Welcome to Community Healthcare Trust 2019 Third Quarter Earnings Release Conference Call. On the call today, the Company will discuss its 2019 third quarter financial results. It will also discuss progress made in various aspects of its business. Following their 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 6, 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 in its SEC filings.The Company undertakes no obligation to update forward-looking statements, whether as the result of new information, future developments or otherwise, except as may be required by law.During this call, the Company will discuss GAAP and non-GAAP financial measures.

A reconciliation between the 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, Chairman, Chief Executive Officer and President of Community Healthcare Trust Incorporated..

Thank you, operator, and good morning. Thank you for joining us today for our 2019 third quarter conference call.

On the call with me today is Dave Dupuy, our Chief Financial Officer; Page Barnes, our Chief Operating Officer; and Leigh Ann Stach, our Chief Accounting Officer.As is our normal process, our earnings announcement and supplemental data report were released last night and filed with an 8-K, and our quarterly report on Form 10-Q was also filed last night.

In addition, we filed documents to refresh our ATM Program that Dave will go over in more detail in his comments.Before we get into our normal discussion, I would like to point out a couple of new pages in our supplemental data report.

We have had several questions on how we calculate our weighted average shares, so we added a new Page 5 to that supplemental data report that shows how they’re calculated.In addition, we have added an analysis of our named officer’s compensation on Page 8 indicating how much of our compensation is performance based.

We believe it is important for our stakeholders to understand the mix between our base salary and incentive compensation and have provided this information because some constituents have not been able to understand how much performance based compensation we have.Now, back to the normal stuff, we were very busy during the third quarter.

However, it was basically business as usual. We have an active ATM Program in place. During the third quarter, the Company issued 680,309 shares of common stock through its ATM Program at an average gross sales price of $42.70 per share.We received net proceeds of approximately $28.5 million at an approximate 3.94% current equity yield.

During the third quarter we acquired three properties with a total of approximately 130,000 square-feet for purchase price of approximately $52.6 million.

These properties were 100% leased with lease running through 2034 and anticipated returns of 9% to 11%.So, far in the fourth quarter we have acquired seven properties with a total of approximately 114,000 square feet for a purchase price of approximately $34.8 million.

These properties are 100% leased with leases running through 2034 and anticipated annual returns of 9.23% to 11%.We have three additional properties under definitive purchase and sale agreements to be acquired after completion and occupancy for an aggregate expected investment of $68 million.

The expected return on these investments should range up to 11%. We expect these to be completed and closed out through mid-2020.We continue to have many properties under review and have signed term sheets on several properties with anticipated returns of 9% to 10%.

We anticipate having enough availability on our revolver to fund our acquisitions and we expect to continue to opportunistically utilize the ATM to strategically access the equity markets.Occupancy declined slightly during the third quarter as we signed agreements to terminate a couple of tenant leases during the quarter as part of our active asset management.

We have had issues with these tenants since we acquired the properties they were in and determined it was better to terminate the leases and seek new tenants.We continue to see a lot of activity on the leasing front and believe we will see the occupancy level tick up over the next few quarters.

Through a combination of new and extended leases and our acquisitions, we have been able to increase our weighted average remaining lease term to approximately 7.7 years.If you recall, this was approximately 4.3 years at the time of our IPO. On another front, we declared our dividend for the third quarter and raised it to $41.5 per share.

This equates to an annualized dividend of $1.66 and I continue to be proud to say, we have raised our dividend every quarter since our IPO.Before I finish my comments, I would like to give an update on Highland Hospital, the process of transitioning continues.

A new operator is managing Highland and is preparing for the transfer of licenses and related items, customary for these types of transactions.

As we indicated in our release, Highland Hospital will likely be the subject of a prepackaged bankruptcy with an anticipated sale to the new operator to expedite and facilitate the transfer of licenses.We have tried to do this without the bankruptcy, but with four of the best and biggest law firms in Nashville involved in the process.

We've determined that’s the easiest and quickest way to get it done. We do not expect our cash flow from Highland to change as we continue to collect monthly payments, roughly equivalent of what we should be collecting. Obviously, there are various contingencies that might still occur such as the outcome could be different than what we think now.

But we believe we have addressed the situation as best we can.I believe that takes care of the items I wanted to cover. So I will hand things off to Dave to cover the numbers..

Great. Thanks Tim. Before jumping into the financial results, I wanted to make everyone aware of a couple of items.

First, we have posted our board approved environmental, social and governance or ESG guidelines to our website, which is www.chct.reit under the governance, Corporate Governance tab, more to come on this topic in the upcoming quarters.Second, as Tim mentioned, we have filed our new Form S-3 self-registration statement as well as the perspective supplement for the issuance of up to $360 million of common stock through our ATM program.

As always, please refer to our website or sec.gov for these and other filings referred to on this call.Now onto the financial results. As Tim said, we continue to see positive growth momentum in our business. Specifically, revenue grew from $14.3 million in the second quarter to $16.3 million in the third quarter, representing 14% sequential growth.

Growth for the same period in 2018 was – revenue rather for the same period in 2018 was $12.6 million, representing 29% growth over the same period last year.Our acquisitions closed relatively early in the quarter, so we ticked up most of their impact in our third quarter results.

That said, giving pro forma effect to these acquisitions is though they closed on day one of the quarter.

Total revenue would have increased by slightly over $400,000, resulting in total revenue of approximately $16.7 million for the third quarter.From an expense perspective, property operating expenses increased quarter-over-quarter from $2,993,000 to $3,327,000 or 11.2%, of which approximately half was related to property tax appeals lost on a handful of properties and the remaining increase related to newly acquired properties as well as normal fluctuations in operating expenses on the remaining portfolio.G&A increased approximately $265,000, driven primarily by increases in amortization of deferred comp and expenses related to recruiting new employees.

We expect G&A to moderate from this quarter but continue to increase slightly over our fourth quarter run rate as we grow our property base, add new employees and meet SEC requirements of being a large accelerated filer by the end of the year.Finally, I am pleased to report that funds from operations for the third quarter of 2019 grew to $8.5 million from $7.4 million in the second quarter or 14.2% sequentially.

Adjusted funds from operations or AFFO, which adjusts for straight-line rent and stock-based compensation, totaled $8.9 million or $0.46 per diluted share, compared with second quarter 2019 of $7.9 million or $0.42 per diluted share.And from a pro forma perspective, if all the 2019 third quarter acquisitions occurred on the first day of the third quarter, AFFO would have increased by approximately $200,000 to a pro forma total of $9.1 million, increasing AFFO to $0.47 per share.

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

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Sheila McGrath with Evercore ISI. Please go ahead..

Yes, good morning. Tim, two of the three acquisitions in third quarter were over $15 million.

I was wondering if you could give us a little bit more detail on the Inpatient Rehabilitation Facility in Texas and the behavior of facility for $27.5 million, just competition for the larger assets, what kind of lease term are encumbering them?.

Good morning, Sheila. Thanks for the questions. And both of those acquisitions are part of our programmatic relationships. So basically we haven't seen any competition with them. We are involved with these operators from the beginning thought process and are involved with the banks as they do the construction financing.

And then we do the takeout after construction completion and occupancy.So, I mean, that's part of our programmatic basis and we're very – as we continue to be excited about what we have in that range.

And don't think that we're going to see any competition because of the way that we do things, in our understanding of what these operators are trying to do. We feel like we're giving them a very desirable service and they enjoy it.So I mean, those properties are leased under 15-year triple-net master leases.

So they go through 2034 and they provide very nice returns to us and have other provisions and then that we like very much..

Okay, great. And then you mentioned in your release the strategic kind of pipeline, there's $68 million in backlog.

Do you expect any of those to close in fourth quarter or do you think the majority will be in 2020?.

We actually already closed one of them in fourth quarter and adjusted the numbers for that.

But of the $68 million, they will be out through the mid-2020, probably one in – I'm looking at Page, one in the first quarter or one in the second quarter, one in third quarter, is that kind of how it’s looking now?.

Yes..

Okay..

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

I mean, we have adjusted what we're doing slightly because of having the pipeline of good acquisitions. It allows us to be pickier on the non-programmatic stuff.

So we feel like the programmatic stuff helps us because it provides that base, but it also helps us because it allows us to be very picky on what we do other than the programmatic stuff.As it relates to cost of capital, we really don't factor that into how we think about the pipeline or how we think about increasing the size of our acquisitions, et cetera.

Basically, the way we look at it is we won't increase our profit margin, in the lower we can push the cost of capital, the higher we can push the profit margin. So that's really what we look at on that side of it..

Okay, great. Thank you..

The next question is from Rob Stevenson with Janney. Please go ahead..

Thanks. Good morning guys.

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

Everything we’ve got for sale – good morning, Rob. Everything that we've got, as I said before, everything that we've got for sale or is not for sale but it can be bought. We re-lease that, we have major leasing efforts on all of it.

I mean, and when you say major pockets – our biggest pocket is the 30,000 square foot building that came out of the AMG bankruptcy, which basically we got kind of as a freebie.So as we lease that up, it will just add to the FFO. And that's a good, yes, that's probably 15% of our overall vacancy.

The rest of its basically small pieces and small places and it's – there's a couple of buildings other than AMG that tenants have moved out of and haven’t been successful in re-leasing but we continue to try to lease those and we obviously view it as an important thing.But again, we look at having good tenants and quality tenants as being as good as anything because I mean, that's the reason that the occupancy tick back down a little bit this quarter was because we reached agreements, I think it's 2016, 18,000 square feet to get those tenants to terminate because we've had issues with them since we bought the buildings they were in and decided it would be easier and better to have better tenants and be rid of those..

Okay. That's helpful. I mean, in terms of the AMG space, I mean, where are you guys in the process there? I mean, is that you have significant interest.

Does that need some work from a tenant improvements before it can be leased, any color there?.

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

Okay, any known or likely move out to the roughly 10% of your lease revenue that's rolling in the remainder of 2019 and 2020 at this point of significance?.

I mean, not that I would call it significance. There's probably 10,000 to 15,000, maybe 20,000 square feet that we think may not renew. I don't remember the exact number off the top of my head, but – and it's something that we're talking to probably 30,000 or 40,000 square feet to people to lease space. So again, it's part of real estate.

The way we view it, if you look at most multi-tenanted portfolios, they are going to end up having 8% to 12% vacancy at any given time..

Okay.

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

Well we're seeing a lot of – we have a lot of interest in and have a lot of confidence in both the inpatient rehab and the psych. So I mean, that's kind of a disproportionate share of our programmatic stuff at this point in time.

We are working to make sure that we keep our portfolio balanced, in line with our investment guidelines on those property types.

And we are turning away some and what I'd consider probably pretty good opportunities and maybe looking at scan set and I'll put it that way because they fall into the categories that we may be getting heavy into, such as the inpatient rehab and the psych..

Okay. Thanks guys. Appreciate it..

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

Hey, good morning and congrats Tim on the UK victory last night. So a few questions here, first, go into your comments on the comp disclosure. Obviously, one thing that you guys have done, which has been almost pioneer in the space is the all stock comp. And that's been one of your hallmarks and definitely been an alignment of interest.

So can you just talk a little bit more about what prompted you guys to disclose this and are you getting pressure to change the all stock comp, just sort of curious..

I wouldn't call it pressure to change the all stock comp, I mean, some constituents. And I'll say proxy advisor constituents, don't understand our compensation strategy. So we put that in to try to make it clearer.

Because if you look at, and I guess, I'll go and say it, if you look at our ISS reports from the last couple of years, they basically say, we don't have any performance based compensation. And we're like, are you looking at our plans, are you looking at our compensation.We don't understand. So we put that in. I mean, number one, we're very proud of it.

Number two is we think everybody needs to understand it. And number three, we probably haven't done as good a job explaining it and how it works in history – through our history.

So we're trying to make it, I guess, more easily understood by people who are looking at us and seeing that we are different than others and trying to help them understand that we are different. We're different in a good way..

Okay. I mean, hopefully they got that because I think clearly it's been one of your benefits that shown up in the stock price. The second question is, I realized that you guys don't do senior housing but obviously a lot of commentary from that area on oversupply.

In the products that you target, medical office, hospital, et cetera, do you see a risk of people trying to capitalize on the growing demand for whatever the services that are provided in these things? And we'll start to see oversupply come to the products that you're targeting or there are things that are very specific about senior housing that the economics don't replicate to make the same sort of capital draw that would flood your product type with too much supply..

Okay, I'll address that in two different ways. Number one, as it relates to our types of properties, we feel like the wind is at our back in most of them. And if you look at psych, psych through the nannies, the reimbursements were cut, we lost 50% of the beds in America. And it turns out there's more of us, man, we're just as crazy as we always were.

So there's now an impetus and a big kind of tailwind on the supply of psych beds.Now, is it possible that that will go too far? And the answer is yes. That's one reasons why we only do the big inpatient psych and see a win state because we feel like that's a governor on the potential for the increase in the psych beds.

But there's a lot of money right now being done at psych from a number of different standpoints and in a lot of places is not well defined exactly. I mean, when I say, psych – behavioral is what it's currently done is.

Behavioral, there's a lot of money being thrown at behavioral all the way from opioids to depression to do long-term behavioral issues.So I mean, it's something we're obviously concerned about or watching, but we think that we're doing things that protect us for the long-term.

Inpatient rehab, we think that the tailwind is there because of the way that it's a lower cost environment than acute care.

It provides a specific service and in any market there's going to be a need for a certain amount of inpatient rehab beds and we're trying to make sure that when we do our underwriting, we understand how that demand is driven, what the population base is.

And we're working, basically significantly all of the inpatient stuff – inpatient rehab stuff that we're doing is brand new state-of-the-art facilities that are – anybody would be proud to have their parent go to, to get satisfied with further rehab.Medical office buildings, you can read all the stats.

I mean, I've seen lots of numbers that indicate that we're so under medical office building that there's going to be, I forget them – I forget what the numbers are, but we think in our specific markets that we're in and what we're looking for.

Again, we're looking for the low cost environment, looking for the ease of access for the patient, et cetera.We think that the demand for that, it's going to be there for a long time.

As it relates to the senior housing, one of the reasons that we've done to senior housing is because the average age of senior housing stock in America is a lot older than what we normally like to do.

It turns out while we are all getting elder, nobody really wants to go to either a senior, a nursing facility or an assisted living facility for that matter.I’ve heard the stat, I don’t know that it’s accurate, but I’ve heard it from a couple of different places that the average age of the resident in assisted living facility has moved from 75 years to 85 years in the last 10 years.

So, what you’re seeing is everybody is wanting to stay at home a lot more than they want to go to an assisted living facility or some other facility.And, our view is that as 5G comes into play and some of the technology comes into play as you’ve seen more of an emphasis on keeping people at home from the reimbursement payers it’s going get even tougher in that senior living environment.

So, I’ll probably spend a lot more time than you wanted on it, but that’s kind of our view on things..

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

Well, it’s, it’s hard for me to say all of the products in all of the markets, but we feel, I mean basically, you know, how we run the company. I mean we view the company as a mutual fund portfolio and we buy assets kind of like buying stocks and are there some that are going to have issues? You buy 111 assets of any type.

There’s going to be a certain number that has issues.But you work through those or repurpose them, whatever. I mean, it is real estate or real estate has a value and it’s just how you look at it and now you’re selling. I mean, again, that’s why we get paid. It’s because it’s real estate and that’s what we’re supposed to do..

Thank you..

The next question is from Bryan Maher with B. Riley. Please go ahead..

Sure. Good morning.

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

No, we’ll own the property now. It’s all a function of a lot of things. But no, we own the property now. The lease will be seen through the bankruptcy then amended and restated on the other side. So that it’s basically what we’ve said it would be all along.So we will own the property.

It’s just a matter of getting – it’s like the quickest way to get the licenses and everything transferred..

Okay.

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

Correct..

Okay, great. Thanks for that.

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

I mean, I’ll let it around the table, but my general view is it’s going down. So, I mean we, we’ve worked through several issues with tenants. They weren’t significant issues and those that we couldn’t work through, we’ve basically kicked them out.

So my view is over the last, particularly the last quarter? We hired a new senior Vice President of Asset Management who came on board a little bit at the end of the second quarter, but he’s been on board now for four or five months.He has been a big add and basically has been focused on some of these issues.

And so I feel a lot better about where we are now as it relates to the tenants..

Okay. And then just lastly for me on the tenant, on the property vacancies that you have, and I think you mentioned that kind of 8% to 10% on multi-tenant is standard.

What is the most successful way you have for filling those tenant vacancies? Are you using, local commercial real estate brokers? How do you go about filling those?.

Yes, I mean that’s again, that’s one of the problems. We don’t have a lot of vacancy in any given market, so we can’t like do a national contract with CBRE or JLL or something because we don’t get any attention from them.

We initially started out trying to do stuff that way, but what we’ve found is, is the best way to do it is to find the local broker who knows the health care market in that local market and get them on board because they’re the ones who interact with people.And again, most of our again, I’m trying to think, probably average space that we have to lease in any of our buildings that have vacancy is less than 10,000 square feet.

Actually, it’s probably more like 8,000 square feet and on average of any of the buildings. So it’s not, a lot of significant pockets.

If you factor the AMG property out of that, that number probably comes down to 4,000 or 5,000 square feet.So I mean it’s – you have to deal with it on the local market basis with a local leasing guy who knows that health care market..

All right, great. Thanks Tim. That was helpful..

That’s fine..

The next question is from Drew Babin with Baird. Please go ahead..

Hey, good morning..

Good morning..

A quick question and I apologize if the answer to this was embedded in the response to a one of Alex’s questions.

But one of the things that’s attractive about inpatient rehab facilities is the limited number of licenses for widget or facilities although the same services are often replicated or attempted to be replicated in [indiscernible] and other facilities like that.And I guess as you kind of draw that comparison to behavioral health can you maybe talk about kind of what makes a behavioral health facility like the ones you’ve bought, a place that offers kind of a superior product to both the end-user customer as well as physicians? In terms of being able, get the right equipment and be properly licensed to provide all of the behavioral services, can you maybe talk more about kind of the stickiness and the staying power of the facilities you’ve bought and why they’re more attractive real estate than other places where behavioral health services are being provided at other facilities..

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

But even if they didn’t have senior wins, the large behavioral facilities there’s very few of them in the country.Number one, because we lost 50% of our beds through the reimbursement issues of the 1990s. But number two is, again, they take a special type of operator and knows the market and is able to provide the capital to do that.

And the fact of the matter is, there’s probably less than 10 in the whole country that can do that.So we feel like it’s, it’s protected from number one a senior win standpoint, number two from the number and ability of others to build something new and compete.

And to kind of gave you a feel for it, like the Highland Hospital, it’s an acute care behavioral facility.

And the reason we were able to find a new tenant and replace it is because their closest competition is I think 70 miles away.And this is basically the only facility of this type in the Charleston West Virginia area, which Charleston is the capital of West Virginia.

And, it’s one of the major metropolitan, I mean, it’s not considered metropolitan by New York standards, but West Virginia standards it is very metropolitan.So, basically what we focus is on are those types of facilities that don’t have any close competition that due to the economics and the state regulatory regime are not likely to have any significant competitors.

But do have a population base that have the population requirement for this type of facility. I don’t know Page, you worked in psych for years.

I mean, do you want to add anything?.

The West Virginia facility was a successful facility prior to our acquiring it. And it was a not-for-profit facility that we thought could be improved but – added issues. And we’re, I think the quality of the facility, as Tim said, was an indication of why we were able to replace the old tenants so quickly.So we have a, we do a good analysis.

I believe on management of the major tenants that we have in that area have been inside for a very long time, have started a couple of other companies and been successful at, in rolling them up to universal or to the old site solution. So we think they’re good operators and that’s a key to any..

And they financially role back..

Yes..

Yes.

Does that give you field Drew?.

That does, yes and I appreciate all the color and that is all for me thank you..

Last question is from Barry Oxford with D.A. Davidson? Please go ahead..

Great guys. Thanks. Real quick, looking at some of the different MSA’s from a cap rate perspective, which ones are you kind of finding more attractive right now? And you know, I guess the flip side of that question is, which ones might be getting a little pricier little ahead of themselves..

Good morning Barry. Thanks for the question. I mean, basically we don’t see a lot of cap rate compression by MSA based upon what we’re looking at. And we, but again, we don’t do the on campus downtown urban hospital campuses, so we’re not competing with any of our peers.

And again, normally if we sense any competition, we’ll back off of it and, not put in a competing bid.So I mean, I don’t think, we’re seeing cap rate issues based upon MSA.

I mean, in some situations we see cap rate issues because owners get things in their mind that brokers put in their mind that since somebody sold a property to one of our peers on the downtown urban hospital campus and all of a sudden their property is worth this much, in which case we just kind of walk away and say, okay, if you can find somebody, my advice would be to sell it to them.In a lot of cases, they come back to us a few months later because they haven’t been able to do that.

But I mean, we’re not turning anything away because a particular MSA is too pricey and we’re not diving into a particular MSA because stuff looks cheap there..

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

Yes.

Okay. Great. Thanks so much guys..

Alright thanks..

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

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

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