Community Healthcare Trust Incorporated — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; dollar amounts below are in millions unless stated otherwise. The company is a healthcare REIT. At quarter-end it owned 111 properties in 32 states, totaling approximately 2.5 million square feet; the portfolio was 89.3% leased.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $16.3 | $12.5 | $44.0 | $36.4 |
| Net income | $2.6 | $2.0 | $6.2 | $6.3 |
| Basic and diluted EPS | $0.12 | $0.10 | $0.28 | $0.31 |
| Operating cash flow | Not separately presented for the quarter | $23.2 | $17.9 | |
| FFO per diluted share | $0.44 | $0.39 | $1.20 | $1.16 |
Q3 net margin, calculated as net income divided by revenue, was approximately 16.3%, versus 15.9% a year earlier. The nine-month net margin was approximately 14.0%, versus 17.3%. FFO was $8.5 million for Q3 and $22.6 million for the nine-month period; FFO is a non-GAAP REIT performance measure, not a substitute for operating cash flow.
At September 30, 2019, total assets were $533.1 million, net real estate was $494.7 million, and total liabilities were $232.1 million. Debt, net, was $215.5 million, compared with $147.8 million at December 31, 2018. Cash and cash equivalents were $1.7 million, with $0.2 million of restricted cash. The company reported $113.8 million of remaining revolving-credit capacity, a 36.6% debt-to-total-capitalization ratio, and compliance with its credit-facility covenants.
Nine-month investing cash outflow was $118.3 million, principally reflecting $115.6 million of real estate acquisitions. Financing cash inflow was $94.7 million, including $75.0 million of term-loan borrowings and $51.6 million of ATM equity proceeds; dividends paid were $23.5 million. Dividends paid exceeded operating cash flow by approximately $0.3 million.
Changes versus the prior comparable periods
- Revenue rose 29.7% in Q3 and 21.0% for the first nine months, primarily due to property acquisitions. Real estate investments increased to $566.3 million from $424.2 million at September 30, 2018.
- Q3 net income increased 32.4%; nine-month net income decreased 2.0% despite higher revenue, as interest and operating expenses increased.
- Interest expense increased 51.1% in Q3 and 51.5% year to date, reflecting higher debt balances and, for the year-to-date period, interest on an assumed mortgage.
- Common shares issued and outstanding rose to 20.2 million from 18.6 million at year-end 2018, including ATM issuance and stock-based awards.
- Other comprehensive loss was $7.5 million for the nine-month period, primarily reflecting a $7.3 million decrease in the fair value of cash-flow hedges; this reduced comprehensive income to a loss of $1.3 million despite positive net income.
Debt, outlook, and notable items
- The March 2019 credit-facility amendment added a $75.0 million A-3 term loan, extended the revolving facility maturity to March 2023, and revised pricing and covenants. The $175.0 million in term loans was fully drawn and had a swap-fixed weighted-average rate of approximately 4.569%; revolving borrowings bear floating rates.
- Seven interest-rate derivatives hedged $175.0 million of notional principal. The company estimated that $1.1 million of accumulated hedge losses would be reclassified to interest expense over the next 12 months. A covenant breach tied to the derivatives could have required settlement of approximately $7.2 million at quarter-end.
- No formal earnings guidance is provided. Management stated that available liquidity and capital sources were expected to meet requirements, while cautioning that funding might not be available on acceptable terms or in sufficient amounts.
- After quarter-end, the company acquired seven properties for approximately $34.8 million; they were 100% leased in aggregate. It also disclosed three properties under definitive agreements, with an expected purchase price of approximately $68.0 million and projected aggregate returns of 9.5%–11.0%; closing timing and completion are not assured.
- Highland Hospital was under new-operator management while licenses and other assets were being transferred. A pre-packaged bankruptcy and sale to the operator were anticipated; the company received approximately $0.3 million monthly and said it did not expect a material adverse long-term effect, but could not assure completion or timing.
- The board declared a $0.4150-per-share quarterly dividend after quarter-end, equivalent to an annualized $1.66 per share. Dividend capacity depends on cash generation and accretive investment activity.
- The company expected to lose emerging-growth-company status and become a large accelerated filer at year-end 2019, bringing additional disclosure and auditor-attestation requirements and potentially higher compliance costs. LIBOR transition was also identified as a risk to credit-facility rates.
Key investor verification points
- Assess whether acquisition-driven revenue and FFO growth can translate into sustainable per-share earnings, given higher interest, property, and corporate expenses.
- Review lease occupancy, tenant credit and retention, and the status and economics of the Highland Hospital transition.
- Evaluate leverage, floating-rate exposure, hedge fair-value movements, covenant headroom, and the company’s ability to fund planned acquisitions without excessive debt or equity issuance.
- Compare dividends with recurring operating cash flow and confirm the funding source for future distributions and investment commitments.
- Track execution of the $68.0 million acquisition pipeline, the subsequent acquisitions, and the expected compliance-cost and internal-control implications of filer-status changes.