Community Healthcare Trust Incorporated — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. The company is a healthcare REIT that owns and leases healthcare properties. At quarter-end, it held 108 properties across 30 states, totaling approximately 2.4 million square feet; the portfolio was approximately 90.1% leased.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $14.3 million | $12.4 million | $27.8 million | $23.8 million |
| Net income | $2.1 million | $2.4 million | $3.5 million | $4.3 million |
| Basic and diluted EPS | $0.09 | $0.12 | $0.16 | $0.22 |
| FFO | $7.4 million | $7.0 million | $14.1 million | $13.8 million |
| FFO per diluted share | $0.40 | $0.40 | $0.76 | $0.78 |
Q2 rental income was $13.4 million, up 13.1%; other operating interest was $1.0 million, up 61.3%. For the first half, rental income rose 14.7% and other operating interest rose 58.4%. Revenue growth was mainly attributable to property acquisitions. Q2 net income fell 14.5% and first-half net income fell 18.0%, as expenses increased, particularly interest expense. Q2 interest expense rose 43.3% to $2.3 million; first-half expense rose 51.6% to $4.3 million. The company attributed the increases primarily to higher debt balances and borrowing costs. General and administrative and property operating costs also increased.
First-half cash from operations was $14.4 million, versus $13.0 million a year earlier. Investing used $64.8 million, principally for $63.4 million of property acquisitions; financing provided $57.3 million. Cash and restricted cash ended the period at $9.3 million. Dividends paid in the first half were $15.4 million, approximately $1.0 million more than operating cash flow; the shortfall was funded from the revolving credit facility.
Balance sheet, debt, and liquidity
- At June 30, 2019, total assets were $490.5 million, net real estate was $445.7 million, total liabilities were $211.4 million, and stockholders’ equity was $279.1 million.
- Debt, net, was $198.2 million, compared with $147.8 million at December 31, 2018. The company reported a 36.5% debt-to-total-capitalization ratio and a financing policy limit of 40%, except for short-term transitory periods.
- The amended credit facility includes a $150 million revolver and $175 million in term loans. At quarter-end, $19 million was drawn on the revolver, leaving approximately $131 million of capacity; all $175 million of term loans was drawn. The term loans had a swapped fixed weighted-average rate of approximately 4.569%. The company reported compliance with its financial covenants.
- Seven interest-rate derivatives hedged $175 million of borrowings. Their quarter-end fair-value liability was $4.8 million; the first-half unrealized hedge loss recorded in other comprehensive income was $5.2 million.
- Notes receivable totaled $23.8 million, mainly including a $23.0 million loan bearing 9% interest and secured by healthcare facility assets. The company identified the borrowers as variable interest entities but stated it was not their primary beneficiary.
Changes, outlook, and risks
- During the first half, the company acquired five properties for approximately $63.4 million in cash consideration. Q2 acquisitions comprised three properties, approximately 110,000 square feet, purchased for about $31.9 million; they were 97.1% leased at acquisition. One acquisition’s original structure resulted in approximately $0.4 million of May and June interest income being reported as other operating interest rather than rent.
- After quarter-end, the company acquired three additional properties for approximately $52.6 million, funded with operating cash and revolver borrowings. It also reported five properties under definitive agreements totaling approximately $15.8 million and four additional properties to be acquired after completion and occupancy for approximately $87.0 million. Closings and projected returns are not assured.
- The company declared a quarterly dividend of $0.4125 per share on August 1, 2019, payable August 30; the stated annualized rate is $1.65 per share. No formal earnings guidance is provided in the filing.
- Management said it expected adequate liquidity from cash, operations, and financing sources, while noting that funding may not be available in sufficient amounts or on acceptable terms. Acquisition activity, access to debt and equity capital, refinancing, interest rates, healthcare-sector developments, and tenant performance are relevant risks.
- Highlands Hospital was being managed by a new operator under a management agreement while license and asset transfers were pursued. A lease with the operator was expected to begin after transfer, anticipated in the second half of 2019; timing and completion were not assured. The company reported monthly payments of approximately $0.3 million and did not expect a material long-term adverse effect, but acknowledged short-term timing effects.
- The company expected to lose emerging-growth-company status and become a large accelerated filer as of December 31, 2019, bringing additional disclosure and auditor-attestation requirements and potentially higher compliance costs. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
- Topic 842 lease accounting was adopted January 1, 2019; adoption added a right-of-use asset and lease liability of approximately $0.1 million for one ground lease. The filing reported no pending or threatened litigation expected to have a material adverse effect.
Important facts for investors to verify
- Whether rent collections, occupancy, and tenant/borrower credit performance support the acquisition-driven revenue growth.
- How debt growth, revolving-facility usage, interest costs, covenant headroom, and the 40% leverage policy limit evolve as acquisitions are funded.
- Whether operating cash flow can sustainably cover dividends and planned investment needs; first-half dividends exceeded operating cash flow.
- Whether announced post-quarter acquisitions and pipeline transactions close as expected and achieve the company’s projected returns.
- Progress and cash-flow effects of the Highlands Hospital operator transition, and the implications of the derivative liability and future hedge-related interest expense.
- Read the full filing and prior annual report for complete risk factors; the filing refers investors to the 2018 Form 10-K for additional risks.