Q1 2024 Community Healthcare Trust Inc Earnings Call

Participants

David Dupuy; President, Chief Executive Officer, Director; Community Healthcare Trust Inc

William Monroe; Chief Financial Officer, Executive Vice President; Community Healthcare Trust Inc

Alexander Goldfarb; Analyst; Piper Sandler & Co.

Robert Stevenson; Analyst; Janney Montgomery Scott LLC

Jim Kammert; Analyst; Evercore ISI Institutional Equities

Alex Fagan; Analyst; Baird

Presentation

Operator

Welcome to the Community Healthcare Trust's 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 and in its earnings release as well as risks factors and MD&A and its SEC filing 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 two 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.

David Dupuy

Great. Thank you, Nick, and good morning, everybody. Thank you for joining us today for 2024 first quarter conference call. On the call with me today is Bill Monroe, our Chief Financial Officer; Leigh 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. So the first quarter was busy, both from an operation 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 with a long-term lease sign on one of our buildings to deliver in an outpatient behavioral health care services business lease will require redevelopment of the property from its former units, and we expect the property redevelopment to be completed and the lease to commence in 2026.
In addition to this project, we have four properties or significant portions of them that are undergoing redevelopment or significant renovations with long-term tenants in place and renovations or redevelopment is completed. Our weighted average remaining lease term remains about the same at slightly less than seven years.
During the first quarter, we acquired four properties with a total of approximately 165,000 square feet for a purchase price of approximately $34.2 million. 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 an inpatient rehabilitation facility for a purchase price of $23.5 million. We entered into a new lease with a lease expiration in 2039, an anticipated annual return of approximately 9.1%.
We also have signed definitive purchase and sale agreements for seven 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 six properties closing throughout '25, '26 and into 2027.
We continue to have many properties under review and have term sheets out on properties with indicative returns at 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 six months of careful consideration of stockholder feedback, the analysis of proxy advisory firm reports as well as guidance from our independent compensation consultant. And I'll let Bill describe our G&A expense in more detail in his section.
To wrap up, we declared our dividend for the first quarter and raises $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.

William Monroe

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. And 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 billion of acquisitions during the last week of the first quarter. On a pro forma basis than 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. The 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 non-cash 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 [401K] contributions and employer tax payments.
Finally, from an expense perspective, interest expense increased by $43,000 quarter over quarter to $5.1 million in the 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 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 and 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.

Question and Answer Session

Operator

Thank you. We will now begin the question-and-answer session to ask a question. (Operator Instructions)
Alexander Goldfarb, Piper Sandler.

Alexander Goldfarb

Hey, a morning. Morning down there. A few questions first and 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 second quarter and third quarter? Or is there going to be a gap in the pipeline until you close that outlined deal in the fourth quarter?

David Dupuy

Hey, Alex, thanks for the question. Always Well, Tom, as it relates to the acquisition pipeline, we have seen fewer opportunities in the first quarter, which has impacted near term pipeline issue flag and we have a corporate for brokers we work with and they saw a dip in activity to our guests. 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 two 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 it was pretty light in terms of building the pipeline in the first quarter.

Alexander Goldfarb

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

David Dupuy

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. Pressure capital is very precious. And so we're being quite disciplined. We want to trying 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 the with making sure that the acquisitions we're doing are at the right yields aren't the right quality, given the very pricey nature of capital, but of debt and equity capital that we're seeing in today's environment. So it's a bit of a tight was tight walk a tight rope we're walking, but we feel very confident that we can get to that $120 million to $150 million.

Alexander Goldfarb

Okay. Thank you, Dave.

Operator

Rob Stevenson, Janney.

Robert Stevenson

Hey, good morning, guys. Dave, sorry if I missed this, but this the sale that you allude to the press release is that one of the Genesis Care Vacon assets.

David Dupuy

Yes.

Robert Stevenson

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 is are you getting closer to being able to release that? How should we be thinking about that asset?

David Dupuy

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

Robert Stevenson

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

William Monroe

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

Robert Stevenson

But on the expense side, was there I mean you're not able to get the triple net on the expenses for insurance, you know, 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 is there any is or half a penny a penny of expenses that goes away when those assets get resolved or is it not meaningful from?

William Monroe

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

Robert Stevenson

Okay. And then I guess it was it was great to get the while. I got you build 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 when we look to the second and third and fourth quarters and what remains in that line item from the various costs,

William Monroe

there's a lot of movement from quarter to quarter. However, we would expect there's 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 yes, 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 see 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 a 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. They have an incremental impact to AFFO of about $0.01 per quarter right, kind of $260,000 similar to what we announced here in the first quarter.

Robert Stevenson

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 three in the second through fourth quarters last year, it's going to wind up running higher than that because of because of the way these comp programs work with the GAAP?

William Monroe

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

Robert Stevenson

All right. That's helpful. And then, Dave, one last one for me when you're talking about the the development assets that are closing in '25, '26, '27. And why is why is that 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?
We expect that even a high rise, Manhattan development could be completed by '27 at that point. So just curious 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 those sort of more suburban assets, it seems like an awfully long down cycle there..

David Dupuy

Yes. No, that's a fair question, Rob. Couple of things going on first of all, there's a net of one new deal that we added to the Group this year was actually one deal that we were going to do in Florida, but we decided not to move forward with again. And this gives you a snapshot into the end of the world with these projects, just a significant amount of issues with the site and pushback on some of their merchant endangered species, both plant and animal on the site that resulted in a lot of expense and problem.
So one of the Florida projects fell out of the Group and we added two new projects. Both of those are in Texas that is 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 average since COVID, the projects getting these projects totally through from beginning to end, there's just been a 6 to even 12 months add as it relates to getting these projects constructed, it Believe me, both our partner as well as others 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 had these two new facilities that we literally just signed up a net one new for that for that pipeline.

Robert Stevenson

So kind of that's helpful. Thank you, guys. Appreciate the time this morning.

David Dupuy

Thanks, Rob.

Operator

(Operator Instructions)
Jim Kammert, Evercore.

Jim Kammert

Good morning, folks. Certainly the whole genesis situation resolved pretty well here. Can you just provide some qualitative comments regarding sort of the new tenants on the five assets that they are assigned or assume the leases? And were there any material incremental or diminution to leases? I presume they're pretty much assumed as they were. Any color there would be helpful.

William Monroe

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

David Dupuy

And in June. We're actively working on lease extensions with these new tenants. And what I would say is, look, these are these leases have uncapped since the ice and water. There's going to another handful of leases that will probably for additional turns, will probably lower to make a more market because during the during COVID, those lease rates went up. So we're 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.

Jim Kammert

That's very helpful. And then I think David, you'd mentioned that potentially you look at some asset sales as partial funding, obviously for the accretive new investments. And I'm just playing devil's advocate looking at where the stock I think consensus implied cap rates around eight nine on the equity. I mean, presumably you could sell a number of your assets. Well, inside of that, just what's the philosophy there? Massive sales versus equity, et cetera, think through your process, please?

David Dupuy

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 race and to opportunistically raise 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 to come.
Yes, as Bill already mentioned, we expect to close on the sale of those assets held for sale in later in the second or third quarter, which is going to really 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 also 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.
And we certainly don't want it because when you sell a property, you basically trading ASFO to delever, and that's not something that we're excited about doing. But but look, it's always an option. And I agree if we wanted to if we wanted to raise capital in using other means, we certainly have the opportunity to do that at attractive cap rates.
So we'll keep an eye on it. And the second half of the year we make we may evaluate doing more.

Jim Kammert

Thanks for your time. Thank you.

David Dupuy

Thanks, Jim.

Operator

[Alex Fagan, Baird].

Alex Fagan

Hey, good morning and thank you for taking my question. 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 and in raising new debt?

William Monroe

Yes, we have 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 billion available on our revolver kind of as of [231]. The next maturity is not until March of 2026. So we have a nice runway until there are any near term maturities.
What we have historically done is look to term out the 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 debt markets, but it's worked well for us in the past. And look, I think as we look into later this year, early next year as we get closer to being about a year out from those March 2026 maturities.
And yes, we think that we don't have maybe you will be in a lower interest rate environment, but that would kind of be the natural time that and yes, our revolver would look to be termed out.

Alex Fagan

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

William Monroe

Yeah, we and I had mentioned earlier, and as you look at our first quarter, G&A, obviously from a from a cash and non-cash mix 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 was about a penny towards AFFO or $260,000.

Alex Fagan

Got it. That's helpful. That's for me. Thank you.

David Dupuy

Thanks, Alex.

Operator

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

David Dupuy

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

Operator

The conference has now concluded. Thank you. For attending today's presentation. You may now disconnect.