Community Healthcare Trust Incorporated — Q3 2018 Form 10-Q
Business context and period: Healthcare REIT that owns and leases properties to healthcare providers. This unaudited report covers the quarter and nine months ended September 30, 2018; comparisons are with the same 2017 periods. At quarter-end, the portfolio comprised 93 properties in 28 states, approximately 2.1 million square feet, and was 89.3% leased.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $12.6 million | $9.4 million | $36.4 million | $26.4 million |
| Net income | $2.0 million | $0.6 million | $6.3 million | $2.0 million |
| Net income per diluted share | $0.10 | $0.02 | $0.31 | $0.10 |
| FFO per diluted share | $0.39 | $0.31 | $1.16 | $1.05 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $17.9 million | $15.4 million |
For the nine months, property operating expenses were $7.5 million, general and administrative expenses $4.1 million, depreciation and amortization $14.5 million, and interest expense $4.5 million. The filing does not provide a clear operating-margin figure.
At September 30, total assets were $415.3 million, total liabilities $136.0 million, and stockholders’ equity $279.3 million. Debt, net, was $127.4 million, versus $93.4 million at year-end 2017. Cash was $1.0 million; the $150 million revolving facility had $28 million drawn and $122 million of remaining capacity. Debt to total book capitalization was approximately 31.3%; the company reported covenant compliance. The $100 million term loans had a hedged fixed weighted-average rate of approximately 4.45%; the revolving facility’s weighted-average rate was approximately 4.29%. Its stated financing policy limits debt to 40% of total book capitalization.
Nine-month investing cash outflow was $38.0 million, including $26.8 million of cash real estate acquisitions, $4.8 million of note funding, and $4.2 million of property capital expenditures. Financing cash inflow was $19.0 million; dividends paid were $21.9 million. Quarterly dividends declared rose from $0.3925 per share in Q3 2017 to $0.4025 in Q3 2018. A $0.4050 per-share dividend was declared after quarter-end.
Material changes versus prior periods
- Q3 revenue increased 33.5% and net income increased 245.3%; nine-month revenue rose 38.1% and net income rose 221.1%. Management attributed growth principally to real estate acquisitions and interest on notes receivable.
- Q3 rental income rose 27.6%; nine-month rental income rose 36.9%. Property operating and general and administrative expenses also increased, reflecting portfolio growth and higher compensation and occupancy costs.
- Interest expense increased 50.6% for Q3 and 54.7% for the nine months, primarily because of term-loan borrowings, including the additional $40 million drawn in March 2018.
- FFO increased to $6.9 million in Q3 from $5.1 million, and to $20.7 million for the nine months from $14.7 million. FFO is a non-GAAP supplemental measure and is not cash flow or a substitute for GAAP earnings.
- Real estate investments increased from approximately $358.0 million at September 30, 2017 to $424.2 million at September 30, 2018. The company acquired eight properties during the first nine months of 2018.
Outlook, risks, and unusual items
- No earnings or operating guidance is provided. Management said it expected 11 properties under definitive purchase agreements, totaling approximately $24 million, to close in Q4 2018, subject to due diligence and closing uncertainty. Five additional properties, expected to cost approximately $103 million, were anticipated to close through the end of 2019, also subject to completion, occupancy, and execution risks. Expected aggregate returns were 9.0%–9.5% and 9.4%–11.0%, respectively.
- Management expected to fund investments with operating cash, the credit facility, or additional debt or equity. In August 2018 it established a $100 million at-the-market equity program; $7.1 million of net proceeds had been raised by quarter-end, with approximately $92.7 million remaining under the program.
- A $23 million loan made in April to a newly formed company helped finance acquisition of healthcare assets from a borrower in bankruptcy. The company also received title to a property valued at approximately $4.5 million in settlement of part of its prior mortgage exposure and recognized no impairment. Notes receivable totaled $28.0 million at quarter-end; the filing identifies maximum exposure of $5 million and $23 million for two VIE borrowers.
- After quarter-end, the company sold a 61,000-square-foot physician clinic for net proceeds of approximately $3.2 million and expected to recognize a gain. It also declared the $0.4050 per-share dividend.
- Principal disclosed risks include interest-rate and capital-market volatility, refinancing availability and terms, healthcare-sector developments, acquisition execution, and tenant or borrower performance. The company reported no material pending or threatened litigation and no material off-balance-sheet arrangements. The revolving facility matures in August 2019, subject to two conditional 12-month extension options.
Important facts for investors to verify
- Lease occupancy, tenant credit quality, lease expirations, and the status and funding needs of the acquisition pipeline.
- Borrower credit and collateral performance for the $23 million and $5 million notes receivable, including the bankruptcy-related restructuring and foreclosure valuation.
- Debt maturities, extension conditions, covenant headroom, interest-rate exposure, and refinancing plans.
- Dividend coverage by recurring cash flow and FFO; FFO is not equivalent to cash available for dividends.
- Future equity issuance under the ATM program and its effect on per-share results and shareholder dilution.