Operator: Welcome to Community Healthcare Trust 2023 Second Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2023 second quarter financial results. It 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 August 2, 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 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 two is available in its earnings release, which is posted on its website. The 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 conference over to Dave Dupuy, CEO of Community Healthcare Trust.
Dave Dupuy: Great. Thanks, Jason and good morning. Thank you for joining us today for our 2023 second quarter conference call. On the call with me today is Bill Monroe, our new Chief Financial Officer; Leigh Stach, our Chief Accounting Officer; and Tim Meyer, our EVP of Asset Management. As previously disclosed, Bill joined CHCT from Truist Securities on June 1 and spent its first full week on the job meeting many of our analysts, investors and bankers at the Nareit’s REIT Week Conference in New York City. We are excited to welcome Bill to the team where he brings a wealth of experience from his days as Managing Director responsible for both healthcare services and healthcare REIT investment banking at Truist. Our earnings announcement and supplemental data report were released last night and filed with an 8-K.
Minerva Studio/Shutterstock.com
Our quarterly report on Form 10-Q was filed last night. In addition, an updated investor presentation was posted to our website last night. Before I discuss more normal topics, I wanted to provide more details on a couple of items we disclosed in our 10-Q. First, one of our tenants Genesis Care filed voluntary petitions for reorganization under Chapter 11 of the US bankruptcy code on June 1. Genesis Care which operates 440 cancer care clinics globally has secured commitments for debtor-in-possession financing to support its business operations, while exploring the separation of its US business from its businesses in Australia, Spain and the UK. On June 27, 2023 the US Bankruptcy Court approved Genesis Care’s request to reject certain unexpired real property leases including one lease of approximately 11,000 square feet with CHCT in Asheville North Carolina.
At June 30, 2023 Genesis Care with the sole tenant in seven of our properties and a tenant in two of our multi-tenanted properties representing approximately 3.1% of our gross real estate properties or approximately 119,000 square feet. Other than the one rejected lease in Asheville, Genesis Care has met substantially all of its lease payment obligations to the company, through July 2023. We’ve engaged counsel to monitor the Genesis Care bankruptcy progress, and any additional potential impacts to the company. Second, we incurred property damage due to vandalism at a vacant property in Houston, Texas which was covered by our insurance policies. We estimate the amount of the casualty loss was approximately $1.6 million and received insurance proceeds totaling $2.3 million, resulting in a net casualty gain of approximately $700,000.
Now back to our core business. The second quarter was busy from an operations standpoint that slowed slightly from an acquisition perspective as a couple of acquisitions anticipated to close in the second quarter slipped into the third quarter. Occupancy increased slightly from 91.6% to 91.7%, and we continue to see good leasing activity. Our weighted average remaining lease term declined slightly from 7.4 to 7.1 years. During the quarter we acquired three properties and one land parcel with a total of approximately 76,000 square feet for a purchase price of $15.7 million. The properties were 98.3% leased, with leases running through 2033 and anticipated annual returns of approximately 9.1% to 9.7%. Subsequent to June 30, we acquired three Medical Office Buildings and one Inpatient Rehabilitation Facility, in two separate transactions for a purchase price of $35.6 million.
The properties were 100% leased, with leases running through 2038. And I am proud to announce that with the closing of these new acquisitions we have surpassed $1 billion in gross real estate properties. This is an important achievement in our company’s history and a milestone we have celebrated with our team over the last week. We’re not resting on our past success however, as the company has three properties under definitive purchase agreements for an aggregate expected purchase price of $16.1 million and expected returns of approximately 9.2% to 10.3%. The company is currently performing due diligence and expects to close these properties in the third quarter. Also the company has eight properties to be acquired after completion and occupancy, for an aggregate expected investment of $191 million.
The expected return on these investments should range from 9.1% to 9.75%. We currently expect to close on one of these properties in late-2023 and the remaining throughout 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 bank 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 second quarter and raised it to $0.4525 per common share. This equates to an annualized dividend of $1.81 per share, and we’re proud to 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 Bill, to discuss the numbers.
Bill Monroe: Thank you, Dave and let me first say, how excited I am to be joining the Community Healthcare Trust team. In my prior role as a health care investment banker covering the sector, it was always an honored work alongside Tim Wallace, you and the entire CHCT team. We look forward to helping build upon our company’s foundation as Chief Financial Officer. I will now provide more details on our second quarter financial performance. I’m pleased to report that total revenue grew from $24 million in the second quarter of 2022 to $27.8 million in the second quarter of 2023, representing 15.6% annual growth over the same period last year. When compared to our $27.2 million of total revenue in the first quarter of 2023, we achieved 2.3% total revenue growth quarter-over-quarter.
And on a pro forma basis, if the acquisitions we completed during the second quarter of 2023 had occurred on the first day of the second quarter, our total revenue would have increased by an additional $308,000 to a pro forma total of $28.1 million in the second quarter. From an expense perspective, property operating expenses declined by approximately $100,000 quarter-over-quarter to $4.8 million. General and administrative expenses decreased from $16.2 million in the first quarter of 2023 to $3.8 million in the second quarter of 2023. The $12.4 million decrease quarter-over-quarter was driven primarily by the accelerated amortization of stock-based compensation, totaling $11.8 million recognized in the first quarter upon the passing of our former CEO and President as well as a reduction in the second quarter’s deferred compensation amortization due to the above-mentioned accelerated amortization in the first quarter.
Offset partially by a onetime increase in employer Medicare taxes paid in the second quarter from the vesting of our former CEO and President’s shares. Interest expense increased from $4 million in the first quarter of 2023 to $4.1 million in the second quarter of 2023 due to a small increase in borrowings under our revolving credit facility to fund acquisitions as well as higher interest rates under our revolving credit facility. Moving to funds from operations, FFO grew from $2.2 million in the first quarter of 2023 to $15.9 million in the second quarter of 2023. On a per diluted common share basis, over these periods, FFO grew from $0.09 to $0.62 per share, but it’s important to remember first quarter FFO was negatively impacted by the $11.8 million or $0.47 per share of non-cash amortization expenses related to the passing of our former CEO and President, whereas our second quarter FFO includes a $700,000 or $0.03 per share net casualty gain from insurance proceeds received related to one property that was analyzed as Dave mentioned earlier.
Adjusted funds from operations or AFFO, which adjusts for straight-line rent stock-based compensation and net casualty gain in the second quarter, totaled $16 million in the second quarter of 2023, which compares to $15 million in the second quarter of 2022 or 7% growth year-over-year. On a per diluted common share basis, AFFO increased from $0.62 in the second quarter of 2022 to $0.63 in the second quarter of 2023. AFFO for the first quarter of 2023 was $15.6 million, so our AFFO grew by 2.8% quarter-over-quarter. And finally, on a pro forma basis, if the acquisitions we completed during the second quarter of 2023 had occurred on the first day of the second quarter, AFFO would have increased by approximately $169,000 to a pro forma total of $16.2 million or $0.63 per diluted common share.
That concludes our prepared remarks. Jason, we are now ready to begin the question-and-answer session.
See also 22 Most Depressing Ugliest Places in the World and 20 Best Apps for Getting Laid and Casual Sex.
Q&A Session
Operator: Thank you. We will now begin the question-and-answer session [Operator Instructions] Our first question comes from Alexander Goldfarb from Piper Sandler. Please go ahead.
Alexander Goldfarb: Hi, good morning. And Bill, welcome to sitting on the public side of the REIT land. So fun times for you. Just a question and Dave certainly, appreciate the upfront disclosure on the Genesis filing. Maybe just a little bit more color. I mean clearly, one rejection out of I think you said you have seven or eight total, seems pretty good. So first, has Genesis, — are they completely through the rejection period? And then two, yes 11,000 square feet not a big space, but you still have to ask the perfunctory. What are your thoughts on backfill?
A – Dave Dupuy: Hi, Alex, thanks for the question. Sure. As it relates to GenesisCare, they’re still — they still have the opportunity to reject leases is our understanding and that can happen all the way up to when the deadline for submission of bids actually occurs. So — and that deadline just so — and this is all publicly available information, submission of bids is September 22. And ultimately, we should hear that first week in October, who the actually winning bidder is, if the schedule as laid out holds. So, as it relates to the nine leases, we have in place this is one of nine. In fact, we are actually already talking to GenesisCare about an early termination of this lease and we’re having discussions with potential tenants, who could backfill the; space.
And so those – obviously, because of the GenesisCare bankruptcy, we’ve got a lease rejection claim although, we’re not expecting to get much from that. But ultimately, we’re just in dialogue with potential tenants. We think it’s an attractive space. And so, our plan would either be to re-lease it or potentially explore selling it if that makes more sense. So
Alexander Goldfarb: Okay. So just — so Dave, just so I understand, and forgive me, the outright rejected one so not paying on one, they’re still paying on the other eight. But those are — there’s a potential that other operators will buy those through the bankruptcy auction process. And presumably once we get to I think the end of September when that bid period stops, I think you said then you’ll know definitively, if what they’re keeping what other operators bought or if in fact others are sold. But overall, you feel pretty comfortable if you get any more of that there’s sufficient demand that the downtime would be minimal.
A – Dave Dupuy: Yes. I mean, we’re doing work right now. The asset management team is looking at those local markets and evaluating, what the market rents are we feel for that type of medical use. We feel like we’ve got competitive rates. And so, we’re doing those market studies now so that we’re prepared when the actual winning bidder comes, and we can evaluate whether we want to move forward under their structure or whether we want to look and potentially evaluate another tenant to fill those spaces. But, it’s our thought that given the provision of healthcare that’s had in many of — most of these spaces that there’s going to be there is going to be a buyer and that buyer is going to want these spaces. So, we’re not anticipating any additional rejections, but obviously that could happen in a bankruptcy process. So we’re monitoring that as we go forward.
Alexander Goldfarb: Okay. Switching topics the vandalism, not something that we typically see in REIT land, I mean outside a few years ago when there were some of the riots. So, is this something like Urban unrest related, or was this a disgruntled employee like 1.6 million of one of your — I mean your properties tend to be sort of out in the outer suburbs not in the inner cities. So, just a little bit more color. And is this something that you think could occur in other facilities?
Dave Dupuy: This is unusual. Look, I think in our eight years, this is by far the most — the biggest sort of vandalism issue that we’ve had. You are a little bit more at risk for that type of vandalism, when the facility is vacant versus when it is occupied and this was a vacant facility. It’s now held for sale. We intend to sell the facility. It’s — frankly, it’s one of our IPO properties. It’s been empty for a couple of years. And so, it’s — I don’t think it’s anything — I think it’s just one of those bad type of things that happen to us. And — but we are very focused whenever we have an empty building. We have a process of putting up security cameras and making sure that there is sufficient security for that space to prevent this type of thing. These vandals just were very sophisticated in their approach and did a significant amount of damage to the building.
Alexander Goldfarb: Good luck. Thank you.
Dave Dupuy: Thanks, Alex. Appreciate all questions.
Operator: The next question comes from Rob Stevenson from Janney. Please go ahead.
Rob Stevenson: Good morning, guys. I guess a question on the Genesis stuff is competitors that might be interested in that business. I mean where are they sort of in that type of business on a rent coverage basis? Are they materially better than where Genesis is? Was Genesis for the assets that you guys have about average in that space? How should we be thinking about that in terms of the potential for credit upgrade, credit neutral, credit downgrade from an acquisition of the US business there?