Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Community Healthcare Trust Inc (CHCT, Financial) reported a slight increase in occupancy from 92.3% to 92.6% during the quarter, indicating positive leasing activity.
- The company acquired an inpatient rehabilitation facility for $23.5 million with an anticipated annual return of approximately 9.1%, and a medical office building for $6.2 million with expected returns of approximately 9.3%.
- CHCT has signed definitive purchase and sale agreements for seven properties with an aggregate expected investment of $169.5 million, with expected returns ranging from 9.1% to 9.75%.
- The company declared a dividend for the second quarter and raised it to $0.4625 per common share, marking a continued trend of increasing dividends every quarter since the IPO.
- CHCT maintains modest leverage levels and anticipates having enough availability on credit facilities and through banking relationships to fund acquisitions, with plans to strategically access equity markets at favorable share prices.
Negative Points
- CHCT faced financial challenges due to a geriatric inpatient psychiatric hospital tenant, resulting in a $3.2 million reduction in total revenue for the second quarter.
- The company recorded an $11 million credit loss reserve on the $22.7 million notes receivable from the tenant, impacting net income.
- Funds from operations (FFO) decreased from $14 million in the first quarter of 2024 to $11.6 million in the second quarter, with a decline in FFO per diluted common share from $0.53 to $0.43.
- Adjusted funds from operations (AFFO) also decreased from $15.7 million in the first quarter to $14.3 million in the second quarter, with a decline in AFFO per diluted common share from $0.59 to $0.53.
- The tenant in question has been experiencing management changes, leading to a decline in census and staff turnover, impacting their ability to consistently pay rent and interest.
Q & A Highlights
Q: Could you talk about how many facilities this tenant has and what percentage you represent of them? How are these properties performing compared to others in case of bankruptcy?
A: The tenant has a total of six hospitals, all of which are with us, making up their entire business. The reduction in census has been a catalyst for their payment issues. The run rate amount of rent and interest associated with this tenant is approximately $1.5 million per quarter. We have consultants working on a turnaround plan, and we are monitoring progress closely.
Q: How long was this tenant on the watch list? Was it a slow process to get here?
A: The tenant was on the watch list during COVID from 2020 to 2022 due to challenges with their geriatric patient base. They improved in 2023 but came back on the watch list in the first quarter of 2024 due to management changes and late payments. They made partial payments in the first and second quarters, but it wasn't enough to ensure rent collectibility.
Q: How significant is the watch list today, and are any other top tenants on it?
A: None of the other top tenants are currently on our watch list. The watch list is similar in size to before, but having a large tenant like this on it is disappointing. We feel good about the top 10 list and the overall portfolio.
Q: How should we think about the $0.53 of AFFO per share going forward?
A: Until we see improvement from this tenant, we're in the right ballpark. Approximately $750,000 to $800,000 of AFFO should be added back on a run rate basis compared to the second quarter. The biggest impetus for an increase will be improved performance and payment from this tenant.
Q: What lessons have been learned from Genesis and this tenant situation regarding underwriting and acquisition pipeline?
A: We have tightened our underwriting standards and will not lend at these levels to a single tenant again. COVID was a unique situation that drove significant borrowings. We will be more rigorous with underwriting and avoid high loan levels to single tenants, aligning with our diversification strategy.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
