Welcome to Community Healthcare Trust 2021 fourth quarter earnings release conference call. On the call today, the company will discuss its 2021 fourth quarter financial results. It will also discuss progress made in various aspects of its business. Following the remarks, the phone lines will be opened for a question-and-answer session. The company's earnings release was distributed last evening and has also been posted on its website, www.chct.reit. The company wants to emphasize that some of the information that may be discussed on this call will be based on information as of today, February 16, 2022, and may contain forward-looking statements that involve risks and uncertainty. Actual results may differ materially from those set forth in such statements.
For a discussion of these risks and uncertainties, you should review the company's disclosures regarding forward-looking statements in its earnings release, as well as its risk factors and MD&A in its SEC filings. The company undertakes no obligation to update forward-looking statements, whether as the result of new information, future developments or otherwise, except as may be required by law. During this call, the company will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in its earnings release, which is posted on its website. Call participants are advised that this conference call is being recorded for playback purposes. An archive of the call will be made available on the company's investor relations website for approximately thirty days and is the property of the company. This call may not be recorded or otherwise reproduced or distributed without the company's prior written permission.
Now I would like to turn the call over to Tim Wallace, CEO of Community Healthcare Trust, Incorporated. Please go ahead.
Thank you, Gary. Good morning, everyone, and thank you for joining us today for our 2021 fourth quarter conference call. On the call with me today is David H. Dupuy, our Chief Financial Officer, Leigh Ann Stach, our Chief Accounting Officer, and Timothy L. Meyer, our Executive Vice President, Asset Management. As is our normal process, our earnings announcement and supplemental data report were released last night and filed with an 8-K, and our annual report on Form 10-K was also filed last night. The fourth quarter was busy from an operations standpoint and a little slow from an acquisition standpoint. We have 5 different properties or significant portions of them that are undergoing redevelopment or significant renovations with long-term tenants in place when the renovations or redevelopment is done. Our occupancy has edged up over 90%, and we have seen a pickup in leasing activity.
We are encouraged by the activity we see on the part of healthcare providers. Our asset managers have been busy attempting to control expenses while maintaining tenant satisfaction. Our weighted average remaining lease term was relatively stable at just less than eight years. During the fourth quarter, we acquired three properties with a total of approximately 55,000 sq ft for purchase price of approximately $9.8 million. These properties were approximately 94% leased, with leases running through 2030 and anticipated annual returns of approximately 9.3%-9.99%.
For the year, we acquired 13 properties with a total of approximately 329,000 sq ft for purchase price of approximately $88.4 million, which in the aggregate were approximately 98.3% leased, with leases running through 2036 and anticipated annual returns of approximately 9.03%-10.83%. In addition, during 2021, we invested $14.4 million in notes receivable with anticipated returns of approximately 12%, bringing our total investments for the year to $102.7 million. The company has three properties under definitive purchase agreements for an aggregate expected purchase price of approximately $11.7 million and expected returns of approximately 9.01%-9.36%.
The company is currently performing due diligence and expects to close these properties in the next few months. We also have the signed definitive purchase and sale agreements for four properties to be acquired after completion and occupancy for an aggregate expected investment of $94 million. The expected return on these investments should range up to 10.25%. We expect to close on one of these properties in the first half of 2022 and the other three through 2022 and into 2023. In addition, we still have the signed term sheet for another 10 new properties and up to approximately $60 million of new investment. It is anticipated that these investments will be made over the next approximately 24 months.
We continue to have many properties under review and have term sheets out on several properties with anticipated returns of 9%-10%. We anticipate having enough availability on our credit facilities to fund our acquisitions, and we expect to continue to opportunistically utilize the ATM to strategically access the equity markets. On another front, we declared our dividend for the fourth quarter and raised it to $0.4375 per common share. This equates to an annualized dividend of $1.75 per share, and I continue to be proud to say we have raised our dividend every quarter since our IPO. I believe that takes care of the items I wanted to cover, so I'll hand things off to Dave to cover the numbers.
Thanks, Tim, and good morning, everybody. I am pleased to report that total revenue for 2021 was $90.6 million compared to $75.7 million for 2020, representing 19.7% growth over the prior year. Meanwhile, total revenue for the fourth quarter of 2021 was approximately $23.2 million versus $20.1 million for the same period in 2020, representing 15.5% growth over the fourth quarter of 2020, while quarter-over-quarter revenue was flat. On a pro forma basis, if all the 2021 fourth quarter acquisitions had occurred on the first day of the quarter, total revenue would have increased by an additional $222,000 to a pro forma total of $23.5 million in the fourth quarter.
From an expense perspective, property operating expenses increased year-over-year from $13.6 million in 2020 to $15.2 million in 2021, or 11.3%. During the fourth quarter, property operating expenses remained flat at $3.5 million in 2021 compared with the same period in 2020. Sequentially, property operating expenses decreased from $4.1 million in the third quarter to $3.5 million in the fourth quarter. The decrease in property operating expenses quarter-over-quarter is a result of property tax true-ups on some of our buildings in the third quarter that did not repeat in the fourth quarter, as well as normal fluctuations in property operating expenses that occur quarter-over-quarter.
For the year, G&A increased from $8.8 million in 2020 to $12.1 million in 2021, or 38.2%. In the fourth quarter, G&A increased from $2.5 million in 2020 to $3.2 million in 2021, or 26.9%, while remaining flat sequentially. For the year, however, cash G&A increased from approximately $4.0 million in 2020 to $4.948 million in 2021, or 23.7%. While in the fourth quarter, cash G&A increased from approximately $1.1 million in 2020 to $1.2 million in 2021, or 5.9%, while decreasing 3.7% quarter-over-quarter.
Increases in G&A were driven by compensation expenses related to new employees, stock issuances, and increases in amortization of deferred compensation, including a compressed amortization schedule for some of our NEOs. Please refer to page eight in the supplemental information report, as included with our 8-K filing and posted to our website for more details on a cash versus non-cash G&A expenses. Interest expense increased year-over-year from $8.6 million in 2020 to $10.5 million in 2021, or 22.3%, while remaining flat quarter-over-quarter. The increase in interest expense for the year related to our 19th March 2021 refinancing, where we added $50 million of incremental term loan debt, which also moved us into a higher pricing tier in our bank grid.
For the year, our Net Debt to Total Capitalization remained conservative at 30.9%. Our net income increased from $19.1 million in 2020 to $22.5 million in 2021, or 17.9%. For the fourth quarter, net income grew from $5.2 million in 2020 to $6.1 million in 2021, or 16.7%. Sequentially, net income grew from $5.4 million to $6.1 million or 14.2%. Finally, I'm pleased to report that funds from operations, or FFO, for the fourth quarter grew from $12.2 million or $0.53 per diluted share in 2020 to $13.8 million or $0.57 per diluted share in 2021.
On an annual basis, FFO increased from $45 million or $2.03 per diluted share in 2020 to $52.9 million or $2.20 per diluted share, or $0.17, representing per share FFO growth of 8.4%. Adjusted funds from operations, AFFO, which adjusts for straight-line rent and stock-based compensation, increased from $12.9 million or $0.56 per diluted share in the fourth quarter of 2020 to $14.9 million or $0.61 per diluted share in the fourth quarter of 2021.
On an annual basis, AFFO increased from $46.6 million or $2.10 per diluted share to $56.5 million or $2.35 per diluted share, representing per share AFFO growth of 0.25 or 11.9%. From a pro forma perspective, if all of the fourth quarter acquisitions occurred on the first day of the quarter, AFFO would have increased by approximately $145,000 to a pro forma total of $15 million, increasing fourth quarter AFFO to $0.62 per share.
That's all I have from a numbers perspective. Gary, I think we're ready to start the question-and-answer session.
We will now begin the question-and-answer session. To ask a question, you may press Star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Sheila McGrath with Evercore ISI. Please go ahead.
Yes, good morning. Tim, you mentioned in your prepared remarks and in the presentation the strategic partnership with the dialysis entity. That still is a term sheet. Just wondering what has to happen for that to be final and a final contract, and are you pretty close on that?
They've actually been going through a private equity raise that we're told they anticipate will close by the end of the first quarter. We're hopeful that right after that, we'll be documenting some actual properties. It's not that there's anything wrong with it's just they are strengthening their balance sheet and their ability to grow, and we're happy for them to do that.
Okay, great. Your balance sheet, by every metric is very conservative. What is your view on introducing a little bit more debt to the equation this year, and what is the kind of leverage metrics that you prefer to operate at under?
Well, we've said from the beginning that, you know, our preferred long-term debt to capital is in the 30%-35% range, and we are on the low end of that. We did, last year, add the $50 million term piece to our credit facility, and in the fourth quarter, we did not access the equity markets through the ATM, so we've kind of let the revolver grow a little bit. Again, our long-term view is still to be in that 30%-35% range and that that's where we feel very comfortable.
Okay, great. Thank you.
Thanks, Sheila.
The next question is from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, good morning. Morning down there.
Good morning.
Hey, how are you? Two questions. First, obviously everyone is talking about inflation, and then certainly for real estate, how landlords are getting pricing power in certain areas, you know, retail, apartments, for example. As you look across the assets, the target assets that you seek to own, do you see the same dynamic where inflation is accelerating market rent growth or the rents that you will get on renewal, or are the properties, you know, driven by different dynamics where the inflation doesn't necessarily translate directly to rent growth?
Yeah, I think healthcare properties are shielded from inflation kind of both ways, lower inflation or higher inflation. I mean, what I mean by that is the majority of our properties have bumps, but they're not inflation based. When we're going to renew properties, we're also fighting against right now the inflation that the provider is feeling from the standpoint of the labor rate and the supply chain cost that they're experiencing. You know, my overall view is inflation is basically somewhat of a neutral. I mean, it's not a positive, it's not a negative, from our standpoint. Then I'll look at Tim for just a second. Do you have any additional comments as it relates to what we're seeing from a leasing standpoint?
No, I think that's accurate and 'cause health systems and other large operators have had pressures, as you've mentioned, and then, but on the flip side, we have seen some CPI increases that were pretty substantial and some that are subject to caps on both the ceilings and floors, which is standard.
Right.
Okay. The second question is, Tim, you mentioned about, you know, fourth quarter being a little slower on the transactions. You mentioned $102 million completed last year. You know, the company has grown almost five times or more so than that since you guys went IPO, which obviously is credit to your to your investment approach, but the target remains sort of in that $125-ish range. What are your thoughts on increasing the not increasing it fivefold, but maybe adding, you know, another, you know, maybe growing it by $50 million or growing it somewhat just to, you know, complement the the overall growth in the company?
Well, in addition to growing, there's been several other aspects to the company that's changed. I mean, one is our cost of capital has gone down substantially. Again, you know, if you look at what we do, we try to manage the difference between our portfolio yield and our Weighted Average Cost of Capital. When we started the company, our Weighted Average Cost of Capital, that spread was not much. The Weighted Average Cost of Capital has gone down rather substantially. We can produce a higher margin and a higher FFO rate on a lower volume than we could then.
I mean, what we've managed to is trying to manage to the FFO growth and AFFO growth, and we wanna do that on a basis that makes sense to us and that we feel comfortable with. You know, as I've said always, this is a lumpy business. Sometimes we'll be on the low end of our investment range, sometimes we'll be on the high end of our investment range. But we feel very comfortable that we can produce the FFO and AFFO growth, that you know, is above the healthcare REIT average, with what our current business plan is.
I've said all along, you know, we'll, you know, there'll come a time when instead of 125-150, it'll be 135-160 or 140-170. I don't see it changing significantly from that as long as we're able to produce the margins and the profit that we can. You know, we feel like we've still and built into the portfolio as we're renovating, redeveloping, re-leasing some of these spaces, we feel like there's a lot of profit that we can wring out of the existing portfolio that obviously adds to that also. We don't feel a lot of pressure to bump it up.
If we bumped it up, we'd probably have to reduce our target investment range from the standpoint of return and we just don't see a need for that right now.
Okay. Thank you, Tim.
Thanks.
The next question is from Kyle Mangas with B. Riley Securities. Please go ahead.
Morning. This is Kyle on for Brian. I was curious if you could provide a little bit more detail on the four properties you plan to acquire for $94 million. Are they all about the same size? I think you mentioned that you expect to close on one in the first half of this year.
Yes. They are basically all the same size. It's one of our clients, and they use the Southwest Airlines approach. It's an inpatient rehab hospital operator. We currently have three of their properties in our portfolio, one in Temple, Texas, one in Longview, and one in Bentonville, Arkansas, or Rogers, Arkansas. You walk into one of the facilities, and it looks exactly the same as the other ones, even down to the artwork on the wall. We're doing more properties with them, and you know, they currently have them under construction. The first one has been slowed down a little bit because of supply chain issues that you know, the construction industry has experienced.
The next two, I think, are going relatively well because they're in climates that allow construction through winter. The first one that we should close on is in Cincinnati, and the next two are in Texas.
Okay, thanks for that detail. Then on the occupancy front, you ended at 90% for the year, which is pretty much the highest we've seen over the past couple years. Do you think that's pretty sustainable, or should we expect that to maybe taper off as we move through 2022?
No, I hope to see that increase. We see a lot of leasing activity now. We see a lot of interest from healthcare providers. They've been very subdued on the leasing front for the last couple of years from an expansion standpoint, but we're seeing a lot of activity. We've got several large blocks now that are under significant discussion and pricing of tenant improvements and analysis of fit up, et cetera. We're very hopeful to see that occupancy rate increase.
Okay, thank you. That's all for me.
Thank you. Tell Brian we said hi.
Will do.
The next question. Excuse me. The next question is from David Toti with Colliers. Please go ahead.
Good morning, guys. Just a quick question, kind of going back to the inflation issue. Do you underwrite an increase in your cost of capital in the next twelve months or so? Secondly, does that impact your investing strategy? If the yields on the assets that you're looking at aren't moving, your spread's obviously collapsing to some extent. Are you underwriting that dynamic, or do you think that you can sort of maintain that spread effectively?
We do anticipate interest rates to rise. We don't underwrite inflation in our cost of capital, but we do anticipate interest rates to rise. I mean, it's a fairly small piece of our capital base. But we do anticipate interest rates to rise. We do underwrite that. We think that we can fairly well maintain the overall portfolio yield to the cost of capital over the near to mid-term.
Okay. If it does begin to compress, is there a point at which the strategy is impacted in any sense, and do the external growth efforts become reduced to some extent?
Well, you know, it's hard to imagine it being impacted that much. I mean, our current portfolio yield is over 9%, and our current weighted average cost of capital is what, Dave Dupuy, had you gotten? 5.25 Yeah. 5.5, something like that? Yep, right around five. I mean, something drastic would have to push the cost of capital up to significantly impact us. The only thing I'll say is if it gets to where it impacts us, I mean it has significantly impacted the other healthcare REITs along the way. I would anticipate at that point in time that the cap rates would rise.
Great. Thank you.
Thank you.
The next question is a follow-up from Sheila McGrath with Evercore ISI. Please go ahead.
Yes. I noticed that the occupancy did hit 90% as well. I was just curious if you could comment on renewal rate in your portfolio. What has that trended and how is that trending recently?
When you say renewal rate, are you talking about the rental rates, or are you talking about the percentages of-
The percent of probability of renewal of the tenants staying in place.
I think, you know, we've been in the 90%, I think, renewals. I'm looking at Tim now. He's looking down, but he's shaking his head. We've been in the 90% basically for the life of the company, and we think we're still there. Would you agree?
Yes, I agree with that. We had a strong quarter of not just renewals, but expansion of existing tenants, along with those renewals.
Since you mentioned it, Tim, what on average is the increase that, you know, is it kind of inflation that you bump upon expiration that you're bumping the new leases?
Yeah, that's generally it. I mean, we're not one who says we can push rates, you know, up 5%. We're generally, you know, as I've said from the beginning, think that we're fairly provider friendly and want to maintain that provider relationship. We're basically in the 1%-3% range, generally, with renewals.
Okay, great. Then just on G&A, and maybe this one's for Dave. The step up was because of, or partially was because of the new amortization schedule. Was that new amortization schedule in place for all 4 quarters? If there's any kind of points that you could give us to how to think about both cash and stock G&A in 2022, any guidance type items, that would be helpful.
Yeah. What I can tell you, Sheila, is, it has slowly increased the non-cash amortization ramp up, quarter-over-quarter, and will probably for the next two and a half years or so, as we get over the hump in terms of the NEOs that have the compressed schedule. That's one of the reasons why we've made an effort to segment in our supplemental the cash versus non-cash, because we truly think the cash is the right thing to measure. When you look at the cash basis, that we put on page eight, especially as a percentage of revenue, it's been trending down over the last three quarters. We certainly like those trends.
Yes, we are not disclosing the specifics with regard to the amount of that amortization increase, but expect it on a non-cash basis to continue to increase for the next two and a half years until we get over that hump.
Okay, great. Thank you.
Sure.
The next question is from Michael Lewis with Truist Securities. Please go ahead.
Thank you. I had a little of what I'll call a work from home distraction, so I apologize if you already addressed these. First, you know, on your third quarter release, I think it had said in the press release that you had already acquired one property for $3.5 million in 4Q, and you had another $12 million that were under purchase agreements expected to close in the quarter. You know, you did a little less volume than that. I was just curious if that was just a timing issue or if something that was under a purchase agreement fell out.
Good morning, Michael, and we'll let you go with the work at home distraction. Actually, we haven't covered that this question. The difference is one property that as we were doing our due diligence, we found out that there was a problem with one of the tenants. Basically, the existing owner now has kicked that tenant out, but says he has another tenant to replace him. We've kind of put it into a holding pattern because we're not buying it, if he can't replace it with a good quality tenant, and he says he can with a hospital system. It's his supposed new tenant. If he does that, we will close on it.
All the due diligence is done at this point, with the exception of this. It would be a very quick close if he can get the lease signed. If he does, we'll close it. If he doesn't, we won't.
I see. There's no cost to you if you don't close on that?
No.
Okay. My other question, you know, I think you have a handful of properties with tenant purchase options that are now exercisable. What's your expectation for those? Are those attractive for the tenant to exercise? Do you think you'll have some properties that get called?
We really don't anticipate that. We've got as of 12/31, I forget what we had. We had eight, was it Leanne? seven. We've actually negotiated three of those away in the first quarter. Now I think it's only four, I think, that do. We're not anticipating that those are gonna get called. You know, you never know, but that's not the anticipation right now.
I see. When you say negotiated away, what does that mean?
We sign lease amendments that takes the
Okay.
purchase option out.
Okay, got it. All right. That's all I had. Thank you.
Thank you.
Again, if you have a question, please press star then one. The next question is a follow-up from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, Tim, just one more follow-up. I think in the opening comments you mentioned OpEx pressures, but I think then Dave mentioned operating expenses were flat. Just sort of curious. My impression is that the tenants, it's basically a pass-through, so except for like some vacancy or whatever was over the first year, you guys are really sheltered from any operating expense or real estate tax increases, right? Or is there some other leakage that we should think about as inflation, you know, seeps through different costs?
Actually what I said was, in my statements, was that the asset managers were working hard to keep operating expenses low and maintain tenant satisfaction, which I think they've done a great job of. To answer directly your question, we've got, you know, 10% vacancy in the portfolio, so operating expenses related to that 10% doesn't get paid by tenants. Then we do have a small percentage of either modified gross or gross leases in the portfolio that we acquired. We don't write those leases. You know, if it's an acquisition and the lease is in place, we do have some of those. There could be some leakage there.
Okay. That's helpful. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Tim Wallace for any closing remarks.
I think that covers it. We appreciate everybody's interest and spending time with us this morning, and we'll see you again in three months. Thanks.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.