties, including one mortgage note, across 27 states; its portfolio was 91.2% leased.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $11.429 million | $8.007 million; up 42.7% |
| Net income | $1.872 million | $0.913 million; up 105.0% |
| Basic and diluted EPS | $0.09 | $0.07 |
| FFO per diluted share | $0.38 | $0.38 |
| Operating cash flow | $5.948 million | $4.555 million |
| Investing cash flow | $(16.349) million | $(29.235) million |
| Cash at period end | $2.285 million | $2.130 million at December 31, 2017 |
| Debt, net | $111.385 million | $93.353 million at December 31, 2017 |
Rental income increased 45.6% to $9.635 million; tenant reimbursements rose 27.7% to $1.440 million. Property operating expense was $2.364 million, general and administrative expense $1.193 million, depreciation and amortization $4.916 million, and interest expense $1.268 million. The filing does not report a profit-margin measure.
At March 31, debt comprised $100 million of term loans and $12 million drawn on a $150 million revolving facility, with $138 million of revolver capacity remaining. Debt to total book capitalization was approximately 28.5%; the company said it was in compliance with financial covenants. The term loans were fully drawn, and swaps fixed their weighted-average interest rate at approximately 4.45%. The company reported $279.610 million of stockholders’ equity.
Changes and operating developments
- Revenue growth was primarily acquisition-driven: acquisitions contributed approximately $3.6 million of the $3.4 million net revenue increase, with other revenue changes offsetting part of that contribution.
- The company acquired three properties totaling about 38,000 square feet for approximately $12.7 million; they were 100% leased at acquisition. It also invested $2.2 million in promissory notes.
- Operating expenses increased 30.4%, including higher property costs, corporate compensation and occupancy costs, and acquisition-related depreciation. Interest expense rose 112.4%, reflecting higher average borrowings and term-loan financing.
- During Q1, the company borrowed the remaining $40 million under its term loans and used the proceeds to repay $40 million of revolver borrowings. It also amended its credit facility, including reducing LIBOR pricing margins and increasing the swingline commitment; amendment fees were approximately $0.2 million.
- Quarterly dividends declared were $0.3975 per share, versus $0.3875 a year earlier. On May 3, 2018, the board declared a $0.40-per-share dividend, payable June 1.
Outlook, risks and unusual items
- No formal earnings or operating guidance is provided. Management said it expects liquidity needs to be met through cash, operating cash flow, its credit facility, and potential debt or equity issuance, while cautioning that financing may not be available on acceptable terms.
- The acquisition pipeline included two properties under definitive agreements for approximately $7.3 million, with expected returns of 9.0%–9.3% and anticipated Q2 2018 closings, subject to due diligence. Four additional properties, expected to be acquired after completion and occupancy, had an aggregate expected purchase price of approximately $76 million and an expected aggregate return of about 11%; closings were expected through 2019. Transactions were not assured.
- A borrower related to the $10.6 million mortgage note filed for bankruptcy in June 2017. The company recorded no mortgage interest in Q1 and said it did not believe a material impairment existed at March 31. Subsequent to quarter-end, on April 25, the company made a new $23 million loan to a newly formed company acquiring certain borrower assets. Promissory notes, related interest and fees, and approximately $6.7 million of mortgage principal and accrued interest were satisfied from loan proceeds; the company also received title to the previously financed property at an approximate $4.5 million valuation.
- Key disclosed risks include interest-rate and capital-market volatility, refinancing availability, healthcare-sector developments, competition, and the ability to complete acquisitions. The company uses interest-rate derivatives for hedging, not speculation; counterparty performance is a stated risk. No material litigation or material off-balance-sheet arrangements were reported.
- The company adopted new revenue-recognition guidance in 2018 with no change to previously reported amounts. It was still evaluating the expected impact of the new lease standard, effective for it in 2019.
Important facts for investors to verify
- Whether the post-quarter $23 million loan and borrower-asset transaction perform as expected, including the value and recovery of the property and related notes.
- Actual occupancy, lease expirations, tenant credit quality, and progress on the acquisition pipeline versus management’s expected timing and returns.
- Debt covenants, floating-rate exposure, swap coverage, refinancing needs, and access to remaining revolver capacity or capital markets.
- Dividend coverage by recurring cash generation; FFO is a supplemental, non-GAAP measure and is not equivalent to operating cash flow or cash available for dividends.
- Potential effects of the 2019 lease-accounting adoption and the company’s ongoing REIT qualification and distribution requirements.