Community Healthcare Trust Incorporated — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions.
Business context
The company is a healthcare-focused REIT that owns and acquires properties leased to healthcare providers. At quarter-end it reported approximately $358.0 million invested in 80 properties and a mortgage note, across 26 states, totaling approximately 1.8 million square feet. The owned-property portfolio was 92.1% leased.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $9.44 | $6.44 | $26.38 | $17.81 |
| Net income | $0.58 | $1.06 | $1.96 | $1.69 |
| Net income per diluted share | $0.02 | $0.08 | $0.10 | $0.16 |
| FFO | $5.12 | $4.56 | $14.69 | $11.33 |
| FFO per diluted share | $0.31 | $0.36 | $1.05 | $1.05 |
- Rental income rose to $8.01 million in Q3 and $21.97 million for the first nine months, primarily reflecting acquisitions. Nine-month tenant reimbursements were $3.62 million; mortgage interest was $0.77 million.
- Net margin was approximately 6.1% in Q3 2017 versus 16.5% in Q3 2016, and 7.4% for the first nine months versus 9.5% in 2016. These are calculated from reported revenue and net income.
- For the first nine months, operating cash flow was $15.36 million; investing cash outflow was $98.69 million; financing cash inflow was $99.24 million. Cash ended at $17.48 million, up from $1.57 million at year-end 2016.
- At September 30, total assets were $355.15 million, total liabilities $67.25 million, and stockholders’ equity $287.90 million. Debt, net, was $59.28 million. The company reported a 17.1% debt-to-total-book-capitalization ratio.
- The $150 million revolving facility was undrawn at quarter-end; $60 million of term loans were outstanding, with $40 million of additional term-loan capacity. Swaps fixed the term-loan rate at a weighted average of approximately 4.34%. The company reported compliance with its credit covenants.
Material changes versus comparable periods
- Q3 revenue increased approximately 47% year over year, but net income fell by $0.49 million. Higher operating costs, depreciation and amortization, and interest expense more than offset increased revenue.
- Nine-month revenue increased approximately 48% and net income increased approximately 16%. FFO rose, while FFO per diluted share was unchanged at $1.05.
- Property operating expenses and depreciation increased with portfolio growth. Nine-month interest expense rose to $2.90 million from $0.79 million, mainly reflecting the 2017 term loans and differing revolver balances between periods.
- The company acquired 22 properties during the first nine months for approximately $93 million, including a third-quarter purchase of two properties for approximately $28.3 million. It also issued 4,887,500 shares in July, receiving approximately $108.9 million net, and used proceeds in part to repay $58 million on its revolver.
Outlook, risks and unusual items
- No formal earnings or operating guidance is provided. Management described acquisition plans: four properties under agreement for about $20.3 million, with expected returns of 9%–10.5%, and three additional properties expected to be acquired after completion and occupancy for about $40.4 million. Closings and timing are not assured. Three further properties totaling $25.9 million were acquired after quarter-end through November 7, 2017.
- Management stated that liquidity was expected to be adequate, relying on cash, operating cash flow, debt capacity, and potential debt or equity issuance. It cautioned that financing may not be available in sufficient amounts or on acceptable terms. The company’s financing policy limits debt to 40% of total book capitalization.
- A borrower under the company’s $10.6 million mortgage note filed for bankruptcy in June 2017. No payments had been received during bankruptcy as of the filing; management recorded no impairment but said it would continue to assess collectability. Approximately $253,000 of accrued interest was past due.
- The company also funded a $5 million mezzanine loan to a tenant in connection with a Q3 property acquisition. The borrower was identified as a variable-interest entity; the company stated its maximum exposure was limited to the outstanding note.
- Quarter-end lease occupancy was 92.1%; approximately 40,000 square feet of leases expired or terminated in Q3, compared with approximately 20,000 square feet leased or renewed. Management noted that some contractual rent increases may trail inflation.
- The board declared a $0.395-per-share quarterly dividend after quarter-end, equivalent to an annualized $1.58. The filing notes that dividend capacity depends on cash generation and accretive investment opportunities. No material litigation was reported.
Important facts for investors to verify
- Collections and collateral developments for the bankrupt mortgage borrower, including recovery of past-due interest, and credit exposure under the $5 million mezzanine loan.
- Portfolio occupancy, lease expirations, tenant retention, and the effect of leasing activity on rental income.
- Whether acquisition pipeline transactions close on schedule and at stated returns, and how they are funded.
- Dividend coverage by operating cash flow and FFO, especially alongside acquisition spending and potential further equity issuance.
- Interest-rate hedge performance, available borrowing capacity, covenant compliance, and future financing costs.