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Edited Transcript of CHCT earnings conference call or presentation 27-Feb-19 3:00pm GMT

Q4 2018 Community Healthcare Trust Inc Earnings Call

Franklin Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Community Healthcare Trust Inc earnings conference call or presentation Wednesday, February 27, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Timothy G. Wallace

Community Healthcare Trust Incorporated - Chairman, CEO & President

* William Page Barnes

Community Healthcare Trust Incorporated - Executive VP, CFO & Secretary

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Conference Call Participants

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* Alexander David Goldfarb

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

* Michael Robert Lewis

SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT 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

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Presentation

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Operator [1]

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Welcome to Community Healthcare Trust 2018 Fourth Quarter and Year-end Earnings Release Conference Call. On the call today, the company will discuss its 2018 fourth quarter and year-end 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 maybe discussed in this call will be based on information as of today, February 27, 2019, 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 and its SEC filings. The company undertakes no obligation to update forward-looking statements, whether as a result of new information, future developments or otherwise, except as maybe 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 prior written permission.

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

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

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Thank you, Jamie. Good morning, and thank you for joining us today for our 2018 fourth quarter and year-end conference call. On the call with me today is Page Barnes, our Executive Vice President, Chief Financial 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 annual report on Form 10-K was also filed last night.

Before we get into our normal topics, I would like to address the impairment charge and related noise in our financial statements.

We acquired our Highlands Inpatient Behavioral Hospital in 2017. We had approximately $30 million invested in Highlands, and at the request of the operator, that was structured as a $25 million lease investment and a $5 million mezzanine loan. The operator requested this structure because they told us they were intending to refinance the loan at a lower rate than our lease rate.

During the second half of 2018, we started experiencing payment issues with the operator of Highlands. We placed them on a close monitoring regime and had our original underwriting confirmed when we found that the operations at the facility were still producing significant cash flow and should not have been having a problem paying us our interest and rent. In early December, it was discovered that the reason there were payment issues was that there was a diversion of funds in violation of our agreements. We moved aggressively to assert our rights under our agreements. We are in the process of transitioning the facility to a new operator and in that regard, we have signed a transition agreement with the old operator. In addition, we have a signed lease with a new operator, subject to a normal transfer of licenses contingency.

The new lease is based on our total investment of little over $30 million, and we expect the lease cash flow from Highlands going forward to be substantially the same as what it would have been from the lease and the mezzanine loan with the old operator. We are currently collecting monthly payments roughly equivalent to the interest and rent we should be receiving. For accounting purposes, it was determined that we should impair the loan and not recognize approximately $500,000 of revenue and write-off approximately $200,000 of straight line rent in the fourth quarter.

As I previously indicated, we are currently receiving monthly payments. We anticipate collecting the amounts previously described that we could not recognize in the next couple of quarters and a new lease provides for rent payments roughly equivalent to old interest -- to our old interest and rent payments. We believe we have addressed the situation as best we can.

Now on to more mundane topics. As you know, we have an active ATM program in place. During the fourth quarter, the company issued through its ATM program 100,700 shares of common stock at an average gross sales price of $30.83 per share. We received net proceeds of approximately $3 million at an approximate 5.3% -- 5.36% current equity yield.

During the quarter, we acquired 11 properties with a total of approximately 143,000 square feet for a purchase price of approximately $24.1 million. These properties were 96.6% leased with leases running through 2028 and anticipated annual returns of 9.04% to 9.51%. So far this quarter, we have acquired 2 properties, with a total of approximately 83,000 square feet for purchase price of approximately $32.7 million. These properties were 100% leased with leases running through 2029 and anticipated annual returns of 9% to 9.3%.

In addition, we continued to have 5 additional properties under definitive purchase and sale agreements to be acquired after completion and occupancy for an aggregate expected investment of $103 million. The expected return on these investments should range from 9.4% to up to 11%.

We anticipate 1 or 2 of these closing in the second quarter, but we've been told that all of these rain we have been having may cause some construction delays with a couple of them.

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

Occupancy was stable during the quarter, however we are seeing a lot of activity on the leasing front and believe we will start seeing the occupancy level start increasing in the next few quarters.

On another front, we declared our dividend for the fourth quarter and raised it to $40.75 per common share. This equates to an annualized dividend of $1.63 per share. And I continue to be proud to say we have raised our dividend every quarter since our IPO.

Something I'd like to mention every year about this time is that Page, Leigh Ann and myself continue to take all of our compensation in stock. And most of our board and several other executives continue to take significant amount of their compensation in stock. I will note that starting last year, some directors and executives have stock that they can sell, and you may see that happen from time to time in small amounts for personal reasons. However, I will point out that I have no intentions of selling any of my stock.

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

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William Page Barnes, Community Healthcare Trust Incorporated - Executive VP, CFO & Secretary [3]

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Thank you, Tim. I'm pleased to review the company's financial performance for the fourth quarter and year ended December 31, 2018.

Total revenues for the fourth quarter of 2018 were approximately $12.2 million versus $11 million for the same period in 2017. Total revenues for the year 2018 were $48.6 million versus $37.3 million for 2017.

Rental and investment interest revenues were $10.5 million and $42.3 million for the quarter and year, respectively versus $9.5 million and $32.3 million for the same periods 2017. The real estate portfolio was approximately 89% leased.

On pro forma basis if all the 2018 fourth quarter acquisitions that occurred on the first day of fourth quarter, rental and interest revenues would have increased by additional $298,000 to pro forma total of $10.8 million for the quarter.

Total expenses for the fourth quarter of 2018 were approximately $9.1 million versus $8.8 million for the same period in 2017. Total expenses for the year 2018 were just under $35.2 million versus just under $30.4 million for 2017.

General and administrative expenses for the fourth quarter were $1,547,000. Depreciation and amortization expense was a little under $5.1 million for the quarter. On a pro forma basis, if all of 2018 fourth quarter acquisitions occurred on the first day of the fourth quarter, depreciation and amortization expense would have increased by $257,000 to a total -- pro forma total of approximately $5.3 million.

The company reported a net loss of $1,885,000 for the fourth quarter versus net income of $1,552,000 for the same period 2017. For the year of 2018, net income was $4.4 million versus $3.5 million for the year 2017.

Funds from operations, FFO, for the fourth quarter of 2018 consisted of the net loss plus $5.1 million in depreciation and amortization, less the gain from the sale of $295,000 for a total of $2.9 million.

Net income and thus FFO was reduced by Highlands rent we did not recognize. Interest, we did not recognize in straight line rent we reversed, which combined to a little over $0.04 a share. As we disclosed, we anticipate collecting these amounts over the next quarter or so. In addition, FFO was reduced by $5 million or $0.28 by the loan impairment, which was partially offset by the tax benefit, which added back $0.074 to FFO.

AFFO, which adjusts for straight line rents and deferred compensation, the impairment of the note and the corresponding income tax benefit for the fourth quarter was $7.2 million or $0.41 per share diluted versus $6.6 million or $0.37 per share for the same period 2017. AFFO was negatively affected by the Highlands rent and interest not recognized by about $0.03 per share. Again, on a pro forma basis adjusting for the debt outstanding for the entire quarter, all of the 2018 fourth quarter acquisitions occurred on the first day of the fourth quarter, AFFO would have increased by approximately $165,000 to a pro forma total of just under $7.4 million, with AFFO remaining at $0.41 per share.

That's all I have from a number standpoint. Operator, I believe we're ready to start the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Sheila McGrath from Evercore ISI.

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

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Tim or Page, I was wondering if you could talk about how this operator situation will reflect in first quarter earnings? Are you getting the transition income the whole time? And also on same topic, how were you able to get a new operator so quickly?

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

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Sheila, yes, the transition agreement is in place. We are receiving payments with the legal fees and all the other stuff related to it. It will probably affect what we're doing a $0.01 or so in the first quarter. But, again, we anticipate collecting what we've been doing. The answer to your question how we were able to is because it's a great facility. And 1.5 years ago when the old operator acquired the facility, there were several others that had reviewed the facility. So we actually talked to several psych operators that would have been happy to taken it over and we were able to move quickly with one of them. So...

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

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Okay, great. And then just on the acquisition side of things. It looks like this year is going to shape out to be at least $135 million with what you closed already and the programmatic acquisitions. I was wondering if you could discuss what's making this year's volume so much bigger than last year? And just any detail you could give us on the 2 acquisitions you just closed in February?

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

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And I'm trying to remember, do we have anything Leigh, did we disclosed anything the details of the acquisitions in February? Basically, one was an LTAC Hospital with Kindred as the operator and rehab, rehab -- it is not LTAC, it is rehab, with Kindred as the operator in Texas and the other is a physician office with a orthopedic group in Pennsylvania. Both of them have basically 10-year leases on them. And as we pointed out, the yields are 9% to 9.3% something like that and they were closed earlier this month.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [6]

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And just if you could comment, Tim, on why this year's acquisitions is so much -- the volume is so much bigger than last year, if there is any rationale?

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

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Well, I mean, part of it is because we've been working on some kind of from the beginning of having this future pipeline with clients that would provide us some view into the future. So having that as a base and then just filling in around it makes it a lot simpler than just actually going out and finding everything every quarter. So we're going to continue to try to develop that out and try to have a future pipeline of steps so that on an ongoing basis, we'll have some visibility into what the acquisitions are for the next 12 to 18 months.

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Operator [8]

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Our next question comes from Alexander Goldfarb from Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [9]

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Few questions here. Just first, going back a little bit, the bankrupt tenant that you did a restructuring of last year. Can you just update how that's going? And I think when you originally talked about that, it sounded like that may -- that was an investment that was likely to exit at some point. So just if you could update us on that and how that tenant is going in? And where you stand there?

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Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [10]

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They were actually in the office in the last month or so and going over what they did for the last year, their operations were pretty much performance what we're anticipating for last year. They're anticipating a good year this year. They are looking at converting the company to employee-owned company through an ESOP. In which case, if they do that, then sometime this year, we will get paid off. We're anticipating getting significantly paid down even if they don't do that by some refinancing if they would do. But our best guess is probably sometime in the second half, most if not all of that loan will get paid off.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [11]

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Okay, okay. And then just, Tim, as you look back on your underwriting. Certainly, it's a big positive that you're able to backfill this -- the Highlands operators so quickly. But one -- any other tenants in your profile giving you pause maybe that you want to talk about that maybe there's something else brewing, but, in particular, on the Highlands tenant and the prior tenant that you just discussed, were there any sort of initial red flags that stood out initially when you did either of these 2 transactions were like something may not be right, but let's go with it? Or these -- or it just happens to be too coincidental kind of deal 1 this year, 1 last that just happened to be coincidental and nothing was flagged, et cetera?

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

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Well, there are 2 entirely different kind of scenarios. The one last year with LTAC were some of the reimbursements that were changed and the LTAC created a lot of flux in the LTAC industry. And these guys took advantage of that to get rid of some of their marginal to negative operations after reimbursements. And that's an area we were able to utilize our underwriting capabilities and our structuring capabilities to come out and not lose money and hopefully have a full circle of getting paid off this year, we'll kind of put an exclamation point in there. The one in Highlands is the attorneys don't want me saying too much, but it's one where you really scratch your head and ask yourself what they were thinking. Because they had an asset that was generating significant cash flow above what our interest and rent payments were. And our original underwriting said that when we went back and looked at it closely again in December -- November, December timeframe, it's still said that -- it still said that when we are able to negotiate the transaction that we were with the new operator. So you just scratch your head and say what was the old operator thinking when they were doing that and screwed up themselves by what they did. So -- and, again, I can't go into detail of what it was or anything, but it's almost inexplicable as to what happened because they had an asset with significant cash flow and now they're not going to have it.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [13]

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Okay. Any other tenants on your watch list?

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

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I think we got over 300 tenants now. So we always have tenants on our watch list, but nothing of this size or nature or concern.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [15]

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Okay. And then final question for Page. Page, on the weather delays that you guys talked about that may affect some of the presales. Sounds like on the acquisition pipeline, we should be back end -- back half waiting the deals from a cadence perspective? It sounds like first quarter is going to be impacted by a $0.01 from the Highlands transaction, but then it sounds like the acquisitions are more back half weighted, is that the right way to think about it?

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William Page Barnes, Community Healthcare Trust Incorporated - Executive VP, CFO & Secretary [16]

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Yes, I think that Tim said that we do expect 1 or 2 to close in second quarter and one is complete, but it's been operating at under the agreement we gave them 90 days to get up and running. But I think you're correct, but the other 3 will be more back half.

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Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [17]

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I'm going to add. When you look at the whole thing, it will probably be kind of even weighted though as we did $32 million in February and then we'll do $40 million, $50 million in the second quarter. And then the rest of it will be probably back end weighted on the second half. But when you look at the whole year, it's probably not that far off.

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Operator [18]

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Our next question comes from Michael Lewis from SunTrust.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [19]

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Most of my questions about Highlands have been answered now. And I have just one. I understand the rent on the new lease approximating the old rent and the mortgage interest. But could you just talk about the collection of the roughly $500,000 that you didn't get paid in 2018? And if there is any risk to that payment in other words that maybe you don't ever collect that?

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Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [20]

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Michael, yes, of course, there is risk related to it. But in the transition agreement, we've got laid out pretty tightly how we should get paid, and it's our belief we are going to be able to collect -- there's receivables that they are collecting --there's funds are there. And the fact of matter is they're generating on a monthly basis twice as much cash flow, I mean, there is a 2x coverage. So there is twice as much cash flow that is -- it takes to pay for our rent and interest. So we feel fairly strong that will be able to get it, but obviously, there are risks that we won't.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [21]

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Okay. Understood, that's helpful. And then, Tim, you mentioned the occupancy should begin to rise. The lease percentage has moved down 6 quarters in a row now. It looks like you have about 38 leases that are scheduled to expire this year. I mean, how should we think about where you think that leased percentage might go throughout the year? I know you had some acquisitions and puts and takes, but how should we think about that trending in 2019?

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Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [22]

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Again, I think you will see it move up throughout 2019. We do have a few leases that are coming up, but we have weathered most of the storm. If you go back when we did the IPO, we had -- it was 26%, 27% of leases rolling in each of the first year or 2. And we have come through that and seeing that -- seeing the occupancy drop to 3%, the majority of which is really related to the AMG property. If it wasn't for that property, it would -- you'd see it over 90%, I believe. And so we see a lot of activity. Most of the stuff we're doing is 100% leased on a going-forward basis. So I think you are going to see that moving in. But the other thing is, if you look at other metrics on the leasing front, our weighted average remaining lease term when we did the IPO 4 years ago, it was just a little over 4 years and now it's up right around 7 years. And we have been able to keep it up around 7 years for the last, I don't know, 4, 6 quarters. So I think, if you look at the overall lease metrics, we have been able to improve some -- and, again, I think the occupancy you will see move up a little bit.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [23]

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And then just lastly for me. Did you disclose or could you share the interest rate on the mortgage payable that you assumed?

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William Page Barnes, Community Healthcare Trust Incorporated - Executive VP, CFO & Secretary [24]

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It was slightly over 5% all-in.

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Operator [25]

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Our next question comes from Rob Stevenson of Janney.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [26]

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So just a follow up on Michael's question, in terms of the properties that have vacancy in them now. I mean, is the strategy just to lease them up or you also actively looking to sell some of the properties either that are vacant or have vacancy in them?

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Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [27]

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I wouldn't say that we are actively looking to sell, we do have some people who have made offers some of the properties that we may end up in the taking. But we are trying to lease the properties, There's only one or 2 that have been significant vacancies that generated since we acquired the property. A lot of our vacancy is we buy a vacancy, but we do not pay for it because we only buy -- we only pay for existing NOI. So if we buy a property that's got 15% vacancy, we're not paying for it, it's all upside potential. So something like that, we obviously aren't looking to sell that, we are obviously looking to try to lease that up.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [28]

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Okay. And then to ask the lease question on a different way. I mean, you have 9.6% of your revenue leases rolling this year. Any known move-outs or downsizings at this point?

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Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [29]

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Yes, there are couple. Again, this is real estate. I mean, we have people move out, we have people move in. I mean, that's -- the occupancy has been basically 89% for the last 2 or 3 quarters. But we've had some people move out and we've had some people move in. So there are some that move out and I think probably our stickiness rate is in the 85%, 90% range. But that means 10% to 15% will move out.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [30]

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Okay. And where do you expect new rents versus expiring on the stuff that you're going to release this year? Is this relatively flat given the triple-net set leases you up, slightly down. I mean, how should we be thinking about that?

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Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [31]

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I think generally speaking, again, we've had some ups and some downs, but on average it's pretty close to the same new leases or basically pretty close to the same as the old leases.

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Operator [32]

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(Operator Instructions) Our next question comes from Sheila McGrath from Evercore ISI.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [33]

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I guess, Tim, I was wondering if you could give us some insight on how G&A should look this year, or Page, versus last year. And do you expect that you're going to be adding employees as you grow significantly this year?

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

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Yes, I mean, again, we do anticipate that we're going to be adding some people. We are going to be -- some of our executives are getting up to retirement age, nobody in the room right now, but some of the other guys are, so we're going to be looking at switching some out. So we're going to add some people at probably lower rates than what we've got now and we're going to be looking at adding some net people. Overall, I think probably G&A will be up 5%, 10% maybe. Not significant because, again, we are not adding significant at the top level that we are not adjusting for otherwise. So...

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [35]

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Okay. And then just now that you have access to more efficient equity capital via the ATM. I just wonder like big picture, how you could help us think about where you want to manage leverage level this year?

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Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [36]

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Well, we have said from beginning in part of our investment guidelines is that we have an internal policy of keeping that below 40% of the book of total cap. And the long term goal is to have that in the 30% to 35% range. So you will basically be seeing us access the equity markets in a way to try to maintain our long-term leverage in that 30% to 35% range.

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Operator [37]

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Our next question is also up follow-up from Alexander Goldfarb from Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [38]

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Just really quick. Tim, just going back to the tenant lease that made you a buy out their restructured portfolio later this year. If that happens -- do you think that you would step up the acquisition pace so that from an earnings perspective, there wouldn't be an impact or would that mean that the 2020 earnings -- I know you guys don't give guidance, but if you think about the company as it grows, does that mean that the earnings bar is reset down by that amount. Just trying to think about the mechanics of if that's going to buy themselves out, what happens from an earnings perspective and how you guys are thinking about addressing them?

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William Page Barnes, Community Healthcare Trust Incorporated - Executive VP, CFO & Secretary [39]

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Well generally speaking, as you know, Alex we have already said we've been doing $20 million to $30 million a year and basically what was done to-date plus the $100 million in the pipeline, we have got $135 million for this year anyway. We're not going to not acquire stuff. We haven't shut down the acquisition department for the next 9 months. So we're still going to be looking at acquiring stuff. But I don't want anybody to say, okay, well now they are going to do $150 million or $160 million because there is that likelihood that the $23 million will get paid off and it nets back down. So to answer your question is we're kind of anticipating our acquisitions will be a little above normal this year because we got the pipeline and everything else there. And basically it will act as a cushion in the event that the loan does get paid off.

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Operator [40]

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And ladies and gentlemen at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

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

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Okay. Thank you, Jamie. And I would like to thank everybody for being on the call today and for obviously your continued support. And we look forward to talking to you again in 3 months. Thanks, so much.

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Operator [42]

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Ladies and gentlemen that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.