Welcome to Community Healthcare Trust 2017 Third Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2017 third quarter financial results. It will also discuss progress made in various aspects of its business. Following the remarks, the phone lines will be open 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 8, 2017, 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 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, further developments or otherwise, except as it 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 Timothy Wallace, President of Community Healthcare Trust Incorporated. Please go ahead, sir..

Good morning, everyone, and thank you for joining us today. I’ll apologize on the front end, I’ve got a touch of a cold, so my voice is little raspy. With me today on the call is Page Barnes, our Executive Vice President and 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 quarterly report on Form 10-Q was also filed last night. We had an extremely busy third quarter this year.

First, as I believe everyone is aware, we completed a public offering of 4,887,500 shares of common stock, which included the full exercise of the underwriter’s option to purchase additional shares, and received net proceeds of approximately $108.9 million.

The net proceeds were used to repay the outstanding balance on our revolving credit facility of approximately $58 million and to funding acquisitions I will describe later. The bad news from this is that normalized funds from operations and AFFO were reduce by approximately $0.11 per share due to the equity offering.

The good news is that we have been – we have seen increased liquidity and the interest in the stock. We believe from both active and index filers due to the equity offering. And next, talking about acquisitions.

We acquired two properties in two states during the quarter, with a total of approximately 147,000 square feet, for a purchase price of approximately $28.3 million. These properties were 100% leased, with leases running through 2032, with anticipated annual returns of 9% to 9.9%.

In addition, we funded a $5 million mezzanine loan to the tenant of one of the properties with an initial yield of 12%. Unfortunately, once again, the majority of the investments did not close until the last of the quarter.

In addition, we have already, during the fourth quarter, acquired three properties in two states with a total of approximately 105,000 square feet for a total purchase price of approximately $25.9 million. These properties were 100% leased, with leases running through 2032, with anticipated annual returns of also of 9% to 9.9%.

As it relates to our pipeline, we have four additional properties with fully negotiated purchase and sale agreements for an aggregate expected investment of $20.3 million. The expected return on these investments should range from approximately 9% to 10.5%, and we anticipate that substantially all of these will close during the fourth quarter.

In addition, we have three additional properties under definitive purchase and sale agreements to be acquired after completion in occupancy for an aggregate and net expected investment of $40.4 million.

The expected return on these investments should range up to approximately 11% and we anticipate that one of these will close during the first half of 2018 and the other two will close in the second half of 2018. This represents almost one-third of our next year’s target for acquisitions already under contract.

This represents two of our client relationships that you’ve heard me talk about owning to develop from the beginning. Our properties under review continues to go up. We currently have term sheets for multiple potential properties with anticipated returns of 9% to 11%.

We anticipate having enough availability on our undrawn term loans and revolver to fund our acquisitions through late 2018. As previously disclosed, we are working through our first bankruptcy. As of yesterday, we got this weight lifted on our borrower so we can get title to the real estate.

We have already begun discussions with potential tenants for the building. We have taken a very aggressive approach in the bankruptcy case, and we’ll pursue all options to ensure we receive maximum value for our investment.

As I have said before, we view this as just part of real estate and we will work to resolve the situation and find a replacement tenant as soon as possible. On another front, we declared our dividend for the third quarter and raised it to $0.395 per common share. This equates to an annualized dividend of $1.58 per share.

And I continue to be proud to say we have raised our dividend every quarter since our IPO. 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..

Thanks, Tim. I am pleased to review the company’s financial performance for the third quarter ended September 30, 2017. Total revenues for the third quarter were $9.4 million versus $6.4 million for the same period in 2016. Rental and interest revenues were $8.3 million for the quarter versus $5.3 million for the same period in 2016.

The real estate portfolio was over 92% leased. On a pro forma basis, if all of the 2017 third quarter acquisitions had occurred on the first day of the third quarter, rental and interest revenues would have increased by an additional $840,000 to a pro forma total of $9.1 million.

Total expenses for the third quarter of 2017 were approximately $7.8 million. General and administrative expenses for the quarter were $1,690,000 – excuse me, and included $11,000 of transaction expenses. Depreciation and amortization expense was over $4.5 million for the quarter.

On a pro forma basis, if all the 2017 third quarter acquisitions had occurred on the first day of the third quarter, depreciation and amortization expense would have increased $593,000 to a pro forma total of approximately $4.7 million. The company reported net income of $579,000 for the third quarter versus $1.64 million for the same period in 2016.

Funds from operations, FFO, for the third quarter of 2017 consisted of net income plus $4.5 million in depreciation and amortization for a total of over $5.1 million.

AFFO, which adjusts for straight line rents and deferred compensations had minimal impact of the total remained at $5.1 million or $0.31 per share diluted versus $4.7 million or $0.37 per share for the same period in 2016.

Again, on a pro forma basis adjusting for the debt outstanding for the entire quarter, if all the 2017 third quarter acquisitions occurred on the first day of the quarter, AFFO would have increased by approximately $561,000 to a pro forma total just under $5.7 million, an increase in AFFO of about $0.04 to $0.35 per share.

That’s all I have from a number standpoint, operator. I believe, we are ready to start the Q&A..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Alex Goldfarb of Sandler O'Neill. Please go ahead..

Good morning. Just a few quick questions. First, on the timing of the – it’s good to hear that you have the stay – or basically, that you’re getting at the bankrupt mortgage loan building.

What should we think about timing for backfill? And then from a modeling perspective, when should we think about earnings returning and would the earnings match the note that stop paying? Or should we think about that earnings being different?.

There are several aspects to this. And let me say on the front, and I don’t want to get into a lot of detail on what we’re doing in the bankruptcy case because one of their financial advisers is on the line with us today, but basically what I would say is assume that earnings will go down slightly from what it has been being.

And as to the timing, basically, there’s a lot of work going on now. I’d love to say we have everything tied up by the end of the year. It is U.S. Bankruptcy Court though, so I can’t adapt that even though everybody says that’s what they’d like to do.

So I’m thinking probably sometime first quarter next year is when probably everything gets settled out..

Okay.

So if you’re saying that earnings will go down slightly, have you guys been booking GAAP earnings relating to this or all of revenue recognition associated with had stopped? And then – in which case, Tim, why would earnings go down if you guys hadn’t been recognizing any revenue from this?.

We have still been recognizing some revenue. We have placed some reserves on that revenue. Again, I don’t want to get into a lot of detail.

But they have not rejected the lease as of yet from our borrowers, so we believe there’s an administrative claim that should have priority on that rent that should be our collateral, cash collateral when it comes to our borrower..

Okay. And then switching gears, the 2018 developments – or sorry, the 2018 acquisitions you guys outlined, the $40 million up to 11% returns, sounds like those are developments. So if you can just talk a little bit more about what they are.

And then if they are developments, I would assume that if they’re sort of presales if you will, that the yields would be tighter than up to 11%. So if you could just provide a little bit more perspective on that..

Well, they are acquisitions that are to be done on development deals. We are not providing the development financing. A bank – or banks are providing the development financing for those properties. These are two relationships – again, they’re clients to have relationships, one is in the kidney dialysis business, one is in the inpatient rehab business.

They’re serial entrepreneurs. They have already built companies, in one case, three times, and sold it to large HealthSouth and Fresinius or DaVita. So we’re not buying them until they are completed and until they are occupied. And some time after that if we happen to see a win, et cetera..

Okay. So just, finally, just on that point. If we think about the $40 million that you have being one-third of basically your $120 million for the year, but if there’s a question that you may – if they don’t stabilize or occupy, then you wouldn’t close on them.

You’re presumably looking to acquire, put more in the pipeline than just that for next year, right?.

Yes. I mean, we’re not doing that and stopping..

No. No. As far as you’re one-third done, you’re obviously going to love to do more. It sounds like do more than the $120 million in case one or a few of these developments don’t actually fully get up in time, that way you still hit your overall target for next year.

Correct?.

I’m not committing to anything over what we’ve already said, but we are looking to buy stuff on a daily basis. We have stuff coming in. We’re negotiating with other clients. So I mean, we’re hopeful to have a lot of these stuff that if we can look out and say, okay, the pipeline is 60%, 80% full for the next year or 18 months..

Okay. That’s helpful. Thank you very much..

Our next question comes from Sheila McGrath with Evercore. Please go ahead..

Good morning. Tim, you’ve already closed almost as much transactions as you did in third quarter. Just wondering if fourth quarter is going to be the largest quarter in the year? Or just give us a little insight on how fourth quarter might shake out..

I mean, I think, fourth quarter will end up being the largest quarter. We had intended the third quarter to, but herding doctors is an art form. It’s hard to kind of the timing down. I had wanted to get – basically, what we already closed this quarter, closed last quarter. The good news is it’s already closed for this quarter.

So we’ve got another $20 million plus of signed purchase and sale agreements that we think will get closed or at least substantially all of it closed this quarter. So the fourth quarter could end up being a $40 million to $50 million quarter..

And then just back on the mechanics of the mortgage on the LTAC. If we go to the Q, if we look at the – I think, there was a reserve. Should we assume that that’s all related to this mortgage and that’s kind of our barometer? Just wondering how we should think about modeling this..

Well, I think, for modeling purposes, most of you all have taken it down, and I would leave it that way probably for now. And again, what we anticipate though is that we’ll end up having earning assets. It will probably generate a little bit less earnings than what we’ve had, but I don’t want to go into a lot of detail at this point..

Okay. Because when – once you take possession of the asset, then it’ll be a little bit of a drag because you’ll have real estate taxes and then we’ll wait for the lease up. It’d just be helpful once you know a little bit more about timing, if you can help us kind of think about….

Once we get it settled, we will. And the thing you all need to keep in mind, that we have other collateral other than just the real estate that we’re pursuing..

I see. Okay, okay. And then last question just on that $40 million transaction.

I may have missed this, but what kind of assets are they? And is this sort of a programmatic kind of thing where you would go back to that same entity and you would be helping them grow and you’re acting as a source of financing for that – those projects?.

Yes. I mean, that’s our client relationships. And one is a dialysis company and one is an inpatient rehab company. And as I said, they’re serial entrepreneurs that have previously built companies and sold to either Fresenius, DaVita or HealthSouth, depending upon which version it is, so yes.

And again, that’s the type of thing that we’re trying to do with several companies is develop those relationships so that we understand what they’re doing and they can get from – to their EBITDA targets for their next sale because the way we look at it is, in three or four years, we’ll end with Fresenius or DaVita or HealthSouth type credit..

Okay. All right, thanks, Tim..

Thank you, Sheila..

Our next question comes from Rob Stevenson with Janney. Please go ahead..

Good morning, guys. Most of my questions have been answered.

But Page, I mean, when you take a look at the capital availability right now, I mean, when you close the deals that you’ve already done in the fourth quarter plus the ones that you expect to do here in the fourth quarter, where do you start the year with a capital availability standpoint to be? What type of investment – gross investment can you make given the current capital stock of the company before I would come back to market?.

Yes. We should have it up to at or $125 million to $150 million..

Rob, we still have $40 million to draw on the term loan and we got $150 million on the revolver..

And in our – within our covenants, we have access to all of it..

Okay.

And I mean, when you fully draw down those two, I mean, what does that put you in terms of expected debt to EBITDA or other leverage metrics?.

Debt to EBITDA, that book capitalization would still be under our 40% internal..

Yes. Rob, that would draw it right to the 40%..

Okay. Perfect.

And then, Tim, in terms of the stock purchase plan that you put into place earlier this year, does that expire soon or whatever you got to have to put another one of those in if you want to do it in 2018? Or was the one that you put it in the sort of early to middle part of 2017 have a longer life for you?.

Well, I’ve seen the stock price today, I’m hoping I’ll have the opportunity to buy some in the next week or so. But basically, it expires in 12/31. With what the stock price has been this year, I don’t think I’ve bought any this year under it. And next year we’ll look at it and probably put something in place that’s similar.

We probably will change the algorithms because kind of what we did – the first time I did it, we did it for the previous year, we based our algorithms on the previous year trading and the stock didn’t trade anything like it. So this year, we based it on last year’s stock trading and the stock hasn’t traded anything like it did last year.

So it’s kind of a moving target. But obviously, we still like the stock, we still think it’s got a lot of value to it. So I would anticipate probably having something next year..

Okay, thanks guys. I appreciate it..

Our next question comes from Eric Fleming with SunTrust. Please go ahead..

Good morning. Just going back to the bankruptcy tenant.

You guys talked last quarter, you’re saying, even if it all goes away, that was only about a $0.01 per quarter impact, right?.

Yes..

Okay.

And then just to – further question, on the property operating expenses, is there anything you can do to keep that lower, for lack of a better word?.

We have been going through budget for next year and are looking at different ways to RMZ at them. I mean, to some extent, there’s a trade off because, to a large extent, with the double net and triple net leases, the tenants pay some of it or pay a good chunk of it.

But we – I will assure you everybody around here is cognizant of those things as we’ve gone through the budget process, and we’re hoping to bring those in on a marginal basis next year..

Okay. That’s it for me. Thanks a lot..

[Operator Instructions] And our next question is a follow-up from Sheila McGrath with Evercore. Please go ahead..

I guess, Tim, I was just checking, did you ever find out what the market cutoff was for the RMZ? I know it’s a little bit of a black box, but I think that, that announcement of index additions is next week, and I’m just curious if you think you made the cutoff or….

We believe that number is somewhere in the low $400 million market cap range and we were well above that. I think it’s the end of August is when the testing was. So we are very hopeful that next week we will be included in it. But as you said, it’s a black box and nobody will really know until next week..

Okay. And then my next question is given kind of your granular acquisition strategy, sometimes the ATM – smaller cap REITs use ATM.

Just curious– if you plan to put one in place or what your thoughts are on that?.

Yes. Again, this quarter has been fairly significantly negatively affected by the large equity raise that we did early in the quarter. I mean, to kind of give you a feel, we have planned on doing that equity raise in August instead of July.

In that one month difference, with the shares that we issued and the immediate exercise of the – Sheila, we basically, put 2 million or close to 2 million, 1.8 million, 1 million something of additional weighted average shares into the mix for this quarter. So we’re very much attuned to wanting to do stuff, raise equity on more of a granular basis.

And at the end of next year, probably mid-year, we’ll put the ATM in place. And some time towards the end of next year, we’ll start exercising off of it. But what I would envision that the large equity raise that we did this last quarter will probably be the last large equity raise like that, that we do..

Okay. Great. And then the last question, Page, I just want to clarify you said – I think that the $0.35 FFO was if we moved all the acquisitions at the beginning of the quarter.

Is that accurate?.

Yes. It’s just under $0.35. It rounds up to $0.35..

Kind of the more amazing number to me, Sheila, is if we hadn’t done the equity offering, FFO would have been $0.11 high..

Wow. Yes, it’s just that, I think, for smaller cap companies, whether it’s the timing of the acquisitions or the equity deal, it’s so sensitive..

It’s a stair-step type of approach. But hopefully, we’re to the point now where it can be a lot more smoother..

Great. Thanks a lot..

Thanks, Sheila..

Our next question comes from Kevin Alberty with Robert W. Baird. Please go ahead. I apologize, there are no further questions at this time. With that, I’d like to turn the conference over to Tim Wallace for any closing remarks..

We appreciate everybody’s support and everybody on the call. If you have any additional questions we should be around most of the day. But other than that, we’re going to get back to business. Thanks so much..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..