U.S. Markets closed

Edited Transcript of CHCT earnings conference call or presentation 6-Nov-19 3:00pm GMT

Q3 2019 Community Healthcare Trust Inc Earnings Call

Franklin Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Community Healthcare Trust Inc earnings conference call or presentation Wednesday, November 6, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David H. Dupuy

Community Healthcare Trust Incorporated - Executive VP & CFO

* Timothy G. Wallace

Community Healthcare Trust Incorporated - Chairman, CEO & President

* William Page Barnes

Community Healthcare Trust Incorporated - Executive VP & COO

================================================================================

Conference Call Participants

================================================================================

* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Andrew T. Babin

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Barry Paul Oxford

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Bryan Anthony Maher

B. Riley FBR, Inc., Research Division - Analyst

* Robert Chapman Stevenson

Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst

* Sheila Kathleen McGrath

Evercore ISI Institutional Equities, Research Division - Senior MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to Community Healthcare Trust 2019 Third Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2019 third quarter financial results. It will also discuss progress made in various aspects of its business. (Operator Instructions) 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 in this call will be based on information as of today, November 6, 2019, and may contain forward-looking statements that involve risk 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 2 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 30 days and is the property of the company. This call may not be recorded or, otherwise, reproduced or distributed without the company's priority written permission.

Now I would like to turn the call over to Timothy Wallace, Chairman, Chief Executive Officer and President of Community Healthcare Trust Incorporated.

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [2]

--------------------------------------------------------------------------------

Thank you, operator. Good morning. Thank you for joining us today for our 2019 third quarter conference call. On the call with me today is Dave Dupuy, our Chief Financial Officer; Page Barnes, our Chief Operating Officer; and Leigh Ann Stach, our Chief Accounting Officer.

As is our normal process, our earnings announcement and supplemental data report were released last night and filed with an 8-K, and our quarterly report on Form 10-Q was also filed last night. In addition, we filed documents to refresh our ATM program that Dave will go over in more detail in his comments.

Before we get into our normal discussion, I would like to point out a couple of new pages in our supplemental data report. We have had several questions on how we calculate our weighted average shares, so we added a new Page 5 to that supplemental data report that shows how they are calculated. In addition, we have added an analysis of our named officers' compensation on Page 8, indicating how much of our compensation is performance-based. We believe it is important for our stakeholders to understand the mix between our base salary and incentive compensation and have provided this information because some constituents have not been able to understand how much performance-based compensation we have.

Now back to the normal stuff. We were very busy during the third quarter. However, it was basically business as usual. As you know, we have an active ATM program in place. During the third quarter, the company issued 680,309 shares of common stock through its ATM program at an average gross sales price of $42.70 per share. We received net proceeds of approximately $28.5 million at an approximate 3.94% current equity yield.

During the third quarter, we acquired 3 properties with a total of approximately 130,000 square feet for a purchase price of approximately $52.6 million. These properties were 100% leased with leases running through 2034 and anticipated returns of 9% to 11%.

So far, in the fourth quarter, we have acquired 7 properties with a total of approximately 114,000 square feet for a purchase price of approximately $34.8 million. These properties are 100% leased with leases running through 2034 and anticipated annual returns of 9.23% to 11%.

We have 3 additional properties under definitive purchase and sale agreements to be acquired after completion and occupancy for an aggregate expected investment of $68 million. The expected return on these investments should range up to 11%. We expect these to be completed and closed out through mid-2020.

We continue to have many properties under review and have signed term sheets on several properties with anticipated returns of 9% to 10%. We anticipate having enough availability on our revolver to fund our acquisitions, and we expect to continue to opportunistically utilize the ATM to strategically access the equity markets.

Occupancy declined slightly during the third quarter as we signed agreements to terminate a couple of tenants' leases during the quarter as part of our active asset management. We have had issues with these tenants since we acquired the properties they were in and determined it was better to terminate the leases and seek new tenants.

We continue to see a lot of activity on the leasing front and believe we will see the occupancy level pick up over the next few quarters. Through a combination of new and extended leases and our acquisitions, we have been able to increase our weighted average remaining lease term to approximately 7.7 years. If you recall, this was approximately 4.3 years at the time of our IPO.

On another front, we declared our dividend for the third quarter and raised it to $0.415 per share. This equates to an annualized dividend of $1.66, and I continue to be proud to say we have raised our dividend every quarter since our IPO.

Before I finish my comments, I would like to give an update on Highland Hospital. The process of transitioning continues. A new operator is managing Highland and is preparing for the transfer of licenses and related items customary for these types of transactions. As we indicated in our release, Highland Hospital will likely be the subject of a pre-packaged bankruptcy with an anticipated sale to the new operator to expedite and facilitate the transfer of licenses. We have tried to do this without the bankruptcy, but with 4 of the best and biggest law firms in Nashville involved in the process, we've determined that's the easiest and quickest way to get it done. We do not expect our cash flow from Highland to change as we continue to collect monthly payments roughly equivalent to what we should be collecting. Obviously, there are various contingencies that might still occur such that the outcome could be different than what we think now. But we believe we have addressed the situation as best we can.

I believe that takes care of the items I wanted to cover, so I'll hand things off to Dave to cover the numbers.

--------------------------------------------------------------------------------

David H. Dupuy, Community Healthcare Trust Incorporated - Executive VP & CFO [3]

--------------------------------------------------------------------------------

Great. Thanks, Tim. Before jumping into the financial results, I wanted to make everyone aware of a couple of items. First, we have posted our Board-approved environmental, social and governance or ESG guidelines to our website, which is www.chct.reit, under the Governance -- Corporate Governance tab. More to come on this topic in the upcoming quarters.

Second, as Tim mentioned, we have filed our new Form S-3 shelf registration statement as well as the prospectus supplement for the issuance of up to $360 million of common stock through our ATM program. As always, please refer to our website or sec.gov for these and other filings referred to on this call.

Now on to the financial results. As Tim said, we continue to see positive growth momentum in our business. Specifically, revenue grew from $14.3 million in the second quarter to $16.3 million in the third quarter, representing 14% sequential growth. Growth for the same period in 2018 was 12 -- revenue, rather, for the same period in 2018 was $12.6 million, representing 29% growth over the same period last year.

Our acquisitions closed relatively early in the quarter, so we picked up most of their impact in our third quarter results. That said, giving pro forma effect to these acquisitions is though they closed on day 1 of the quarter, total revenue would have increased by slightly over $400,000, resulting in total revenue of approximately $16.7 million for the third quarter.

From an expense perspective, property operating expenses increased quarter-over-quarter from $2,993,000 to $3,327,000 or 11.2%, of which approximately half was related to property tax appeals lost on a handful of properties and the remaining increase related to newly acquired properties as well as normal fluctuations in operating expenses on the remaining portfolio.

G&A increased approximately $265,000, driven primarily by increases in amortization of deferred comp and expenses related to recruiting new employees. We expect G&A to moderate from this quarter but continue to increase slightly over our 4-quarter run rate as we grow our property base, add new employees and meet SEC requirements of being a large accelerated filer by the end of the year.

Finally, I am pleased to report that funds from operations for the third quarter of 2019 grew to $8.5 million from $7.4 million in the second quarter or 14.2% sequentially. Adjusted funds from operations, or AFFO, which adjusts for straight-line rent and stock-based compensation, totaled $8.9 million or $0.46 per diluted share compared with second quarter 2019 of $7.9 million or $0.42 per diluted share.

And from a pro forma perspective, if all the 2019 third quarter acquisitions occurred on the first day of the third quarter, AFFO would have increased by approximately $200,000 to a pro forma total of $9.1 million, increasing AFFO to $0.47 per share.

That's all I have from a numbers' perspective. Operator, we are ready to start the question-and-answer session.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is from Shiela McGrath with Evercore ISI.

--------------------------------------------------------------------------------

Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [2]

--------------------------------------------------------------------------------

Tim, 2 of the 3 acquisitions in third quarter were over $15 million. I was wondering if you could give us a little bit more detail on the inpatient rehab facility in Texas and the behavioral facility for $27.5 million? Just competition for the larger assets, what kind of lease term are encumbering them?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [3]

--------------------------------------------------------------------------------

Shiela, thanks for the questions. And both of those acquisitions are part of our programmatic relationships. So basically, we haven't seen any competition with them. We are involved with these operators from the beginning thought process and are involved with the banks as they do the construction financing and then we do the takeout after construction completion and occupancy. So -- I mean that's part of a programmatic basis, and we're very -- we continue to be excited about what we have in that range, and don't think that we're going to see any competition because of the way that we do things and our understanding of what these operators are trying to do. We feel like we're giving them a very desirable service and they enjoy it. So I mean those properties are leased under 15-year triple-net master leases, so they go through 2034. And they provide very, very nice returns to us and have other provisions in them that we like very much.

--------------------------------------------------------------------------------

Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [4]

--------------------------------------------------------------------------------

Okay. Great. And then you mentioned in your release the strategic kind of pipeline. There's $68 million in backlog. Do you expect any of those to close in fourth quarter? Or do you think the majority will be in 2020?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [5]

--------------------------------------------------------------------------------

Yes. I mean we actually already closed one of them in fourth quarter and adjusted the numbers for that. But of the $68 million, they'll be out through the mid-2020, probably one in -- I'm looking at Page -- one in the first quarter, one in the second quarter, one in the third quarter, is that kind of how it's looking now?

--------------------------------------------------------------------------------

William Page Barnes, Community Healthcare Trust Incorporated - Executive VP & COO [6]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [7]

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [8]

--------------------------------------------------------------------------------

Okay. And last quick question. Your cost of both equity capital and debt capital is compelling. Just wondering how you're looking at changing the pipeline. Any -- will you look to higher barrier markets? Or just your thought -- philosophy on acquisitions given your attractive cost of capital.

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [9]

--------------------------------------------------------------------------------

I mean we have adjusted what we're doing slightly because of having the pipeline of good acquisitions. It allows us to be pickier on the nonprogrammatic stuff. So we feel like the programmatic stuff helps us because it provides that base. But it also helps us because it allows us to be very picky on what we do other than the programmatic stuff.

As it relates to cost of capital, we really don't factor that into how we think about the pipeline or how we think about increasing the size of our acquisitions, et cetera. Basically, the way we look at it is we want to increase our profit margin. And the lower we can push the cost of capital, the higher we can push the profit margin. So that's really what we look at on that side of it.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

The next question is from Rob Stevenson with Janney.

--------------------------------------------------------------------------------

Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [11]

--------------------------------------------------------------------------------

Can you talk a little bit about where your major pockets of vacancy are? What the prospects are for retenanting that space? And if any of them you're thinking about selling at this point in time?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [12]

--------------------------------------------------------------------------------

Everything we've got is for sale -- Rob, everything that we've got -- as I've said before, everything that we've got is for sale or is not for sale, but it can be both. We review stuff. We have major leasing efforts on all of it. I mean -- and when you say major pockets, our biggest pocket is the 30,000-square-foot building that came out of the AMG bankruptcy, which basically we got kind of as a freebie. So as we lease that up, it will just add to the FFO. And that's a good -- that's probably 15% of our overall vacancy. The rest of it is basically small pieces in small places. And it's -- there's a couple of buildings other than AMG that tenants have moved out of and haven't been successful in re-leasing, but we continue to try to lease those, and we, obviously, view it as an important thing.

But again, we look at having good tenants and quality tenants as being as good as anything because, I mean, the reason that the occupancy ticked back down a little bit this quarter was because we reached agreements on I think it's between 16,000 and 18,000 square feet, to get those tenants to terminate because we've had issues with them since we bought the buildings they were in and decided it would be easier and better to have better tenants and be rid of those.

--------------------------------------------------------------------------------

Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [13]

--------------------------------------------------------------------------------

Okay. That's helpful. I mean in terms of the AMG space, I mean where are you guys in the process there? I mean is -- do you have significant interest? Does that need some work from a tenant improvements before it could be leased? Any color there?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [14]

--------------------------------------------------------------------------------

We've had various people look at it. We had -- we actually had it under a letter of intent and was negotiating a lease for the full thing at one point in time. The answer is when we get it leased, yes, there will be some tenant improvement dollars that will be required, but we will factor that into the economics of it when we do it.

--------------------------------------------------------------------------------

Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [15]

--------------------------------------------------------------------------------

Okay. Any known or likely move-outs of the roughly 10% of your lease revenue that's rolling in the remainder of '19 and 2020 at this point of significance?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [16]

--------------------------------------------------------------------------------

Not that I would call of significance. There's probably 10,000 to 15,000, maybe 20,000 square feet that we think may not renew. I don't remember the exact number off the top of my head, but -- and it's something that -- we're talking to probably 30,000 or 40,000 square feet of people to lease space. So again, it's part of real estate, the way we view it. If you look at most multi-tenanted portfolios, they're going to end up having 8% to 12% vacancy at any given time.

--------------------------------------------------------------------------------

Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [17]

--------------------------------------------------------------------------------

Okay. And then last one for me. Of your sort of 6 or 7 sort of primary property types, any specific ones that represent a disproportionate amount of the current acquisition pipeline that you guys are either looking at or the stuff that's expected to close between now and early 2020?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [18]

--------------------------------------------------------------------------------

Well, we're seeing a lot of -- we have a lot of interest in and have a lot of confidence in both the inpatient rehab and the psych. So I mean that's kind of a disproportionate share of our programmatic stuff at this point in time. We are working to make sure that we keep our portfolio balanced, in line with our investment guidelines [own] those property types. And we're turning away some, what I'd consider probably pretty good, opportunities or -- and maybe looking askance at them. I'll put it that way, because they fall in the categories that we may be getting heavy into such as the inpatient rehab and the psych.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

The next question is from Alexander Goldfarb with Sandler O'Neill.

--------------------------------------------------------------------------------

Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [20]

--------------------------------------------------------------------------------

So a few questions here. First, going to your comments on the comp disclosure. Obviously, one thing that you guys have done, which has been almost a pioneer in the space, is the all-stock comp. And that's been one of your hallmarks and definitely been an alignment of interest. So can you just talk a little bit more about what prompted you guys to disclose this? And are you getting pressure to change the all-stock comp? Just sort of curious.

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [21]

--------------------------------------------------------------------------------

I wouldn't call it pressure to change the all-stock comp. I mean some constituents, and I will say proxy advisor constituents, don't understand our compensation strategy. So we put that in to try to make it clearer because if you look at and -- I guess I'll go ahead and say, if you look at our ISS reports from the last couple of years, they basically say we don't have any performance-based compensation. And we're like, are you looking at our plans? Are you looking at our compensation? We don't understand. So we put that in. I mean, number one, we're very proud of it. Number two is we think everybody needs to understand it. And number three, we probably haven't done as good a job explaining it and how it works in history -- through our history. So we're trying to make it more easily understood by people who are looking at us and seeing that we are different than others and trying to help them understand that we are different, but we're different in a good way.

--------------------------------------------------------------------------------

Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [22]

--------------------------------------------------------------------------------

Okay. I mean, hopefully, they got that because I think clearly it's been one of your benefits that's shown up in the stock price. The second question is, I realize that you guys don't do senior housing, but obviously, a lot of commentary from that area on oversupply. In the products that you target medical office, hospital, et cetera, do you see a risk of people trying to capitalize on the growing demand for whatever the services that are provided in these things and will start to see oversupply come to the products that you're targeting? Or there are things that are very specific about senior housing that the economics don't replicate to make the same sort of capital draw that would flood your product type with too much supply?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [23]

--------------------------------------------------------------------------------

Okay. I will address that in 2 different ways. Number one, as it relates to our types of properties, we feel like the wind is at our back in most of them. And if you look at psych, psych through the '90s, the reimbursements were cut. We lost 50% of the beds in America. And it turns out there's more of us now, and we are just as crazy as we always were. So there is now an impetus and a big kind of tailwind on the supply of psych beds now. Is it possible that, that will go too far? The answer is yes.

That's one reasons why we only do the big inpatient psych in CON states because we feel like that's a governor on the potential for the increase in the psych beds. But there's a lot of money right now being done at psych from a number of different standpoints. And in a lot of places, it's not well defined exactly. I mean when I say psych, behavioral is what it's currently done as. Behavioral, there's a lot of money being thrown at behavioral, all the way from opioids to depression to long-term behavioral issues.

So I mean it's something we're obviously concerned about, we're watching, but we think that we're doing things that protect us for the long term.

Inpatient rehab, we think that the tailwind is there because of the way that -- it's a lower-cost environment than acute care. It provides a specific service. And in any market, there's going to be a need for a certain amount of inpatient rehab beds. And we're trying to make sure that when we do our underwriting, we understand how that demand is driven, what the population base is, and we're working. Basically, significantly all of the inpatient stuff that -- inpatient rehab stuff that we're doing is brand-new, state-of-the-art facilities that are -- anybody would be proud to have their parent go to, to get satisfied with further rehab.

Medical office buildings, you can read all of the stats. I mean I've seen lots of numbers that indicate that we're so under medical office building that there's going to be -- I forget -- I forget what the numbers are. But we think in our specific markets that we're in and what we're looking for, again, we're looking for the low-cost environment, looking for the ease of access for the patient, et cetera. We think that the demand for that is going to be there for a long time.

Now as it relates to the senior housing. One of the reasons that we don't do senior housing is because the average age of senior housing stock in America is a lot older than what we normally like to do. It turns out while we are all getting older, nobody really wants to go to either a senior nursing facility or an assisted living facility for that matter. I've heard this data. I don't know that it's accurate, but I've heard it from a couple of different places that the average age of a resident in assisted-living facility has moved from 75 years to 85 years in the last 10 years. So what you're seeing is everybody is wanting to stay at home a lot more than they want to go to an assisted living facility or some other facility.

And our view is that as 5G comes into play, as some of the technology comes into play, as you see more of an emphasis on keeping people at home from the reimbursement payers, it's going to get even tougher in that senior living environment. So I've probably spent a lot more time than you wanted on it, but that's kind of our view on things.

--------------------------------------------------------------------------------

Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [24]

--------------------------------------------------------------------------------

Okay. So Tim, the bottom line is in your portfolio and the assets you own and the markets that you own, as you sit here today, you don't see any of your product being threatened by oversupply? You feel comfortable with all of your products in all of the markets?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [25]

--------------------------------------------------------------------------------

Well, it's hard for me to say all of the products in all of the markets, but we feel -- I mean, basically, you know how we run the company. I mean we view the company as a mutual fund portfolio, and we buy assets kind of like buying stocks. And are there some that are going to have issues? If you buy 111 assets of any type, there's going to be a certain number that has issues, but you work through those or repurpose them. You -- whatever -- I mean it is real estate, all real estate has a value, and it's just how you look at it and how you sell it. I mean, again, that's why we get paid. It's because it's real estate, and that's what we're supposed to do.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

The next question is from Bryan Maher with B. Riley.

--------------------------------------------------------------------------------

Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [27]

--------------------------------------------------------------------------------

And just to be clear, I'm a little confused on this with the Highland Hospital. Once it comes out the other side of bankruptcy, will you own the property or will they own the property?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [28]

--------------------------------------------------------------------------------

No, we'll own the property. No, it's all a function of a lot of things. But no, we own the property now. The lease will be assumed through the bankruptcy, then amended and restated on the other side so that it's basically what we said it would be all along. So no, we will own the property. It's just a matter of getting the -- it's like the quickest way to get the licenses and everything transferred.

--------------------------------------------------------------------------------

Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [29]

--------------------------------------------------------------------------------

Okay. So the lease is what goes through, not the title of the property?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [30]

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [31]

--------------------------------------------------------------------------------

Okay, great. And then on your internal watch list, and you talked a little bit about some of these tenant issues, and that's good, but would you say that over the past quarter or 2 the watch list going forward has stayed the same? Has it increased? Has it decreased? What are you seeing there?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [32]

--------------------------------------------------------------------------------

I mean I'll look around the table, but my general view is it's gone down some. I mean we've worked through several issues with tenants, they weren't significant issues. And those that we couldn't work through, we've basically kicked them out. So my view is, is it over the last -- particularly the last quarter, we hired a new Senior Vice President of Asset Management, who came onboard a little bit at the end of the second quarter, but has been on full board now for 4, 5 months. He's been a big add and basically has been focused on some of these issues. And so I feel a lot better about where we are now as it relates to the tenants.

--------------------------------------------------------------------------------

Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [33]

--------------------------------------------------------------------------------

Okay. And then just lastly for me. On the tenant -- on the property vacancies that you have. And I think you mentioned the kind of 8% to 10% on multi-tenant just standard, what is the most successful way you have for filling those tenant vacancies? Are you using local commercial real estate brokers? How do you go about filling those?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [34]

--------------------------------------------------------------------------------

Yes. I mean, that's -- again, that's one of the problems. We don't have a lot of vacancy in any given market. So we can't like do a national contract with CBRE or JLL or something because we don't get any attention from them. We initially started out trying to do stuff that way, but what we found is the best way to do it is to find a local broker who knows the health care market in that local market and get them onboard because they're the ones who interact with people. And again, most of our -- again, I'm trying to think, probably average space that we have to lease in any of our buildings that have vacancy is less than 10,000 square feet.

Actually, it's probably more like 8,000 square feet in -- on the average of any of the buildings. So it's not -- there's not a lot of significant pockets. If you factor the AMG property out of that, that number probably comes down to 4,000 or 5,000 square feet. So I mean, it's -- you have to deal with it on a local market basis with a local leasing guy who knows that health care market.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

The next question is from Drew Babin with Baird.

--------------------------------------------------------------------------------

Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [36]

--------------------------------------------------------------------------------

A quick question, and I apologize if the answer to this was embedded in the response to one of Alex' questions. But one of the things that's attractive about inpatient rehab facilities is the limited number of licenses for legit -- or facilities although the same services are often replicated or attempted to be replicated in LTACs and other facilities like that. And I guess, as you kind of draw that comparison to behavioral health, can you maybe talk about kind of what makes the behavioral health facility, like the ones you've bought, a place that offers kind of a superior product to both the end user or customer as well as physicians in terms of being able to get the right equipment and be properly licensed to provide all of the behavioral services?

Can you maybe talk more about kind of the stickiness and staying power of the facilities you've bought? And why they're more attractive real estate than other places where behavioral health services are being provided at other facilities?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [37]

--------------------------------------------------------------------------------

Sure. Thanks for the question, Drew. Basically, if you look at -- and let me say this -- we've got several different types of behavior, but I think what you're talking about is probably the big bites, the $25 million, $30 million. And basically, those are ones that we've got in markets, as I said, that have CON -- they're CON states.

But even if they didn't have CONs, the large behavioral facilities, there's very few of them in the country, number one, because we lost 50% of our beds through the reimbursement issues of the 1990s. But number 2 is, again, they take a special type of operator who knows the market and is able to provide the capital to do that, and the fact of the matter is, there is probably less than 10 in the whole country that can do that.

So we feel like it's protected from, number one, the CON standpoint; number two, from the number and ability of others to build something new and compete. And to kind of give you a feel for it, like the Highland Hospital, it's an acute care behavioral facility. And the reason we were able to find a new tenant and replace it is because their closest competition is, I think, 70 miles?

--------------------------------------------------------------------------------

Unidentified Company Representative, [38]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [39]

--------------------------------------------------------------------------------

70 miles away. And this is basically the only facility of this type in the Charleston, West Virginia area, which Charleston is the capital of West Virginia, and it's one of the major metropolitan. I mean it's not considered metropolitan by New York standards, but West Virginia standards, it's very metropolitan.

So basically, what we focus on are those types of facilities that don't have any close competition. That, due to the economics and the state regulatory regime, are not likely to have any significant competitors, but do have a population base that have the population requirement for this type of facility.

I don't know, Page, you worked in psych for years. I mean do you want to add anything?

--------------------------------------------------------------------------------

William Page Barnes, Community Healthcare Trust Incorporated - Executive VP & COO [40]

--------------------------------------------------------------------------------

The West Virginia facility was a successful facility prior to our acquiring it, and it was a not-for-profit facility that we thought could be improved upon. It had its issues and we -- I think the quality of the facility, as Tim said, was an indication of why we were able to replace the old tenant so quickly. So we have a -- we do a good analysis, I believe, on management. The major tenants that we have in that area have been in psych for a very long time. Have started a couple of other companies and been successful in rolling them up to universal or to the [all-psych] solutions. So we think they're good operators. And that's a key to any...

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [41]

--------------------------------------------------------------------------------

And they are financially [well-banked].

--------------------------------------------------------------------------------

William Page Barnes, Community Healthcare Trust Incorporated - Executive VP & COO [42]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [43]

--------------------------------------------------------------------------------

Does that give you a feel Drew?

--------------------------------------------------------------------------------

Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [44]

--------------------------------------------------------------------------------

It does, yes, and I appreciate all the color.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

Last question is from Barry Oxford with D.A. Davidson.

--------------------------------------------------------------------------------

Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [46]

--------------------------------------------------------------------------------

Real quick. Looking at some of the different MSAs from a cap rate perspective, which ones are you kind of finding more attractive right now? And I guess the flip side of that question is which ones might be getting a little pricey or a little ahead of themselves?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [47]

--------------------------------------------------------------------------------

I mean, basically, we don't see a lot of cap rate compression by MSA based upon what we're looking at. And we -- but again, we don't do the on-campus downtown urban hospital campuses. So we're not competing with any of our peers. And again, normally, if we assume there's any competition, we'll back off of it and not put in a competing bid. So I mean I don't think we're seeing cap rate issues based upon MSA.

I mean in some situations, we see cap rate issues because owners get things in their mind that brokers put in their mind that since somebody sold a property to one of our peers on the downtown urban hospital campus, that all of a sudden, their property's worth this much, in which case we just kind of walk away and say, "Okay, if you find somebody, my advice would be to sell it to him." In a lot of cases, they come back to us a few months later because they haven't been able to do that. But -- I mean we're not turning anything away because that particular MSA is too pricey and we're not diving into a particular MSA because stuff looks cheap there.

--------------------------------------------------------------------------------

Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [48]

--------------------------------------------------------------------------------

Right. So when you are walking away, it's more of a runoff reason than it is an MSA reason?

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [49]

--------------------------------------------------------------------------------

Right.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Tim Wallace for any closing remarks.

--------------------------------------------------------------------------------

Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [51]

--------------------------------------------------------------------------------

Thanks, Francesca, and we appreciate everybody being on the call today and asking the questions and showing interest in us, and we look forward to being back on here with you guys after the end of the year and see a lot of you all out in L.A. at Nareit. Thanks.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.