CHCT - NYSE

Welcome to the Community Healthcare Trust 2024 First Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2024 first quarter financial results. We will also discuss progress made in various aspects of its business. Following the remarks, the phone lines will be open for a question-and-answer session. 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 1, 2024, and may contain forward-looking statements that involve risk and uncertainty. 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 risk factors and MD&A in 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. All 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 Dave Dupuy, CEO of Community Healthcare Trust. Please go ahead.

Great. Thank you, Nick, and good morning, everybody. Thank you for joining us today for our 2024 first quarter conference call. On the call with me today is Bill Monroe, our Chief Financial Officer; Leigh Ann Stach, our Chief Accounting Officer; and Tim Meyer, our EVP of Asset Management. Our earnings announcement and supplemental data report were released last night and furnished on Form 8-K, along with our quarterly report on Form 10-Q. In addition, an updated investor presentation was posted to our website last night. The first quarter was busy both from an operations standpoint and also from an acquisition perspective. Our occupancy increased from 91.1% to 92.3% during the quarter. A key component for the increased occupancy was the long-term lease sign on one of our buildings to deliver in and outpatient behavioral health care services. This new lease will require redevelopment of the property from its former use, and we expect the property redevelopment to be completed and the lease to commence in 2026. In addition to this project, we have 4 properties or significant portions of them that are undergoing redevelopment or significant renovations with long-term tenants in place when the renovations or redevelopment is completed. Our weighted average remaining weeks term remains about the same, at slightly less than 7 years. During the first quarter, we acquired 4 properties with a total of approximately 165,000 square feet for a purchase price of approximately $34.2 million. The properties were 98.6% leased in the aggregate, with leases running through 2039 and anticipated aggregate annual returns ranging from 9.3% to 9.75%. Subsequent to March 31, we acquired a new patient rehabilitation facility for a purchase price of $23.5 million. We entered into a new lease with a lease expiration in 2039 and anticipated annual return of approximately 9.1%. We also have a signed definitive purchase and sale agreements for 7 properties to be acquired after completion and occupancy for an aggregate expected investment of $169.5 million. The expected return on these investments should range from 9.1% to 9.75%. We expect to close on one of these properties in the fourth quarter of 2024, with the remaining 6 properties closing throughout '25, '26 and into 2027. We continue to have new properties under review and have turn sheets out on properties with indicative returns of 9% to 10%. Given our modest leverage levels, we anticipate having enough availability on our credit facilities and through our banking relationships to fund our acquisitions, and we expect to opportunistically utilize the ATM to strategically access the equity markets. These traditional capital sources, combined with proceeds from selected asset sales, will provide sufficient capital for continued growth at attractive yields throughout 2024. Also during the first quarter, our Board approved and adopted certain changes to executive compensation. These changes were a result of 6 months of careful consideration of stockholder feedback, the analysis of proxy advisory firm reports as well as guidance from our independent compensation consultant. I'll let Bill describe our G&A expense in more detail in his section. So to wrap up, we declared our dividend for the first quarter and raised it to $0.46 per common share. This equates to an annualized dividend of $1.84 per share, and we are very proud to have raised our dividend every quarter since our IPO. That takes care of the items I wanted to cover. So I will hand things off to Bill to discuss the numbers.

Thank you, Dave. I will now provide more details on our first quarter financial performance. I'm pleased to report that total revenue grew from $27.2 million in the first quarter of 2023 to $29.3 million in the first quarter of 2024, representing 7.9% annual growth over the same period last year. When compared to our $29.1 million of total revenue in the fourth quarter of 2023, we achieved 0.7% total revenue growth quarter-over-quarter, although our growth was negatively impacted by the timing of our acquisitions as we closed $27.7 million of acquisitions during the last week of the first quarter. On a pro forma basis, if all $34.2 million of the acquisitions we completed during the first quarter of 2024 had occurred on the first day of the first quarter, our total revenue would have increased by an additional $774,000 to a pro forma total of $30.1 million in the first quarter. From an expense perspective, property operating expenses increased by $193,000 quarter-over-quarter to $5.8 million, primarily as a result of seasonal increases in utilities and snow removal expense at several properties, along with higher repairs and maintenance. General and administrative expenses increased by $826,000 quarter-over-quarter to $4.6 million. Dave highlighted the executive compensation plan design changes made in January, but let me provide more details on the increases to G&A expense in the first quarter. While total compensation to executives is expected to be less under the new plan, because 50% of executive salaries are taken in cash and the amortization period for the long-term equity incentive awards is shorter under the new plan, executive compensation expense increased by $660,000 during the first quarter. Only $260,000 of the increase was cash compensation with the remaining $400,000 being noncash stock-based compensation. The remainder of the increases quarter-over-quarter were a combination of employer tax payments due upon the vesting of stock-based awards from 2016 deferrals and typical first quarter seasonal adjustments due to the timing of the annual employee salary increases, employer 401(k) contributions and employer tax payments. Finally, from the expense perspective, interest expense increased by $43,000 quarter-over-quarter to $5.1 million. Turning to funds from operations. FFO was $14 million in the first quarter of 2024. On a quarter-over-quarter basis, FFO decreased from $14.9 million in the fourth quarter of 2023. And on a per diluted common share basis over these periods, FFO declined from $0.57 to $0.53 per share. Adjusted funds from operations, or AFFO, which adjusts for straight-line rent and stock-based compensation, totaled $15.7 million in the first quarter of 2024, which compares to $15.6 million in the first quarter of 2023, or 0.8% growth year-over-year. On a quarter-over-quarter basis, AFFO decreased by 2.2% from $16.1 million in the fourth quarter of 2023. And on a per diluted common share basis over these periods, AFFO declined from $0.61 to $0.59 per share. And finally, on a pro forma basis, if the acquisitions we completed during the first quarter of 2024 had occurred on the first day of the first quarter, AFFO would have increased by approximately $498,000 to a pro forma total of $16.2 million. That concludes our prepared remarks. Nick, we are now ready to begin the question-and-answer session.

[Operator Instructions] The first question comes from Alexander Goldfarb with Piper Sandler.

A few questions. First, Dave, just looking at the acquisitions that are outlined in the press release that you also discussed in your opening remarks, are there any acquisitions that we should be modeling for the remainder of the second quarter and third quarter or is there going to be a gap in the pipeline until you close that outline deal in the fourth quarter?

Alex, thanks for the question. As it relates to the acquisition pipeline, we have seen fewer opportunities in the first quarter, which has impacted near-term pipeline, as you flagged. We have a core group for brokers we work with, and they saw the dip in activity, too. Our guess and theirs was that sellers were on the sidelines in the hopes that we would start seeing some rate cuts. Obviously, expectations for cuts have been pushed back to later in the year, if at all. I will say that market sentiment does appear to be changing because our last 2 investment committee meetings included more interesting opportunities at attractive cap rates, so we're hopeful that we can start building the pipeline for the third and fourth quarters beyond the inpatient rehab facility that we are expecting to close in the fourth quarter. But it was pretty light in terms of building the pipeline in the first quarter.

Okay. So then that extends to the second question. We go back to during COVID when rates went to 0 and you guys were aggressively outbid, and wisely, you guys made the decision that you weren't going to chase rates -- cap rates to 0 and you maintain discipline. Now we're sort of in another period of volatility. The point of the company, though, is to be able to acquire sort of $125 million a year, hopefully grow that pipeline to something above that, especially if the asset base has grown multiples of that. Do you -- as you guys sit there, do you still think that, that holds true and that you'll be able to grow the pipeline back? Or is it just because of what you're looking for in nature just means that it's sort of a limited pool of assets to go after?

Well, I guess I would say a couple of things related to that, Alex. First of all, you're right, it is a different environment we find ourselves in today. Fresh capital is very precious. And so we're being quite disciplined. We want to try to maximize, as we always have, but we really are making sure that the acquisitions that we are going after are going to have the quality we're looking for and the yield we're looking for, especially given this higher cost environment. And so look, we have acquired almost $60 million in acquisitions thus far. And so I absolutely think it's achievable that we can get in that $120 million to $150 million range, but we're balancing that with making sure that the acquisitions we're doing are at the right yields and the right quality given the very pricey nature of capital, both debt and equity capital that we're seeing in today's environment. So it's a bit of a tight rope we're walking, but we feel very confident that we can get to that $120 million to $150 million range.

The next question comes from Rob Stevenson with Janney.

Dave, sorry if I missed this, but the sale that you allude to in the press release, is that one of the Genesis Care vacant assets?

It is.

Okay. And then can you talk about what the plan -- the current plan is for the other one? Is that also going to likely be a sale? Or are you getting closer to being able to release that? How should we be thinking about that asset?

That's actually -- the good news there is that's currently under LOI for -- to be re-leased. So we're working on a draft lease right now, and hopefully, that property will get leased here very soon. So it's -- and it's at rates that are similar to the rates that we were getting as part of the Genesis Care portfolio. So we feel very good about getting that property re-leased.

Okay. Bill, how meaningful was the drag in the first quarter from the vacant assets on the expense line?

The vacant assets? I mean, obviously, we have discussed Genesis Care and the properties that were rejected is about $1 million of total annualized rent. And so certainly, that is a drag. Again, as Dave mentioned, being able to re-lease the Asheville property we're excited about and then the Fort Myers property, having that under contract to sell so that we can recycle that capital will kind of help reduce that drag, but it is something that, obviously, we have to work through.

But on the expense side, was there -- I mean, you're not able to get the triple net on the expenses for insurance, taxes, et cetera. Was that any material amount of drag from that, that goes away if you wind up selling and re-leasing? We know that the revenue has come out of the numbers. But I guess, is there any -- is there $0.005, $0.01 of expenses that goes away when those assets get resolved or is it not meaningful?

I don't expect that it's meaningful. I don't have the number right in front of me, but it's certainly -- it incrementally helps.

Okay. And then I guess it was great to get the -- while I've got you, Bill, the G&A sort of breakdown. But I guess the one question I have is, what is the -- out of that line from the first quarter, what goes away when we look to the second and third and fourth quarters? And what remains in that line item from the various comp stuff?

There is a lot of movement from quarter-to-quarter. However, we would expect there is some seasonality in the first quarter. But as we look at the changes to the compensation plan, those amortization schedules are over 36 months for kind of the long-term incentive awards. So those will remain, the cash salary will remain. So we typically see some movement in the second quarter versus the first quarter, but I would not expect it to be a material amount. The other thing we would highlight as we look at kind of compensation throughout the year is beginning in the third quarter, we will start accruing for 50% of executive bonuses to be paid in cash as part of the new executive compensation plan approved in January. We waited for that to be enacted to align with the start of the new performance period, which always goes from July 1 to June 30. So similar to the impact of executive cash salaries this quarter, we would expect that 50% cash bonus to have an incremental impact on AFFO of about $0.01 per quarter, right, kind of $260,000 similar to what we announced here in the first quarter.

Okay. So we shouldn't be expecting the G&A to revert back to sort of the $3.6 million, $3.7 million a quarter that you had in the second through fourth quarters of last year? It's going to wind up running higher than that because of the way these comp programs work with GAAP.

That's right. It is -- while executive compensation will be lower, compensation is not the same as GAAP expense. And so there is a significant amount of kind of noncash compensation and amortization that we will continue to have going forward.

That's helpful. And then, Dave, one last one for me. When you're talking about the development assets that are closing in '25, '26, '27, why is it as far out as '27? Did some new development get added to the pipeline? Or was there some sort of significant delay? Seems awfully far out into the future. I respect that even a high-rise Manhattan development could be completed by '27 at this point. So just curious as to what's taking that one in the -- and I don't know when -- if the '26 one is a back half of '26, but for sort of more suburban assets, it seems like an awfully long cycle there.

Yes. No, that's a fair question, Rob. A couple of things going on. First of all, there's a net of one new deal that we added to the group this year. We've actually -- one deal that we were going to do in Florida that we decided not to move forward with, again, and this gives you a snapshot into the world with these projects, just a significant amount of issues with the site and push back on some -- there were some endangered species, both plant and animal on the site that resulted in a lot of expense and problems. So one of the Florida projects fell out of the group and we added 2 new projects. Both of those were in Texas that are now part of the new group. So because we just signed those deals, it typically takes at least a couple of years. And the reality is, ever since COVID, the projects -- getting these projects totally through from beginning to end, there's just been a 6- to even 12-month add as it relates to getting these projects constructed. Believe me, both our partner as well as us want to get these online as quickly as possible. And so that's what you're seeing. You're seeing the addition of 2027 sort of recognizes that we just have these 2 new facilities that we literally just signed up a net one new for that pipeline.

[Operator Instructions] The next question comes from Jim Kammert with Evercore.

It sounds like the whole Genesis situation resolved pretty well here. Can you just provide some qualitative comments regarding sort of the new tenants on the 5 assets that they were signed or assumed leases? And were there any material increments or diminution to leases? I presume they're pretty much assumed as they were. But any color there would be helpful.

Yes. It certainly was a long bankruptcy process, but we're proud of the outcome and the team's hard work to get all 7 of those remaining properties assigned to buyers or assumed by the new Genesis Care. As you look at those new buyers that were signed, it was 5 separate buyers. They include a large oncology provider, a large hospital system and some local oncology practices. And so received adequate assurance as part of the bankruptcy process from Genesis Care on these assignments and look forward to working with these new tenants and feel good about those new tenants in those facilities. The 2 remaining properties that Genesis Care assumed -- after exiting from bankruptcy, again, Genesis Care is in a much different leverage position than they were entering bankruptcy. And so again, received adequate assurance around the new Genesis Care and look forward to working with them as well.

And Jim, we're actively working on lease extensions with these new tenants. And what I would say is, look, these leases had uncapped CPIs and were -- there's going to enter a handful of leases that will probably, for additional turn, we'll probably lower to make a more market because during COVID, those lease rates went up to way out of market. But the good news is we've got good operators in those businesses, and we feel like that they're in a good place right now.

That's very helpful. And then I think, David, you had mentioned that potentially you look at some asset sales and partial funding, obviously, for the accretive new investments. And just playing devil's advocate, looking at where they're stocked, I think consensus implied cap rate is around 8, 9 on the equity. I mean I presume you could sell a number of your assets well inside of that. Just what's the philosophy there, asset sales versus equity just to try to think through your process, please.

Yes. The way -- yes. No, I appreciate the question, Jim. The way we think about raising capital in this environment is still number one, fund under the revolver and raise; and two, opportunistically raised funds through the ATM; and then finally, yes, asset sales that aren't a great fit with the portfolio is something we can look at, too. As Bill already mentioned, we expect to close on the sale of those assets held for sale later in the second or third quarter, which is going to help us from a capital perspective. And we continue to evaluate other assets that may not be a good long-term fit for the portfolio, and we'll opportunistically evaluate a sale if we think it makes sense. Today, we don't think that, that is going to be a primary way in which we can fund growth going forward. We certainly don't want it because when you sell a property, you're basically trading AFFO to de-lever and that's not something that we're excited about doing. But look, it's always an option, and I agree, if we wanted to raise capital in the other means, we certainly have the opportunity to do that at attractive cap rates. So we'll keep an eye on it. And in the second half of the year, we may evaluate doing more.

The next question comes from [ Alex Fagan ] with Baird.

First one for me is, what's kind of the thoughts about raising debt to potentially clear the line of credit? And if there's any timing that you can talk about in raising new debt?

Yes. We are focused on kind of a modest financial policy and keeping our debt to total capitalization at modest levels. It was at 38% at March 31. Right now, we have $61 million available on our revolver, kind of as of 3/31. The next maturity is not until March of 2026. So we have a nice runway until our near-term maturities. What we have historically done is look to term out those revolver borrowings into a new term loan, which then lets us kind of reset the revolver with less undrawn. I expect that that's what we will do again this time. We're always evaluating that market, but it's worked well for us in the past. And look, I think as we look into later this year or early next year, as we get closer to be in about a year out from those March 2026 maturities, we think that maybe we'll be in a lower interest rate environment, but that would kind of be the natural time that our revolver would look to be termed out.

Got it. That's helpful. Second one for me, and sorry if I missed this, but what are the expectations for the cash G&A and total G&A going forward throughout the year?

Yes. We -- as I had mentioned earlier, as you look at our first quarter G&A, obviously, from a cash and noncash mix, it's similar to what it's been in the past, and we kind of outlined that in our supplemental. The only change we would expect as we move throughout the year is, again, beginning in the third quarter, the annual incentive awards will become under the new compensation plan design as well. And so we would begin accruing for 50% of those executive bonuses to be paid in cash, which would be a similar effect to the 50% of cash salaries in the first quarter. It was about $0.01 towards AFFO or $260,000.

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

Okay. Thank you very much, and thank you, everybody, for joining us today. I look forward to seeing everybody at NAREIT coming up in June.