Welcome to Community Healthcare Trust 2016 Third Quarter Earnings Release Conference Call. .

On the call today, the company will discuss its 2016 third quarter financial results. It will also discuss progress made in various aspects of its business. Following the remarks, the phone lines will be opened for a question-and-answer session.

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 11, 2016, 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 and 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 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 two 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 Tim Wallace, Chief Executive Officer of Community Healthcare Trust Incorporated. .

Thanks, Austin. Good morning, everyone, and thank you for joining us today for our 2016 third quarter conference call. With me on the call today is Page Barnes, our Executive Vice President and Chief Financial Officer. .

Once again, we have had a very busy quarter. We acquired 4 properties during the quarter in 4 states, with a total of approximately 57,983 square feet for a total purchase price of $12.1 million. These properties were 100% leased by 11 tenants with anticipated annual returns of 9.2% to 10%.

We have already acquired 1 property in the fourth quarter with a total of approximately 11,000 square feet for a purchase price of approximately $3.3 million, the property is 100% leased to 1 tenant through 2023, with an anticipated annual return of 9.34%.

In addition, we have 7 properties under definitive purchase agreements for an aggregate expected purchase price of approximately $50.2 million. The expected return on these investments range from approximately 9% to 9.7%. We anticipate substantially all of these will close during the fourth quarter. .

As it relates to our pipeline, our properties under review continues to go up. We currently have several properties under signed term sheets and several more with term sheets being actively negotiated. .

In addition to our acquisition activity in the third quarter, we were very active on a number of other fronts. We declared our dividend for the third quarter and raised it to $0.385 per common share. This equates to an annualized dividend of $1.54 per share, and I continue to be proud to say, we have raised our dividend every quarter since our IPO. .

We also amended our revolving credit facility, increasing the maximum borrowing capacity from $75 million to $150 million, and reducing the interest rate downward by 25 basis points. Also, certain financial covenants were adjusted or replaced, and the maturity date was pushed out to August of 2019. .

In addition, we filed a registration statement on Form S-3 that will allow us to offer up to $750 million of various securities from time to time. The registration statement was declared effective as of September 26, 2016. However, The company has no intent to currently offer any securities under this registration statement. .

As announced in the first quarter of 2016, I entered into a 10b-5 plan to acquire shares of the company's stock. The trading plan was entered into on February 29, 2016, and became effective April 4, 2016. During the third quarter, I've acquired, pursuant to this, plan 58,181 shares of the company's common stock.

To date in the fourth quarter, I have acquired an additional 33,670 shares of the company's common stock. .

Now I'm going to off script for just a few minutes because of some of the e-mail and text traffic that I've gotten today wondering about our thoughts on how Obamacare, how the election, what's likely to happen with Obamacare will affect our strategy and how we look at things.

And as it relates to the election, we view most of this as fitting into our game plan, not because of the election, but because of where our game plan is set up.

From a fundamental standpoint, we have, from the beginning, been focused on medium to shorter-term leases, which we anticipate seeing interest rates rise and inflation -- more of a possibility of inflation over the next few years than would have been in other situations.

And we feel like that plays into our portfolio of properties that have 5.5-year, 6-year average life on the leases as opposed to another -- a period that might have 10-year, 12-year, 15-year lease terms.

We feel like this gives us the opportunity to reprice those properties on a regular basis as we have annual rolls of 10% to 20% on an annual basis out to the next few years. .

The second thing as it relates to Obamacare, we've said from the beginning, what we focus on is a low-cost environment. And we think a low-cost environment is what is important regardless of how health care is financed. Obamacare, in essence, was just a financing, how you financed health care.

And what you've seeing over the last month or so with the increases in insurance premiums from anywhere from 25% to 100%, that focus on cost is going to come into play because we cannot sustain increases like that, and we feel like that will be seen as we go through the next few years.

So we feel like we are directly on point, and what's happening in the environment is directly on point with what our fundamental game plan was from the beginning, and that is being a low-cost provider for the health care industry for the future. .

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

Thanks, Tim. I'm pleased to review the company's financial performance for the third quarter ended September 30, 2016. Total revenues for the third quarter of 2016 were $6.4 million. Rental and mortgage interest revenues were $5.3 million. The company closed on 4 properties during the quarter that were 100% leased at acquisition.

The total real estate portfolio was 92.4% leased. On a pro forma basis, if all of the 2016 third quarter acquisitions had occurred on the first day of the third quarter, rental and mortgage interest revenues would have increased by an additional $257,000 to a pro forma total of approximately $5.5 million. .

Total expenses for the third quarter of 2016 were approximately $5.2 million. General and administrative expenses for the third quarter were $671,000. Of this amount, transaction expenses totaled $137,000. Depreciation and amortization expense was $3.5 million for the quarter.

On a pro forma basis, if all the 2016 third quarter acquisitions occurred on the first day of the third quarter, depreciation and amortization expense would have increased by $146,000 to a pro forma total of just over $3.6 million. .

The company reported net income of $1,064,000 for the third quarter. Funds from operations for the third quarter of 2016 consist of net income, plus $3.5 million in depreciation and amortization, for a total of approximately $4.6 million or $0.36 per diluted common share.

Normalized FFO, which adds back acquisition expenses, increases this total to $4.7 million or $0.37 per diluted common share. Adding back deferred compensation and eliminating straight-line rent basically offsets each other for the quarter, and AFFO per diluted common share is also $0.37.

Again, on a pro forma basis, adjusted for debt outstanding for the quarter, if all the 2016 third quarter acquisitions occurred on the first day of the third quarter, normalized FFO would have increased by an additional $257,000 to a pro forma total of approximately $5 million and increasing normalized FFO by $0.02 to $0.39 per share. .

That's all I have from a number standpoint, operator. I believe we're ready for the question-and-answer session. .

[Operator Instructions] And our first question comes from Rob Stevenson with Janney. .

Page and Tim, can you talk a little bit about the leases that roll over the next couple of years? It's roughly 1/3 of the portfolio and sort of, is there anybody of any size -- I mean, most of your tenants are relatively small, but is there anybody of any size that's in that that's come back to you that you're not feeling quite as certain is going to renew going forward?.

Rob, glad to have you on the call, and I'll let Page get into more granular aspects of it. But basically, what we see happening in the portfolio is kind of what you anticipate happening with a portfolio of tenants.

I mean, now I think we've got over 100 -- like 110, 120 tenants and you have some roll out, you have some roll over, most of them get renewed. I think this year, our experience is that 90-plus percent have been renewed. I think you noted in your early note that occupancy was down like 60 basis points.

But over half of that was in one of the buildings in Florida where we traded out tenants. One -- we had a local or regional lab tenant, and we traded up in credit to a national lab tenant. Just moved -- one moved out, one moved in. One moved out on June 30 and then they moved in on November 1.

And we had no TI or anything because it was lab space beginning to end. So I mean, we see what's happening. I think we've got 12%, 15% a year rolling over the next 2, 3 years. And in a portfolio like ours, we just see that as natural rolling. We're on top of it. We're dealing with it on a moving forward basis and don't see anything that unusual.

And I'll let Page address it. .

Who can add any granular details on that? No, I don't see -- Rob, I don't see anything that concerns me, there's this -- a typical negotiation but -- going on, on some of the outlying leases that we're in contact with. But so far, there's nothing that comes to a level that I'm alarmed about. .

And actually the -- let me address a little bit more. Because actually, as I've said in my off-script comments, I mean, again, we've seen this roll as a strength of the portfolio from the beginning.

And we see it even more now with the way it appears things are going and with the anticipation that interest rates and inflation are going to have an increased opportunity to rise. We see this as just providing us with an additional hedge as those leases roll. .

Okay. And sort of a related question.

How are you thinking about hiring and sort of personnel at this point? I mean, is the bench right now -- do you have enough to sort of continue to grow at the rate that you're growing at and not overextend, not only you and Page, but everybody else? Is it a situation where over the next 6 months, that you need to hire or you feel confident that you've got what you need right now for the next phase of growth for this company?.

We're comfortable that we don't need another CEO in the next few months or another CFO in the next few months. I mean, we've been adding people over the last 18 months. We started out, I think it was with 8, and I think as we sit today, we've got 12.

Those adds have been down in the accounting area, accounts payable, accountants, so it's not the high-cost people. It's the lower-cost people. And we feel like we've got -- as we've said from the beginning, we anticipate being able to acquire $25 million to $35 million a quarter.

We think we got the people in place who can do that, and then we just add the people at the -- in the accounting department to keep up with everything. So we think that we -- at the top of the level, we're fine, and we're adding people as we need them at the bottom, and that doesn't affect G&A all that much. .

Okay. And last then just last question for me.

Page, if you'd wind up doing all the rest of the $50 million that you guys identified in the release last night, what does that leave you in terms of dry powder to make incremental acquisitions?.

Well, that would translate another $50 million under the line with -- from the September quarter would throw us up to $55 million. So we still have what's available. The line is $150 million. So we'd have $80 million, $90 million under that line, at least. .

Yes. And let me address that, too, because I've said this previously, and I want to be consistent and make sure everybody understands how we're looking at this.

But what we intend to do is take the line up to $100 million, plus or minus, which we see happening some time first, second quarter of next year, and then look at doing $100 million bond offering, either with an insurance company or the banks have expressed some interest in doing that, something with a 5-year to 10-year term on it as being the first kind of permanent debt leverage that's put on the balance sheet.

Pay down the bank line, have $150 million available there, and then draw it back up, $50 million or so, and look at doing, in all likelihood, third quarter, fourth quarter next year, like a $50 million marketed equity base. I mean, a lot of people are talking to us about ATMs.

I think we probably should do one more touch at the market before we try to do something in the ATM side of it. But that's kind of the thoughts on how we're going to go and finance stuff on a going forward basis. .

And our next question comes from Alexander Goldfarb with Sandler O'Neill. .

So appreciate the proactive comments on Obamacare. Obviously, I realized that the move in 10-year is just this week and I doubt any pricing in the market has changed for that.

But just in general, when you guys are out evaluating, pricing product and people are valuing their product to sell to you, how much does the 10-year factor in versus the sellers are literally just looking at what sort of cash flow they can get or what sort of absolute dollar amount they can get? So bottom line, how much do interest rate movements affect the buyers, the sellers that you're dealing with versus they're looking at other different metrics to determine valuation?.

Well, actually, where we have found it to be -- the interest rates to come into play mostly, and it's affected by the 10-year, but not near as much as probably particular issues related to health care. And what I mean by that is, what we have used in some cases is, okay, these people are wanting cap rates that we think are unreasonable.

And we point out what the interest rates on secured and unsecured debt of the providers are. So I mean -- and pick one because a lot of -- I track the interest rates from the providers standpoint, and in several of them, you have seen some substantially increases as they have had weak performance and other things.

So what we have found is that we get a lot more leverage about saying, well, Community Healthcare Trust's unsecured bonds are trading at 10.5% as opposed to saying, well, the 10-year just moved from 1.50% to 2%.

But it is something that we take into consideration when we follow with basically all of the providers and all of the health care side of it. But so far, yes, I don't think what's happening with the 10-year has played into it, although if the 10-year goes up another 100, 200 basis points, and I anticipate, that it will. .

Okay, so for right now, it would not impact you.

It would need another 100 to 200 basis points in your view to have an impact on your pricing?.

Well, yes. I mean, and again, 100 to 200 basis points, we still got a great spread. So we're going to be looking to increase our cap rates wherever we can, but we've always done that, so that's not new. .

Good. And then the second question.

Page, on the timing of, from a modeling perspective, the $50 million that you intend on closing mostly in the fourth quarter, is that going to be, from a modeling perspective, we should assume very late in the fourth quarter? Or how should we be thinking about that?.

They'd be weighted toward December as most of that will close in December., It won't all be at the end of the year, we certainly hope, but I would -- I'd have a very bad Christmas if that's the case, but. .

We have an emphasis on driving it down sooner rather than later, particularly in this quarter. .

Okay.

So around the headache that comes with the holiday time, both Thanksgiving and Christmas, from an acquisition perspective, you guys had noted end of summer, everyone's off and that slowed down the third quarter just thinking, as we head into Thanksgiving and Christmas, is there a similar phenomenon where first quarter next year could be light because people tend to wind down transaction volume by -- in the next few weeks? Or first quarter should be another sort of $25 million to $35 million a quarter type period?.

I would think the first quarter will be more a $25 million, $35 million period just because of what we're seeing in -- that we currently have in signed term sheets and term sheets outstanding that we think will get signed relatively soon.

So I mean we have -- the stuff that happened in the third quarter was kind of a layover from a number of things that happened in the summer.

And we think that, obviously, with what we've got going now that we're looking to close in the fourth quarter, we've seen that pick up and we think it'll be, again, relatively easy to do $25 million, $35 million in the first quarter. .

And our next question comes from Amit Nihalani with Oppenheimer. .

I just had a few modeling questions.

And sorry if I missed this, but what caused tenant reimbursements to be greater than operating expenses, the company operating expenses?.

Yes, and we were anticipating some questions on that. But we've had -- as we take over the buildings from a year ago through this year, we've had various things that have affected both the timing and the amount of the operating expenses and the reimbursements.

And I think previous quarters, we lost a penny or two because of it this year this quarter we picked up a couple of pennies because of it. So from a modeling standpoint, I would say, take a trailing 12 months on kind of what those are on a margin basis and apply that.

Don't look at the -- what happened in the third quarter and say, we've got a new paradigm shift that the margins have gone up substantially or in any one quarter, have gone down substantially. So just take a trailing 12 months and model that in from that standpoint. .

Makes sense.

And similar, what should we expect as far as the G&A run rate going forward?.

On a normalized basis, I'd say take -- again, take the last few quarters, take out the acquisition costs. So it's normalized for the acquisition costs, and apply an increase to it. We're adding, as I said earlier, we're adding a person or two every 6 months, probably at the lower end of the scale.

And we're having a buildup in our noncash compensation as everybody takes their compensation in stock. So that's building up. So from -- but from a cash standpoint, just take what's happened over the last 12 months, back out the acquisition costs, back out the noncash stock stuff and add a little bit to the line. That would be my guess.

I mean, Page, do you have any thoughts?.

No, I think that's about right. .

And as far as the mortgage note, should we expect that to remain on the balance sheet for the next few quarters?.

Yes, I think the answer to that is yes. I mean, the underlying asset there is an LTAC, and the market definitely likes LTACs right now. So we did that as a kind of a way to get into it. And we've got an option to buy a property that we are not likely to exercise any time soon until the market kind of says whether they like the LTACs.

I mean, we feel like we've got a lot of good collateral with guarantees, and everything, so the note we think is a great note and a great return for us and don't see any need to push the exercise or the option to put the property on versus have the note on. .

Okay. And just one last one.

Can you comment on the bad debt expense?.

We think we reserved cautiously and I anticipate that maybe some of that will be recovered. But we try to reserve as we go through and make appropriately cautious of reserves. And so, I mean, we have a lot of small tenants, and typically, that's what it is, is that we have a small tenant that has some difficulty for one reason or another.

And I think in our portfolio, we're going to have some bad debt expense, although it's been pretty minor. .

Yes, I would agree.

Okay, I guess that would just lead me to ask, have there been any changes to your watch list?.

No. .

[Operator Instructions] At this time, I'm showing no further questions. I would like to turn the call back to Tim Wallace for any closing remarks. .

Thanks, Austin. And again, thanks, everybody, for being on the call. We appreciate the interest that you have in Community Healthcare Trust, and we felt like we had a great quarter and we've got good stuff happening in the fourth quarter and look forward to the fourth quarter call in the end of the year. Thanks so much. .

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