Community Healthcare Trust Incorporated — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The company is a healthcare-property REIT leasing facilities to healthcare providers. At quarter-end, it held 91 properties in 27 states, totaling approximately 2.1 million square feet; the portfolio was 89.3% leased. Unless noted otherwise, financial figures below are in millions of dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $12.40 | $8.93 | $23.83 | $16.94 |
| Net income | $2.42 | $0.47 | $4.29 | $1.38 |
| Net income per share, diluted | $0.12 | $0.04 | $0.22 | $0.11 |
| FFO | $7.04 | $4.74 | $13.82 | $9.58 |
| FFO per diluted share | $0.40 | $0.37 | $0.78 | $0.75 |
Calculated net income margin was approximately 19.5% in Q2 2018 versus 5.2% a year earlier, and 18.0% for the first half versus 8.1%. Management attributed revenue growth principally to property acquisitions and interest earned on notes receivable. FFO is a supplemental REIT measure, not a substitute for GAAP earnings or operating cash flow.
Cash flow, balance sheet and capital
- First-half operating cash flow was $13.0 million, compared with $8.8 million in 2017. Investing used $30.7 million, versus $65.2 million; financing provided $17.3 million, versus $55.6 million. Cash declined by $0.35 million to $1.78 million.
- At June 30, total assets were $410.8 million, net real estate was $371.1 million, other assets were $37.9 million, total liabilities were $134.4 million, and stockholders’ equity was $276.4 million.
- Debt, net, was $125.4 million, up from $93.4 million at year-end 2017. This comprised $100 million of term loans and $26 million drawn on the revolving facility. Remaining revolver availability was $124 million; the company reported a 31.2% debt-to-total-book-capitalization ratio and compliance with debt covenants.
- The term loans’ $100 million balance was fixed through swaps at a weighted-average rate of approximately 4.45%. The $26 million revolver balance carried a floating rate averaging approximately 4.6%. The revolver matures in August 2019, with two conditional 12-month extension options.
- Dividends declared were $0.40 per share for Q2 and $0.7975 per share for the first half. The board subsequently declared $0.4025 per share, equivalent to an annualized $1.61, payable August 31, 2018.
Material changes and notable transactions
- Q2 revenue rose 38.9% and net income rose 418.7% year over year; first-half revenue increased 40.7% and net income 211.0%. Growth chiefly reflects portfolio expansion, while expenses and interest costs also increased.
- In the first half, the company acquired six properties for approximately $24.4 million in aggregate consideration, including $20.1 million cash and $4.5 million of real estate received in foreclosure. Q2 acquisitions comprised three properties totaling about 68,000 square feet; one was not yet leased and was subject to a signed term sheet. A separate July 30 acquisition added a fully leased 17,000-square-foot property for approximately $3.5 million.
- In April, the company extended a $23 million loan to Newco, secured by assets and ownership interests in eight healthcare facilities. The transaction facilitated Newco’s acquisition of certain assets of a distressed borrower. The company also received title to a property previously securing its mortgage note, valued at approximately $4.5 million; it reported no impairment.
- The portfolio’s leased percentage was 89.3%. During the first half, approximately 58,000 square feet of leases expired or terminated, while approximately 109,000 square feet were leased or renewed.
Outlook, risks and contingencies
No formal earnings or financial guidance is provided. Management said liquidity and capital sources were believed adequate, relying on cash on hand, operating cash flow, borrowing capacity, and potential debt or equity issuance; availability and acceptable terms are not assured. The company had one property under contract for approximately $3.2 million and five properties to be acquired after completion and occupancy for approximately $103 million, with expected returns of 9.4%–11.0%; timing and completion are not assured. The company described its acquisition funding plans as including operating cash, credit-facility proceeds, or additional debt or equity.
Key risks include refinancing and capital-market access, interest-rate and general economic changes, healthcare-industry developments, acquisition execution, tenant and borrower performance, and lease occupancy. The $23 million Newco note and a separate $5 million tenant note are identified as variable-interest-entity exposures; the company is not the primary beneficiary and states maximum exposure is limited to the outstanding note balances. Management reported no material pending or threatened litigation and no material off-balance-sheet arrangements. It also noted that future lease-accounting adoption effects were still being evaluated.
Important facts for investors to verify
- Whether occupancy and leasing at the property awaiting a negotiated lease improved, and how portfolio occupancy changed after quarter-end.
- Borrower repayment performance and credit quality of the $23 million Newco loan and the $5 million tenant note, including collateral and concentration exposure.
- Progress, funding and expected returns for the approximately $103 million acquisition pipeline, and whether contracted acquisitions close as planned.
- Debt maturity and refinancing plans, floating-rate exposure, covenant headroom, and the sustainability of dividends relative to operating cash flow and REIT taxable income.