Healthcare REIT Community Healthcare Trust CHCT is planning its $125 million IPO for Thursday, May 21.
The company is the fourth REIT to go public this year. Community Healthcare will offer 6.25 million shares and expects to price between $19 and $21 per share under the ticker CHCT on the NYSE.
Franklin, Tennessee based Community Healthcare was recently setup to buy and own 35 properties leased to hospitals, health care systems, doctors, and other health care service providers in non-urban markets. The company plans to invest in properties diversified among healthcare provider, geography, facility type and industry segment.
Community Healthcare’s model is built around favorable demographic trends such as an aging population that’s requires greater health care needs, increases in health care spending, and the shift in the delivery of health care services to community-based outpatient facilities.
The company aims to target non-urban health care facilities because it believes the residents in these counties tend to be older and poorer than their urban counterparts and the majority of the newly-insured will enter the health system through Medicaid and state health exchanges. This presents a need for health care providers to invest in these areas for patients to gain access to affordable and convenient care.
Community Healthcare will use its management’s team vast relationships with health care providers and owners of facilities to acquire favorable non-urban health care facilities outside of the competitive bidding process. The company also sees growth opportunities that generate attractive returns due to less competition from existing REITs and institutions for the non-urban assets.
Growth Strategy
Community Health plans to grow its portfolio of health care properties through the acquisitions of non-urban health care facilities that generate consistent revenue growth and predictable long-term cash-flows.
The company is focused on the acquisitions of properties of $10 million or less and prefers not to participate in competitive bidding or auctions. Over the long-term, Community Healthcare seeks to acquire properties from third-party owners of existing leased buildings and directly with health care providers through sale-leaseback transactions.
The company’s target portfolio will be diversified among ambulatory surgery centers, behavioral facilities, dialysis clinics, medical office buildings, oncology centers, and physician clinics spread out geographically. Its second portfolio will focus on acute care and post-acute hospitals, assisted living facilities, skilled nursing facilities, and specialty hospitals.
After completing the offering, the company will own 35 properties and won’t be subject to any mortgage financing. In addition, Community expects not to have any outstanding corporate debt.
Community plans to take advantage of the rise in health care expenditures which are projected to grow $2.9 trillion to $4.3 trillion by 2020, an average annual growth rate of 5.6 percent. In 2013, health care spending counted for about 17 percent of GDP and is expected to reach 18 percent of GDP in 2020. This expected increase in demand for health care services combined with a costly and complicated regulatory environment, changes in medical technology and cuts in government reimbursements are believed to put more pressure on health care providers to seek cost-effective solutions for their real estate needs.
Source: U.S. Census Bureau, Population Projections; CMS, National Health Expenditures 1970-2021
Financials
Community Healthcare is a newly formed REIT with no revenue and will use the proceeds from the offering to buy its initial 35 properties. The anticipated rental income from the properties for the first year is expected to be $14.0 million, representing base rent, operating cost reimbursements, and straight-line rent under the lease terms. Operating expenses include taxes, assessments, water and sewer, and are projected to be $2.40 million. The company will account for these straight-line depreciation method over a 30 year period. General and administration expenses should approximate to $380,000.
The cost of the initial properties is $114.5 million, allocated to land, building, and intangibles based on the fair value located in 18 states.
The company will pay a quarterly cash dividend of $0.375 per share or $1.50 on an annual basis.
Looking at a close peer of Community Healthcare, Physicians Realty Trust DOC has traded up 44.7 percent from its July 13 IPO where it opened at $11.50. The company’s properties include medical office buildings, outpatient treatment facilities, acute and post-acute hospitals and other health care real estate.
Conclusion and Pricing Info
Due to the expected rise of health care costs, a larger, aging population that will require more health needs, and Community Healthcare’s niche of targeting non-urban areas, the company may be a viable play for investors desiring more diversification to their holdings in a growing field.
Community Healthcare estimates the net proceeds from the offering and concurrent private placements to be $116.8 million. The net proceeds from the offering will contribute to its operating partnership and used in the following mannger:$114.5 million will be used to acquire the initial properties, and to develop future acquisitions.
The lead bookrunners for the offering are Sandler O’Neill + Partners, L.P., SunTrust Robinson Humphrey, and Evercore. The company will list on the NYSE under the ticker CHCT. Pricing is expected to take place Wednesday night.
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