SEC Form 10-Q filed by Community Healthcare Trust Incorporated
$CHCT
Real Estate Investment Trusts
Real Estate
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||||||||
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED | ||||||||
OR | ||||||||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO | ||||||||
Commission file number: 001-37401
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of Principal Executive Offices) (Zip Code)
(615 ) 771-3052
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each Class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | Emerging-growth company | Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The Registrant had 28,242,370 shares of Common Stock, $0.01 par value per share, outstanding as of October 22, 2024.
1
COMMUNITY HEALTHCARE TRUST INCORPORATED
FORM 10-Q
SEPTEMBER 30, 2024
TABLE OF CONTENTS
Page | ||||||||
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands, except per share amounts)
(Unaudited) | |||||||||||
| September 30, 2024 | December 31, 2023 | ||||||||||
ASSETS | |||||||||||
Real estate properties | |||||||||||
Land and land improvements | $ | $ | |||||||||
Buildings, improvements, and lease intangibles | |||||||||||
Personal property | |||||||||||
Total real estate properties | |||||||||||
Less accumulated depreciation | ( | ( | |||||||||
Total real estate properties, net | |||||||||||
Cash and cash equivalents | |||||||||||
Restricted cash | |||||||||||
| Real estate properties held for sale | |||||||||||
Other assets, net | |||||||||||
Total assets | $ | $ | |||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
Liabilities | |||||||||||
Debt, net | $ | $ | |||||||||
Accounts payable and accrued liabilities | |||||||||||
Other liabilities, net | |||||||||||
Total liabilities | |||||||||||
Commitments and contingencies | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
Additional paid-in capital | |||||||||||
Cumulative net income | |||||||||||
Accumulated other comprehensive income | |||||||||||
Cumulative dividends | ( | ( | |||||||||
Total stockholders’ equity | |||||||||||
Total liabilities and stockholders' equity | $ | $ | |||||||||
See accompanying notes to the condensed consolidated financial statements.
3
COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
(Unaudited; Dollars and shares in thousands, except per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
REVENUES | |||||||||||||||||||||||
Rental income | $ | $ | $ | $ | |||||||||||||||||||
Other operating interest, net | |||||||||||||||||||||||
EXPENSES | |||||||||||||||||||||||
Property operating | |||||||||||||||||||||||
General and administrative (1) | |||||||||||||||||||||||
Depreciation and amortization | |||||||||||||||||||||||
| OTHER (EXPENSE) INCOME | |||||||||||||||||||||||
| Gain on sale (impairment) of depreciable real estate asset | ( | ( | ( | ||||||||||||||||||||
Interest expense | ( | ( | ( | ( | |||||||||||||||||||
Credit loss reserve | ( | ||||||||||||||||||||||
Deferred income tax expense | ( | ( | |||||||||||||||||||||
Interest and other income, net | |||||||||||||||||||||||
| ( | ( | ( | ( | ||||||||||||||||||||
| NET INCOME (LOSS) | $ | $ | $ | ( | $ | ||||||||||||||||||
| NET INCOME (LOSS) PER COMMON SHARE | |||||||||||||||||||||||
| Net income (loss) per common share - Basic | $ | $ | $ | ( | $ | ||||||||||||||||||
| Net income (loss) per common share - Diluted | $ | $ | $ | ( | $ | ||||||||||||||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-BASIC | |||||||||||||||||||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-DILUTED | |||||||||||||||||||||||
| ___________ | |||||||||||||||||||||||
(1) General and administrative expenses for the nine months ended September 30, 2024 included stock-based compensation expense totaling approximately $ | |||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
4
COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
(Unaudited; Dollars in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||
| NET INCOME (LOSS) | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||||||||
| (Decrease) increase in fair value of cash flow hedges | ( | ||||||||||||||||||||||||||||
Reclassification for amounts recognized as interest expense | ( | ( | ( | ( | |||||||||||||||||||||||||
| Total other comprehensive (loss) income | ( | ( | |||||||||||||||||||||||||||
| COMPREHENSIVE (LOSS) INCOME | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
5
COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
(Unaudited; Dollars and shares in thousands, except per share amounts)
Preferred Stock | Common Stock | Additional Paid in Capital | Cumulative Net Income | Accumulated Other Comprehensive Income | Cumulative Dividends | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of issuance costs | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation, net of forfeitures | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Shares withheld on vesting of stock-based compensation | — | — | ( | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||
| Decrease in fair value of cash flow hedges | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||
| Reclassification for amounts recognized as interest expense | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Dividends to common stockholders ($ | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2024 | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of issuance costs | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation, net of forfeitures | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Shares withheld on vesting of stock-based compensation | — | — | ( | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||
| Increase in fair value of cash flow hedges | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Reclassification for amounts recognized as interest expense | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||
Dividends to common stockholders ($ | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
6
COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023
(Unaudited; Dollars and shares in thousands, except per share amounts)
Preferred Stock | Common Stock | Additional Paid in Capital | Cumulative Net Income | Accumulated Other Comprehensive Income | Cumulative Dividends | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of issuance costs | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation, net of forfeitures | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Increase in fair value of cash flow hedges | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Reclassification for amounts recognized as interest expense | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Dividends to common stockholders ($ | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation, net of forfeitures | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Shares withheld on vesting of stock-based compensation | — | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||
| Increase in fair value of cash flow hedges | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Reclassification for amounts recognized as interest expense | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Dividends to common stockholders ($ | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
7
COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited; Dollars in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
OPERATING ACTIVITIES | |||||||||||
| Net (loss) income | $ | ( | $ | ||||||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | |||||||||||
Other amortization | |||||||||||
Stock-based compensation | |||||||||||
| Accelerated amortization of stock-based compensation | |||||||||||
Straight-line rent receivable | ( | ( | |||||||||
| Net gain from insurance recovery on casualty loss | ( | ||||||||||
| Impairment of real estate asset, net of gain on sale | |||||||||||
Credit loss reserve | |||||||||||
| Deferred income tax expense | |||||||||||
Changes in operating assets and liabilities: | |||||||||||
Other assets | ( | ( | |||||||||
Accounts payable and accrued liabilities | |||||||||||
Other liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
INVESTING ACTIVITIES | |||||||||||
Acquisitions of real estate | ( | ( | |||||||||
Proceeds from sale of real estate | |||||||||||
Funding of notes receivable | ( | ( | |||||||||
Proceeds from the repayment of notes receivable | |||||||||||
| Insurance proceeds from casualty loss | |||||||||||
Capital expenditures on existing real estate properties | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
FINANCING ACTIVITIES | |||||||||||
| Net borrowings on revolving credit facility | |||||||||||
Mortgage note repayments | ( | ( | |||||||||
Dividends paid | ( | ( | |||||||||
Proceeds from issuance of common stock | |||||||||||
| Taxes paid on behalf of employees and shares withheld upon shares vesting | ( | ( | |||||||||
Equity issuance costs | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Decrease in cash, cash equivalents and restricted cash | ( | ( | |||||||||
Cash, cash equivalents and restricted cash, beginning of period | |||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | $ | |||||||||
Supplemental Cash Flow Information: | |||||||||||
Interest paid (net of capitalized interest) | $ | $ | |||||||||
Invoices accrued for construction, tenant improvement, and other capitalized costs | $ | $ | |||||||||
Reclassification of registration statement costs incurred in prior years to equity issuance costs | $ | $ | |||||||||
| Increase in fair value of cash flow hedges | $ | $ | |||||||||
Income taxes paid | $ | $ | |||||||||
| Capitalized interest | $ | $ | |||||||||
See accompanying notes to the condensed consolidated financial statements.
8
COMMUNITY HEALTHCARE TRUST INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Overview
Community Healthcare Trust Incorporated (the ‘‘Company’’, ‘‘we’’, ‘‘our’’) was organized in the State of Maryland on March 28, 2014. The Company is a fully-integrated healthcare real estate company that owns and acquires real estate properties that are leased to hospitals, doctors, healthcare systems or other healthcare service providers. As of September 30, 2024, the Company had gross investments of approximately $1.1 billion in 198 real estate properties (including a portion of one property accounted for as a sales-type lease with a gross amount totaling approximately $3.0 million and one property classified as an asset held for sale with a net investment totaling approximately $6.4 million. See Note 10 – Other Assets, net and Note 4 – Real Estate Acquisitions, Disposition, and Assets Held for Sale, respectively). The properties are located in 35 states, totaling approximately 4.4 million square feet in the aggregate and were approximately 91.3 % leased, excluding the real estate asset held for sale, at September 30, 2024 with a weighted average remaining lease term of approximately 6.8 years. Any references to square footage, property count, or occupancy percentages, and any amounts derived from these values in these notes to the Condensed Consolidated Financial Statements, are outside the scope of our independent registered public accounting firm's review.
Basis of Presentation
The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. This interim financial information should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Management believes that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2024. All intercompany accounts and transactions have been eliminated.
Use of Estimates in the Condensed Consolidated Financial Statements
Preparation of the Condensed Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying notes, including among others, estimates related to impairment assessments, purchase price allocations, valuation of properties held for sale, allowances for accounts and interest receivables, and valuation of financial instruments. Actual results may materially differ from those estimates.
Cash and Cash Equivalents and Restricted Cash
9
Notes to Condensed Consolidated Financial Statements - Continued
Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows:
Balance as of September 30, | |||||||||||
| (Dollars in thousands) | 2024 | 2023 | |||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Cash, cash equivalents and restricted cash | $ | $ | |||||||||
Rental Income
The primary source of revenue for the Company is generated through its leasing arrangements with its tenants which is accounted for under ASC Topic 842. The Company's rental income is based on contractual arrangements with its tenants. From the inception of a lease, if collection of substantially all of the lease payments is probable for a tenant, then rental income is recognized as earned over the life of the lease agreement on a straight-line basis. Recognizing rental revenue on a straight-line basis for leases may result in recognizing revenue in amounts more or less than amounts currently due from tenants.
Interest Income
Credit Losses
Losses from Operating Lease Receivables
We assess the probability of collecting substantially all rents under our leases, on a tenant-by-tenant basis, based on several factors, including, payment and default history, financial strength of the tenant and/or guarantors, historical and operating trends of the property, and the value of the underlying collateral, if any. If management determines that collection of substantially all of a tenant's lease payments is not probable, we will revert to recognizing such lease payments at the lesser of cash collected, lease income reflected on a straight-line basis, or another systematic basis plus variable rent when it becomes accruable and will reverse any recorded receivables related to that lease. In the event that management subsequently determines collection of substantially all of that tenant's lease payments is probable, management will reinstate and record all such receivables for the lease in accordance with the lease terms. The Company also maintains a general allowance for its lease receivables that management has determined are probable of collection. Accounts receivable, straight-line rent and related allowances are included in Other assets on the Company's Condensed Consolidated Balance Sheets and any offsetting reduction in income is included in rental income on the Company's Condensed Statements of Operations.
Credit Losses on Loans and Interest Receivables
Historically, the Company has at times entered into loans with certain of its tenants for working capital or other needs. We consider our loans to be incidental to our main business of acquiring and leasing healthcare real estate. Credit losses on financial instruments are measured using an expected credit loss ("CECL") model in evaluating the collectability of notes receivable and other financial instruments. The CECL impairment model requires an estimate of expected credit losses, measured over the contractual life of an instrument, that considers forecasts of future economic conditions in addition to information about past events and current conditions. Under the CECL model, the Company estimates credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument and is required to record a credit loss expense (or reversal) in each reporting period. The Company evaluates factors such as its historical credit loss experience with the borrower or similar financial assets, current economic conditions, current and expected future financial condition of the borrower, as well as payment history of the borrower, along with other relevant factors for each borrower or similar instruments. If a sale of the borrower's collateral, such as the underlying business or real estate, is expected to repay amounts due to the Company, the Company will also evaluate the underlying collateral in measuring any expected credit loss. The Company's financial instruments included in the scope of the CECL guidance are the principal balances of its tenant
10
Notes to Condensed Consolidated Financial Statements - Continued
notes receivable and its net investment in a sales-type lease which are included in Other assets on the Company's Condensed Consolidated Balance Sheets.
Income Taxes
The Company has elected to be taxed as a real estate investment trust ("REIT"), as defined under the Internal Revenue Code of 1986, as amended (the "Code"). The Company and two subsidiaries have also elected for those subsidiaries to be treated as taxable REIT subsidiaries ("TRSs"), which are subject to federal and state income taxes. No provision has been made for federal income taxes for the REIT; however, the Company has recorded income tax expense or benefit for the TRSs to the extent applicable. The Company intends at all times to qualify as a REIT under the Code. The Company must distribute at least 90% per annum of its REIT taxable income to its stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP) and meet other requirements to continue to qualify as a REIT.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued ASU 2023-07, Segment Reporting (Topic 280) on November 27, 2023. The provisions of this update generally include; (i) a requirement to disclose significant segment expenses, on an annual and interim basis, that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of segment profit or loss; (ii) a requirement to disclose the title and position of the CODM and an explanation of how the CODM uses the reported measures of segment profit and loss in assessing segment performance and deciding how to allocate resources, and (iii) a requirement that entity's with a single reportable segment provide all of the disclosures required by the amendments in this update. This update is effective for annual reporting periods beginning after December 31, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company does not expect that the adoption of this ASU will have a material impact on its consolidated financial statements other than the new disclosure requirements, as we operate under a single reportable segment. Compliance with these new disclosure requirements will begin with the Company's Annual Report on Form 10-K for the year ended December 31, 2024.
NOTE 2. REAL ESTATE INVESTMENTS
As of September 30, 2024, we had gross investments of approximately $1.1 billion in 198 real estate properties (including a portion of one property accounted for as a sales-type lease with a gross amount totaling approximately $3.0 million and one property classified as held for sale with a gross amount totaling approximately $6.4 million). The Company's investments are diversified by property type, geographic location, and tenant as shown in the following tables:
| Property Type | # of Properties | Gross Investment (in thousands) | ||||||
| Medical Office Building | $ | |||||||
| Inpatient Rehabilitation Hospitals | ||||||||
| Acute Inpatient Behavioral | ||||||||
| Specialty Centers | ||||||||
| Physician Clinics | ||||||||
| Surgical Centers and Hospitals | ||||||||
| Behavioral Specialty Facilities | ||||||||
| Long-term Acute Care Hospitals | ||||||||
| Total | $ | |||||||
11
Notes to Condensed Consolidated Financial Statements - Continued
| State | # of Properties | Gross Investment (in thousands) | ||||||
| Texas | $ | |||||||
| Illinois | ||||||||
| Ohio | ||||||||
| Florida | ||||||||
| Pennsylvania | ||||||||
| All Others | ||||||||
| Total | $ | |||||||
| Primary Tenant | # of Properties | Gross Investment (in thousands) | ||||||
Lifepoint Health | $ | |||||||
| US HealthVest | ||||||||
| All Others (less than 4%) | ||||||||
| Total | $ | |||||||
NOTE 3. REAL ESTATE LEASES
Lessor Accounting
The Company’s properties are generally leased pursuant to non-cancelable, fixed-term operating leases with expiration dates through 2044. The Company’s leases generally require the lessee to pay minimum rent, with fixed rent renewal terms or increases based on a Consumer Price Index and may also include additional rent, which may include the reimbursement of taxes (including property taxes), insurance, maintenance and other operating costs associated with the leased property.
Some leases provide the lessee, during the term of the lease, with an option or right of first refusal to purchase the leased property. Some leases also allow the lessee to renew or extend their lease term or in some cases terminate their lease, based on conditions provided in the lease.
Future minimum lease payments under the non-cancelable operating leases due to the Company for the years ending December 31, as of September 30, 2024, are as follows (in thousands):
| 2024 (three months ended December 31) | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| 2029 and thereafter | |||||
| $ | |||||
Rental income is recognized as earned over the life of the lease agreement on a straight-line basis when collection of rental payments over the term of the lease is probable. Straight-line rent increased rental income by approximately $0.7 million and $0.4 million, respectively, for the three months ended September 30, 2024 and 2023, and increased rental income by approximately $1.2 million and $2.2 million, respectively, for the nine months ended September 30, 2024 and 2023.
Purchase Option Provisions
Certain of the Company's leases provide the lessee with a purchase option or a right of first refusal to purchase the leased property. The purchase option provisions generally allow the lessee to purchase the leased property at fair
12
Notes to Condensed Consolidated Financial Statements - Continued
value or at an amount greater than the Company's gross investment in the leased property at the time of the purchase. At September 30, 2024, the Company had an aggregate gross investment of approximately $32.9 million in 10 real estate properties with purchase options exercisable at September 30, 2024 that had not been exercised.
Sales-type Lease
The Company has a portion of one property accounted for as a sales-type lease with a gross amount totaling approximately $3.0 million included in other assets, net on the Company's Condensed Consolidated Balance Sheets. Future lease payments due to the Company under this lease for the years ending December 31, as of September 30, 2024, are as follows (in thousands):
| 2024 (three months ended December 31) | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| 2029 and thereafter | |||||
| Total undiscounted lease receivable | |||||
| Discount | ( | ||||
| Lease receivable | $ | ||||
The Company recognized interest income of approximately $0.1 0.2
Lessee Accounting
At September 30, 2024, the Company was obligated, as the lessee, under four non-prepaid ground leases accounted for as operating leases with expiration dates, including renewal options, through 2076, and two non-prepaid ground leases accounted for as financing leases with expiration dates through 2109, including renewal options. Any rental increases related to the Company's ground leases are generally either stated or based on the Consumer Price Index. The Company's future lease payments under these non-prepaid ground leases were as follows (in thousands):
| Operating | Financing | |||||||
| 2024 (three months ended December 31) | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 and thereafter | ||||||||
| Total undiscounted lease payments | ||||||||
| Discount | ( | ( | ||||||
| Lease liabilities | $ | $ | ||||||
13
Notes to Condensed Consolidated Financial Statements - Continued
The following table discloses other information regarding the ground leases.
| Three Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Operating leases: | ||||||||
| Weighted-average remaining lease term in years (including renewal options) | ||||||||
| Weighted-average discount rate | % | % | ||||||
| Financing leases: | ||||||||
| Weighted-average remaining lease term in years (including renewal options) | ||||||||
| Weighted-average discount rate | % | % | ||||||
NOTE 4. REAL ESTATE ACQUISITIONS, DISPOSITION, AND ASSETS HELD FOR SALE
Acquisitions
During the third quarter of 2024, the Company acquired one physician clinic. Upon acquisition, the property was 100.0 % leased to a tenant with a lease expiration in 2027. Amounts reflected in revenues and net income for the property for the three months ended September 30, 2024 were approximately $116,000 and $26,000 , respectively, and transaction costs totaling approximately $123,000 were capitalized relating to this property acquisition.
During the second quarter of 2024, the Company acquired one inpatient rehabilitation facility. The property was 100.0 % leased to a tenant with a lease expiration in 2039. Amounts reflected in revenues and net income for this property for the nine months ended September 30, 2024 was approximately $1.1 million and $0.8 million, respectively, and transaction costs totaling approximately $47,000 were capitalized relating to this property acquisition.
During the first quarter of 2024, the Company acquired four real estate properties in three transactions. Upon acquisition, the properties were 98.6 % leased in the aggregate with lease expirations through 2039. Amounts reflected in revenues and net income for these properties for the nine months ended September 30, 2024 were approximately $2.1 million and $1.0 million, respectively, and transaction costs totaling approximately $0.3 million were capitalized relating to these property acquisitions.
The following table summarizes our property acquisitions for the nine months ended September 30, 2024:
| Location | Property Type (1) | Number of Properties | Date Acquired | Purchase Price | Cash Consideration | Real Estate | Other (2) | Square Footage | ||||||||||||||||||
| (000's) | (000's) | (000's) | (000's) | |||||||||||||||||||||||
| New Bedford, MA | LTACH | 1/31/24 | $ | $ | $ | $ | ( | |||||||||||||||||||
| Elkton, MD | MOB | 3/25/24 | ( | |||||||||||||||||||||||
| Bemidji, MN | MOB | 3/29/24 | ( | |||||||||||||||||||||||
| San Antonio, TX | IRF | 4/16/24 | ||||||||||||||||||||||||
| Camp Hill, PA | PC | 7/22/24 | ( | |||||||||||||||||||||||
| $ | $ | $ | $ | ( | ||||||||||||||||||||||
(1) LTACH - Long-term Acute Care Hospital; MOB - Medical Office Building; IRF - Inpatient Rehabilitation Facility; PC - Physician Clinic | ||||||||||||||||||||||||||
(2) Includes other assets acquired, liabilities assumed, and above and below-market intangibles recognized at acquisition | ||||||||||||||||||||||||||
14
Notes to Condensed Consolidated Financial Statements - Continued
The following table summarizes the relative fair values of the assets acquired and liabilities assumed in the property acquisitions for the nine months ended September 30, 2024:
| Relative Fair Value | Estimated Useful Life | |||||||||||||
| (in thousands) | (in years) | |||||||||||||
| Land and land improvements | $ | |||||||||||||
| Building and building improvements | ||||||||||||||
| Intangibles: | ||||||||||||||
| In-place lease intangibles | ||||||||||||||
| Above-market lease intangibles | ||||||||||||||
| Below-market lease intangibles | ( | |||||||||||||
| Total intangibles | ||||||||||||||
| Accounts payable, accrued liabilities and other liabilities assumed | ( | |||||||||||||
| Accounts receivable and other assets acquired | ||||||||||||||
| Prorated rent, interest and operating expense reimbursement amounts collected | ( | |||||||||||||
| Total cash consideration | $ | |||||||||||||
Disposition
During the third quarter of 2024, the Company disposed of an 11,200 square foot surgical center in Texas, and received net proceeds of approximately $1.0 million. The vacant property was previously classified as real estate property held for sale on the Company's Condensed Consolidated Balance Sheet. The Company recorded impairments on the property in previous quarters to adjust the carrying value of the property to its fair value less costs to sell, recorded a casualty loss due to vandalism at the property, and sold the property during the three months ended September 30, 2024, recording an immaterial gain on sale.
Real Estate Properties Held for Sale
The Company had one property classified as held for sale as of September 30, 2024 and two properties classified as held for sale as of December 31, 2023. The table below reflects the real estate assets classified as held for sale as of September 30, 2024 and December 31, 2023.
| (Dollars in thousands) | September 30, 2024 | December 31, 2023 | |||||||||
| Balance Sheet data: | |||||||||||
| Land | $ | $ | |||||||||
| Building, improvements, and lease intangibles | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Real estate properties held for sale, net | $ | $ | |||||||||
15
Notes to Condensed Consolidated Financial Statements - Continued
NOTE 5. DEBT, NET
The table below details the Company's debt as of September 30, 2024 and December 31, 2023.
| Balance as of | |||||||||||
| (Dollars in thousands) | September 30, 2024 | December 31, 2023 | Maturity Dates | ||||||||
| Credit Facility: | |||||||||||
| Revolving Credit Facility | $ | $ | 3/26 | ||||||||
| A-3 Term Loan, net | 3/26 | ||||||||||
| A-4 Term Loan, net | 3/28 | ||||||||||
| A-5 Term Loan, net | 3/30 | ||||||||||
| Mortgage Note Payable, net | 5/24 | ||||||||||
| $ | $ | ||||||||||
Credit Facility
The Company's third amended and restated credit agreement, as amended (the "Credit Facility") is by and among
Community Healthcare Trust Incorporated, as borrower, the several banks and financial institutions party thereto as lenders, and Truist Bank, as administrative agent. The Company amended the Credit Facility on October 16, 2024. See Note 14 – Subsequent Events on the Credit Facility refinancing.
As of September 30, 2024, the Credit Facility provided for a $150.0 million revolving credit facility (the "Revolving Credit Facility") and $350.0 million in term loans (the "Term Loans"). The Revolving Credit Facility was scheduled to mature on March 19, 2026 and included one 12-month option to extend the maturity date, subject to the satisfaction of certain conditions. The Term Loans include a seven-year term loan facility in the aggregate principal amount of $75.0 million (the "A-3 Term Loan"), which was scheduled to mature on March 29, 2026, a seven-year term loan facility in the aggregate principal amount of $125.0 million (the "A-4 Term Loan"), which matures on March 19, 2028, and a seven-year and three-month term loan facility in the aggregate principal amount of $150.0 million (the "A-5 Term Loan") which matures on March 14, 2030. Loans under the Credit Facility are interest only with principal amounts due as of each facility's applicable maturity date. The Credit Facility allowed the Company to borrow, through the accordion feature, up to $700.0 million, including the ability to add and fund incremental term loans. The Company's material subsidiaries are guarantors of the obligations under the Credit Facility.
Amounts outstanding under the Revolving Credit Facility bore interest at a floating rate based on the Company's option, on either: (i) adjusted term SOFR or adjusted daily simple SOFR plus 1.25 % to 1.90 % or (ii) a base rate plus 0.25 % to 0.90 % in each case, depending upon the Company’s leverage ratio. In addition, the Company is obligated to pay an annual fee equal to 0.20 % of the amount of the unused portion of the Revolving Credit Facility if amounts borrowed are greater than 33.3 % of the borrowing capacity under the Revolving Credit Facility and 0.25 % of the unused portion of the Revolving Credit Facility if amounts borrowed are less than or equal to 33.3 % of the borrowing capacity under the Revolving Credit Facility. At September 30, 2024, the Company had $125.0 million outstanding under the Revolving Credit Facility with a weighted average interest rate of 6.58 % and a borrowing capacity remaining of $25.0 million.
Amounts outstanding under the Term Loans will bear interest at a floating rate that is based, at the Company's option, on either (i) adjusted term SOFR or adjusted daily SOFR plus 1.65 % to 2.30 %, plus a simple SOFR adjustment equal to 0.10 % per annum, or (ii) a base rate plus 0.65 % to 1.30 %, in each case, depending upon the Company’s leverage ratio. The Company has entered into interest rate swaps to fix the interest rates on the Term Loans. See Note 6 – Derivative Financial Instruments for more details on the interest rate swaps. At September 30, 2024, the Company had $350.0 million outstanding under the Term Loans with a fixed weighted average interest rate under the swaps of approximately 4.4 %.
16
Notes to Condensed Consolidated Financial Statements - Continued
The Company’s ability to borrow under the Credit Facility is subject to its ongoing compliance with a number of customary affirmative and negative covenants, including limitations with respect to liens, indebtedness, distributions, mergers, consolidations, investments, restricted payments and asset sales, as well as financial maintenance covenants. The Company was in compliance with its financial covenants under its Credit Facility as of September 30, 2024.
Mortgage Note Payable
During the three months ended June 30, 2024, the Company repaid its mortgage note payable totaling approximately $4.8 million.
NOTE 6. DERIVATIVE FINANCIAL INSTRUMENTS
Risk Management Objective of Using Derivatives
The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
As of September 30, 2024, the Company had fifteen outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk for notional amounts totaling $350.0 million, which mature between 2026 and 2030, at the maturity dates of the associated term loans (see Note 5 – Debt, net).
Tabular Disclosure of Fair Value of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023.
| Asset Derivatives Fair Value at | Liability Derivatives Fair Value at | ||||||||||||||||||||||
| (Dollars in thousands) | September 30, 2024 | December 31, 2023 | Balance Sheet Classification | September 30, 2024 | December 31, 2023 | Balance Sheet Classification | |||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | |||||||||||||||||||
The changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income ("AOCI") and are subsequently reclassified to interest expense in the period that the hedged forecasted transaction affects earnings.
Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s Term Loans. During the next twelve months, the Company estimates that an additional $5.4 million will be reclassified from AOCI as a decrease to interest expense.
17
Notes to Condensed Consolidated Financial Statements - Continued
Tabular Disclosure of the Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income
The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three and nine months ended September 30, 2024 and 2023.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
| (Dollars in thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Amount of unrealized (loss) gain recognized in OCI on derivative | $ | ( | $ | $ | $ | ||||||||||||
| Amount of gain reclassified from AOCI into interest expense | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||
| $ | $ | $ | $ | ||||||||||||||
Tabular Disclosures of Offsetting Derivatives
The tables below present a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of September 30, 2024 and December 31, 2023. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the Condensed Consolidated Balance Sheets.
Offsetting of Derivative Assets (as of September 30, 2024) | ||||||||||||||||||||
| Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets | ||||||||||||||||||||
| (In thousands) | Gross Amounts of Recognized Assets | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | Net Amounts of Assets in the Condensed Consolidated Balance Sheets | Financial Instruments | Cash Collateral Received | Net Amount | ||||||||||||||
| Derivatives | $ | $ | $ | $ | ( | $ | $ | |||||||||||||
Offsetting of Derivative Liabilities (as of September 30, 2024) | ||||||||||||||||||||
| Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets | ||||||||||||||||||||
| (In thousands) | Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | Net Amounts of Liabilities in the Condensed Consolidated Balance Sheets | Financial Instruments | Cash Collateral Received | Net Amount | ||||||||||||||
| Derivatives | $ | ( | $ | $ | ( | $ | $ | $ | ||||||||||||
Offsetting of Derivative Assets (as of December 31, 2023) | ||||||||||||||||||||
| Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets | ||||||||||||||||||||
| (In thousands) | Gross Amounts of Recognized Assets | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | Net Amounts of Assets in the Condensed Consolidated Balance Sheets | Financial Instruments | Cash Collateral Received | Net Amount | ||||||||||||||
| Derivatives | $ | $ | $ | $ | $ | $ | ||||||||||||||
18
Notes to Condensed Consolidated Financial Statements - Continued
Offsetting of Derivative Liabilities (as of December 31, 2023) | ||||||||||||||||||||
| Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets | ||||||||||||||||||||
| (In thousands) | Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | Net Amounts of Liabilities in the Condensed Consolidated Balance Sheets | Financial Instruments | Cash Collateral Received | Net Amount | ||||||||||||||
| Derivatives | $ | $ | $ | $ | $ | $ | ||||||||||||||
Credit-risk-related Contingent Features
As of September 30, 2024, the Company did not have any derivatives in a net liability position. As of September 30, 2024, the Company had not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company terminated these interest rate swaps or breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value.
NOTE 7. STOCKHOLDERS' EQUITY
Common Stock
The following table provides a reconciliation of the beginning and ending common stock balances for the nine months ended September 30, 2024 and for the year ended December 31, 2023:
| (In thousands) | Nine Months Ended September 30, 2024 | Year Ended December 31, 2023 | ||||||
| Balance, beginning of period | ||||||||
| Issuance of common stock | ||||||||
| Vested RSUs | ||||||||
| Restricted stock issued, net of withheld shares and forfeitures | ||||||||
| Balance, end of period | ||||||||
| _____________ | ||||||||
ATM Program
The Company has an at-the-market offering program ("ATM Program"), with Piper Sandler & Co., Evercore Group L.L.C., Truist Securities, Inc., Regions Securities LLC, Robert W. Baird & Co. Incorporated, Fifth Third Securities, Inc. and Janney Montgomery Scott LLC, as sales agents (collectively, the “Agents”). Under the ATM Program, the Company may issue and sell shares of its common stock, having an aggregate gross sales price of up to $500.0 million. The shares of common stock may be sold from time to time through or to one or more of the Agents, as may be determined by the Company in its sole discretion, subject to the terms and conditions of the agreement and applicable law.
The Company's activity under the ATM Program during the nine months ended September 30, 2024 is detailed in the table below. As of September 30, 2024, the Company had approximately $426.3 million remaining that may be issued under the ATM Program.
| Three Months Ended September 30, 2024 | Nine Months Ended September 30, 2024 | |||||||
Shares issued (in thousands) | ||||||||
Net proceeds received (in millions) | $ | |||||||
| Average gross sales price per share | $ | |||||||
19
Notes to Condensed Consolidated Financial Statements - Continued
NOTE 8. NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income (loss) per common share for the three and nine months ended September 30, 2024 and 2023, respectively.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands, except per share data) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Net income (loss) | $ | $ | $ | ( | $ | ||||||||||||||||||
| Participating securities' share in earnings | ( | ( | ( | ( | |||||||||||||||||||
| Net income (loss), less participating securities' share in earnings | $ | $ | $ | ( | $ | ||||||||||||||||||
| Weighted average Common Shares outstanding | |||||||||||||||||||||||
Weighted average Common Shares outstanding | |||||||||||||||||||||||
Unvested restricted shares | ( | ( | ( | ( | |||||||||||||||||||
| Weighted average Common Shares outstanding–Basic | |||||||||||||||||||||||
Weighted average Common Shares outstanding –Diluted | |||||||||||||||||||||||
| Basic Net Income (Loss) Per Common Share | $ | $ | $ | ( | $ | ||||||||||||||||||
| Diluted Net Income (Loss) Per Common Share | $ | $ | $ | ( | $ | ||||||||||||||||||
NOTE 9. STOCK INCENTIVE PLAN
Adoption of the 2024 Incentive Plan
The 2024 Incentive Plan, as amended, (the "Plan") was approved by our stockholders at our annual meeting on May 2, 2024. The Plan replaced our 2014 Incentive Plan, as amended, (the "2014 Plan") which had expired on March 31, 2024. The Plan, which will expire on March 4, 2034, implements several changes from the previous 2014 Plan:
•Freezes all awards under the 2014 Plan as of its expiration date;
•Removes the "evergreen provision" which allowed for the incremental automatic increase in the number of shares of common stock reserved for issuance under the Plan;
•Increases the number of shares of common stock authorized for issuance under the Plan to 1,150,000 ; and
•Expands the types of awards that may be awarded under the Plan.
A summary of restricted stock activity for the three and nine months ended September 30, 2024 and 2023 is included in the table below, as well as compensation expense recognized from the amortization of the value of shares over the applicable vesting periods.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
| (Dollars and shares in thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||
| Stock-based awards, beginning of period | ||||||||||||||||||||
| Stock in lieu of compensation | ||||||||||||||||||||
| Stock awards | ||||||||||||||||||||
| Total stock granted | ||||||||||||||||||||
Vested shares (1) | ( | ( | ( | |||||||||||||||||
| Forfeited shares | ( | ( | ( | |||||||||||||||||
| Stock-based awards, end of period | ||||||||||||||||||||
Amortization expense (1) | $ | $ | $ | $ | ||||||||||||||||
| ___________ | ||||||||||||||||||||
(1) Amortization expense for the nine months ended September 30, 2023 included accelerated amortization totaling approximately $ | ||||||||||||||||||||
20
Notes to Condensed Consolidated Financial Statements - Continued
Restricted Stock Issuances
On January 12, 2024, pursuant to the 2014 Incentive Plan and the Third Amended and Restated Alignment of Interest Program, the Company granted 79,533 shares of restricted stock to its employees, in lieu of salary, that will cliff vest between and eight years . Of the shares granted, 43,292 shares of restricted stock were granted in lieu of compensation from the program pool and 36,241 shares of restricted stock were awarded based on the restriction period elected from the plan pool. Also, on January 12, 2024, pursuant to the 2014 Incentive Plan and the Non-Executive Officer Incentive Program, the Company granted 10,159 shares of restricted stock to certain employees that will cliff vest in five years .
On May 2, 2024, pursuant to the 2024 Incentive Plan, the Company granted an aggregate of 22,070 shares of restricted stock to its Board of Directors, which will cliff vest in three years . On May 16, 2024, pursuant to the 2024 Incentive Plan and the Fourth Amended and Restated Alignment of Interest Program, the Company granted an aggregate of 24,887 shares of restricted stock to its Board of Directors, in lieu of fees, that will cliff vest in three years . Of the shares granted, 15,553 shares of restricted stock were granted in lieu of compensation from the program pool and 9,334 shares of restricted stock were awarded based on the restriction period elected from the plan pool. Also, on June 3, 2024, pursuant to the 2024 Incentive Plan, the Company granted 7,000 shares of restricted stock to an employee that will cliff vest in five years .
During the third quarter of 2024, pursuant to the 2024 Incentive Plan and the Fourth Amended and Restated Alignment of Interest Program, the Company granted an aggregate of 195,447 shares of restricted stock to its employees, in lieu of salary and bonus compensation, which will cliff vest between and eight years . Of the shares granted, 98,111 shares of restricted stock were granted in lieu of compensation from the program pool and 97,336 shares of restricted stock were awarded based on the restriction period elected from the plan pool.
Compensation Programs under the 2024 Incentive Plan
The Company's various programs under the 2024 Incentive Plan have been amended during 2024 for various items, including: (i) allowing for the grant of RSUs and other types of awards other than restricted stock; (ii) limiting the maximum elective deferral percentage amount of salary and bonus to 50 % to the acquisition of restricted stock for certain participants (previously 100 %); and (iii) limiting the duration of the restriction period election depending on the retirement eligibility date per those participant's employment agreement. The deferral and restriction period limitations were effective beginning January 1, 2024 for salary and other compensation deferrals and are now effective for performance periods commencing on and after July 1, 2024 for cash bonus deferrals.
Restricted Stock Units
The Plan, and previous 2014 Plan, provide for the award of restricted stock units ("RSUs"). The Company historically granted long-term incentive awards to its executive officers which was comprised of restricted stock that vested in 8 years, based on backward-looking performance metrics. On January 2, 2024, the Board approved and adopted a new incentive compensation structure for its executive officers, including the issuance of time-based and performance-based RSUs with three-year forward-looking performance targets beginning with an initial performance period beginning July 1, 2023.
On January 2, 2024, the Company granted performance-based and time-based RSUs to its executive officers under the 2014 Incentive Plan and the Third Amended and Restated Executive Officer Incentive Program. These RSUs with a grant date value totaling $2.6 million are forward-looking with a three-year performance period beginning July 1, 2023. The performance-based RSUs were valued by independent specialists utilizing a Monte Carlo simulation to calculate the weighted average grant date fair values of $13.67 per share for the Absolute TSR units and $20.77 per share for the Relative TSR units. The grant date fair value of the Time-based TSR units was based on the Company's stock price on the grant date of $26.62 . The combined weighted average grant date fair value of the RSUs granted was $19.24 per share. The following assumptions were used in valuing the performance-based RSUs:
21
Notes to Condensed Consolidated Financial Statements - Continued
| Volatility | % | |||||||||||||
| Dividend assumption | % | |||||||||||||
| Expected term | ||||||||||||||
| Risk-free rate | % | |||||||||||||
| Stock price (per share) | $ | |||||||||||||
A summary of the Company's RSU activity during the three and nine months ended September 30, 2024 and 2023, respectively, is included in the table below, as well as compensation expense recognized from the amortization of the value of RSUs over the applicable vesting periods.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
| (Dollars and RSUs in thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||
| Restricted Stock Units, beginning of period | ||||||||||||||||||||
Absolute TSR Performance-based RSUs granted (1) | ||||||||||||||||||||
Relative TSR Performance-based RSUs granted (1) | ||||||||||||||||||||
Time-based RSUs granted (2) | ||||||||||||||||||||
| Total RSUs granted | ||||||||||||||||||||
Vested RSUs (2) | ( | ( | ||||||||||||||||||
| Restricted Stock Units, end of period | ||||||||||||||||||||
| Amortization expense | $ | $ | $ | $ | ||||||||||||||||
| Grant Date Value Remaining at period end to be Amortized During the Performance Period | $ | $ | $ | $ | ||||||||||||||||
| ______________ | ||||||||||||||||||||
| (1) The number of Performance-based RSUs granted were based on target levels. Actual number of shares granted will be based on performance at the end of the performance period which is June 30, 2026. The Performance-based RSUs, if earned, will vest at the end of the performance period. | ||||||||||||||||||||
(2) The number of Time-based RSUs granted were based on target levels. One-third of these RSUs will vest on each of June 30, 2025 and 2026. The first tranche of the | ||||||||||||||||||||
NOTE 10. OTHER ASSETS, NET
Other assets, net on the Company's Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023 are detailed in the table below.
| Balance as of | ||||||||
| (Dollars in thousands) | September 30, 2024 | December 31, 2023 | ||||||
| Notes receivable, net of credit loss reserve | $ | $ | ||||||
| Straight-line rent receivables, net | ||||||||
| Fair value of interest rate swaps | ||||||||
| Leasing commissions, net | ||||||||
| Sales-type lessor receivable | ||||||||
| Prepaid assets | ||||||||
| Accounts receivable, net | ||||||||
| Above-market intangible assets, net | ||||||||
| Interest receivable, net | ||||||||
| Operating lease right of use assets | ||||||||
| Deferred financing costs, net | ||||||||
| Other | ||||||||
| $ | $ | |||||||
22
Notes to Condensed Consolidated Financial Statements - Continued
The Company's notes receivable mainly included:
•At September 30, 2024 and December 31, 2023, notes receivable included a term loan totaling $3.8 million and $6.0 million, respectively, secured by all assets and ownership interests in seven long-term acute care hospitals and one inpatient rehabilitation hospital owned by the borrower. The term loan will be repaid in equal monthly installments of $250,000 through the maturity date of December 31, 2025 and bears interest at 9 % per annum.
•At September 30, 2024 and December 31, 2023, notes receivable included a term loan totaling $17.0 6.3 million and $5.4 million drawn, respectively, secured by assets and ownership interests of six geriatric behavioral hospitals and affiliated companies all of which are co-borrowers on the loans. At September 30, 2024, the Company had an unfunded commitment of $2.2 million on the revolving credit facility and an unfunded commitment of up to $2.0 million on an advancing term loan facility. The term loan bears interest at 9 % per annum, with interest only payments due initially and then equal monthly installments of principal payments due beginning March 31, 2025. The term loan facility matures on December 31, 2032. The revolving credit facility bears interest at 9 % per annum and matures on December 31, 2025. The advancing term loan may be funded at the Company's discretion, and bears interest at 9 % per annum on any amount funded, that may be used by the borrower to pay existing liabilities of co-borrowers. The term loan, the revolving credit facility and the additional commitment all include a 3 % per annum non-cash interest charge that is due and payable upon the earlier of the repayment or maturity of each note.
In the second quarter of 2024, the Company determined that the collectability of the term loan and revolver loan was not reasonably assured. The tenant/borrower has experienced challenges with patient census and employee staffing, which has impacted cash flows from operations and the consistency of rent and interest payments to the Company. In the second quarter of 2024, the Company valued the notes based on its estimated value of the underlying collateral. As a result, in the second quarter of 2024, the Company recorded an $11.0 million credit loss reserve on its notes receivable with the tenant and reversed approximately $1.4 million of interest and placed the notes on non-accrual status. Changes in cash flows of the business, changes in market data, such as market multiples, and other relevant data may drive a change in the estimated value of the underlying collateral. At September 30, 2024, however, the Company did not believe that there were any material changes to warrant a change in the credit loss reserve recorded in the second quarter of 2024.
•At September 30, 2024 and December 31, 2023, notes receivable also included a $2.2 million and $2.3 million, respectively, revolving credit facility. This note will be repaid in equal monthly installments of $40,000 beginning on November 1, 2024, through the maturity date of April 1, 2027. The revolving credit facility bears interest at 9 % per annum, as well as a 3 % per annum non-cash interest charge that is due and payable upon the earlier of the repayment or maturity of the note.
•At September 30, 2024, notes receivable also included a $2.0 million construction mortgage loan with a developer which is secured by the land, improvements, and personal property. The mortgage loan, which bears interest at 10 % per annum, will be interest only until the principal is due at the earlier of the completion and acquisition of the property, or August 15, 2027.
The Company identified the borrowers of these notes as variable interest entities ("VIEs"), but management determined that the Company was not the primary beneficiary of the VIEs because we lack either directly or through related parties any material decision-making rights or control of the entities that impact the borrowers' economic performance. We are not obligated to provide support beyond our stated commitment to the borrowers, and accordingly our maximum exposure to loss as a result of this relationship is limited to the amount of our outstanding notes receivable. The VIEs that we have identified at September 30, 2024 are summarized in the table below.
23
Notes to Condensed Consolidated Financial Statements - Continued
| Classification | Carrying Amount (in thousands) | Maximum Exposure to Loss (in thousands) | ||||||
| Note receivable (term loan) | $ | $ | ||||||
| Note receivable (revolving credit facility) | $ | $ | ||||||
| Note receivable (mortgage note) | $ | $ | ||||||
| Notes receivable (revolving credit facility and term loan), net of credit loss | $ | $ | ||||||
NOTE 11. OTHER LIABILITIES, NET
Other liabilities, net on the Company's Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023 are detailed in the table below.
| Balance as of | ||||||||
| (Dollars in thousands) | September 30, 2024 | December 31, 2023 | ||||||
| Prepaid rent | $ | $ | ||||||
| Security deposits | ||||||||
| Below-market lease intangibles, net | ||||||||
| Fair value of interest rate swaps | ||||||||
| Other | ||||||||
| $ | $ | |||||||
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate the fair value.
Cash and cash equivalents and restricted cash - The carrying amount approximated the fair value. The fair value estimates were determined using level 1 inputs.
Notes and mortgage note receivable - The fair value was estimated using cash flow analyses, based on an assumed market rate of interest or at a rate consistent with the rates on notes carried by the Company and were classified as level 2 inputs in the hierarchy. The fair value of notes receivable with one tenant was determined utilizing the fair value of the receivables' collateral, as the receivables are collateral-dependent, and were classified as level 3 inputs in the hierarchy.
Borrowings under our Credit Facility - The carrying amount approximated the fair value because the borrowings were based on variable market interest rates. The fair value estimates were determined using level 2 inputs.
Derivative financial instruments (Interest rate swaps) - The fair value was estimated using discounted cash flow techniques. These techniques incorporate primarily level 2 inputs. The market inputs were utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation model for interest rate swaps were observable in active markets and were classified as level 2 inputs in the hierarchy.
Mortgage note payable - The fair value was estimated using cash flow analyses which were based on an assumed market rate of interest or at a rate consistent with the rates on mortgage notes assumed by the Company and were classified as level 2 inputs in the hierarchy.
The table below details the fair values and carrying values for our notes and mortgage note receivable, interest rate swaps, and mortgage note payable at September 30, 2024 and December 31, 2023, using level 2 and level 3 inputs.
24
Notes to Condensed Consolidated Financial Statements - Continued
| September 30, 2024 | December 31, 2023 | ||||||||||||||||
| (Dollars in thousands) | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
| Notes and mortgage note receivable (Level 2) | $ | $ | $ | $ | |||||||||||||
Notes receivable, net of credit loss (1) | $ | $ | $ | $ | |||||||||||||
| Interest rate swap asset | $ | $ | $ | $ | |||||||||||||
| Interest rate swap liability | $ | $ | $ | $ | |||||||||||||
| Mortgage note payable (principal amount) | $ | $ | $ | $ | |||||||||||||
| ___________________ | |||||||||||||||||
(1) Calculated utilizing Level 3 inputs at September 30, 2024 and Level 2 inputs at December 31, 2023. | |||||||||||||||||
NOTE 13. COMMITMENTS AND CONTINGENCIES
Tenant Improvements
The Company may provide tenant improvement allowances in new or renewal leases for the purpose of refurbishing or renovating tenant space. The Company may also assume tenant improvement obligations included in leases acquired in its real estate acquisitions. As of September 30, 2024, the Company had approximately $26.0 million in commitments for tenant improvements. Six of these projects totaling $13.1 million, represent redevelopment projects of the buildings into different healthcare uses backed by long-term leases.
Capital Improvements
The Company has entered into contracts with various vendors for various capital improvement projects related to its portfolio. As of September 30, 2024, the Company had approximately $3.1 million in commitments for capital improvement projects. Six of these projects totaling $0.8 million, represent redevelopment projects of the buildings into different healthcare uses backed by long-term leases.
Legal Proceedings
The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company's Consolidated Financial Statements.
NOTE 14. SUBSEQUENT EVENTS
Dividend Declared
On October 24, 2024, the Company’s Board of Directors declared a quarterly common stock dividend in the amount of $0.465 per share. The dividend is payable on November 22, 2024 to stockholders of record on November 8, 2024.
Credit Facility Refinancing
On October 16, 2024, the Company entered into a second amendment to the third amended and restated credit agreement (the "Amended Credit Facility") with a syndicate of lenders, under which Truist Bank serves as administrative agent. The Amended Credit Facility, among other things, (i) increased the Company's Revolving Credit Facility from $150.0 million to $400.0 million, (ii) extended the maturity date of the Revolving Credit Facility from March 19, 2026 to October 16, 2029, and (iii) lowered pricing on the Revolving Credit Facility by 10 to 30 basis points, depending on the Company's leverage ratio. Proceeds from the increased Revolving Credit Facility were used to repay the existing $75.0 million A-3 Term Loan which was scheduled to mature on March 29, 2026. In addition, amounts outstanding under the Revolving Credit Facility prior to the second Amendment will remain outstanding. Interest rate swaps previously entered into to fix the interest rates on the A-3 Term Loan will remain in place on the Revolving Credit Facility through their maturity on March 29, 2026.
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Disclosure Regarding Forward-Looking Statements
This report and other materials that Community Healthcare Trust Incorporated (the "Company") has filed or may file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made, or to be made, by management of the Company, contain, or will contain, statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “believes”, “expects”, “may”, "will', “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates”, “anticipates” or other similar words or expressions, including the negative thereof. Forward-looking statements are based on certain assumptions and can include future expectations, future plans and strategies, financial and operating projections or other forward-looking information. Such forward-looking statements reflect management’s current beliefs and are based on information currently available to management. Because forward-looking statements relate to future events, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Company’s control. Thus, the Company’s actual results and financial condition may differ materially from those indicated in such forward-looking statements. Some factors that might cause such a difference include the following: general volatility of the capital markets and the market price of the Company’s common stock, changes in the Company’s business strategy, availability, terms and deployment of capital, the Company’s ability to refinance existing indebtedness at or prior to maturity on favorable terms, or at all, changes in the real estate industry in general, interest rates or the general economy, adverse developments related to the healthcare industry, changes in governmental regulations, the degree and nature of the Company’s competition, the ability to consummate acquisitions under contract, catastrophic or extreme weather and other natural events and the physical effects of climate change, the occurrence of cyber incidents, effects on global and national markets as well as businesses resulting from increased inflation, changes in interest rates, supply chain disruptions, labor conditions, the conflicts in Ukraine and the Middle East, and/or uncertainties related to the 2024 U.S. presidential election, and the other factors described in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, and the Company’s other filings with the Securities and Exchange Commission from time to time. Readers are therefore cautioned not to place undue reliance on the forward-looking statements contained herein which speak only as of the date hereof. The Company intends these forward-looking statements to speak only as of the time of this report and 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.
The purpose of this Management's Discussion and Analysis ("MD&A") is to provide an understanding of the Company's consolidated financial condition, results of operations and cash. MD&A is provided as a supplement to, and should be read in conjunction with, the Company's Condensed Consolidated Financial Statements and accompanying notes.
Overview
References such as "we," "us," "our," and "the Company" mean Community Healthcare Trust Incorporated, a Maryland corporation, and its consolidated subsidiaries.
We were organized in the State of Maryland on March 28, 2014. We are a self-administered, self-managed healthcare real estate investment trust, or REIT, that acquires and owns properties that are leased to hospitals, doctors, healthcare systems or other healthcare service providers.
Trends and Matters Impacting Operating Results
Management monitors factors and trends that it believes are important to the Company and the REIT industry in order to gauge their potential impact on the operations of the Company. Certain of the factors and trends that management believes may impact the operations of the Company are discussed below.
26
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Real Estate Acquisitions
During the first nine months of 2024, the Company acquired six real estate properties totaling approximately 223,000 square feet for an aggregate purchase price of approximately $63.9 million and cash consideration of approximately $64.2 million. Upon acquisition, the properties were 99.3% leased in the aggregate with lease expirations through 2039. These acquisitions were funded with net proceeds from equity sales through the ATM program and the Company's Revolving Credit Facility. See Note 4 – Real Estate Acquisitions, Disposition, and Assets Held for Sale to the Condensed Consolidated Financial Statements for more details on these acquisitions.
Real Estate Dispositions
During the third quarter of 2024, the Company disposed of an 11,200 square foot surgical center in Texas, received net proceeds of approximately $1.0 million, and recognized an immaterial gain on sale.
Acquisition Pipeline
The Company has four properties under definitive purchase agreements for an aggregate expected purchase price of approximately $8.8 million. The Company's expected returns on these investments range from 9.29% to 9.50%. The Company expects to close on these properties in the fourth quarter of 2024; however, the Company cannot provide assurance as to the timing of when, or whether, these transactions will actually close. The Company expects to fund these acquisitions with proceeds from the Company's Revolving Credit Facility.
The Company has seven properties under definitive purchase agreements, to be acquired after completion and occupancy, for an aggregate expected purchase price of approximately $169.5 million. The Company's expected return on these investments will approximate 9.1% to 9.75%. The Company anticipates closing on these properties throughout 2025, 2026 and 2027; however, the Company cannot provide assurance as to the timing of when, or whether, these transactions will actually close.
Leased Square Footage
As of September 30, 2024, our real estate portfolio was approximately 91.3% leased, excluding real estate properties held for sale. During the first nine months of 2024, we had expiring or terminated leases related to approximately 431,000 square feet, and we leased or renewed leases relating to approximately 427,000 square feet.
Purchase Option Provisions
Certain of the Company's leases provide the lessee with a purchase option or a right of first refusal to purchase the leased property. The purchase option provisions generally allow the lessee to purchase the leased property at fair value or at an amount greater than the Company's gross investment in the leased property at the time of the purchase.
At September 30, 2024, the Company had an aggregate gross investment of approximately $32.9 million in 10 real estate properties with purchase options exercisable at September 30, 2024 that had not been exercised.
Inflation
Periods of high and persistent inflation could cause an increase in our expenses, capital expenditures, and cost of our variable-rate borrowings which could have a material impact on our financial position or results of operations. Many of our lease agreements contain provisions designed to mitigate the adverse impact of inflation, including annual rent increases based on stated increases or CPI increases. In response to inflationary pressures, the Federal Reserve began raising interest rates in 2022. Though these higher interest rates have just begun to decline, these higher rates may adversely impact real estate asset values and increase our interest expense on our variable-rate borrowings under our revolving credit facility.
Executive Compensation
During the first quarter of 2024, the Company's Board approved and adopted certain changes to executive compensation. Through the adoption of the Third Amended and Restated Alignment of Interest Program, the Board established a maximum elective deferral percentage amount of 50% (previously 100%) of compensation allowed to be deferred and applied to the acquisition of restricted stock for certain participants in the program, and limited the
27
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
duration of the restriction period election depending on each individual's retirement eligibility date. These changes were effective beginning January 1, 2024 for salary and other compensation deferrals and are now effective beginning July 1, 2024 for cash bonus deferrals.
Further, the Board approved and adopted a new long-term incentive compensation structure for its executive officers, which includes the issuance of time-based RSUs and performance-based RSUs with three-year forward-looking performance targets. Historically, the Company had granted long-term incentive awards to its executive officers comprised of restricted stock that vested in eight years, based on backward-looking performance metrics. See Note 9 – Stock Incentive Plan for more details.
Results of Operations
The Company's results of operations for the three and nine months ended September 30, 2024 compared to the same period in 2023 were impacted by real estate acquisitions, lease receivable, interest and loan loss reserves recognized in the second quarter of 2024 related to a tenant, the amortization of non-cash compensation, including the accelerated amortization of unvested restricted shares upon the passing of the Company's former CEO and President in the first quarter of 2023, the new executive compensation program implemented in the first quarter of 2024, as well as other items discussed in more detail below.
Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023
The table below shows our results of operations for the three months ended September 30, 2024 compared to the same period in 2023 and the effect of changes in those results from period to period on our net income.
| Three Months Ended September 30, | Increase (Decrease) | |||||||||||||||||||
(Dollars in thousands) | 2024 | 2023 | $ | % | ||||||||||||||||
| REVENUES | ||||||||||||||||||||
| Rental income | $ | 29,335 | $ | 27,690 | $ | 1,645 | 5.9 | % | ||||||||||||
| Other operating interest, net | 304 | 1,045 | (741) | n/m | ||||||||||||||||
| 29,639 | 28,735 | 904 | 3.1 | % | ||||||||||||||||
| EXPENSES | ||||||||||||||||||||
| Property operating | 5,986 | 5,456 | (530) | (9.7) | % | |||||||||||||||
| General and administrative | 4,935 | 3,618 | (1,317) | (36.4) | % | |||||||||||||||
| Depreciation and amortization | 10,927 | 11,208 | 281 | 2.5 | % | |||||||||||||||
| 21,848 | 20,282 | (1,566) | (7.7) | % | ||||||||||||||||
| OTHER (EXPENSE) INCOME | ||||||||||||||||||||
| Gain on sale (impairment) of depreciable real estate asset | 5 | (102) | 107 | n/m | ||||||||||||||||
| Interest expense | (6,253) | (4,641) | (1,612) | (34.7) | % | |||||||||||||||
| Deferred income tax expense | — | (221) | 221 | n/m | ||||||||||||||||
| Interest and other income, net | 206 | 3 | 203 | n/m | ||||||||||||||||
| (6,042) | (4,961) | (1,081) | 21.8 | % | ||||||||||||||||
| NET INCOME | $ | 1,749 | $ | 3,492 | $ | (1,743) | (49.9) | % | ||||||||||||
___________
n/m-not meaningful
Revenues
Rental income increased approximately $1.6 million, or 5.9%, for the three months ended September 30, 2024 compared to the same period in 2023. Rental income on properties acquired during 2023 and 2024 resulted in additional rental income of approximately $2.7 million in 2024 compared to 2023, offset partially by the impact of moving a tenant to cash basis in 2024 resulting in a reduction of approximately $0.8 million, with the remaining reduction due mainly to lease terminations, including two Genesis Care leases with the Company that they rejected in 2023 as part of their bankruptcy.
28
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Other operating interest decreased approximately $0.7 million for the three months ended September 30, 2024 compared to the same period in 2023 due mainly to placing a tenant note on non-accrual and reversing interest due from that tenant, as well as a reduction in interest on notes due to reduced principal balances from payments received.
Expenses
Property operating expenses increased approximately $0.5 million, or 9.7%, for the three months ended September 30, 2024 compared to the same period in 2023 due mainly to additional expenses on properties acquired during 2023 and 2024.
General and administrative expenses increased approximately $1.3 million, or 36.4%, for the three months ended September 30, 2024 compared to the same period in 2023 due mainly to compensation-related expenses. The non-cash amortization of deferred compensation increased approximately $0.6 million and cash compensation increased approximately $0.7 million for the three months ended September 30, 2024 compared to the same period in 2023 due to the issuance of additional restricted shares and from the impact of adopting the new executive compensation program in January 2024 which included the grant of 3-year forward-looking restricted stock units, as well as limiting the maximum elective deferral percentage amount of salary and bonus to 50% (previously 100%) as described in more detail in Note 9 – Stock Incentive Plan to the Condensed Consolidated Financial Statements.
Depreciation and amortization expense decreased approximately $0.3 million, or 2.5%, for the three months ended September 30, 2024 compared to the same period in 2023. This decrease was due mainly to the following:
•Fully amortized real estate lease intangibles which generally have a shorter depreciable life than a building resulted in a decrease of approximately $1.9 million;
•Depreciation and amortization on the two properties classified as held for sale during the second and fourth quarters of 2023 resulted in a decrease of approximately $1.3 million;
•Accelerated amortization of lease intangibles on the two GenesisCare properties where the leases were rejected resulted in a decrease of approximately $1.5 million;
•Depreciation and amortization on real estate acquired during 2023 and 2024 resulted in an increase of approximately $1.3 million; and
•Depreciation on tenant and other capital improvements resulted in an increase of approximately $3.2 million.
Interest expense
Interest expense increased approximately $1.6 million, or 34.7%, for the three months ended September 30, 2024 compared to the same period in 2023 due mainly to increases in the weighted average balance and interest rates on the revolving credit facility.
Deferred income tax expense
Deferred income tax expense decreased approximately $0.2 million for the three months ended September 30, 2024 compared to the same period in 2023. During the three months ended September 30, 2023, the Company recorded an additional valuation allowance on its deferred tax asset.
Interest and other income, net
Interest and other income, net increased approximately $0.2 million for the three months ended September 30, 2024 compared to the same period in 2023. During the three months ended September 30, 2023, the Company received earnest money on a terminated contract on a property held for sale.
29
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023
The table below shows our results of operations for the nine months ended September 30, 2024 compared to the same period in 2023 and the effect of changes in those results from period to period on our net (loss) income.
| Nine Months Ended September 30, | Increase (Decrease) | |||||||||||||||||||
(Dollars in thousands) | 2024 | 2023 | $ | % | ||||||||||||||||
REVENUES | ||||||||||||||||||||
Rental income | $ | 85,582 | $ | 80,582 | $ | 5,000 | 6.2 | % | ||||||||||||
Other operating interest, net | 906 | 3,139 | (2,233) | n/m | ||||||||||||||||
| 86,488 | 83,721 | 2,767 | 3.3 | % | ||||||||||||||||
EXPENSES | ||||||||||||||||||||
Property operating | 17,349 | 15,115 | (2,234) | (14.8) | % | |||||||||||||||
General and administrative | 14,249 | 23,610 | 9,361 | 39.6 | % | |||||||||||||||
Depreciation and amortization | 31,981 | 29,445 | (2,536) | (8.6) | % | |||||||||||||||
| 63,579 | 68,170 | 4,591 | 6.7 | % | ||||||||||||||||
| OTHER (EXPENSE) INCOME | ||||||||||||||||||||
| Impairment of depreciable real estate asset | (135) | (102) | (33) | (32.4) | % | |||||||||||||||
Interest expense | (17,301) | (12,773) | (4,528) | (35.4) | % | |||||||||||||||
| Credit loss reserve | (11,000) | — | (11,000) | n/m | ||||||||||||||||
Deferred income tax expense | — | (306) | 306 | n/m | ||||||||||||||||
Interest and other income, net | 514 | 777 | (263) | (33.8) | % | |||||||||||||||
| (27,922) | (12,404) | (15,518) | n/m | |||||||||||||||||
| NET (LOSS) INCOME | $ | (5,013) | $ | 3,147 | $ | (8,160) | n/m | |||||||||||||
n/m - not meaningful
Revenues
Rental income increased approximately $5.0 million, or 6.2%, for the nine months ended September 30, 2024 compared to the same period in 2023 due mainly to rental income on properties acquired during 2023 and 2024 resulting in additional rental income of approximately $9.2 million, offset partially by the impact of moving a tenant to cash basis in the second quarter of 2024 totaling approximately $1.9 million (including $0.9 million of straight-line rent) with the remaining reduction due mainly to lease terminations, including two Genesis Care leases with the Company that they rejected in 2023 as part of their bankruptcy.
Other operating interest decreased $2.2 million for the nine months ended September 30, 2024 compared to the same period in 2023 due mainly to placing a tenant note on non-accrual and reversing interest due from that tenant, as well as a reduction in interest on notes due to reduced principal balances from payments received.
Expenses
Property operating expenses increased approximately $2.2 million, or 14.8%, for the nine months ended September 30, 2024 compared to the same period in 2023 due mainly to the following:
•Expenses on properties acquired during 2023 and 2024 increased property operating expenses by approximately $1.5 million;
•Property insurance resulted in an increase of approximately $0.2 million;
•Snow plow and landscaping services resulted in an increase of approximately $0.2 million;
•Repairs and maintenance expenses resulted in an increase of approximately $0.2 million; and
•Amortization of leasing commissions resulted in an increase of approximately $0.1 million.
30
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
General and administrative expenses decreased approximately $9.4 million, or 39.6% for the nine months ended September 30, 2024 compared to the same period in 2023 due mainly to the following:
•Non-cash accelerated amortization of deferred compensation in the first quarter of 2023 for non-vested restricted common shares held by former CEO and President Timothy Wallace at the time of his passing in March 2023 accounted for a decrease of approximately $11.8 million; offset partially by
•An increase in the non-cash amortization of other deferred compensation of approximately $1.3 million and cash compensation of approximately $1.4 million for the nine months ended September 30, 2024 compared to the same period in 2023 due to the issuance of additional restricted shares and from the impact of adopting the new executive compensation program in January 2024 which included the grant of 3-year forward-looking restricted stock units, as well as limiting the maximum elective deferral percentage amount of salary and bonus to 50% (previously 100%) as described in more detail in Note 9 – Stock Incentive Plan to the Condensed Consolidated Financial Statements.
Depreciation and amortization expense increased approximately $2.5 million, or 8.6%, for the nine months ended September 30, 2024 compared to the same period in 2023. This increase was comprised mainly of the following:
•Acquisitions of real estate in 2023 and 2024 resulted in an increase of approximately $4.2 million;
•Tenant improvements and other capital expenditures resulted in an increase of approximately $4.2 million; offset against
•Fully amortized real estate lease intangibles which generally have a shorter depreciable life than a building resulted in a decrease of approximately $2.8 million;
•Accelerated amortization of lease intangibles on the two GenesisCare properties in 2023 where the leases were rejected resulted in a decrease of approximately $1.5 million; and
•Depreciation and amortization on the two properties classified as held for sale during the second and fourth quarters of 2023 ceased at that time resulting in a decrease of approximately $1.5 million.
Interest expense
Interest expense increased approximately $4.5 million, or 35.4%, for the nine months ended September 30, 2024 compared to the same period in 2023. Interest due under the Credit Facility increased approximately $4.2 million due mainly to an increase in the revolving credit facility balance and a rise in interest rates (See Note 5 – Debt, net to the Condensed Consolidated Financial Statements), and the maturity of two interest rate swaps, which were replaced with two forward-starting interest swaps (See Note 6 – Derivative Financial Instruments to the Condensed Consolidated Financial Statements). Also, capitalized interest on redevelopment projects decreased approximately $0.4 million for the nine months ended September 30, 2024 compared to the same period in 2023. Mortgage interest decreased approximately $0.1 million for the nine months ended September 30, 2024 compared to the same period in 2023 due to the repayment of the mortgage note at maturity.
Credit loss reserve
Credit loss reserve totaling $11.0 million was recorded during the second quarter of 2024 related to notes receivable with a geriatric inpatient behavioral hospital tenant. See Note 10 – Other Assets, net for more details on the credit loss reserve.
Deferred income tax expense
Deferred income tax expense decreased approximately $0.3 million for the nine months ended September 30, 2024 compared to the same period in 2023. During the nine months ended September 30, 2023, the Company recorded an additional valuation allowance on its deferred tax asset.
Interest and other income, net
Interest and other income, net decreased approximately $0.3 million, or 33.8%, for the nine months ended September 30, 2024 compared to the same period in 2023. During the nine months ended September 30, 2023, the Company recognized a net casualty gain relating to a property totaling $0.7 million. During the second quarter of
31
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
2024, the Company recorded into income an undistributed allowance for tenant improvements totaling $0.3 million for a lease that expired on June 30, 2024. Also, during the nine months ended September 30, 2024, the Company recorded into income $0.2 million of earnest money on a terminated contract on a property held for sale.
Non-GAAP Financial Measures and Key Performance Indicators
Management considers certain non-GAAP financial measures and key performance indicators to be useful supplemental measures of the Company's operating performance. A non-GAAP financial measure is generally defined as one that purports to measure financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable measure determined in accordance with GAAP. The Company reports non-GAAP financial measures because these measures are observed by management to also be among the most predominant measures used by the REIT industry and by industry analysts to evaluate REITs. For these reasons, management deems it appropriate to disclose and discuss these non-GAAP financial measures. Set forth below are descriptions of the non-GAAP financial measures management considers relevant to the Company's business and useful to investors, as well as reconciliations of those measures to the most directly comparable GAAP financial measure.
The non-GAAP financial measures and key performance indicators presented herein are not necessarily identical to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. These measures should not be considered as alternatives to net income, as indicators of the Company's financial performance, or as alternatives to cash flow from operating activities as measures of the Company's liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of the Company's needs. Management believes that in order to facilitate a clear understanding of the Company's historical consolidated operating results, these measures should be examined in conjunction with net income and cash flows from operations as presented in the Condensed Consolidated Financial Statements and other financial data included elsewhere in this Quarterly Report on Form 10-Q.
Funds from Operations ("FFO") and Adjusted Funds from Operations ("AFFO")
FFO is an operating performance measure adopted by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to net income (calculated in accordance with GAAP), excluding gains or losses from the sale of certain real estate assets, gains and losses from change in control, impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity, plus depreciation and amortization related to real estate properties, and after adjustments for unconsolidated partnerships and joint ventures. NAREIT also provides REITs with an option to exclude gains, losses and impairments of assets that are incidental to the main business of the REIT from the calculation of FFO.
In addition to FFO, the Company presents AFFO and AFFO per share. The Company defines AFFO as FFO, excluding certain expenses related to closing costs of properties acquired accounted for as business combinations and mortgages funded, excluding straight-line rent and the amortization of stock-based compensation, and including or excluding other non-cash items from time to time. AFFO presented herein may not be comparable to similar measures presented by other real estate companies due to the fact that not all real estate companies use the same definition.
Management believes that net income, as defined by GAAP, is the most appropriate earnings measurement. However, management believes FFO, AFFO, FFO per share and AFFO per share provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. The Company believes that by excluding the effect of depreciation, amortization, impairments and gains or losses from sales of real estate, losses and impairment of incidental assets, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, FFO, AFFO, FFO per share and AFFO per share can facilitate comparisons of operating
32
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
performance between periods. The table below reconciles net income (loss) to FFO and AFFO for the three and nine months ended September 30, 2024 compared to the same periods in 2023.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands, except per share amounts) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
Net income (loss) (1) (2) (3) | $ | 1,749 | $ | 3,492 | $ | (5,013) | $ | 3,147 | |||||||||||||||
Real estate depreciation and amortization | 11,077 | 11,375 | 32,350 | 29,756 | |||||||||||||||||||
(Gain on sale) impairment of depreciable real estate asset (2) | (5) | 102 | 135 | 102 | |||||||||||||||||||
Credit loss reserve (4) | — | — | 11,000 | — | |||||||||||||||||||
| FFO | 12,821 | 14,969 | 38,472 | 33,005 | |||||||||||||||||||
Straight-line rent (1) | (679) | (444) | (1,230) | (2,180) | |||||||||||||||||||
Stock-based compensation | 2,497 | 1,898 | 7,390 | 6,137 | |||||||||||||||||||
Accelerated amortization of stock-based compensation (3) | — | — | — | 11,799 | |||||||||||||||||||
Net gain from insurance recovery on casualty loss (2) | — | — | — | (706) | |||||||||||||||||||
| AFFO | $ | 14,639 | $ | 16,423 | $ | 44,632 | $ | 48,055 | |||||||||||||||
| FFO per diluted common share | $ | 0.48 | $ | 0.58 | $ | 1.44 | $ | 1.29 | |||||||||||||||
| AFFO per diluted common share | $ | 0.55 | $ | 0.63 | $ | 1.67 | $ | 1.88 | |||||||||||||||
Weighted average common shares outstanding - diluted (5) | 26,853 | 26,025 | 26,781 | 25,538 | |||||||||||||||||||
___________________
(1) During the three months ended June 30, 2024, the Company placed leases related to a tenant on cash basis and reversed rent and placed notes related to the tenant on non-accrual and reversed interest totaling approximately $3.2 million, including straight-line rent of approximately $0.9 million.
(2) During the three months ended June 30, 2023, the Company recognized a $0.7 million net casualty gain from insurance proceeds received related to one property. The Company recorded impairments on the property in previous quarters based on contracts to sell, and sold the property during the three months ended September 30, 2024, recording an immaterial gain on sale.
(3) During the three months ended March 31, 2023, the Company accelerated the amortization of stock-based compensation totaling $11.8 million upon the passing of our former CEO and President.
(4) During the three months ended June 30, 2024, the Company recorded an $11.0 million credit loss reserve related to notes receivable that are incidental to the Company's main business with a geriatric inpatient behavioral hospital tenant.
(5) Diluted weighted average common shares outstanding for FFO and AFFO are calculated based on the treasury method, rather than the 2-class method used to calculate earnings per share.
Net Operating Income ("NOI")
NOI is a key performance indicator. NOI is defined as net income or loss, computed in accordance with GAAP, generated from our total portfolio of properties and other investments before general and administrative expenses, depreciation and amortization expense, gains or loss on the sale of real estate properties or other investments, interest expense, and income tax expense. We believe that NOI provides an accurate measure of operating performance of our operating assets because NOI excludes certain items that are not associated with management of the properties. The Company's use of the term NOI may not be comparable to that of other real estate companies as they may have different methodologies for computing NOI.
33
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
The table below reconciles net income (loss) to NOI for the three and nine months ended September 30, 2024 compared to the same periods in 2023.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (In thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||
Net income (loss) (1) (2) | $ | 1,749 | $ | 3,492 | $ | (5,013) | $ | 3,147 | ||||||||||||||||||
General and administrative (3) | 4,935 | 3,618 | 14,249 | 11,811 | ||||||||||||||||||||||
| Accelerated amortization of stock-based compensation | — | — | — | 11,799 | ||||||||||||||||||||||
| Depreciation and amortization | 10,927 | 11,208 | 31,981 | 29,445 | ||||||||||||||||||||||
(Gain on sale) impairment of depreciable real estate asset (2) | (5) | 102 | 135 | 102 | ||||||||||||||||||||||
Credit loss reserve (4) | — | — | 11,000 | — | ||||||||||||||||||||||
| Interest expense | 6,253 | 4,641 | 17,301 | 12,773 | ||||||||||||||||||||||
| Deferred income tax expense | — | 221 | — | 306 | ||||||||||||||||||||||
| Interest and other income, net | (206) | (3) | (514) | (777) | ||||||||||||||||||||||
| NOI | $ | 23,653 | $ | 23,279 | $ | 69,139 | $ | 68,606 | ||||||||||||||||||
| ____________ | ||||||||||||||||||||||||||
(1) During the three months ended June 30, 2024, the Company placed leases related to a tenant on cash basis and reversed rent and placed notes related to the tenant on non-accrual and reversed interest totaling approximately $3.2 million, including straight-line rent of approximately $0.9 million. | ||||||||||||||||||||||||||
(2) During the three months ended June 30, 2023, the Company recognized a $0.7 million net casualty gain from insurance proceeds received related to one property. The Company recorded impairments on the property in previous quarters based on contracts to sell, and sold the property during the three months ended September 30, 2024, recording an immaterial gain on sale. | ||||||||||||||||||||||||||
(3) During the three months ended March 31, 2023, the Company accelerated the amortization of stock-based compensation totaling $11.8 million upon the passing of our former CEO and President. | ||||||||||||||||||||||||||
(4) During the three months ended June 30, 2024, the Company recorded an $11.0 million credit loss reserve related to notes receivable that are incidental to the Company's main business with a geriatric inpatient behavioral hospital tenant. | ||||||||||||||||||||||||||
EBITDAre and Adjusted EBITDAre
The Company uses the NAREIT definition of EBITDAre which is net income or loss plus interest expense, income tax expense, and depreciation and amortization, plus losses or minus gains on the disposition of depreciable property, including losses/gains on change of control, plus impairment write-downs of depreciable property and of investments in unconsolidated affiliates caused by a decrease in value of depreciable property in the affiliate, plus or minus adjustments to reflect the entity's share of EBITDAre of unconsolidated affiliates and consolidated affiliates with non-controlling interest. The Company also presents Adjusted EBITDAre which is EBITDAre before non-cash stock-based compensation expense.
We consider EBITDAre and Adjusted EBITDAre important measures because they provide additional information to allow management, investors, and our current and potential creditors to evaluate and compare our core operating results and our ability to service debt.
34
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
The table below reconciles net income (loss) to EBITDAre and Adjusted EBITDAre for the three and nine months ended September 30, 2024 compared to the same periods in 2023.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (In thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||
Net (loss) income (1) (2) | $ | 1,749 | $ | 3,492 | $ | (5,013) | $ | 3,147 | ||||||||||||||||||
| Interest expense | 6,253 | 4,641 | 17,301 | 12,773 | ||||||||||||||||||||||
| Depreciation and amortization | 10,927 | 11,208 | 31,981 | 29,445 | ||||||||||||||||||||||
| Deferred income tax expense | — | 221 | — | 306 | ||||||||||||||||||||||
(Gain on sale) impairment of depreciable real estate asset (2) | (5) | 102 | 135 | 102 | ||||||||||||||||||||||
EBITDAre | $ | 18,924 | $ | 19,664 | $ | 44,404 | $ | 45,773 | ||||||||||||||||||
Non-cash stock-based compensation expense (3) | 2,497 | 1,898 | 7,390 | 6,137 | ||||||||||||||||||||||
| Accelerated amortization of stock-based compensation | — | — | — | 11,799 | ||||||||||||||||||||||
| Net gain from insurance recovery on casualty loss | — | — | — | (706) | ||||||||||||||||||||||
Credit loss reserve (4) | — | — | 11,000 | — | ||||||||||||||||||||||
Adjusted EBITDAre | $ | 21,421 | $ | 21,562 | $ | 62,794 | $ | 63,003 | ||||||||||||||||||
| _____________ | ||||||||||||||||||||||||||
(1) During the three months ended June 30, 2024, the Company placed leases related to a tenant on cash basis and reversed rent and placed notes related to the tenant on non-accrual and reversed interest totaling approximately $3.2 million, including straight-line rent of approximately $0.9 million. | ||||||||||||||||||||||||||
(2) During the three months ended June 30, 2023, the Company recognized a $0.7 million net casualty gain from insurance proceeds received related to one property. The Company recorded impairments on the property in previous quarters based on contracts to sell, and sold the property during the three months ended September 30, 2024, recording an immaterial gain on sale. | ||||||||||||||||||||||||||
(3) During the three months ended March 31, 2023, the Company accelerated the amortization of stock-based compensation totaling $11.8 million upon the passing of our former CEO and President. | ||||||||||||||||||||||||||
(4) During the three months ended June 30, 2024, the Company recorded an $11.0 million credit loss reserve related to notes receivable that are incidental to the Company's main business with a geriatric inpatient behavioral hospital tenant. | ||||||||||||||||||||||||||
Liquidity and Capital Resources
The Company monitors its liquidity and capital resources and relies on several key indicators in its assessment of capital markets for financing acquisitions and other operating activities as needed, including the following:
•Leverage ratios and financial covenants included in our Credit Facility;
•Dividend payout percentage; and
•Interest rates, underlying treasury rates, debt market spreads and equity markets.
The Company uses these indicators and others to compare its operations to its peers and to help identify areas in which the Company may need to focus its attention.
Financing Policy
The Company’s current financing policy limits aggregate debt (secured or unsecured) in excess of 40% of the Company's total capitalization, except for short-term, transitory periods. At September 30, 2024, our debt to total capitalization ratio (debt plus stockholders' equity plus accumulated depreciation) was approximately 40.0%.
Sources and Uses of Cash
The Company derives most of its revenues from its real estate properties. Our rental income represents our primary source of liquidity to fund our dividends, general and administrative expenses, property operating expenses, capital improvements on our properties, interest expense on our Credit Facility, and other expenses incurred related to managing our existing portfolio. To the extent additional resources are needed, the Company will fund its investment activity generally through equity or debt issuances either in the public or private markets or through proceeds from our Credit Facility, which was amended in October 2024 to provide additional financing for
35
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
acquisitions, capital improvements and other cash needs. See Note 14 – Subsequent Events to the Condensed Consolidated Financial Statements.
The Company expects to meet its liquidity needs through cash on hand, cash flows from operations and cash flows from sources discussed above. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs.
Credit Facility
On October 16, 2024, the Company amended its Credit Facility to increase the Revolving Credit Facility capacity from $150.0 million to $400.0 million and extend the maturity through October 16, 2029. The amended Credit Facility also lowered pricing on the Revolving Credit Facility by 10 to 30 basis points, depending on the Company's leverage ratio. Proceeds from the increased Revolving Credit Facility were used to repay the existing $75.0 million A-3 Term Loan which was scheduled to mature on March 29, 2026. In addition, amounts outstanding under the Revolving Credit Facility prior to this amendment will remain outstanding. Interest rate swaps previously entered into to fix the interest rates on the A-3 Term Loan will remain in place on the Revolving Credit Facility through their maturity on March 29, 2026. See Note 5 – Debt, net and Note 14 – Subsequent Events to the Condensed Consolidated Financial Statements which provide more details on the Company's Credit Facility. At September 30, 2024, prior to the amendment, the Company had borrowing capacity remaining under the Revolving Credit Facility of approximately $25.0 million. At the time of closing on the amendment, on October 16, 2024, the Company had borrowing capacity remaining under the Revolving Credit Facility of approximately $198.0 million.
The Company’s ability to borrow under the Credit Facility is subject to its ongoing compliance with a number of customary affirmative and negative covenants, including limitations with respect to liens, indebtedness, distributions, mergers, consolidations, investments, restricted payments and asset sales, as well as financial maintenance covenants. The Company was in compliance with its financial covenants under its Credit Facility as of September 30, 2024.
Ground Leases
At September 30, 2024, the Company was obligated, as the lessee, under four non-prepaid ground leases accounted for as operating leases with expiration dates, including renewal options, through 2076, and two non-prepaid ground leases accounted for as financing leases with expiration dates through 2109, including renewal options. Any rental increases related to the Company's ground leases are generally either stated or based on the Consumer Price Index. At September 30, 2024, the Company's aggregate obligation under these ground leases was approximately $8.7 million. See Note 3 – Real Estate Leases to the Condensed Consolidated Financial Statements.
Acquisition Pipeline
The Company has four properties under definitive purchase agreements for an aggregate expected purchase price of approximately $8.8 million. The Company's expected returns on these investments range from 9.29% to 9.50%. The Company expects to close on these properties in the fourth quarter of 2024; however, the Company cannot provide assurance as to the timing of when, or whether, these transactions will actually close. The Company expects to fund these acquisitions with proceeds from the Company's Revolving Credit Facility.
The Company has seven properties under definitive purchase agreements, to be acquired after completion and occupancy, for an aggregate expected purchase price of approximately $169.5 million. The Company anticipates closing on these properties throughout 2025, 2026 and 2027; however, the Company cannot provide assurance as to the timing of when, or whether, these transactions will actually close. The Company expects to fund these acquisitions through net proceeds from equity sales through the ATM program and the Company's Revolving Credit Facility.
Tenant Improvements and Capital Improvements
Subject to Company approval, we may fund or reimburse tenants for tenant improvements, which are allowed for in certain leases, of up to approximately $26.0 million as of September 30, 2024. At September 30, 2024, six of these
36
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
projects, totaling $13.1 million, represented redevelopment projects on buildings with tenants backed by long-term leases.
The Company has also entered into contracts regarding certain capital expenditures with remaining commitments totaling approximately $3.1 million as of September 30, 2024. Six of these projects totaling $0.8 million, represent redevelopment projects of the buildings into different healthcare uses backed by long-term leases. Reimbursement of these expenditures by our tenants will be determined by each tenant's lease.
The Company expects to fund these expenditures through the Company's free cash flow, proceeds from equity sales through the ATM program, and the Company's Revolving Credit Facility.
Notes Receivable
The Company has two notes with a tenant with unfunded commitments remaining totaling $4.2 million at September 30, 2024. See Note 10 – Other Assets, net to the Condensed Consolidated Financial Statements.
Automatic Shelf Registration Statement
On November 2, 2022, the Company filed an automatic shelf registration statement on Form S-3 with the Securities and Exchange Commission. The registration statement is for an indeterminate number of securities and is effective for three years. Under this registration statement, the Company has the capacity to offer and sell from time to time various types of securities, including common stock, preferred stock, depository shares, rights, debt securities, warrants and units.
Operating Activities
Cash flows provided by operating activities for the nine months ended September 30, 2024 and 2023 were approximately $43.2 million and $47.1 million, respectively. Cash flows provided by operating activities were generally provided by contractual rents and interest on our notes receivable, net of property operating expenses not reimbursed by the tenants and general and administrative expenses.
Investing Activities
Cash flows used in investing activities for the nine months ended September 30, 2024 and 2023 were approximately $83.2 million and $100.1 million, respectively. During the nine months ended September 30, 2024, the Company invested in six properties for an aggregate cash consideration of approximately $64.2 million and sold a property for cash consideration of approximately $1.0 million. Also, during the nine months ended September 30, 2024, the Company funded notes totaling $2.9 million, received payments on its notes totaling $2.4 million and funded capital expenditures on its existing portfolio totaling approximately $19.5 million.
During the nine months ended September 30, 2023, the Company invested in 17 properties and one land parcel for an aggregate cash consideration of approximately $92.0 million and funded notes receivable totaling approximately $2.0 million. Also, during the nine months ended September 30, 2023, the Company received payments on its notes receivable totaling $3.0 million, received insurance proceeds from a casualty loss totaling $2.3 million, and funded capital expenditures on its existing portfolio totaling approximately $11.5 million.
Financing Activities
Cash flows provided by financing activities for the nine months ended September 30, 2024 and 2023 were approximately $38.2 million and $45.9 million, respectively. During the nine months ended September 30, 2024, the Company (i) borrowed $75.0 million under its Revolving Credit Facility, (ii) repaid a mortgage note totaling approximately $4.8 million, (iii) paid dividends totaling approximately $38.6 million, (iv) completed equity offerings under its at-the-market program, resulting in net proceeds, net of underwriters' discount and offering costs, of approximately $7.3 million, and (v) upon the vesting of stock-based awards for certain employees, withheld shares and paid taxes totaling approximately $0.8 million on behalf of the employees.
During the nine months ended September 30, 2023, the Company (i) borrowed $48.0 million under its Revolving Credit Facility, (ii) completed equity offerings under its at-the-market program, resulting in net proceeds, net of
37
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
underwriters' discount and offering costs, of approximately $34.6 million, (iii) upon the vesting of stock-based awards for certain employees, withheld shares and paid taxes totaling approximately $1.0 million on behalf of employees, and (iv) paid dividends totaling approximately $35.6 million.
Security Deposits
As of September 30, 2024, the Company held approximately $2.9 million in security deposits for the benefit of the Company in the event the obligated tenant fails to perform under the terms of its respective lease. Generally, the Company may, at its discretion and upon notification to the tenant, draw upon the security deposits if there are any defaults under the leases.
Dividends
The Company is required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to maintain its qualification as a REIT.
On October 24, 2024, the Company’s Board of Directors declared a quarterly common stock dividend in the amount of $0.465 per share. The dividend is payable on November 22, 2024 to stockholders of record on November 8, 2024. This rate equates to an annualized dividend of $1.86 per share.
The ability of the Company to pay dividends is dependent upon its ability to generate cash flows and to make accretive new investments.
Corporate Responsibility
The Company is committed to conducting its business according to the highest ethical standards and upholding its corporate responsibilities as a public company operating for the benefit of its stockholders. To that end, the Company modified its Governance Committee to be the Environmental, Social, and Governance (“ESG”) Committee with a revised charter included on the Company’s website at www.chct.reit. Among other duties, the ESG Committee meets at least annually to review and recommend to the Board the general strategy and initiatives regarding ESG matters, including the Company’s internal and external communications and disclosures.
The Company’s Board of Directors has adopted a revised Code of Ethics and Business Conduct that not only applies to its directors, officers, and other employees but also extends the Company's expectations that its vendors, service providers, contractors, and consultants will embrace the Company's commitment to integrity and personal responsibility by complying with this Code at all times. The Code of Ethics and Business Conduct includes the Company’s commitment to promote high standards of integrity by conducting its affairs honestly and ethically and to include in its periodic reports or other publicly available documents information and metrics related to internal monitoring, whistleblower, or reporting systems.
The Company’s whistleblower policy prohibits the Company and its affiliates and their officers, employees and agents from discharging, demoting, suspending, threatening, harassing or in any other manner discriminating against any employee for raising a concern. If an employee desires to raise a concern in a confidential or anonymous manner, the concern may be directed to the whistleblower officer at the Company’s whistleblower hotline. During the quarter ended September 30, 2024, the whistleblower officer received no whistleblower complaints.
The Company’s Information Technology infrastructure is cloud-based, utilizing Software as a Service (“SaaS”) applications for substantially all of its software requirements. Management has formed an IT Committee consisting of the Chief Executive Officer, Chief Financial Officer, and the Vice President of Information Technology to review and discuss information security matters and cyber security risks. The committee meets at least twice a year and reports to the Board of Directors as needed. The Company has adopted the Center of Internet Security (CIS) v8 IG1 cyber security controls including adopting an annual information security training program for its employees. The Company has partnered with a global cyber security leader to continuously and proactively manage and mitigate the ever growing list of cyber threats. As part of the managed monitoring and remediation platform, the Company benefits from a $100,000 breach prevention warranty. Since its inception, the Company has not had a security breach, and has not incurred any resulting expenses, penalties or settlements.
38
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We may use certain derivative financial instruments to manage, or hedge, interest rate risks related to our borrowings. We will not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based upon their credit rating and other factors. An interest rate swap is a contractual agreement entered into by two counterparties under which each agrees to make periodic payments to the other for an agreed period of time based on a notional amount of principal. Under the most common form of interest rate swap, known from our perspective as a floating-to-fixed interest rate swap, a series of floating, or variable, rate payments on a notional amount of principal is exchanged for a series of fixed interest rate payments on such notional amount. During the nine months ended September 30, 2024, there were no material changes in the quantitative and qualitative disclosures about market risks presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.
Changes In Internal Control Over Financial Reporting
There were no changes in our system of internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
39
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company may, from time to time, be involved in litigation arising in the ordinary course of business or which may be expected to be covered by insurance. The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, an investor should consider the risk factors included in its Annual Report on Form 10-K for the year ended December 31, 2023 and other reports that may be filed by the Company. There were no material changes in the risk factors presented in the Company's Annual Report on Form 10-K for the year ended December 31, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2024, the Company canceled shares of the Company's common stock to satisfy employee tax withholding obligation payable upon the vesting of stock-based awards, as follows:
| Period | Total Number of Shares Purchased | Average Price Paid per share | Total Number of Shares purchased as part of publicly announced plans or programs | Maximum Number of Shares that may yet be purchased under the plans or programs | ||||||||||
| July 1 - July 31 | 2,701 | $ | 23.22 | — | — | |||||||||
| August 1 - August 31 | 9,241 | $ | 18.56 | — | — | |||||||||
| September 1 - September 30 | — | $ | — | — | — | |||||||||
| Total | 11,942 | |||||||||||||
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
During the quarter ended September 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted terminated
ITEM 6. EXHIBITS
The exhibits required by Item 601 of Regulation S-K which are filed with this report are listed in the Exhibit Index and are hereby incorporated in by reference.
40
EXHIBIT INDEX
Exhibit No. | Description | ||||||||||
| 3.1 | |||||||||||
| 3.2 | |||||||||||
| 10.1 | |||||||||||
| 31.1 * | |||||||||||
| 31.2 * | |||||||||||
| 32.1 ** | |||||||||||
| 101.INS | Inline XBRL Instance Document | ||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document | ||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||||||||
___________________
(1)Filed as Exhibit 3.1 to Amendment No. 2 to the Registration Statement on Form S-11 of the Company filed with the Securities and Exchange Commission on May 6, 2015 (Registration No. 333-203210) and incorporated herein by reference.
(2)Filed as Exhibit 3.2 to the Quarterly Report on Form 10-Q of the Company filed with the Securities and Exchange Commission on November 3, 2020 (File No. 001-37401) and incorporated herein by reference.
(3)Filed as Exhibit 10.1 to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on October 16, 2024 (File No. 001-37401) and incorporated herein by reference.
* Filed herewith.
** Furnished herewith.
† Denotes executive compensation plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: October 29, 2024
| COMMUNITY HEALTHCARE TRUST INCORPORATED | ||||||||
| By: | /s/ David H. Dupuy | |||||||
| David H. Dupuy | ||||||||
| Chief Executive Officer and President | ||||||||
| By: | /s/ William G. Monroe IV | |||||||
| William G. Monroe IV | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
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