National Healthcare Properties, Inc. (HLTC) Earnings Call Transcript & Summary

Welcome to the fourth quarter 2019 Healthcare Trust Inc. or HTI Webcast. [Operator Instructions] Please note that this event is being recorded. Also note that certain statements and assumptions in this webcast presentation, which are not historical facts, will be forward-looking and are being made in pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain assumptions and risk factors which could cause the company's actual results to differ materially from these forward-looking statements. We refer all of you to this CEC (sic) [ SEC ] filings, including the Form 10-K filed for the year ended December 31, 2019 filed on March 19, 2020, and all other filings with the SEC after that date for a more detailed discussion of the risk factors that could cause these differences. Also during today's call, we will discuss the non-GAAP financial measures of HTI. Those -- these measures should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. The company has provided a reconciliation of these measures to the most directly comparable GAAP measures as part of the fourth quarter 2019 investor presentation for HTI and part of the 2019 annual report on Form 10-K for HTI, both available on HTI's website at www.healthcaretrustinc.com. You may submit questions during today's webcast by typing them in the box at the lower-right screen and member of our Investor Relations group will follow to answer questions directly after the presentation. Also, you may note that later today, a copy of the presentation and replay of this webcast will be available at the company's website at www.healthcaretrustinc.com I would now like to turn the call over to Michael Weil, Chief Executive Officer of AR Global. Please go ahead.

Hi, this is Mike Weil, CEO of AR Global. I'd like to take a few minutes to update you all about the AR Global platform before going into the fourth quarter webinar materials. Although this call is a fourth quarter review, we'd be remiss if we didn't acknowledge the ongoing COVID-19 pandemic. As we're all focused on the health of our families and the country at large, we wanted to provide a corporate update to shareholders. While we're doing our part to be responsible global corporate citizens, we remain confident, believing that our business is in good order and that our tenants are strong. We'll continue to focus on building and managing high-quality portfolios that are committed to the differentiated investment strategies that define our 2 publicly traded and 2 public nontraded REITs. We believe that the current disruption in global markets could result in the availability of favorable debt terms and lowered competition for high-quality acquisitions. Our objective, at the appropriate time, is to take the steps necessary to capitalize on these opportunities. The portfolio of each of our REITs are already stocked with tenants who have investment-grade credit, provide essential or in-demand services and are likely to continue to operate, whether physically in the space they lease from us or virtually throughout the duration of the crisis. During 2019 and during the first 3 months of 2020, many economic and political developments in the U.S. and abroad have dominated the headlines and caused market disruptions. Central banks around the world have been responding to global economic slowdowns prompted by international trade disputes and concerns related to the COVID-19 coronavirus by cutting interest rates and adjusting monetary policy in order to stimulate their economies and promote credit and business investment. While most central banks were already supporting a low interest rate environment, the reduction of the federal funds rate in the U.S. even before the coronavirus became a global event, marked a major reversal of monetary policy from the past decade. The Fed Funds Rate in 2019 had risen to a high of 2.45%, a level not seen since before the financial crisis, and is currently effectively 0 after further reductions by the U.S. Federal Reserve. Recently and in light of the many unknowns surrounding the coronavirus and the upcoming presidential election, we have witnessed a significant increase in the VIX, a measure of volatility and investor uncertainty. In general, a VIX of over 20 indicates a high degree of volatility. In recent weeks, we've seen VIX values of at least 35 and beyond 75 as the market responds to developments on political and world health care fronts. We anticipate that a heightened degree of volatility will persist throughout the resolution of the COVID-19 pandemic and the presidential election in November. The REITs on AR Global's platform capitalized on business opportunities presented by market uncertainty to deliver a strong finish to 2019, capturing strong investment spreads by completing acquisitions at what we believe are attractive cap rates while financing at relatively low interest rates as well as taking advantage of opportunities to raise equity. American Finance Trust, NASDAQ symbol AFIN, completed an $87 million Series A preferred stock add on at a lower effective yield than the initial offering and raised an additional $32 million through its ATM program to help fund over $420 million of acquisitions during 2019. AFIN also completed an inaugural $242 million asset-backed security financing, ABS, which diversified and provided flexibility to the company's capital structure. AFIN's portfolio as of the end of 2019 consisted of 819 properties in 46 states in the District of Columbia. Portfolio occupancy was over 94.5% on over 18 million square feet of rentable space with average annual rent escalators of 1.3% and 8.8 years of remaining lease term. 100% of the straight-line rent generated by AFIN's top 10 tenants comes from actual or implied investment-grade rated tenants. Please refer to AFIN's most recent earnings release available on AFIN's website at www.americanfinancetrust.com for more information about what AFIN considers to be implied investment-grade tenants. We believe the quality and stability of AFIN's earnings serves as an important differentiator for the company. We're confident that the long-term net lease structure of many of AFIN's leases will help ensure the REIT from volatility as it continues to provide shareholders with consistent, dependable income through a portfolio of best-of-class assets. We've continued to close on AFIN's pipeline with over $50 million of acquisitions closed during the quarter ended March 31, 2020, throughout the recent market turmoil. Our other publicly traded REIT, Global Net Lease, New York Stock Exchange symbol GNL, completed an $86.2 million Series B preferred stock offering at a lower yield than its initial Series A offering while raising an additional $298 million through its ATM programs to help fund acquisitions and capital expenditures of $576.4 million during 2019. GNL closed 2019 and entered 2020 well positioned for steady and deliberate growth through its portfolio of industrial, distribution and office assets, net leased on a long-term basis to primarily investment-grade tenants. Please refer to GNL's most recent earnings release available on GNL's website at www.globalnetlease.com for more information about what GNL considers to be implied investment-grade tenants. During the year, GNL closed on 39 acquisitions, well balanced between industrial and office properties located primarily in the United States. The weighted average cap rate for these acquisitions was 7.4% with a weighted average remaining lease term of 12.5 years at closing. In December, the company closed on the first part of $180 million U.S. and European sale-leaseback transaction with Whirlpool, a Fortune 150 company. We closed on the second part of the transaction in the first quarter. GNL's $3.7 billion of real estate investment at cost 278 property, 31.6 million square feet portfolio as of December 31, 2019, is of the highest quality, producing steady, predictable cash flow that generates growth with embedded annual rent escalators. As of the end of the fourth quarter, the portfolio was 99.6% leased with a weighted average lease term remaining of 8.3 years and 68.2% of straight-line rent coming from actual or implied investment-grade tenants. 93.2% of leases have embedded contractual rent growth, providing further predictable upside going forward. On the nontraded REIT front, Healthcare Trust Inc., HTI, completed the $40 million Series A preferred stock offering. HTI's Series A preferred stock trades on the NASDAQ under the ticker symbol HTIA and is the first example of NASDAQ-traded preferred shares ever issued by a nontraded REIT. HTI was extremely active in both the debt and equity capital markets last year as we access capital markets at opportunistic times and leveraged our banking relationships to create an industry-first security, funding growth and lowering interest expense. HTI continues its focus on 2 strong health care real estate segments: medical office building, MOB; and senior housing operating properties, SHOP. During 2019, the company closed on $85.4 million of real estate while maintaining modest net leverage of 38%. Please refer to HTI's investor presentation expected to be filed April 1, 2020, available on HTI's website at healthcaretrustinc.com for HTI's definition of net leverage. During the fourth quarter, the issuance of Series A preferred stock served as an introduction for HTI to the public markets and the institutional investor community. It demonstrated an innovative approach for a nontraded REIT and provided proceeds to help fund its acquisition pipeline. Lastly, we were focused on the leasing program for New York City REIT, NYCR, an AR Global-advised REIT which invests in New York City real estate. As of the end of February, we've executed leases for which rent has not yet commenced for 42,600 square feet at 9 Times Square, 123 William Street and 1140 Avenue of the Americas. We have a further forward pipeline of over 50,000 square feet of new leases and lease renewals that we're negotiating. We continue to focus on strategic objectives, emphasizing new and renewal leasing activity, maintaining an efficient capital structure and pursuing selective acquisitions. I'm proud of the steady accomplishments we continue to record for each of the 4 REITs on the AR Global platform. Today, these REITs own more than $12 billion in assets in 8 countries. Over 1,000 unique tenants occupy our 1,298 properties, over 61 million square feet. As of the applicable proxy record dates for 2020 annual meetings, we have over 135,000 shareholders who own stock in our companies directly or beneficially. Our REITs rely on 8 AR Global's professionals across 6 offices in New York; San Diego; London, Newport, Rhode Island; Luxembourg; and Jenkintown, Pennsylvania to provide steady growth and quality of earnings through value-enhancing initiatives. In closing, I'd like to thank you for your support and confidence in AR Global and the REITs we advise. While no one yet knows the global economic impact of the current pandemic, we continue to work hard as a manager and with our tenants to ensure continued successful operations at our properties. To be sure, the current challenge is one that will impact every business, and although we don't underestimate the significance of COVID-19, we believe this is a short to midterm crisis. Once it is resolved, we believe that the strength of our high-quality portfolios will be apparent. As we look ahead to 2020 and beyond, we're committed to executing on our investment objectives across our platform in order to achieve strong steady results for our stockholders. I'd like to thank you for joining us on today's call and wish you and your families good health during this turbulent time. We'll now begin today's presentation. While the ultimate global impact of the pandemic, including our properties, is still unknowable, we believe that definitive action taken by the company's SHOP team in response to the threat of the COVID-19 virus has helped and will continue to help us confront this challenge. We believe that preventative actions that were implemented in early March, including restriction of visitation, except in very limited and controlled circumstances, the practice of social distancing measures and the immediate screening of all persons entering our facilities have helped prevent the introduction of the virus into the senior housing properties that we own, which are operated on behalf of our third-party operators. Enhanced training for staff members, the implementation of telehealth to help residents be safe while keeping appointments with important but nonemergency health providers, virtual tours for potential new residents and agreements between some of our facilities and local lab partners to provide testing services, if necessary, are only some of the additional steps we've taken to address this crisis. In the absence of visitors, outside vendors and the observance of other precautionary measures, our on-site team members and caregivers have stepped in to provide care for our residents that far exceeds meeting just their medical needs. Healthcare Trust Inc. is a $2.5 billion health care real estate portfolio primarily focused on 2 strong and healthy segments: medical office buildings, known as MOB; and seniors housing operating properties, SHOP properties. These 2 segments represent over 92% of HTI's net operating income, with the balance coming from Triple-Net Leased healthcare facilities. The MOB portfolio continues to generate predictable and stable cash flows with contractual rent increases, and we like the SHOP portfolio because we believe U.S. demographics supports sustained demand for seniors housing. Additionally, we're focused on transitioning underperforming triple-net senior housing assets to the SHOP structure, whereby we'll gain more control over the operation, which we believe will allow us to improve operating performance. HTI has a high-quality portfolio of 193 health care properties, comprised of 49% medical office building, 43% SHOP and 8% triple-net properties. We continue to grow our portfolio through a robust acquisition program, including $189.2 million of total acquisitions closed in 2019 and through February 29, 2020. We have a conservative balance sheet with modest net leverage of 38% and a weighted average interest rate of only 4%. Our experienced management team has a proven track record and significant public REIT experience and significant operating experience in the team that manages our SHOP portfolio. As of December 31, 2019, HTI owned 193 properties, totaling approximately 9.4 million rentable square feet spread out over 31 states. The portfolio consisted of 113 medical office buildings; 61 seniors housing operating properties, which includes 2 land parcels, 4 triple-net leased senior housing properties, 8 post-acute and skilled nursing facilities, 6 hospitals and 1 development property in Jupiter, Florida. The medical office buildings were 90.9% occupied with a weighted average remaining lease term of 4.9 years. The seniors housing operating properties were 85.7% occupied, and the senior housing triple-net leased properties were 100% occupied with a weighted average remaining lease term of 11 years. The post-acute skilled nursing properties were 100% leased at year-end with a weighted average remaining lease term of 7.8 years. We also owned 6 hospitals, which were 90.7% leased with a weighted average remaining lease term of 7.1 years. HTI's MOB and triple-net portfolio is nearly 92% leased to top U.S. health care brands. We're extremely pleased with HTI's portfolio mix with significant focus on MOB and SHOP. As we grow the portfolio, we plan to continue emphasizing these property types within our acquisition strategy. We've elected to focus on medical office buildings due to growing demand from tenants as the ever-evolving health care system in the U.S. encourages medical professionals to consolidate practices and locate near hospital campuses. We believe that our increasing occupancy rates year-over-year are evidence of this in practice. Revenues from MOBs as compared to skilled nursing facilities are subject to far less government reimbursement exposure. This allows us to underwrite MOB acquisitions with less concern that policy changes will unexpectedly impact rent payments. We also continue to believe in the long-term benefit of our senior housing operating portfolio based on the favorable demographics and our confidence in our SHOP team to manage our assets in an accretive way. As the baby boomer generation approaches their 80s, we believe that demand for high-quality, well-run and strategically located senior housing facilities will continue to increase. We have worked diligently to construct a portfolio that is well diversified by geography and segment. Our complete U.S. portfolio is dispersed across 31 states, with 74% of the NOI coming from 10 states. As we mentioned before, 92% of NOI comes from the MOB and SHOP segment with an 8% contribution from our Triple-Net leased Healthcare facilities segment. Occupancy in the MOB and triple-net segments of the portfolio has increased by 1.6% year-over-year, reflecting our continued efforts, leasing space in these segments. One of the most important aspects of a well-run portfolio of health care-related real estate is the quality of the tenants who occupy and the operators who run our properties. Procuring well-respected brands and developing strong partnerships with them is a core focus in our asset management strategy in order to deliver superior long-term benefits for not only HTI, but for the residents and practitioners who live and work at our properties. This slide lists some of the leading brands we partner with. In HTI's MOB portfolio, we have partners such as the University of Pittsburgh Medical Center, an integrated global, nonprofit health enterprise with over 87,000 employees, 40 hospitals and 700 clinical locations. In the SHOP portfolio, we partner with core brands such as KR Management and Senior Lifestyle Corp. As we grow our portfolio, we continue to look for high-quality tenants within HTI's MOB portfolio and to further develop a roster of strong SHOP operators of whom we trust to provide the best care for residents at our facilities. Last year, we acquired 9 properties for a contract purchase price of $85 million. We acquired 8 MOB properties with a weighted average remaining lease term of 7.6 years at a 7.5% weighted average cap rate and 1 SHOP property for $33 million. So far in 2020, we've also closed on 4 MOB properties for a total contract purchase price of $26.3 million and 4 SHOP properties for $77.5 million. We believe we have a strong cash position, and we'll continue to seek acquisitions that we believe are attractively priced due to the ongoing disruption in the market. I'd now like to turn the call over to Katie Kurtz, HTI's Chief Financial Officer.

Thank you, Mike. This slide provides a snapshot of HTI's capital structure at the end of the fourth quarter 2019. Our net leverage was 38% at December 31, 2019, with net debt of approximately $1.1 billion at a weighted average interest rate of 4%. As of December 31, 2019, the company had a total of $887 million of secured debt comprised of $528 million in mortgage notes payable and $359 million of Fannie Mae master revolving credit facility. The Fannie Mae debt is comprised of 2 facilities, one being arranged by KeyBank and the other by Capital One. Altogether, the Fannie Mae debt is secured by mortgages on 22 seniors housing properties. As of December 31, 2019, our unsecured corporate level credit facility had an outstanding balance of $251 million, inclusive of the term loan component of $150 million. The weighted average interest rate for the corporate level credit facility at the end of the fourth quarter 2019 was approximately 4%. We continue to seek to improve the company's capital structure by extending our debt maturity profile, locking in long-term attractive financing rates and diversifying our debt mix. On December 17, 2019, HTI completed a refinancing of its mortgage loan with Capital One, increasing the commitment to $378.5 million from $136.5 million and lowering the interest rate to 3.66% while extending the maturity to 2026. HTI remains committed to increasing earnings through active portfolio management, accretive acquisitions and a continued focus on our capital structure. Comparing fourth quarter 2019 to fourth quarter 2018, revenues from tenants increased to $92.5 million from $91.8 million. While HTI drove revenue growth, the company was also able to lower its cost of mortgage debt from 4.5% to 3.9% year-over-year while also decreasing our net leverage to 38% from 38.7%. As always, a reconciliation of GAAP net income to non-GAAP measures can be found in our Form 10-K and other SEC filings, which are posted on our website and on sec.gov. I would now like to turn the call back to Mike for some color on the HTI team and some closing remarks.

HTI supports our high-quality portfolio with a robust acquisition program that's already closed over $100 million of acquisitions in 2020. We operate with a conservative balance sheet and seek to drive strong operational performance while working to decrease the company's overall leverage and interest expense. Our management team is the key to achieving results based on its significant experience in the health care industry. We believe we have the right team in place to execute our strategy to drive long-term value for HTI shareholders. In addition to Katie, HTI is fortunate to have Leslie Michelson, who has more than 30 years of experience as a founder, CEO, investor and adviser for a portfolio of entrepreneurial health care companies and an advocate for patient education and empowerment as our Non-Exec Chair and Audit Committee Chair. Leslie has had a long career in health care and currently is the Chairman of Private Health Management. On the MOB real estate side, David Ruggiero and his team bring over 20 years of experience to HTI's adviser, evaluating and negotiating hundreds of potential transactions per year while adhering to our strict investment guidelines and underwriting standards. Trent Taylor is our Portfolio Asset Manager, and he ensures that our existing properties are leased, performing as expected and that our tenants' needs are being met by local property managers. Supplementing HTI's leadership team, John Rimbach and his team are dedicated to managing our SHOP portfolio. In 2018, HTI made a significant commitment to the SHOP segment of our portfolio and brought John and other key operating personnel from WESTLiving to HTI's adviser to manage our SHOP properties. John's team has extensive experience in the seniors housing space and has already made significant improvements to this segment of our portfolio, both operationally and through advising on potential real estate acquisitions and dispositions. HTI has an engaged Board of Directors, led by Non-Executive Chair, Leslie Michelson, whom we mentioned earlier. Also serving on HTI Board are Lee Elman; former Governor of Pennsylvania, Ed Rendell; Elizabeth Tuppeny; and B.J. Penn. The Board is comprised of a majority of independent directors, including an Audit Committee made up of only independent directors. In addition to their distinguished careers, several of our Board members, currently or formerly, have served on the Boards of publicly traded REITS. Thank you for joining us today. We believe HTI has the portfolio and the intellectual capital in place to perform well in the current and future U.S. health care landscape. We're focused on the medical office and seniors housing segments of the health care space because we believe these types of properties provide the best long term, risk-adjusted returns for the company. We believe that our conservative balance sheet and ability to source transactions provide opportunities for the company to grow in the future. For account information, including balances and the status of submitted paperwork or for any questions, in general, please call us at (866) 902-0063. Thank you.

The conference is now concluded. If you have submitted a question during today's webcast, a member of our Investor Relations group will follow up to answer your question. Also, please note that later today, a copy of the presentation and replay to this webcast will be available on the company's website at www.healthcaretrustinc.com. Thank you for attending today's presentation. You may now disconnect.