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Community Healthcare Trust Inc (NYSE:CHCT)
Q2 2020 Earnings Call
Aug 5, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Community Healthcare Trust 2020 Second Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2020 second quarter financial results and will also discuss progress made in various aspects of its business. Following the remarks, the phone lines will be opened 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 the information as of today, August 5, 2020, 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 and you should review the company's disclosures regarding forward-looking statements and its earnings release as well as its 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. Reconciliation between the two 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 this call will be made available on the company's Investor Relations website for approximately 30 days and is 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 Timothy Wallace, Chairman, Chief Executive Officer and President of Community Healthcare Trust Incorporated.

Timothy G. Wallace -- Chief Executive Officer and President

Thank you, Carrie. Good morning everyone and thank you for joining us today for our 2020 second quarter conference call. On the call with me today is Dave Dupuy, our Chief Financial Officer; Page Barnes, our Chief Operating Officer; and Leigh Ann Stach, our Chief Accounting Officer.

As is our normal process, our earnings announcement and supplemental data report were released last night and filed with an 8-K and our quarterly report on Form 10-Q was also filed last night. Once again, as usual, we were very busy during the second quarter, and most of it was business as usual. However, I guess I should start with the topic of the quarter, of course COVID-19.

As in the first quarter, many healthcare providers have been impacted by the COVID-19 pandemic. Some of them have not been seeing patients, others have seen a reduced number of elective procedures and/or patient visits. While others have experienced limited impact or have even see an improved cash flows from either increases in census or from government funding. As of July 31, the company has entered into or anticipates entering into deferral agreements with approximately 20 tenants, representing less than 1% of our annualized rent. The company is generally providing tenants with two months to four months of base rent deferral and the tenant continues to pay operating expenses. Pursuant to these agreements, the tenants are generally required to repay the deferred amounts in equal monthly installments, during the third quarter and fourth quarter of 2020.

Our receivables are in the best shape, they have been in the company's history. Our asset management group has done a great job related to COVID-19. The most significant effect COVID-19 has had on the Company is slowing down our acquisition process, not the pipeline but the process. This has pushed the properties we closed in the second quarter to the end of the quarter, we also believe it will slow the process through the second half of the year.

Now on to more normal items. As you know, we have an active ATM program in place. During the second quarter, the company issued 578,759 shares of stock through its ATM program at an average gross sales price of $41.70 per share. We received net proceeds of approximately $23.7 million at an approximate 4.11% current equity yield.

During the second quarter, we acquired seven properties with a total of approximately 92,000 square feet for a purchase price of approximately $21.3 million. These properties were 100% leased with leases running through 2035 and anticipated annual returns of 9.1% to 9.5%. The company has two properties under definitive purchase agreements for an aggregate expected purchase price of approximately $2.6 million and expected aggregate return of approximately 9.3%. The company is currently performing due diligence and expects to close these properties in the third quarter. In addition, the company has 10 properties under term sheets for an aggregate expected purchase price of approximately $45.7 million and expected aggregate returns ranging from approximately 9.5% to 9.9%. The company is currently negotiating purchase and sale agreements and expects to close these properties in the second half of the year.

We also continue to have three additional properties under definitive purchase and sale agreements to be acquired after completion and occupancy for an aggregate expected investment of $68 million. The expected return on these investments should range from approximately 9.5% to 11%. We expect to close on one of these properties in the fourth quarter and the other two through the middle of 2021. We continue to have many properties under review and have term sheets at on several properties with anticipated returns in the 9% to 10% range. We anticipate having enough availability on our revolver to fund our acquisitions. And we expect to continue to opportunistically utilize the ATM to strategically access the equity markets.

On an operation standpoint, occupancy was stable during the quarter, leasing activity was somewhat muted due to the challenges caused by COVID-19. Through a combination of new and extended leases and our acquisitions, we have been able to maintain our weighted average remaining lease term at approximately 7.9 years.

On another front, we declared our dividend for the second quarter and raised it to $0.4225 per common share. This equates to an annualized dividend of $1.69 per share and I continue to be very proud to say we have raised our dividend every quarter since our IPO.

As it relates to Highland Hospital, on July 1, 2020 the bankruptcy sale of Highland Hospital was completed and the operator who had been managing of the facility acquired its operations and entered into a lease with the company. As previously disclosed, the company provided financing to facilitate the process. And as of today, the net receivable balance is approximately $1.4 million. The company expects this receivable to be repaid by the end of the year. Obviously, there are various contingencies that might still occur such that the outcome could be different than what we think now, but we believe we have addressed the situation as best we can.

I believe that takes care of the items I wanted to cover, so I will hand things off to Dave to cover the numbers.

David H. Dupuy -- Executive Vice President and Chief Financial Officer

Great. Thanks, Tim. And good morning everyone. I'm pleased to review CHCT second quarter financial results through June 30, 2020. Total revenue grew from $14.3 million in the second quarter 2019 to $18.3 million in the second quarter of 2020, representing 27.7% growth over the same period last year. Revenue for the first quarter 2020 was $17.9 million, representing 1.9% sequential growth.

As Tim already discussed in his opening comments, COVID-19 delayed several of our acquisitions to the very end of the second quarter, impacting growth quarter-over-quarter. Giving pro forma effect to these acquisitions as though they closed on day one of the quarter, total revenue would have increased by over $348,000, resulting in total revenue of approximately $18.6 million for the second quarter.

From an expense perspective, property operating expenses decreased slightly quarter-over-quarter from $3,343,000 to $3,223,000 or 3.6%, driven by normal fluctuations in property expenses experienced quarter-to-quarter. In addition, G&A decreased from 2.2 -- $2,192,000 rather to $1,919,000 or 12.5%. Most of this decrease was a result of a decrease and reimbursement of legal fees related to the Highland Hospital bankruptcy.

During the quarter, we sold remote parking lot related to one of our MOB properties for approximately $300,000, resulting in a $313,000 book loss, but also during the quarter we acquired a parcel adjacent to the same property for $400,000 and this new parcel will be used for parking as well as to improve and reorient the building entrance and traffic flow. Interest expense declined $66,000 from $2,249,000 in the first quarter to $2,183,000 in the second quarter. This decrease related to net proceeds raised through our ATM program as well as the back-end loaded nature of our acquisitions in the corner, quarter rather as Tim discussed.

Our net income increased from $2,066,000 for the second quarter of 2019 to $4,526,000 in the second quarter of 2020, representing year-over-year growth of 119.1%. Net income for the first quarter of 2020 was $4,100,000, representing 10.4% growth sequentially. Finally, I'm pleased to report that funds from operations, FFO, for the second quarter of 2020 grew to $11 million from $7.4 million in the second quarter of 2019 or 48.6% year-over-year. On a per share basis, FFO increased from $0.40 per diluted share in the second quarter of 2019 to $0.51 per diluted share in the second quarter of 2020 or 27.5%. Meanwhile, FFO for the first quarter of 2020 was $10.2 million, representing 7.8% growth on a sequential basis.

In addition, adjusted funds from operations or AFFO, which adjusts for straight-line rent and stock-based compensation totaled, $11.4 million compared with $7.9 million in the second quarter of 2019 or 43.8% growth year-over-year. On a per share basis, FFO increased from $0.42 per diluted share in the second quarter of 2019 to $0.52 per diluted share in the second quarter of 2020 or 23.8%. Finally, AFFO for the first quarter of 2020 was $10.4 million, representing 9.7% growth sequentially. And from a pro forma perspective, if all of the second quarter acquisitions occurred on the first day of the second quarter, AFFO would have increased by approximately $302,000 to a pro forma of $11.7 million, increasing AFFO to $0.54 a share.

That's all I have from a numbers' perspective. Carrie, we are ready to start the question-and-answer session.

Questions and Answers:

Operator

Great. We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Nate Crossett of Berenberg.

Nate Crossett -- Berenberg -- Analyst

Good morning guys.

Timothy G. Wallace -- Chief Executive Officer and President

Good morning, Nate.

Nate Crossett -- Berenberg -- Analyst

I was wondering maybe you could help us kind of size, the acquisition pipeline outside of what you've already announced. What is the deal flow look like? Are you seeing any changes in property types? Has there been any changes in pricing?

Timothy G. Wallace -- Chief Executive Officer and President

So far we really can't say there has been that much difference in the pipeline or the pricing or what we're seeing from what we reported in previous quarters. We are seeing a lot of specialty stuff, we are seeing a lot of -- a lot of psych related, behavior related properties. We do have a very active pipeline and we feel very comfortable on being able to -- to meet our acquisition targets for the year, and have a good start on next year's target also.

Nate Crossett -- Berenberg -- Analyst

Okay. Would you say that COVID has increased the kind of opportunities? I mean is there any distressed sellers [Technical Issues] that you're kind of able to take advantage or --?

Timothy G. Wallace -- Chief Executive Officer and President

You know, I don't really think we're are seeing distressed sellers. All of our tenants are vaccine [Phonetic] patients. I don't know if any of them aren't operating now, we may have one or two small ones that aren't, but -- most of healthcare I think is pretty much back to -- back to business and maybe it is that we're not looking for distressed. I mean we're not -- we're not actively looking for distressed. We want strong operators, we want strong properties. So we really haven't seen that, but we haven't been looking for it.

Nate Crossett -- Berenberg -- Analyst

Okay. The $16 million, that's there under definitive agreement. I'm just curious, how big is the one that is expected to close I think in 4Q?

Timothy G. Wallace -- Chief Executive Officer and President

I think it's $30 million range, is it?

David H. Dupuy -- Executive Vice President and Chief Financial Officer

Yeah.

Timothy G. Wallace -- Chief Executive Officer and President

$30 million.

Nate Crossett -- Berenberg -- Analyst

Okay. And just last, so I kind of wanted to ask a bigger picture question just on telehealth, how should we kind of think about how this could impact your portfolio? Is it a net positive or how should we be thinking about this, I guess?

Timothy G. Wallace -- Chief Executive Officer and President

Well, the way we look at telehealth, we think telehealth overall basis is a net positive to healthcare. If you look at what happens in our buildings, most of it can't happen over telephone. I mean we have inpatient site, we have inpatient rehab, we have oncology, -- radiation oncology, we have kidney dialysis, we've got surgery centers. Most of what we do can't happen. I mean even dental visits can't happen or ophthalmological visits can't happen in telehealth. Telehealth will be very good from the standpoint of consults, from the standpoint of -- there's probably some behavioral stuff that can be done, telehealth but there's still a lot of issues related to telehealth. I mean, as we've talked to some of our doctors and some of the ones that you think might be very much in favor of it like dermatologists. Theoretically, you can take a good picture of something on your skin and send it to the doctor and they can talk to you etc., but what we're told by the doctors is that depending upon the camera, depending upon the lighting, a lot of what they do depends upon the coloration and you can get various degrees of coloration when you're trying to do something on a remote basis. And the protocols around that and potential legal liability are still not well defined i.e. from the standpoint of if they think they can do something on a telehealth basis and then it turns out, they should have told them to come in and get it looked at, are they going to be held liable for that. So there is a lot of issues, I mean I know there's a lot of discussion particularly today with the Teladoc, Livongo merger talks, etc., but we see it as something that will make healthcare more accessible and if we didn't have it over the next few years, we would have a very severe shortage of doctors, but with it, it will help bend the curve, if we don't have a severe shortage of doctors. That's a long-winded answer to it, but it's not all that simple of a question.

Nate Crossett -- Berenberg -- Analyst

No, I appreciate the color. Thanks guys.

Operator

The next question will come from Gaurav Mehta of National Securities.

Gaurav Mehta -- National Securities -- Analyst

Hi guy, thanks, good morning.

Timothy G. Wallace -- Chief Executive Officer and President

Good morning.

Gaurav Mehta -- National Securities -- Analyst

So following up on acquisitions, I was wondering if you could comment on how you're thinking about funding acquisitions between equity and [Indecipherable] various stock prices today?

Timothy G. Wallace -- Chief Executive Officer and President

Well, as we've always said we will opportunistically use the ATM to access the equity markets. And being able to produce the growth that we have that produces the stock price that we have, it makes it very advantageous to use equity and not leverage the balance sheet because our view is that you can always come back later and leverage the balance sheet if something happens, if there is more issues, etc. So as you -- so in the second quarter, we basically match funded all the acquisitions with equity, you probably won't see us do that in every quarter, but our goal is to keep our long-term debt to total capitalization in the 30% to 35% range, but we're not -- we're not concerned about having it direct a little lower when times that the stock price is good.

Gaurav Mehta -- National Securities -- Analyst

Okay. Second question I have is on the on the lease expirations for the year. Your 4% of lease is expiring in 2020, maybe talk about what you're hearing from your tenants? And then I was hoping if you could also comment on prospect of releasing the vacancy that you have in your current portfolio?

Timothy G. Wallace -- Chief Executive Officer and President

Sure. That's one area that COVID has slowed things down. I mean most systems and healthcare providers have had their hands full dealing with what's coming at them on a daily basis, much less thinking about leasing so. So overall, I think the leasing is going relatively well this year. We still think we're going to come out basically with a fairly stable occupancy rate through the end of the year. We do have several leases that are actively working and some that we're hopeful to get signed relatively soon that would make a dent in the vacancy rate, but we're relatively comfortable with the occupancy rate being at plus or minus 90% and feel like we can produce good results with that.

Gaurav Mehta -- National Securities -- Analyst

Okay, thank you. That's all I had.

Timothy G. Wallace -- Chief Executive Officer and President

Thank you.

Operator

The next question will come from Alexander Goldfarb of Piper Sandler.

Alexander Goldfarb -- Piper Sandler -- Analyst

Hey, good morning down there.

Timothy G. Wallace -- Chief Executive Officer and President

Good morning.

Alexander Goldfarb -- Piper Sandler -- Analyst

Good morning. I have to ask, are you guys still driving around the RV for acquisitions or are you back to your place.

Timothy G. Wallace -- Chief Executive Officer and President

Actually the acquisition guy went on and bought an RV, so he could do it. So yes, we are still using an RV to get around to see acquisitions. And the plus side of it is, while he is doing that, he is stopping by and doing inspections on our existing properties. So, I mean he will be going out for a week, week and half and he will come back and he'll have been 20 inspections or something so.

Alexander Goldfarb -- Piper Sandler -- Analyst

That sounds like a lot of coffee and Slim Jim on the road.

Timothy G. Wallace -- Chief Executive Officer and President

Well, I will say his wife is going with him. So it's kind of almost like a vacation or something.

Alexander Goldfarb -- Piper Sandler -- Analyst

Then you can't be serving Slim Jim, you got to upscale. So two questions here. First, Tim, you mentioned that your receivables are some of the best you've had. Clearly, less than 1% of ABR in deferral is quite impressive. So the -- yeah, we read stories about law firms that have been financially impacted and lawyers having to cut salaries etc. because of the impact. Clearly, we see what's going on in retail, fitness clubs, entertainment, where you have these areas have been impacted from closures. So what's going on in your medical practices, if a number were closed for a period of time, is it just that everyone got PPP or these are all just really well capitalized practices. It's just the -- the minimal impact is really impressive. And as I say, I mean even other parts of real estate like industrial, industrial had a lot more tenants impacted and you think there it's all like e-commerce and their they are still impacted. So what's going on in your portfolio that it's still insulated?

Timothy G. Wallace -- Chief Executive Officer and President

Well, I think it's a number of different things. Number one, is the diversification by tenant, by geography, and by industry segment has provided a lot of benefit through this process. Another piece of it is, I mean a lot of what we provide in our portfolio, the inpatient side, the inpatient rehab, radiation oncology, kidney dialysis, you can't do that any other way. And if you don't do it people die or severely hurt etc. So there is a lot of -- basically what we've said all along is one of the major part of our acquisition criteria is how is this property needed by the community. And I think what we've seen through this process is substantially all of our properties are needed by the community and therefore they will withstand this test of time. But again diversification not having not having any single tenant, be a significant piece of it, not having -- having to spread out between the different industry segments. So if one industry segment kind of got hurt, then the others didn't so, and I think overall, we've got a good tenant base.

Alexander Goldfarb -- Piper Sandler -- Analyst

Okay. And then that leads me to the second question. Page 13 of the PowerPoint, here you have two tenants, Everest and US Health they are over 5%. When do you think that, as you look at your pipeline, when do you think that the portfolio will grow sufficiently so that sort of all your tenants or below a 5% waiting?

Timothy G. Wallace -- Chief Executive Officer and President

You know, I don't know the answer to that Alex. We don't really look at 5% as being a significant threshold.

Alexander Goldfarb -- Piper Sandler -- Analyst

Yeah, I was just throwing that out as sort of benchmark.

Timothy G. Wallace -- Chief Executive Officer and President

All right. I mean, we anticipate still doing some more business with US Health and more business with Everest. We think they are very good clients and we're getting very good properties and feel comfortable with them. We are slowing down acquisitions with them because of the concentration that we have with them. I mean I don't particularly like seeing somebody in double digits. I mean our investment guidelines require diversification, but I think they allow up to 20%. But I'd not like seeing them in double digits. So we have slowed down those and try to spread them out, but they are good tenants and our challenge is to make sure that the rest of the portfolio grows as fast or faster than those clients do.

Alexander Goldfarb -- Piper Sandler -- Analyst

Okay. Thank you, Tim.

Timothy G. Wallace -- Chief Executive Officer and President

Thanks Alex.

Operator

[Operator Instructions] The next question will come from Sheila McGrath of Evercore.

Sheila McGrath -- Evercore -- Analyst

Yes, good morning. Tim, I was just wondering, it was good news on the Highland Hospital, I just wonder when you go through the puts and takes on that kind of restructuring and assuming payback of the $1.4 million, which looks highly likely where does CHCT come out on this situation? Is it whole or with interest, maybe a bit better than the prior scenario?

Timothy G. Wallace -- Chief Executive Officer and President

Actually it's probably a little bit better on a net, net basis. Number one, we end up with a lot stronger tenant. We -- the new lease is based upon a $30 million valuation whereas the old lease was based upon a $25 million valuation because we had the $5 million mezz loan that we wrote-off. So basically over the period the lease, we're going to be getting paid as if the mezz loan was still there. So overall, we think it was very good outcome. It was a little bit of a pain to get there, but we're very comfortable and it looks like the new operator may turn out to be another one of our clients, because we are reviewing two or three other opportunities with them currently.

Sheila McGrath -- Evercore -- Analyst

Okay, that's great. And then just maybe Dave, this is for you, on G&A, it was lower in the second quarter compared to first quarter, where were there some savings with COVID shutdown not traveling, or what should we think about for a good run rate for this year for G&A?

David H. Dupuy -- Executive Vice President and Chief Financial Officer

Well, as I mentioned in my remarks a lot of the reduction in G&A was -- had to do with some of the reimbursement we got for the legal costs associated with the Highland situation.

Timothy G. Wallace -- Chief Executive Officer and President

And not having legal costs [Speech Overlap]

David H. Dupuy -- Executive Vice President and Chief Financial Officer

Exactly. It's a little bit of both. You got paid plus there is a reduction that goes into it. So look, I think you know while we're balancing that which is good news we actually continue to grow as a company. We've got a couple of new people that are joining the company in important positions for us. And so I think you'll continue to see a similar relationship in terms of that I think we've mentioned 12% to 13% of rental income, with G&A and I think we'll continue to see that over time to be a pretty good proxy for where it's going to be, but we continue to grow and as we grow, we're going to add staff, we're going to add accountants, we're going to add other important roles. And so I do think that drop was -- was a little bit of a blip. And we'll continue to see that 12% to 13%.

Sheila McGrath -- Evercore -- Analyst

Okay, great. And last question, it was certainly a very small item in the 10-Q, but just curious if there is a story around like, I think you sold a small parcel of land or something, was there any story behind that?

Timothy G. Wallace -- Chief Executive Officer and President

When we brought that particular property, there were actually three parking lots attached to it and two of them were adjacent to the building and one of them was like three blocks away. And there is a building with a hot dog stand. I mean, it has been a joke here in the company that we bought a hot dog stand property, but basically we bought it to tear it down. And as Dave mentioned in his comments, what this is going to allow us to do is reorient the building and use that as parking lot and reorient kind of the front of the building to the side now that will give better traffic flow and access. So basically the way that I look at it is we flip that one parking lot for another parking lot. We've sold one for $300,000, we've bought another one for $400,000. So we had a net $100,000 investment in new parking lot.

Sheila McGrath -- Evercore -- Analyst

Okay. Great, thanks a lot.

Timothy G. Wallace -- Chief Executive Officer and President

Thanks, Sheila.

Operator

And this concludes our question-and-answer session. I would now like to turn the conference back over to Tim Wallace for any closing remarks.

Timothy G. Wallace -- Chief Executive Officer and President

We certainly appreciate your interest in being on the call today and we look forward to having a good third quarter and talking to you in three months. Thanks again.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Timothy G. Wallace -- Chief Executive Officer and President

David H. Dupuy -- Executive Vice President and Chief Financial Officer

Nate Crossett -- Berenberg -- Analyst

Gaurav Mehta -- National Securities -- Analyst

Alexander Goldfarb -- Piper Sandler -- Analyst

Sheila McGrath -- Evercore -- Analyst

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