CHCT - NYSE

Welcome to Community Healthcare Trust’s 2023 First Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2023 first quarter financial results. It will also discuss progress made in various aspects of its business. [Operator Instructions] The company’s earnings release was distributed last evening and has also been posted on its website, www.chct.reit. The company wants to emphasize that some of the information that may be discussed on this call will be based on information as of today, May 3, 2023 and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the company’s disclosures regarding forward-looking statements in its earnings release as well as its risk factors and MD&A and its SEC filings. The company undertakes no obligation to update forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. During this call, the company will discuss GAAP and non-GAAP financial measures. A reconciliation between the 2 is available in its earnings release, which is posted on its website. Call participants are advised that this conference call is being recorded for playback purposes. An archive of the call will be made available on the company’s Investor Relations website for approximately 30 days and is the property of the company. This call may not be recorded or otherwise reproduced or distributed without the company’s prior written permission. Now I would like to turn the call over to David Dupuy, CEO of Community Healthcare Trust. Please go ahead.

Great. Thanks, Gary. Good morning and thank you for joining us today for our 2023 first quarter conference call. On the call with me today is Leigh Ann Stach, our Chief Accounting Officer and Tim Meyer, our EVP of Asset Management. The CHCT family had an incredibly difficult and emotional quarter with the loss of the company’s founder, Chairman and CEO, Tim Wallace. Tim was a great leader but also a friend and mentor to me and many others. I have received many heartfelt calls, letters and e-mails of support from colleagues and friends expressing their sympathy and remembering Tim. His presence and leadership will be missed, but he built a top-notch team that I am now fortunate to lead. I am grateful for the support I’ve received from our Board of Directors, employees and investors, and I look forward to carrying on being mindful of Tim’s legacy as the company’s new CEO. Our earnings announcement and supplemental data report were released last night and filed with an 8-K. Our quarterly report on Form 10-Q was filed last night. In addition, an updated investor presentation was posted to our website last night. The extraordinary events of the first quarter required everyone on the team to step up and fill the void left by Tim. I am proud of how our executive, accounting and asset management teams responded to these challenges while still delivering a good service to our tenants and continued growth for our shareholders. We are seeing steady acquisition activity and our acquisition pipeline continues to build. Occupancy was stable at 91.6% and we continue to see good leasing activity. Our weighted average remaining lease term declined slightly from 7.6 to 7.4 years. On another front, one of our clients, Everest Rehabilitation sold the operations of 4 of its inpatient rehab hospitals to LifePoint Health in February. And now LifePoint is our new tenant in these 4 buildings. As part of this transaction, LifePoint can acquire future buildings from Everest upon completion and Medicare licensure. We believe this gives credence to the quality of Everest buildings and operations. In the first quarter, we acquired 7 properties with a total of approximately 162,000 square feet for a purchase price of $23.4 million. The properties were 100% leased with leases running through 2031 and anticipated annual returns of approximately 9.2% to 10.6%. The company has 4 properties under definitive purchase agreements for an aggregate expected purchase price of $19.7 million and expected returns of approximately 9.2% to 9.3%. The company is currently performing due diligence and expects to close on these properties in the second quarter. The company signed three additional purchase and sale agreements with Everest this quarter and now has signed agreements for 9 properties to be acquired after completion and occupancy for an aggregate expected investment of $214.5 million. The expected return on these investments could range up to 10.25%, and we expect to close on these properties throughout 2023, 2024 and 2025. We continue to have many properties under review and have term sheets out on several properties with indicative returns of 9% to 10%. We anticipate having enough availability on our credit facilities and through our banking relationships to fund our acquisitions and we expect to continue to opportunistically utilize the ATM to strategically access the equity markets. Also, we declared our dividend for the fourth quarter and raised it to $0.45 per common share. This equates to an annualized dividend of $1.80 per share, and we continue to be proud to say we have raised our dividend every quarter since our IPO. That takes care of the items I wanted to cover, so I’ll hand things off to Leigh Ann to discuss the numbers.

Thank you, Dave, and good morning, everyone. I’m pleased to report that total revenue grew from $23.5 million in the first quarter of ‘22 to $27.2 million in the first quarter of 2023, representing 15.7% growth over the same period last year. Revenue for the fourth quarter of 2022 was $25.3 million, representing 7.2% sequential growth. On a pro forma basis, if all the 2023 first quarter acquisitions had occurred on the first day of the quarter, total revenue would have increased by an additional $383,000 to pro forma total of $27.6 million in the first quarter. From an expense perspective, property operating expenses increased quarter-over-quarter from $4.2 million in the fourth quarter of 2022 to $4.9 million in the first quarter of 2023 or 17.3%. The increase in property operating expenses was mainly due to expenses on properties acquired as well as increases in property taxes and other normal fluctuations occurring from period to period. G&A increased from $4.1 million to $16.2 million sequentially. G&A for the first quarter of 2023 included the non-cash accelerated amortization of Mr. Wallace’s unvested shares totaling $11.8 million. This accelerated amortization – excluding this accelerated amortization, G&A increased $0.3 million quarter-over-quarter or 6.2%. Increases in G&A were driven primarily by increases in compensation from annual salary increases as well as professional fees associated with the passing of Mr. Wallace. Also, interest expense increased from $3.5 million to $4 million or 15.2% sequentially. This increase was due to the credit facility refinancing in December of ‘22 in which we added on a net basis, $100 million in term loans as well as increases in interest rates. Funds from operations, or FFO, for the first quarter of 2023 was $2.2 million, which includes the non-cash accelerated amortization of Mr. Wallace’s unvested shares totaling $11.8 million as compared to FFO of $13.5 million in the first quarter of 2022. On a per share basis, FFO was $0.09 per diluted share in the first quarter of 2023 compared to $0.56 per diluted share in the first quarter of 2022. The non-cash amortization of Mr. Wallace’s unvested shares recognized in the first quarter of 2023 reduced FFO per diluted share by $0.47. Adjusted funds from operations, or AFFO, which adjusts for straight-line rent and stock-based compensation, including the accelerated amortization of Mr. Wallace’s unvested shares totaled $15.6 million compared with $14.8 million in the first quarter of 2022 or 5.2% growth year-over-year. On a per share basis, AFFO increased from $0.61 per diluted share in the first quarter of ‘22 to $0.62 per diluted share in the first quarter of 2023 or 1.6% growth. Finally, FFO for the fourth quarter of 2022 was $15.4 million, representing a $0.012, 2% increase on a sequential basis and down on a per share basis by $0.01 per diluted share. On a pro forma perspective, if all of the first quarter acquisitions occurred on the first day of the first quarter, AFFO would have increased by approximately $214,000 to a pro forma total of $15.8 million or about $0.01 per diluted share. That’s all I have for the numbers perspective. Operator, we are ready to start the question-and-answer session.

[Operator Instructions] Our first question is from Rob Stevenson with Janney. Please go ahead.

Good morning. Dave, how does the breakdown of the nine properties totaling $215 million of completion breakdown in terms of expected ‘23, ‘24 and ‘25 in terms of taking possession and you guys needing to fund?

Yes. So based on the information we have today – and good morning, Rob. Thanks for the question. Based on the information we have today, we are expecting two of those facilities to close in this year. And then we’re expecting four to close in 2024, and the remaining three would close in 2025.

Okay. And are any of those outsized? Are they all sort of roughly, call it, $20 million, $25 million assets?

Yes, they are all in that range consistent with what we’ve done in the past.

Okay. Alright. And then how do you guys look at the credit quality of LifePoint compared to where Everest used to be?

Look, I think LifePoint obviously did a large take-private transaction a few years ago, Apollo is their private equity sponsor. My guess is LifePoint over the next 12 to 18 months will be exploring an IPO as Apollo looks to get out of the deal. I think it’s a pickup in credit from our perspective. And we think it – like I said in the prepared remarks, we think it really gives credence to the quality of the buildings, frankly, the locations and the operations of Everest. So we think this is a great transaction. Obviously, for the folks at Everest, it really validates what they are doing. But we also think it validates our partnership with Everest, and we’re very excited about it.

Okay. And then last one for me. Where are you seeing cap rates trend these days? What was it on the first quarter acquisitions? It looks like that the four properties for $20 million are sort of low 9s. And then what’s coming across your desk these days in terms of pipeline for the back half of the year?

It’s really consistent with that 9% to 10% range. Occasionally, we will see opportunities north of 10%. Usually, there is a story associated with those properties such as shorter-dated leases or some other dynamic that might make the cap rate a little bit higher. But in general, we’re seeing really consistent trends in that – call it, 9.25%, up to 10.25% range. And from our perspective, those are right down the middle of the fairway for us. And so those are attractive yields, and we will continue to go after those opportunities.

Okay. So you haven’t seen any big ballooning from the – what’s going on with the banks and other capital sources and pricing these days to really expand that much beyond about a 10% cap rate at this point.

That’s right. That’s right. And look, we’re going to continue to obviously try to drive the best yield we can. But I think to the extent people have an asset that would yield north of that 10.5% range, my guess is they’d look to hold it for a while and not look to sell. But again, we think that 9.25% to 10.25% is right down the middle of the fairway.

Okay. Perfect. Thanks. Appreciate the time this morning.

Great. Thank you.

The next question is from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hi, good morning and yes, obviously, condolences on Tim. So Dave, you got big shoes to fill.

I appreciate that.

Hopefully, you can channel some of Tim’s snarkiness, that way that part can live on. So two questions here. First, just Tim, obviously was long tenured in the business, started the company and had a lot of relationships out there, especially with the sort of cyclical or the serial developers and such. But you guys have a big team – acquisitions team. Do you feel that the relationships that he had will be maintained? Or are there some that really were – really Tim centric and you guys will need to either work to rebuild – not to rebuild, that’s a bad word, but you know what I mean, like bridge the relationship?

No. Listen, Alex, that’s a great question. Appreciate it. A couple of things I would say about that. First of all, the entire team was really instrumental and that included myself. It included Paige who’s still actively engaged and working on those types of relationships, and it included Tim. But I would say Tim’s focus was a lot more around originating some of the broker transactions and the broker relationships. And so from our perspective, and frankly, from my perspective, I was laser-focused on making sure that we had those broker relationships institutionalized. And I think we’ve done a good job in doing that and reaching out because obviously, the client relationships are very important, but so is the brokered business. And Tim was the one that had most of those relationships. And so I think what we’ve done over the last 3 months is do a real good job of reaching out, reengaging with the brokers that we did a lot of work with and making sure that they knew that we’re going to continue to grow the business consistent with some of the parameters that Tim had, and I think that’s been successful. I mean our deal flow has – really hasn’t missed a beat.

Okay. The second question is going back to the banks and the serial developers and some of the smaller businesses, I guess it’s sort of two parts. One, are you seeing any of the developers or small practices that are getting hit because their local bank is pulling back on credit, and it’s making them harder to proceed with development or is this where this increases the opportunity for you guys to put out more capital? And if that’s the case, do you see doing more sort of like mezz or pref funding upfront versus buying out on the back end?

We are seeing and hearing anecdotally that some of the developers out there as well as some of the buyers who had a deal under control like cap rate that was 6.5% or 7%, all of a sudden, that cap rate doesn’t make sense. And so they are not in a position where they can close on that deal or they perhaps reach out to us and see if we’re interested. And ultimately, that isn’t of interest to us. I mean we view our capital as very precious, and we want to generate the best yields we can on that capital. And so we feel like the best opportunity to do that is through client relationships that we develop. And so I will tell you, we’re continuing to push forward. We have talked to many operators, in the behavioral space, we have talked to operators, in the inpatient rehab space and beyond, and we will continue to have that dialogue. We think that all of a sudden, the capital that we were offering at 9% to 10%, which appeared expensive a year or so ago is not so expensive today. And so the good news is, I guess what I would tell you is we continue to have that dialogue with the potential – and most of those are owners, owner-occupied type of folks and not providing a capital source for developers per se. Never say never, we will look at every opportunity as it presents itself, but in general, we like the idea of working with our banks and getting them to fund the actual deal and then taking it out when that transaction is open and ready for operations.

So Dave, to be clear, you guys are not interested in getting into the mezz or pref business. You only want to buy completed assets at the back end, correct?

That’s correct.

Okay. Awesome. Thank you.

Thanks Alex.

The next question is from Michael Lewis with SunTrust. Please go ahead.

Thank you. So, first of all, sad for all of us to have this first earnings call without Tim. And I especially extend my sympathies to everybody on the call who worked with him on a daily basis, more so than I interacted with him. I am not going to say things, but sorry for the loss. My question, first, maybe an update on the CFO search to the extent that you can. And I wonder if it’s important to you that they would be paid in stock, which has been kind of the history of the company. And maybe any other structural or strategy changes at the company as a result of Tim’s passing?

Michael, thanks for the question and really appreciate your kind words. And it’s – we miss Tim and miss his presence and we appreciate that note. As for the CFO search, we are very focused on getting that done. As you might imagine, in my spot, juggling both of those roles over the last three months has been challenging. It’s a lot of work. And so what I can tell you is, we are having good dialogue with qualified candidates. And we think that, hopefully those will result in the near-term getting somebody onboard. As for the compensation question, we have always said as we launch the search and discussing it at the Board level, it’s very important that we, as a firm, I think maintain kind of our shareholder-centric approach and all of us sitting in this room take 100% of our compensation in stock. But we are not going to let that drive be the sole driver for our CFO search and candidates. So, while it’s important that that candidate understands that, that’s a significant part of what we do and how we operate, we are going to be open to finding the best candidate. And if that means that, that person over time or right away take some amount of cash versus stock, we are not going to preclude that candidate from being considered. So, I think that answers the questions or at least all I can say about the CFO search. As it relates to our focus as a business, and I have said this on our last call, when Tim was on medical leave that Tim has developed a really good roadmap for this business, and it’s consistent, it’s replicatable. We have got a team in place that understands how this works. We think our investors like the way we go about our business. And we have created a nice niche for ourselves in the marketplace. And so I don’t have any plans near-term to change that. I think it’s – it’s a good operating strategy and has served us well since the company’s inception in 2015. So, we will continue to push forward being consistent with some of those guiding principles that Tim set forth for us.

Great. Thanks. And then just one more for me. You have improved the occupancy quite a bit the last couple of years, largely through acquisitions of well-occupied assets. What do you think about, say, the bottom 5% or 10% of your portfolio, stuff that maybe you have owned for a while, and it’s not up to the quality of what you have been buying more recently or maybe it’s underperforming for some other reason. People have already asked about access to capital and what’s going on with the local and regional banks. I imagine maybe it’s tough to call the bottom 5%, maybe because of the high cap rates and they are worth more in the portfolio and that sort of thing. But is there any stress in the portfolio or any thoughts like I have said, on some of those underperformers?

I think there is always going to be some level of buildings that aren’t performing where you want them to. I think in general, what we have been able – been successful at doing is redeveloping those projects and those buildings in a way that allows us to get those projects yielding where we want them to yield and get the occupancy up. But what I will say, Michael, is to the extent we have had buildings empty for more than a year or 2 years, we are going to take a look at the portfolio. And if it makes sense for us to look at selling those properties, we will evaluate doing that. I know Tim was very reluctant to do that historically. I think it’s incumbent on this team to take a good look at some of those buildings and look at potentially recycling that capital, nothing has been decided at this point, but we will certainly look at it.

Great. Thank you.

[Operator Instructions] The next question is from Jim Kammert with Evercore ISI. Please go ahead.

Hi. Good morning. Thank you. I apologize, did you cover in the prepared remarks that I see in the investor presentation you have also perhaps entered into a development agreement or a takeout agreement for some dialysis centers. And I was just curious if you could provide more color on the timing and about the credit profile of that to operator.

Hi Jim. No, that has been an agreement that we have had outstanding for a while now. Those term sheets have been – that term sheet has been outstanding for a while. And that is with an existing client who we have – who was a tenant in a handful of our buildings. We like that tenant a lot and that tenant actually just a year ago raised some private equity financing that we think really was, again, gives credence to their ability to operate dialysis centers and I think provide some good overall financial footing for the company. So, it’s a recognizable private equity firm. And so we are hopeful that those term sheet – that term sheet results in some business. We have looked at a couple of transactions. What I will say is most of the focus of the business or just the reality of the deals they have been looking at in terms of acquisition, there has not been to own real estate as part of that. And so as a result, there hasn’t been an opportunity for us to get involved on the real estate side. I still think they are going to focus on some development projects, which could involve us in that – in those – in that term sheet. But private equity is very focused on ramping up growth as quickly as possible. And so they are rightfully looking at acquisitions and so that’s been their primary focus over the last year. We are actually going to be meeting with that private equity firm next week to get a better sense of what their growth goals are and whether there are some development opportunities there and how we can be more helpful. So, I will have some better color after that meeting, but that relationship and that term sheet has been in place for a while now.

My mistake, sort of never agree and you are waiting for a resolution. Got it. And then just turning to the operating portfolio, if I could, you have got sort of a mounting amount of lease expirations coming in the next 3 years. Any color you can provide on sort of expected roll up or roll down? I know you have been kind of flattish. I don’t want to put words in your mouth, but in terms of the rent movement, just curious what you are foreseeing coming up on the renewals?

I think what our experience has been that in general, we have – it’s very market specific in some of our markets, we have been up and some of our markets, we have been down a little bit. On average, our portfolio is right about where market is. And so we don’t expect a material roll down relative to these leases. But the leasing team and Tim’s team has done a great job at improving occupancy over the last 1.5 years or so. And I don’t know, Tim, if you want to add any more specifics.

Yes. I mean we like where we are from a leasing perspective. We like where the pipeline sits and we are going to have some natural flow as some tenants roll off, but we have been very successful with the plan that we have and what we are executing. So, we are very excited about where the pipeline is and what we are seeing from a retention rate perspective as well in the portfolio.

Terrific. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to David Dupuy for any closing remarks.

Great. Thanks everybody for the questions. We appreciate everyone’s interest in the company and look forward to if there is any additional questions you have, feel free to reach out. Look forward to seeing everybody on the upcoming NAREIT in June. Thank you.