Community Healthcare Trust Incorporated — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report. Financial statements are audited; the auditor issued an unqualified opinion.
Business context
Community Healthcare Trust is a healthcare real estate investment trust (REIT) that owns and leases properties to healthcare providers. At year-end, it had 103 properties in 29 states, approximately 2.2 million square feet, and $444.9 million of gross real estate investments. The portfolio was 88.8% leased, with a weighted-average remaining lease term of approximately 6.8 years. No individual tenant generated 10% or more of annual revenue.
Key financial results
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $48.630 million | $37.343 million | Up 30.2% |
| Net income | $4.403 million | $3.510 million | Up $0.893 million |
| Diluted earnings per share | $0.19 | $0.19 | Unchanged |
| Funds from operations (FFO) | $23.769 million | $21.224 million | Up 12.0% |
| Diluted FFO per share | $1.32 | $1.41 | Down 6.4% |
| Cash from operating activities | $24.441 million | $22.127 million | Up 10.5% |
| Dividends paid | $29.375 million | $24.432 million | Up 20.2% |
Revenue growth mainly reflected contributions from properties acquired in 2017 and 2018. Rental income rose 29.2% to $40.149 million; tenant reimbursements increased 25.8% to $6.377 million. Net income margin was approximately 9.1%, compared with 9.4% in 2017. FFO is a non-GAAP supplemental measure and is not equivalent to cash flow available for distributions.
Balance sheet, debt and liquidity
- Total assets were $426.570 million, versus $385.766 million in 2017; net real estate was $389.632 million.
- Debt, net of financing costs, was $147.766 million, compared with $93.353 million. Year-end cash and cash equivalents were $2.007 million, plus $0.385 million of restricted cash.
- The company reported $43.0 million drawn on its $150 million revolving facility, leaving $107 million available, and $100 million drawn on term loans. Term-loan interest was fixed through swaps at a weighted-average rate of approximately 4.45%; the revolver’s weighted-average rate was 4.41%.
- The revolving facility was scheduled to mature August 9, 2019, with two 12-month extension options subject to conditions. The company said it complied with its debt covenants and its internal policy generally limiting debt to 40% of book capitalization.
- Debt-to-book capitalization was reported as 35.2%. The filing also states debt was 34.6% of total assets; these are different measures.
Material changes and unusual items
- The company acquired 19 properties in 2018 for an aggregate purchase price of approximately $55.1 million. It sold a physician clinic for net proceeds of approximately $3.2 million and recorded a $0.3 million gain.
- A $5.0 million mezzanine loan associated with Highlands Hospital was fully impaired after the prior operator experienced payment issues and the company arranged a transition to a new operator. The impairment reduced annual net income; the company recorded a related tax benefit. It also did not recognize approximately $0.3 million of rent, reimbursements and fees and approximately $0.2 million of interest and fees due during 2018, and wrote off approximately $0.2 million of straight-line rent.
- Fourth-quarter 2018 net loss was $1.885 million, including the note impairment and related tax benefit; annual net income remained positive at $4.403 million.
- Geographic exposure was concentrated in Illinois, Ohio and Florida, which together generated 42.4% of 2018 consolidated revenue (18.9%, 13.4% and 10.1%, respectively).
Outlook, risks and contingencies
Management expected the Highlands transition and license transfer to conclude by the end of the second quarter of 2019. The new lease was signed, and the company said transition payments approximated the prior rent plus interest on the impaired loan; it did not anticipate a material ongoing adverse effect on cash flows or net income, while noting possible short-term timing effects.
Management reported five properties under definitive purchase agreements, expected to cost approximately $103 million, with estimated returns of 9.4%–11.0%; closings were anticipated through 2019 but were not assured. In February 2019, the company acquired two additional properties for approximately $32.7 million, fully leased at acquisition. Management identified cash from operations, the credit facility, and future debt or equity offerings as potential funding sources. No formal earnings or FFO guidance is provided in the filing.
- Dividend payments exceeded annual FFO in 2018: $29.375 million of dividends paid versus $23.769 million of FFO. The board declared a quarterly dividend of $0.4075 per share in February 2019; future dividends remain discretionary and depend on cash flows and investment activity.
- Leasing risk includes 38 leases scheduled to expire in 2019, representing 9.6% of annualized lease revenue, and 37 in 2020, representing 9.1%.
- Key risks include tenant defaults or non-renewals, healthcare reimbursement and regulatory changes, geographic and healthcare-sector concentration, access to external capital, refinancing and interest-rate exposure, and REIT qualification requirements.
- The company reported no litigation known to be material to its financial position, results or cash flows. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end. The company remained an emerging growth company and therefore had no auditor attestation on internal controls.
Important facts for investors to verify
- Whether the Highlands license transfer and new lease became effective as expected, and whether outstanding amounts from the former operator were collected.
- How the company addressed the August 2019 revolving-facility maturity, including any extensions, refinancing, or replacement financing.
- Whether the $103 million acquisition pipeline closed on schedule and at the stated expected returns, and how those investments were financed.
- Whether recurring operating cash flow supports the dividend, given 2018 dividends exceeded FFO and diluted FFO per share declined year over year.
- Tenant and lease exposure by property, particularly upcoming expirations and the concentration of revenue in Illinois, Ohio and Florida.
- The credit quality, collateral and collectability of notes receivable, including the $23 million Newco loan and the remaining Highlands-related exposure.