CHCT - GenesisCare Bankruptcy Drags On: Asset Purchases - A Glass Half Empty For Community Healthcare Trust?

2024-01-08 02:42:29 ET

Summary

• Community Healthcare Trust's valuation is at risk due to the unresolved Chapter 11 filing of GenesisCare.
• GenesisCare's assets are being sold off individually, as no entity was interested in purchasing the company as a whole.
• The practices operating in two of Community Healthcare Trust’s properties were purchased, and it is likely the leases were assumed with no modifications.
• Community Healthcare Trust owns five other properties that are leased to GenesisCare, representing 2.6% of the annual base rent.

In late June, I published a piece, Community Healthcare Trust's Third Largest Tenant Declares Bankruptcy, Poses Risk , on the impact of GenesisCare’s bankruptcy, which occurred on June 1 ^st since there was no announcement from Community Healthcare Trust (CHCT). In October, in Update On GenesisCare's Chapter 11 Filing's Impact On Community Healthcare Trust , I updated readers on the two leases that GenesisCare had rejected, which equaled 2.13% of CHCT’s consensus FFO. During CHCT’s 3Q23 earnings call, management discussed the two rejected leases mentioned above. They were optimistic they would be re-tenanted. To date, there have not been any leasing announcements for these sites. Additionally, during the call, management stressed that cancer care was being provided at all of the remaining sites leased by GenesisCare, which made them hopeful that the leases would be assumed by a winning bidder. Over the last couple of months, while no bidders have emerged for all of GenesisCare’s assets, the winning bidders have been selected for certain practices, including two that are in centers owned by CHCT.

On November 13th, Limitless Partners, LLC agreed to acquire three practices from GenesisCare, including one operating on CHCT’s property in Andalusia, AL. Additionally, on November 17th, Physician Reliance Network, LLC agreed to acquire two practices, including one operating on CHCT’s property in Princeton, WV. These two centers represent 0.60% of CHCT annualized base rents. Although the Purchase Agreements and Sale Orders have not been disclosed, based on the notice of the Winning Bidders, it appears all liabilities (leases) have been assumed. This is clearly a positive for CHCT investors as they no longer need to worry about these two leases being rejected. While I have no knowledge of the financial strength of either of these buyers, it would be unlikely that they would be acquiring practices if they were not in reasonably good shape. CHCT is almost certainly getting a tenant with a better credit profile than GenesisCare.

However, investors may also look at the sale of these two practices and see a glass half empty. It has been over seven months since GenesisCare filed for Chapter 11 and no bidder has emerged that is interested in purchasing GenesisCare as a whole or the practices in five of the properties owned by CHCT. This should make investors nervous about whether there will be any party that is interested in assuming these leases. Given the lack of interest, I think it is still a distinct possibility that the eventual buyer of the practices may make their offer conditional on a lease concession from CHCT. An even worse outcome is possible for CHCT. Given the tertiary markets that it operates in, there may be no bidders for the practices that are operating in its facilities. If this occurs, CHCT would be left with a vacant property in a tertiary market. They would still incur property taxes, insurance, and maintenance costs, but would have no revenue. This would be a significant hit to their 2024 FFO, as the revenue from the five properties represents 4.0% of consensus 2024 FFO (this calculation is based on the lost rental revenue and consensus FFO), and unreimbursed expenses would only add to the hit.

The chart below details CHCT’s exposure to GenesisCare.

Changes to Risk/Reward since October

I would argue that the risk of owning CHCT has increased over the last three months. While it is true that CHCT investors now know that at least two of the GenesisCare leases will be assumed, the risk to the other five leases has increased with the passage of time. CHCT's story to investors has always been focused on growing FFO and the dividend, and its ability to navigate risk effectively in tertiary markets. If the other leases are not assumed in the near future, CHCT will have to explain a 4.0% hit to FFO to its investors. This will not only impact estimates and growth for 2024, but it will also dent management's reputation for being able to handle risk in markets most REITs avoid.

Risk to Shorting CHCT

It is important for readers to understand that despite the problems I believe CHCT faces due to the bankruptcy of GenesisCare, the stock is very volatile. This means any number of things could cause the stock price to spike temporarily. A short seller without sufficient capital could be forced to liquidate their position at a loss in this scenario. It is easy to envision circumstances where the remainder of GenesisCare’s leases are assumed and there is no need for additional announcements. Additionally, CHCT will likely continue to pay its dividend. Not only does the dividend represent a cost to a short seller, I believe the dividend will put a floor on the stock price for some time as there will always be investors who are seeking yield. In other words, I believe someone shorting CHCT needs to have the patience and capital to wait until the market has a clear and informed view of the impact of GenesisCare’s Chapter 11 filing.

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