Community Healthcare Trust Incorporated — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company is a healthcare REIT that owns properties leased to healthcare providers. At quarter-end it held 161 properties across 34 states, with approximately $890.0 million invested, 90.8% occupancy and a 7.8-year weighted-average remaining lease term.
Financial performance and position
- Quarterly results: Total revenue was $24.8 million, up 6.7% year over year; net income was $5.7 million, up 6.0%. Basic and diluted EPS were $0.21 versus $0.20.
- Nine-month results: Total revenue was $72.3 million, up 7.4%; net income was $16.8 million, up 2.5%. EPS was $0.62 versus $0.63.
- Margins: Net income was 22.9% of revenue for Q3 versus 23.0% a year earlier, and 23.2% for the nine months versus 24.3%. Interest expense rose 8.6% for the quarter and 8.5% for the nine months.
- Cash flow: Nine-month operating cash flow was $44.9 million, compared with $41.4 million. Investing used $55.9 million and financing provided $11.5 million. Cash and restricted cash totaled $3.3 million at September 30.
- Debt and liquidity: Debt, net, was $310.8 million, up from $265.6 million at December 31, 2021. The company had $57.0 million drawn on its $150 million revolver, with $93.0 million available; it reported compliance with credit-facility covenants. Debt to total capitalization was approximately 32.8%.
- Portfolio and distributions: The company acquired five properties for approximately $46.8 million in purchase price during the nine months. Dividends were $1.32 per share for the nine-month period. After quarter-end, the board declared a $0.445-per-share quarterly dividend.
- Supplemental measures: Q3 FFO was $13.8 million ($0.57 per diluted share) and AFFO was $15.4 million ($0.63 per diluted share), versus $13.2 million and $14.3 million, respectively, in Q3 2021.
Changes versus prior comparable periods
Revenue growth was principally attributed to real estate acquisitions; other operating interest also increased as the company funded additional amounts under existing notes receivable. Expenses rose as well: property operating costs reflected acquisitions, general and administrative expense increased mainly due to non-cash restricted-stock compensation, and depreciation and amortization increased with acquisitions and capital spending. Higher revolver borrowings and interest rates, along with the prior-year term-loan refinancing, contributed to higher interest expense. Net income growth therefore lagged revenue growth over the first nine months.
Outlook, risks and unusual items
- Acquisition pipeline, not earnings guidance: Management reported 20 properties under definitive agreements for approximately $71.6 million, with expected returns of 9.0%–10.17% and anticipated closings in Q4 2022. Five additional properties, expected to be acquired after completion and occupancy, total approximately $117.5 million, with expected returns near 10.25% and anticipated closings during 2023. Timing and completion are not assured. Funding may include cash, ATM proceeds or revolver borrowings.
- Interest-rate and inflation exposure: The $57 million revolver is floating-rate debt. Management warned that persistent inflation could increase expenses, capital expenditures and variable-rate borrowing costs, and that higher rates could pressure real estate values. Swaps fixed the rate on $250 million of term loans at a weighted average of approximately 3.79%; the company had 12 cash-flow hedges. The swaps’ fair-value gain raised other comprehensive income, not current-period net income.
- Commitments and concentration considerations: Potential tenant-improvement funding was up to approximately $12.0 million, with $5.2 million of remaining capital-expenditure commitments. Notes receivable totaled $29.3 million, including loans to healthcare borrowers identified as variable-interest entities; the company said it was not their primary beneficiary.
- Other disclosures: Management said it was unaware of pending or threatened litigation expected to materially adversely affect the company. Disclosure controls were deemed effective, and no material changes to internal control were reported. The filing provides no formal earnings or full-year financial guidance.
Key facts for investors to verify
- Whether the acquisition pipeline closes on the expected schedule and how it is financed.
- Occupancy, lease renewals and rent collections, given reported occupancy of 90.8% and expiring or terminated leases of approximately 337,000 square feet during the first nine months.
- The effect of interest rates on revolver expense, debt capacity and the company’s ability to fund acquisitions while maintaining covenant compliance.
- Performance and collectability of the $29.3 million notes-receivable portfolio, including borrower exposure and any further funding commitments.
- Cash available for dividends and investment needs; the company states its dividend capacity depends on cash generation and accretive investment opportunities.