Community Healthcare Trust Incorporated — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; filed November 10, 2016. The company is a healthcare-focused REIT owning and acquiring properties leased to healthcare providers, primarily in non-urban markets. At quarter-end, it reported 51 owned properties and one mortgage note, with investments of approximately $217.6 million across 20 states.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $6.44 million | $3.24 million | $17.81 million | $4.08 million |
| Net income (loss) | $1.06 million | $(0.07) million | $1.69 million | $(1.58) million |
| Diluted EPS | $0.08 | $(0.01) | $0.16 | $(0.42) |
| FFO | $4.56 million | $2.14 million | $11.33 million | $1.21 million |
| FFO per diluted share | $0.36 | $0.29 | $1.05 | $0.32 |
| Cash from operations | Not separately stated for the quarter | $10.80 million | $1.47 million |
Net income margin, calculated as net income divided by revenue, was approximately 16.5% for Q3 2016 versus negative 2.1% in Q3 2015, and 9.5% for the first nine months of 2016 versus negative 38.7% in the prior-year period. FFO is a non-GAAP supplemental measure and is not equivalent to operating cash flow or cash available for dividends.
- Revenue mix: Q3 rental income was $4.99 million, tenant reimbursements $1.19 million, and mortgage interest $0.27 million. Nine-month amounts were $13.19 million, $3.25 million, and $1.37 million, respectively.
- Costs: Q3 property operating expense was $0.96 million, general and administrative expense $0.67 million, depreciation and amortization $3.50 million, and bad debt expense $0.07 million. Nine-month totals were $3.24 million, $2.37 million, $9.64 million, and $0.10 million, respectively.
- Balance sheet and liquidity: At September 30, cash was $1.74 million, total assets $208.60 million, and total liabilities $10.85 million. The revolving facility had $5.0 million drawn and $145.0 million of remaining capacity. Management reported a 2.5% debt-to-total-book-capitalization ratio and approximately 4.75% weighted-average interest rate; the company was in compliance with facility covenants.
- Cash flows: Nine-month investing cash outflow was $71.78 million, primarily reflecting acquisitions, mortgage funding, and capital expenditures. Financing provided $60.70 million, including $86.8 million net proceeds from the April share offering, offset in part by $12.0 million of net credit-facility repayments and $12.78 million in dividends. Cash declined $0.28 million from year-end 2015.
- Dividends: Dividends declared were $0.3825 per share for Q3 and $1.14 per share year to date. A subsequent quarterly dividend of $0.385 per share was declared, equivalent to a $1.54 annualized rate. REIT status generally requires distribution of at least 90% of taxable income.
Material changes and operating developments
- Revenue rose sharply against 2015 as the portfolio expanded following the company’s 2015 IPO and subsequent acquisitions. Management attributed period-to-period results primarily to the growth in properties and mortgage investments; the comparisons are not solely same-property performance.
- During the first nine months of 2016, the company acquired 11 properties for an aggregate purchase price of approximately $71.1 million, including cash consideration and conversion of a $12.5 million mortgage note. Four additional properties acquired in Q3 cost approximately $12.1 million and were fully leased at acquisition.
- In April 2016, the company issued 5.175 million shares in a follow-on offering, receiving approximately $86.8 million net of underwriting discount. Common shares outstanding were 12,988,482 at September 30, compared with 7,596,940 at December 31, 2015.
- In August, the credit facility’s maximum capacity increased from $75 million to $150 million, its maturity was extended to August 2019 with two conditional extension options, and borrowing rates were reduced by 25 basis points. The facility permits an accordion increase up to $275 million, subject to conditions.
- Portfolio occupancy was approximately 92.4% at quarter-end. Approximately 13.8% of annualized rent was scheduled to expire in 2017; management said leases expiring during the remainder of 2016 had been renewed or re-leased.
Outlook, risks, and unusual items
- The company had seven properties under definitive purchase agreements, with expected aggregate purchase price of approximately $50.2 million and anticipated returns of 9.0%–9.7%. Due diligence remained underway, and closing, timing, and returns were not assured. A further property was acquired after quarter-end for approximately $3.3 million, funded through the credit facility.
- Management stated it expects liquidity needs to be met through cash on hand, operating cash flow, and access to debt or equity financing, but cautioned that funding may not be available on acceptable terms or in sufficient amounts. It identified capital-market conditions, interest rates, refinancing, healthcare-sector developments, competition, acquisition execution, and lease renewals as relevant risks.
- Contingent purchase consideration adjustments reduced property operating expense by approximately $0.5 million in Q3 and $1.0 million year to date. The company also recorded a new $0.5 million contingent liability during the first nine months; total acquisition-related contingent liabilities were $0.7 million at quarter-end, with measurement periods ending December 2016 through April 2017.
- Bad debt expense was $0.07 million in Q3 and $0.10 million year to date, relating to four and eight tenants, respectively. The company reported no material pending or threatened litigation and no material off-balance-sheet arrangements. It had not entered into interest-rate hedges as of quarter-end.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No numerical earnings or FFO guidance was provided.
Important facts for investors to verify
- Whether the reported 92.4% occupancy and 2017 lease expirations translate into sustained rent collection, renewals, and comparable-property growth.
- Whether the acquisition pipeline closes as expected, at the stated prices and returns, and how acquisitions are funded without materially increasing leverage or share dilution.
- The collectability and terms of the mortgage note portfolio, including the transition from interest-only to principal-and-interest payments on the remaining note.
- Whether operating cash flow supports the dividend as the portfolio expands; FFO should not be treated as cash flow or dividend coverage without further reconciliation.
- The sensitivity of results and borrowing costs to floating rates, credit-facility availability, and covenant requirements, as well as the final impact of contingent consideration adjustments.