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Edited Transcript of CHCT earnings conference call or presentation 26-Feb-20 3:00pm GMT

Q4 2019 Community Healthcare Trust Inc Earnings Call

Franklin Mar 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Community Healthcare Trust Inc earnings conference call or presentation Wednesday, February 26, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David H. Dupuy

Community Healthcare Trust Incorporated - Executive VP & CFO

* Timothy G. Wallace

Community Healthcare Trust Incorporated - Chairman, CEO & President

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Conference Call Participants

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* Alexander David Goldfarb

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Andrew T. Babin

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

* Matthew David Boone

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

* Michael Robert Lewis

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

* Nathan Daniel Crossett

Joh. Berenberg, Gossler & Co. KG, 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

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Presentation

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Operator [1]

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Welcome to Community Healthcare Trust's 2019 Fourth Quarter and Year-End Earnings Release Conference Call.

On the call today, the company will discuss its 2019 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 may be discussed on this call will be based on information as of today, February 26, 2020, 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 a 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 prior 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.

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

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Good morning, and thank you, everyone, for joining us today for our 2019 Fourth 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.

Again, 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.

Once again, as usual, we were very busy during the fourth quarter. However, it was basically business as usual. As you know, we have an active ATM program in place. During the fourth quarter, the company sold 1,352,985 shares of stock through the ATM program at an average gross sales price of $45.73 per share. We received net proceeds of approximately $60.6 million at an approximate 3.63% current equity yield.

During all of 2019, the company, through its ATM program, sold 2,674,347 shares of common stock at an average sales price of $42.84 per share, and received net proceeds of approximately 112 million -- $112.3 million.

During the fourth quarter, we acquired 7 properties with a total of approximately 113,000 square feet for a purchase price of approximately $34.8 million. These properties were 100% leased with leases running through 2034, and anticipated annual returns of 9.23% to 11%.

During 2019, the company acquired 15 properties for an aggregate purchase price of approximately $152 million. The properties were approximately 99.5% leased with lease expirations through 2034. So far, in the first quarter, we have acquired 3 properties with a total of approximately 56,000 square feet for a purchase price of approximately $11.7 million. These properties are approximately 96.1% leased with leases running through 2026. And anticipated annual returns of 9.1% to 9.5%.

The company has 2 properties under definitive purchase agreements for an aggregate expected purchase price of approximately $6.3 million, and expected aggregate returns from approximately 9.4% to 9.9%. The company is currently performing due diligence and expect to close these properties in the first quarter.

We also have 4 additional properties under definitive purchase and sale agreements, to be acquired after completion and occupancy. That's for an aggregate expected investment of $73.4 million. The expected return on these investments should range from approximately 9.5% to 11%. We expect to close on one of these, in the first quarter of 2020, representing an investment of approximately $19 million and a return of approximately 11%. We anticipate the rest to be completed and closed from the third quarter of 2020 through the first quarter of '21.

And let me go into a little more detail on this because I think our release was confusing to at least a couple of people. But basically, we're closing -- of the 4 properties, we're closing 1 in the first quarter, we anticipate closing 1 in third quarter of 2020, 1 in the fourth quarter of 2020 and 1 in the first half of 2021. And that one has gotten pushed because there was a fire at the facility during the construction process, and they are having to go back and redo several things. So that's the reason that, that kind of got pushed out into 2021.

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 subsequently access the equity market. Occupancy was up slightly during the fourth quarter. 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 and maintain our weighted average remaining lease term at approximately 7.7 years. On another front, we declared our dividend for the third quarter and raised it to $0.4175 per common share. This equates to an annualized dividend of $1.67 per share, and I continue to be proud to say, we have raised our dividend every quarter since our IPO.

After this dividend is paid, we will have paid almost $120 million in dividends in about 4.5 years of operations. The important point of this is that basically, we will have paid out about what we raised in the IPO, after we pay -- make this dividend payment. So in 4.5 years, we've been able to return to our investors what they originally invested with us.

Now before I finish my comments, I would like to comment on a couple of items. First, on Highland Hospital. The filing of a pre-packaged bankruptcy to expedite and facilitate the transfer of license is imminent, with an anticipated sale to the new operator that continues to manage the facility. 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. Now 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.

Second, you will note that we never recorded a valuation allowance related to the deferred tax asset that was generated last year by the impairment of the Highland mezzanine loan. The recording of the deferred tax asset last year was generated by certain technical accounting rules based on the facts that existed at that time. And the valuation allowance this year was generated in essence by a change in those facts, basically related to in which entities we hold various assets. Of course, the loan impairment generation as a deferred tax asset and the valuation allowance are all noncash items. Based on consultations with NAREIT and our auditors, it was determined that all of these items should be added back to net income to arrive at FFO. Therefore, we have replant the amounts for 2018 to adjustments to arrive at FFO from adjustments to arrive at AFFO in the reconciliation, from net income to FFO and then to AFFO.

That was a lot to say. I believe that takes care of the ends I wanted to cover. So I will hand things off to Dave to cover the numbers.

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

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Great. Thanks, Tim. Before covering the financial results, I wanted to provide a couple of quick updates. First, as it relates to environmental, social and governance, or ESG, very shortly, we will be adding a new section to our website at www.chct.reit, under the Investor Relations tab that will include ESG guidelines and policies. Feel free to reach out directly to me, should you have any questions about these guidelines and policies.

Second, as many of you are aware, we achieved large accelerated filer status, which required us to expand our audit to include an internal control of our financial reporting or ICFR audit in compliance with SOX 404. I am proud of how well the team worked together to comply with this expanded audit, and pleased to say that we are fully in compliance with these additional SEC requirements.

Now on to the financial results for the fourth quarter and year ended December 31, 2019. Total revenue for the fourth quarter of 2019 was approximately $16.8 million versus $12.2 million for the same period in 2018, representing 38% growth over the fourth quarter of 2018. Total revenue for 2019 was $60.8 million compared to $48.6 million for 2018, representing 25.3% growth over the prior year.

In addition, our real estate portfolio was approximately 90% leased at year-end. On a pro forma basis, if all the 2019 fourth quarter acquisitions had occurred on the first day of the fourth quarter, total revenue would have increased by an additional $294,000 to a pro forma total of $17.1 million for the quarter. From an expense perspective, property operating expenses, or POE, increased in the fourth quarter from $2.4 million in 2018 to $2.8 million in 2019 or approximately 16%.

For the year, POE was $12.2 million in 2019 compared with $9.9 million in the prior year, resulting in growth of approximately 23%. It should be noted, however, that the increase in POE is in line with the growth we are experiencing in total revenue period-to-period.

In the fourth quarter, G&A increased from $1.5 million in 2018 to $2.1 million in 2019. For the year, G&A grew from $5.6 million to $7.7 million or approximately 37%. This was driven primarily by increases in amortization of deferred compensation, new employee-related costs as well as increased legal and accounting professional fees incurred to comply with the additional SEC requirements of being a large accelerated filer. Although, G&A will continue to grow as we add properties, we expect the level of growth to moderate in 2020.

The company reported net income of $2.213 million for the fourth quarter of 2019 versus a net loss of $1.885 million for the same period in 2018. As discussed earlier in the call, the prior year's net loss related to the impairment of the $5 million note receivable, having to do with Highland Hospital.

For the year, 2019 net income was 18 -- $8.4 million versus $4.4 million in 2018. I am pleased to report the funds from operations, or FFO, for the fourth quarter of 2019 grew to $9.5 million or $0.47 per diluted share compared to $6.6 million or $0.37 per diluted share in the fourth quarter of 2018. Adjusted funds from operations, or AFFO, which adjusts for straight-line rent and stock-based compensation, totaled $9.9 million or $0.49 per diluted share compared with the fourth quarter of 2018 of $7.2 million or $0.41 per diluted share. And from a pro forma perspective, if all of 2019 fourth quarter acquisitions occurred on the first day of the fourth quarter, AFFO would have increased by approximately $258,000 to a pro forma total of $10.1 million, increasing AFFO to $0.50 per share.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Nate Crossett with Berenberg.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [2]

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Maybe you can help us size the pipeline outside of what you've already announced. What does the deal flow look like? Maybe you can give us some guidepost for acquisition volumes in 2020.

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

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Well, basically, Nate -- and thanks for the question, we haven't changed kind of our approach to this from the very beginning. We're still anticipating that in 2020, we'll close somewhere between $120 million and $150 million. We anticipate doing that in 2021. We feel like with where we've got our cost of capital at this point, thanks to all of our investors and the support of our banks, that investing in the properties that we are -- the margins that we are that we can generate significant returns. So we don't see any need to change what we're doing. So the answer still is $120 million to $150 million a year.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [4]

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Okay. What about just velocity of deal flow this year that ticked up? Or are there some property types you're seeing more or less opportunities?

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

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I mean, I think we're still seeing about the same amount of opportunities. And will say, I think probably it shifted some to what we've started calling a specialty behavior -- specialty behavioral-type emphasis. We see a lot of stuff like autism and other things that are kind of a specialty behavioral. We're still seeing a lot of stuff on the rehab side. We still see a lot of physician office in those types. I mean, we've got what I consider probably fairly consistent deal flow, and again, the only kind of internal change that might be to it is seeing more of the specialty behavioral.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [6]

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Okay. And then just one lastly on yields. I mean, you continue to quote these very high yields. We've seen the 10-year essentially collapsing. Do you -- what's your expectation as we look farther into the year? The numerator is staying the same, even though funding costs continue to go lower?

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

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We like our margins increasing. I mean, people ask me that -- people have asked me that for the last 5 years, basically, from the time that we did the IPO. And the answer is that I really don't see that changing that much. I mean, and I know for a lot of people, it's hard to believe that most doctors in America don't keep up with what the 10-year treasury is on a daily basis. And there are a lot of people out there like that, that own properties that we are very interested in, that are using different metrics to determine when and how they sell versus what the 10-year treasury is. So we feel very comfortable right now that we can continue investing in generating the margins that we're generating.

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Operator [8]

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Our next question comes from Rob Stevenson with Janney.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [9]

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Tim, the 4 properties under definitive for purchase agreements to be -- the tech set required to be after completion and occupancy, and you talked about the fire at one. Are all 4 of those build-to-suits?

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

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Yes. They're brand-new properties with 3 different health care providers.

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

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Okay. And so basically -- but when you gave the first quarter, third quarter, fourth quarter and then first half of 2021, does the rent commence there? Or is that just when they get -- when it close?

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

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That's -- well, it's the same thing. And obviously, they're single tenant. So when we close, the rent starts.

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

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Okay. So there's no free rent?

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

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I don't believe in free rent.

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

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Okay. All right. That's always a good thing. I wish some of your office peers felt the same way. You've got around 15% of your leases rolling over the next couple of years. Any known vacates among the 2020 and 2021 lease rollovers of note?

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

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Yes. I think we probably have a couple that are probably going to vacate. That's probably a total of about 15,000, 20,000 square feet. But we're releasing stuff as we go. So I mean, I think what you're going to see is the occupancy stayed pretty stable at right around 90%.

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

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Okay. And then, Dave, appreciate your comments on the -- some of the factors that drove the 37% year-over-year increase in G&A. But how should we be thinking about growth for 2020? Is it -- even if it moderates, are we still talking of a number that's roughly $10 million at 30% growth? Something closer to 20%? I mean, what's in the budget for you guys for this year? And are you guys needing to add any material people this year to continue to grow the business?

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David H. Dupuy, Community Healthcare Trust Incorporated - Executive VP & CFO [18]

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Yes. Most of the additions that you saw in 2019 are directly related to some of the additional costs that we had in -- are dealing with the requirements for 404. And so those are behind us. We will continue to add accountants and other staff based on adding buildings. But the G&A as a percentage of our revenue is going to continue to moderate into 2020, and we don't see any big adds coming up in 2020. So I think you -- suffice it to say, we don't give specifics with regard to projections in terms of what that number is going to be. But it is going to continue to be -- come down, I would say, as a percentage of revenue over 2020. So we don't expect any big adds.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [19]

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Okay. I mean, if I look at 2018, it was around 11.6% of revenue and in 2019, it was about 12.7%. So do you think it trends closer to back to where it was as a percentage of revenue in 2018 then?

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David H. Dupuy, Community Healthcare Trust Incorporated - Executive VP & CFO [20]

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I think that 11% to 13% is a good range. And from quarter-to-quarter, we're going to have ebbs and flows. As you know, I mean, business works when we add properties, we add chunks of G&A. And so it's tough to get very precise, but I think that 11% to 13% range is a good range to use. And we can -- so I would just guide you there.

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Operator [21]

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Our next question comes from Drew Babin with Baird.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [22]

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Appreciate the accounting lesson, I have a lots to learn. But moving on to corporate finance items, 9% of revenues expiring this year. I know you've talked about kind of vacates that you are expecting. As far as leases that you expect to be renewed, can you just give an update on kind of where you expect those renewal rents to be? Should we model them as kind of just a continuation of the leases that are currently in place? Or do you expect any change there?

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

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Well, we don't expect any significant change. I mean, we basically have already taken care of a lot of those, and see an upward trend, probably kind of like what we've always said, 1%, 2% a year type of thing. So I mean, we don't think there's any significant above market, below market in the portfolio and even the steps that we're releasing, where it's vacating doctors. We're seeing that basically at or slightly above where they were. So...

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [24]

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Okay. Appreciate that color. And if you look at the acquisition opportunities, including the build-to-suits that are currently laid out and announced, can you tell us just directionally, you probably can on specific buildings, but what medical segments, those are most focused in or geographies? Or kind of give an indication of where that growth is occurring?

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

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I don't think that we have disclosed that, but you can probably determine it by what we've talked about and what we've closed relative to our clients in the past. I mean, it's going to be inpatient rehab. It's going to be acute care side. It's going to be dialysis. It's going to be those types of things that -- from a subsegment standpoint, as it relates to geography, I don't think we've ever said where those properties are. So -- and I don't know that I can quote it off the top of my head right now. So I'm not going to try to do that.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [26]

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Understood. And just one question for Dave on the balance sheet side. Obviously, most of your funding comes from the equity side, and obviously, the revolver and term loans. Do you expect anything to potentially occur as far as just new forms of unsecured financing? Or I know secured financing is something you probably don't want to ton of. But you expect to see anything kind of new as far as the pattern goes this year?

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David H. Dupuy, Community Healthcare Trust Incorporated - Executive VP & CFO [27]

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No. I mean, I think one of the things that we believe is the strength of the company is keeping our balance sheet simple. And that's really a tenant that from the beginning of -- the founding of the business with Page and with Tim, is to keep the balance sheet as clean and as simple as possible. And I think that's going to continue. We've been opportunistic, as everyone could see, in terms of issuing shares under the ATM. When you look at those equity yields, you think those are approaching our cost of debt. I mean, right now, if 1-month LIBOR is 1.65%, our cost of debt is right around 3.45%. That could come down a little bit. But that's really right on top of where our yield is in terms of issuing shares.

So I think what we'd like to do is we like to stay underlevered. We like to be conservative with our balance sheet, but don't expect any meaningful changes or bells and whistles in terms of how we do that. We think keeping things simple is something that the market likes, and frankly, we like.

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Operator [28]

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Our next question comes from Alexander Goldfarb with Piper Sandler.

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Alexander David Goldfarb, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [29]

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So one, Tim -- first, thank you for the explanation on the cadence of the presale acquisition. So that was helpful. Just a few questions. It sounds like, I don't know if the Highland is taking the length of time that you expected or not, but good to see it progressing. There was a reference that you guys would be available for financing if that was needed to facilitate the process. So can you just give a little bit more color on what may be needed for you guys to step in? And if the process is going according to what you guys expected? Or is it taking longer?

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

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Well, maybe there's hopes and there's expectations. It is taking longer than we would have hoped. And it's gotten complicated in a number of different ways. But basically, it's at the in-line of where it needs to be, we think, to move forward. So the answer is, yes, it's taking longer. I think the outcome is going to be the same one way or the other. As it relates to the potential exit financing out of the prepaying bankruptcy, we may end up needing to advance up to $2.5 million, something like that, to get it out. They've currently got over $3 million of receivables. It's generating a lot of cash. It's actually -- the new manager is -- done wonders with it. It was generating cash before. And if you recall, the old operator was taking that cash and doing something else with it. Well, the new operators got it generating more cash. So it's something that we're really looking forward to, having out of the situation it is, and we feel very comfortable that whatever it is, that it takes -- if it takes $2.5 million, then we'll get that paid back in a very short period of time.

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Alexander David Goldfarb, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [31]

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And why -- just to explain, why would you need to get involved in financing? Doesn't the guy have banks or lenders? Or just if you could just walk us through why you'd need to do the $2.5 million?

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

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The new people wants to stay as far away from the old problems as possible. And we are heavily involved in the ill problems. So basically, we're going to provide a bridge from the old to the new. And again, we're going to earn 9% on it. So we don't view it as being a significant issue, $2.5 million, and I'll clear this to kind of what it would be. So if we invest $2.5 million, be secured by all of the assets of the facility and make a 9% return on it for 3 to 6 months, we're not -- we don't see significant issues with it.

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Alexander David Goldfarb, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [33]

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Okay. And then switching to one of your favorite topics, compensation. You guys have been making an effort to cite the fact that you're all-stock comp, including Dave. This quarter, you also included a thing on the CEO pay ratio to the average employee. Maybe if you could just a little expand, is there -- again, is there a pushback from like ISS, Glass Lewis? Or you guys stand out as one of the few REITs that I know of that actively publishes this stuff regularly, not just as part of a proxy? So is this ISS, Glass Lewis? Or what's driving this?

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

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It's good ESG. I mean, the CEO pay ratio is something that's required by being a large accelerated filer. So that's going to be something that shows up in the proxy. We decided if we're going to put it in the proxy, we might as well put it in other places. And because -- again, we're proud of the way that we compensate ourselves. We're proud of the way that we compensate all of our employees. And so, I mean, I doubt very seriously if -- what we were required to do was disclose CEO pay and the median pay. We weren't required to disclose the average pay or the lowest paid. But when we got to looking at it, we said, we think we're proud of this. I mean it's -- and I forget the exact number, but I think, I only make like 8x what the average employee makes. So we're very proud of that, and we decided we just wanted to highlight it. And -- so hopefully, Glass Lewis and ISS don't have any more questions about it.

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David H. Dupuy, Community Healthcare Trust Incorporated - Executive VP & CFO [35]

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Yes. I would just say, Alex, building on that, because we're different than the norm, we feel like the more disclosure we can have around that, the easier it will be for the firms out there that look at it to better understand what our approach is. And so we're just trying to air on the side of more disclosure, and trying to be very -- as transparent about that kind of thing as we can. And it's part of ESG, and it's just part of our effort to make sure we're communicating in the right way to -- all in all, to all stakeholders.

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Operator [36]

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Our next question comes from Michael Lewis with SunTrust.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [37]

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So you kind of addressed the questions on my list. So I have -- I thought I would ask 2 hypotheticals that I think could be a big deal several months from now or it can be no deal at all. And the first was coronavirus, specifically the potential for a widespread outbreak in the U.S., which, I guess, the CDC thinks might be inevitable. Certainly, for most companies, that's been -- that's kind of rattled the market. I would think, for you guys, not so much, maybe even more people seeing the doctor. But do you have any thoughts around that? Risks of that? Or how CHCT would hold up in that scenario?

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Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [38]

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Well, and I'm going to go with a personal opinion for a moment, and then I'll discuss some of the things that we've done related to it. But my view is it's -- we have some of these periodically throughout our lifetimes. I mean, in my lifetime, I can probably name 6 or 8 of these things that have come up. And what I keep scratching my head about is, in America this year, I forget exactly what the numbers are, but I think there's been like 15 million cases of the flu and almost 30,000 people in America have died this flu seasoning of the flu. And yet, we're seeing all of this uproar about the coronavirus when it's like, we're talking about tens of thousands of people that have been infected with it in, and a couple of thousand people have died. Now I'm not trying to downplay. That's not a good thing. But on a relative basis, it's kind of like, okay, so it's hard to put that into perspective. Now how it affects CHCT, we think if it or when, because I'll go along with it, it will make it to the United States. I believe that. And when that happens, there will be a slight uptick in the use of the medical system, which is not a bad thing for CHCT, generally speaking. We've had discussions with various of operators of what they're doing to prepare themselves for it, as it relates to how they're going to continue to provide patient service, how they're going to continue to keep their facility open, et cetera. Because that's probably where our risk is, if it affects our tenants, employees, so that our tenants can't keep the doors open on their health care facilities. And so we've done that. We've talked to some of the larger clients and tenants on that, and gotten reasonably comfortable that they do have a plan in place. They are preparing, and they do have mass, they do have other things that they're doing. So that's kind of, I guess, my view and kind of how I see it affecting us and what we're doing related to it. Does that answer your question?

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [39]

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Yes. That's a good thorough answer. My second hypothetical, which maybe is less -- well, maybe I should say it's less likely, I guess, it depends on who to talk to. When Bernie Sanders' President, will you get a real push for universal health care? And we talked about universal health care a little bit in the past. Again, that's another thing where you might see more doctor visits, but maybe the reimbursement isn't as favorable. This could be a broader conversation for another time. But thoughts on that and how it might affect the company?

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Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [40]

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Yes. I almost want to ask the same question Bernie asked last night. It's like how much time do we have? On a general basis, number one, I think the likelihood of it, whether it's Bernie, Elizabeth, Pete, whoever, know that the ability to actually get something implemented, I think is extremely small, regardless of what you think their ability to get elected is. If it didn't happen, yes, it's -- again, probably a mild positive because you'll see an uptick in the utilization of the system. There will probably be a downtick in physician and provider net income. But regardless, they're going to need real estate to practice in. In real estate, generally speaking, occupancy cost is a relatively small percentage of their overall cost of practice. So I don't think you're going to see a significant push down in rates, particularly in the types of assets that we have, because we don't have the high cost assets to begin with. I mean, we don't have $40, $50 a square foot owned campus MOB space. We've got $12, $15, $18 space out close to where the community is. So if anything, I think, it's probably a slight uptick in the utilization of the system, a slight downtick in provider net incomes. And close to a push on what happens with rent and real estate utilization.

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Operator [41]

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Our next question comes from Sheila McGrath with Evercore ISI.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [42]

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I was wondering, Tim, with your cost of equity at a very attractive FFO yield, what are your thoughts on the mix of equity and debt or managing leverage levels right now? Should we expect more ATM than typical?

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

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That's an excellent question and one that we've picked around some. And with it as it is, basically, what we've said from the beginning is that we put a 40% limit on debt to equity. We anticipate managing over the long-term debt to equity in the -- equity being 65%, 70% of our capital structure with debt being 30% to 35%. In -- from a long-term standpoint, I don't think that's changed. Now in short term -- in a short run, as long as we have the ability that we have, you may see us manage that down to 20%, 25%. But I don't think it changes over the long run. I mean, obviously, what it does, the more we issue and are able to invest at the rates that we can, the more great margins we lock ourselves into over the long term. So we anticipate accessing the ATM as much as it makes sense. You're not going to see us access the ATM and leave cash sitting on the balance sheet or anything like that. But over the short term, you'll probably see that go down as a percent of the total capital structure.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [44]

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Okay. Makes sense. And then on the strategic relationship side of the acquisitions, it appears to be a very good way to add new products with long-term leases. Any progress securing additional strategic relationships for the pipeline? And is that like a focus right now?

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Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [45]

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It is definitely a focus. There's nothing that we can announce at this point in time. But we do have several ongoing discussions. And that was -- with Dave's background being in the investment banking side and dealing with PE firms and some of those emerging providers, we're trying to access his Rolodex. And that challenged him and he's challenged himself over the next 3 to 6 months to try to access some of those and get some moving. So it's very much a focus. We don't have anything to announce right now, but hopefully, in the next few quarters, we will.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [46]

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Okay. Great. And one last one. Just on larger acquisition in the quarter in Temple, Texas for $19 million. Is -- was that part of the strategic relationship pipeline? Or -- and if not, was there much competition for that acquisition?

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

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It was part of the strategic relationship.

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Operator [48]

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Our next question comes from Matt Boone with B. Riley FBR.

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Matthew David Boone, B. Riley FBR, Inc., Research Division - Associate [49]

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I'm on for Bryan. Just going back to your acquisition pipeline. As you guys are filling that out for 2020, how should we be thinking about the split between acquisition of existing product versus adding more of that new build product to your portfolio?

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Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [50]

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For 2020, I'd probably say it's 50-50, kind of. I mean, with what we know that we're doing and what we can see at, just off the top of my head, I'd say, pretty close to 50-50.

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Matthew David Boone, B. Riley FBR, Inc., Research Division - Associate [51]

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Okay. And then which markets are you seeing the, I guess, most compelling investment opportunities?

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Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [52]

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When you -- well, and we don't try to look at it like that. Again, what we try to do is be opportunistic. We don't choose a geographic area and say, okay, we're going to invest here. What we will do is we try to choose some operators. And obviously, the lower cost environment, whether that's 30 centers, whether that's surgical hospitals, whether that's the inpatient rehab even as a lower cost environment, is kind of what we target and what we look for. But we don't have any geographic markets that we're targeting right now.

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Matthew David Boone, B. Riley FBR, Inc., Research Division - Associate [53]

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Okay. Got it. And then lastly for me. It sounds like we're going to see some resolution with the Highland situation here pretty soon. I'm sorry if I missed this. But are there any other tenants that have kind of popped up that might be on an internal watch list to take care of this?

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Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [54]

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Well, we've had -- we have always watching tenant. I mean, it's basically one other that's working through some issues, but we feel very confident on it and they're making payments, so we feel very good about it. But their own, a close watch list, I guess, you call it.

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Operator [55]

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

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Timothy G. Wallace, Community Healthcare Trust Incorporated - Chairman, CEO & President [56]

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Well, we would like to thank everybody for being on the call and keeping up with us and showing the interest that you do, and we'll talk to you next quarter. Thanks.

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Operator [57]

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