UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO
Commission file number: 001-37401
 
Community Healthcare Trust Incorporated
(Exact Name of Registrant as Specified in Its Charter)
 
Maryland
(State or Other Jurisdiction of Incorporation or Organization)
 
46-5212033
(I.R.S. Employer Identification No.)
3326 Aspen Grove Drive
Suite 150
Franklin, Tennessee 37067
(Address of Principal Executive Offices) (Zip Code)
(615) 771-3052
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each Class
Trading Symbol
Name of each exchange on which registered
 
 
Common stock, $0.01 par value per share
CHCT
New York Stock Exchange
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x     No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  x     No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated 
filer ¨
Accelerated filer x
Emerging-growth company x
Non-accelerated filer ¨

Smaller reporting 
company x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes  ¨     No x
The Registrant had 20,177,693 shares of Common Stock, $0.01 par value per share, outstanding as of October 31, 2019.

1


COMMUNITY HEALTHCARE TRUST INCORPORATED
FORM 10-Q
September 30, 2019
TABLE OF CONTENTS

 
 
Page
 
3
 
3
 
4
 
5
 
6
 
7
 
8
 
 
 
 
 

2


PART I. FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 
(Unaudited)
 
 
 
September 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Real estate properties
 
 
 
Land and land improvements
$
63,015

 
$
50,270

Buildings, improvements, and lease intangibles
503,110

 
394,527

Personal property
202

 
133

Total real estate properties
566,327

 
444,930

Less accumulated depreciation
(71,617
)
 
(55,298
)
Total real estate properties, net
494,710

 
389,632

Cash and cash equivalents
1,724

 
2,007

Restricted cash
224

 
385

Other assets, net
36,414

 
34,546

Total assets
$
533,072

 
$
426,570

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities
 
 
 
Debt, net
$
215,460

 
$
147,766

Accounts payable and accrued liabilities
4,004

 
3,196

Other liabilities
12,661

 
3,949

Total liabilities
232,125

 
154,911

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders' Equity
 
 
 
Preferred stock, $0.01 par value; 50,000,000 shares authorized; none issued and outstanding

 

Common stock, $0.01 par value; 450,000,000 shares authorized; 20,177,693 and 18,634,502 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
202

 
186

Additional paid-in capital
391,247

 
337,180

Cumulative net income
15,341

 
9,178

Accumulated other comprehensive (loss) income
(6,826
)
 
633

Cumulative dividends
(99,017
)
 
(75,518
)
Total stockholders’ equity
300,947

 
271,659

Total liabilities and stockholders' equity
$
533,072

 
$
426,570


See accompanying notes to the condensed consolidated financial statements.

3


COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited; Dollars in thousands, except per share amounts)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
REVENUES
 
 
 
 
 
 
 
Rental income
$
15,718

 
$
11,858

 
$
41,977

 
$
34,743

Other operating interest
541

 
679

 
2,039

 
1,625

 
16,259

 
12,537

 
44,016

 
36,368

 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
Property operating
3,327

 
2,627

 
9,395

 
7,497

General and administrative
2,041

 
1,395

 
5,602

 
4,092

Depreciation and amortization
5,774

 
4,925

 
16,319

 
14,471

 
11,142

 
8,947

 
31,316

 
26,060

 
 
 
 
 
 
 
 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND OTHER ITEMS
5,117

 
3,590

 
12,700

 
10,308

Interest expense
(2,483
)
 
(1,643
)
 
(6,788
)
 
(4,482
)
Interest and other income, net
13

 
52

 
251

 
462

INCOME FROM CONTINUING OPERATIONS
2,647

 
1,999

 
6,163

 
6,288

NET INCOME
$
2,647

 
$
1,999

 
$
6,163

 
$
6,288

 
 
 
 
 
 
 
 
NET INCOME PER COMMON SHARE:
 
 
 
 
 
 
 
Net income per common share – Basic
$
0.12

 
$
0.10

 
$
0.28

 
$
0.31

Net income per common share – Diluted
$
0.12

 
$
0.10

 
$
0.28

 
$
0.31

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-BASIC
18,832,902

 
17,669,681

 
18,347,630

 
17,695,688

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-DILUTED
18,832,902

 
17,669,681

 
18,347,630

 
17,695,688


See accompanying notes to the condensed consolidated financial statements.

4


COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited; Dollars in thousands)

 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
NET INCOME
$
2,647

 
$
1,999

 
$
6,163

 
$
6,288

 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
(Decrease) increase in fair value of cash flow hedges
(2,060
)
 
527

 
(7,305
)
 
2,152

 
 
Reclassification for amounts recognized as interest expense
3

 
46

 
(154
)
 
201

 
Total other comprehensive (loss) income
(2,057
)
 
573

 
(7,459
)
 
2,353

COMPREHENSIVE INCOME (LOSS)
$
590

 
$
2,572

 
$
(1,296
)
 
$
8,641


See accompanying notes to the condensed consolidated financial statements.


5


COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited; Dollars in thousands, except per share amounts)
 
Preferred Stock
 
Common Stock
 
Additional Paid in Capital
 
Cumulative Net
Income
 
Accumulated Other Comprehensive (Loss) Income
 
Cumulative Dividends
 
Total Stockholders' Equity
 
Shares
Amount
 
Shares
Amount
 
Balance at June 30, 2019

$

 
19,401,244

$
194

 
$
361,913

 
$
12,694

 
$
(4,769
)
 
$
(90,912
)
 
$
279,120

Issuance of common stock, net of issuance costs


 
680,309

$
7

 
$
28,333

 
$

 
$

 
$

 
$
28,340

Stock-based compensation


 
96,140

1

 
1,001

 

 

 

 
1,002

Unrecognized gain on cash flow hedges


 


 

 

 
(2,060
)
 

 
(2,060
)
Reclassification adj for losses included in net income (interest expense)


 


 

 

 
3

 

 
3

Net income


 


 

 
2,647

 

 

 
2,647

Dividends to common stockholders ($0.4125 per share)


 


 

 

 

 
(8,105
)
 
(8,105
)
Balance at September 30, 2019

$

 
20,177,693

$
202

 
$
391,247

 
$
15,341

 
$
(6,826
)
 
$
(99,017
)
 
$
300,947

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018

$

 
18,634,502

$
186

 
$
337,180

 
$
9,178

 
$
633

 
$
(75,518
)
 
$
271,659

Issuance of common stock, net of issuance costs


 
1,321,362

14

 
51,318

 

 

 

 
51,332

Stock-based compensation


 
221,829

2

 
2,749

 

 

 

 
2,751

Unrecognized loss on cash flow hedges


 


 

 

 
(7,305
)
 

 
(7,305
)
Reclassification adj for gain included in net income (interest expense)


 


 

 

 
(154
)
 

 
(154
)
Net income


 


 

 
6,163

 

 

 
6,163

Dividends to common stockholders ($1.23 per share)


 


 

 

 

 
(23,499
)
 
(23,499
)
Balance at September 30, 2019

$

 
20,177,693

$
202

 
$
391,247

 
$
15,341

 
$
(6,826
)
 
$
(99,017
)
 
$
300,947

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2018


 
18,199,975

182

 
325,719

 
9,064

 
2,039

 
(60,646
)
 
276,358

Issuance of common stock, net of issuance costs


 
234,000

2

 
7,062

 

 

 

 
7,064

Stock-based compensation


 
99,827

1

 
687

 

 

 

 
688

Unrecognized gain on cash flow hedges


 


 

 

 
527

 

 
527

Reclassification adj for losses included in net income (interest expense)


 


 

 

 
46

 

 
46

Net income


 


 

 
1,999

 

 

 
1,999

Dividends to common stockholders ($0.4025 per share)


 


 

 

 

 
(7,365
)
 
(7,365
)
Balance at September 30, 2018

$

 
18,533,802

185

 
333,468

 
11,063

 
2,612

 
(68,011
)
 
279,317

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017

$

 
18,085,798

$
181

 
$
324,303

 
$
4,775

 
$
258

 
$
(46,143
)
 
$
283,374

Issuance of common stock, net of issuance costs


 
234,000

2

 
7,062

 

 

 

 
7,064

Stock-based compensation


 
214,004

2

 
2,103

 

 

 

 
2,105

Unrecognized gain on cash flow hedges


 


 

 

 
2,153

 

 
2,153

Reclassification adj for loss included in net income (interest expense)


 


 

 

 
201

 

 
201

Net income


 


 

 
6,288

 

 

 
6,288

Dividends to common stockholders ($1.20 per share)


 


 

 

 

 
(21,868
)
 
(21,868
)
Balance at September 30, 2018

$

 
18,533,802

$
185

 
$
333,468

 
$
11,063

 
$
2,612

 
$
(68,011
)
 
$
279,317

See accompanying notes to the condensed consolidated financial statements.

6


COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in thousands)
 
Nine Months Ended September 30,
 
2019
 
2018
OPERATING ACTIVITIES
 
 
 
Net income
$
6,163

 
$
6,288

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
16,731

 
14,929

Stock-based compensation
2,751

 
2,105

Straight-line rent receivable
(1,353
)
 
(1,165
)
Deferred income tax expense (benefit)
9

 
(103
)
Changes in operating assets and liabilities:
 
 
 
Other assets
(1,889
)
 
(3,332
)
Accounts payable and accrued liabilities
723

 
(373
)
Other liabilities
52

 
(427
)
Net cash provided by operating activities
23,187

 
17,922

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Acquisitions of real estate
(115,624
)
 
(26,820
)
        Acquisitions of notes receivable

 
(2,201
)
Funding of notes receivable

 
(4,833
)
Proceeds from the repayment of notes receivable
752

 
50

Capital expenditures on existing real estate properties
(3,461
)
 
(4,220
)
Net cash used in investing activities
(118,333
)
 
(38,024
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Net repayments on revolving credit facility
(6,750
)
 
(6,000
)
Term loan borrowings
75,000

 
40,000

Mortgage note repayments
(77
)
 

Dividends paid
(23,499
)
 
(21,868
)
Proceeds from issuance of common stock
51,640

 
7,147

Equity issuance costs
(308
)
 
(83
)
Debt issuance costs
(1,304
)
 
(218
)
Net cash provided by financing activities
94,702

 
18,978

Decrease in cash and cash equivalents and restricted cash
(444
)
 
(1,124
)
Cash and cash equivalents and restricted cash, beginning of period
2,392

 
2,130

Cash and cash equivalents and restricted cash, end of period
$
1,948

 
$
1,006

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Interest paid
$
6,380

 
$
3,823

Invoices accrued for construction, tenant improvement and other capitalized costs
$
270

 
$
102

Reclassification between accounts and notes receivable
$
45

 
$

Reclassification of registration statement costs incurred in prior year to equity issuance costs
$
321

 
$
34

(Decrease) increase in fair value of cash flow hedges
$
(7,305
)
 
$
2,152

Fair value of property received in foreclosure
$

 
$
4,541

Notes and mortgage receivable repayments utilized to originate note receivable
$

 
$
18,167

See accompanying notes to the condensed consolidated financial statements.

7


COMMUNITY HEALTHCARE TRUST INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)


Note 1. Summary of Significant Accounting Policies

Business Overview
Community Healthcare Trust Incorporated (the ‘‘Company’’, ‘‘we’’, ‘‘our’’) was organized in the State of Maryland on March 28, 2014. The Company is a fully-integrated healthcare real estate company that owns and acquires real estate properties that are leased to hospitals, doctors, healthcare systems or other healthcare service providers in our target submarkets. As of September 30, 2019, the Company had investments of approximately $566.3 million in 111 real estate properties, located in 32 states, totaling approximately 2.5 million square feet in the aggregate.

Basis of Presentation
The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements.

This interim financial information should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Management believes that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2019. All material intercompany accounts and transactions have been eliminated.

Use of Estimates in the Condensed Consolidated Financial Statements
Preparation of the Condensed Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results may materially differ from those estimates.

Reclassifications
Tenant reimbursements totaling $1.7 million and $4.7 million, respectively, on the Company's Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 were reclassified into rental income.

Income Taxes
The Company has elected to be taxed as a real estate investment trust ("REIT"), as defined under the Internal Revenue Code of 1986, as amended (the "Code"). The Company and one subsidiary have also elected for that subsidiary to be treated as a taxable REIT subsidiary ("TRS"), which is subject to federal and state income taxes. No provision has been made for federal income taxes for the REIT; however, the Company has recorded income tax expense or benefit for the TRS to the extent applicable. The Company intends at all times to qualify as a REIT under the Code. The Company must distribute at least 90% per annum of its REIT taxable income to its stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP) and meet other requirements to continue to qualify as a REIT.


8

Notes to Condensed Consolidated Financial Statements - Continued

New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Lease Accounting
In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases; in January 2018, the FASB issued ASU 2018-01, Leases - Land Easement Practical Expedient for Transition to Topic 842; in July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases - Targeted Improvements; and in December 2018, the FASB issued ASU 2018-20, Narrow-Scope Improvements for Lessors. The Company adopted this group of ASUs, collectively referred to as Topic 842, on January 1, 2019. Topic 842 superseded the existing standard for lease accounting (Topic 840, Leases).

The Company elected to utilize the following practical expedients provided by Topic 842:

• the package of practical expedients that allows an entity not to reassess upon adoption (i) whether an expired or existing contract contains a lease, (ii) whether a lease classification related to expired or existing lease arrangements, and (iii) whether costs incurred on expired or existing leases qualify as initial direct costs, and

• as a lessor, the practical expedient not to separate certain non-lease components, such as common area maintenance, from the lease component if (i) the timing and pattern of transfer are the same for the nonlease component and associated lease component, and (ii) the lease component would be classified as an operating lease if accounted for separately.

Topic 842 requires lessees to record most leases on their balance sheet through a right-of-use ("ROU") model, in which a lessee records a ROU asset and a lease liability on their balance sheet. Leases with terms that are 12 months or less or leases that are clearly insignificant have not been accounted for under the ROU model. Lessees will account for leases as financing or operating leases, with the classification affecting the timing and pattern of expense recognition in the income statement. Lease expense will be recognized based on the effective interest method for leases accounted for as finance leases and on a straight-line basis over the term of the lease for leases accounted for as operating leases.

The accounting by a lessor under Topic 842 is largely unchanged from that of Topic 840. Under Topic 842, lessors will continue to account for leases as a sales-type, direct-financing, or operating. A lease will be treated as a sale if it is considered to transfer control of the underlying asset to the lessee. A lease will be classified as direct-financing if risks and rewards are conveyed without the transfer of control. Otherwise, the lease is treated as an operating lease. Topic 842 requires accounting for a transaction as a financing in a sale leaseback when the seller-lessee is provided an option to purchase the property from the landlord at the tenant's option. The Company expects that this provision could change the accounting for these types of leases in the future. Topic 842 also includes the concept of separating lease and nonlease components. Under Topic 842, nonlease components, such as common area maintenance, would be accounted for under Topic 606 and separated from the lease payments. However, the Company elected the lessor practical expedient allowing the Company to not separate these components when certain conditions are met. With this election, the Company combined tenant reimbursements with rental income on its Condensed Consolidated Statements of Income. Additionally, we will recognize a charge to rental income for amounts deemed uncollectible. Further, the Company has historically only capitalized direct leasing costs, such as leasing commissions. While the new standard revises the treatment of indirect leasing costs and permits the capitalization and amortization only of direct leasing costs, the Company does not expect an impact to its financial statements related to the capitalization of leasing costs. Also, the Narrow-Scope Improvements for Lessors under ASU 2018-20 allows the Company to continue to exclude from revenue costs paid by our tenants on our behalf directly to third parties, such as property taxes and insurance.

Topic 842 provided two transition alternatives. The Company adopted the standard based on the prospective optional transition method, in which leases for comparative periods continue to be accounted for in accordance with Topic 840.


9

Notes to Condensed Consolidated Financial Statements - Continued

Upon adoption, where the Company is the lessee, we recorded a ROU asset and a related operating lease liability, each totaling approximately $0.1 million, related to one ground lease which will have minimal impact on the recognition of future ground lease expense. The ROU lease asset is included in other assets and the operating lease liability is included in other liabilities on the Company's Condensed Consolidated Balance Sheets.

Derivatives and Hedge Accounting
In October 2018, the FASB issued an update, ASU 2018-16, Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes to ASC Topic 815, Derivatives and Hedging. ASU 2018-16 expands the list of U.S. benchmark interest rates permitted in the application of hedge accounting by adding the OIS rate based on SOFR as an eligible benchmark interest rate. ASU 2018-16 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018. We adopted this update effective January 1, 2019. The adoption of this update did not have an impact on our Condensed Consolidated Financial Statements.

Recently Issued Accounting Pronouncements
Financial Instruments-Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses, which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, companies will be required to use a new current expected credit loss ("CECL") model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, companies will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. Companies will have to disclose significantly more information, including information they use to track credit quality by year of origination for most financing receivables. Companies will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This standard is effective for the Company on January 1, 2020 with early adoption permitted. In August 2018, the FASB issued a proposal that would amend the ASU to clarify that receivables arising from leases would not be within the scope of the ASU but rather would be accounted for under the leasing standard. The Company continues to monitor the FASB's activity relating to this ASU and the effects that it could have on our Consolidated Financial Statements.



10


Note 2. Real Estate Investments

At September 30, 2019, the Company had investments of approximately $566.3 million in 111 real estate properties. The following table summarizes the Company's real estate investments.


(Dollars in thousands)
Number of Facilities
 
Land and
Land Improvements
 
Buildings, Improvements, and Lease Intangibles
 

Personal
Property
 


Total
 

Accumulated Depreciation
Medical office buildings:
 
 
 
 
 
 
 
 
 
 
 
Florida
5

 
$
4,648

 
$
29,384

 
$

 
$
34,032

 
$
5,328

Ohio
6

 
3,665

 
26,578

 

 
30,243

 
6,209

Texas
3

 
3,164

 
15,591

 

 
18,755

 
4,862

Illinois
3

 
1,918

 
15,019

 

 
16,937

 
3,195

Kansas
3

 
2,455

 
15,539

 

 
17,994

 
4,480

Iowa
1

 
2,241

 
9,062

 

 
11,303

 
2,967

Other states
16

 
5,587

 
40,952

 

 
46,539

 
5,805

 
37

 
23,678

 
152,125

 

 
175,803

 
32,846

Physician clinics:
 
 
 
 
 
 
 
 
 
 
 
Kansas
2

 
610

 
6,921

 

 
7,531

 
1,690

Illinois
6

 
2,888

 
9,709

 

 
12,597

 
838

Florida
5

 
506

 
10,322

 

 
10,828

 
1,101

Other states
9

 
2,903

 
21,742

 

 
24,645

 
3,984

 
22

 
6,907

 
48,694

 

 
55,601

 
7,613

Surgical centers and hospitals:
 
 
 
 
 
 
 
 
 
 
 
Louisiana
1

 
1,683

 
21,353

 

 
23,036

 
1,511

Michigan
2

 
637

 
8,383

 

 
9,020

 
2,623

Illinois
2

 
2,355

 
8,222

 

 
10,577

 
1,797

Florida
1

 
271

 
7,070

 

 
7,341

 
1,043

Arizona
2

 
576

 
5,389

 

 
5,965

 
1,774

Other states
7

 
2,130

 
17,935

 

 
20,065

 
4,534

 
15

 
7,652

 
68,352

 

 
76,004

 
13,282

Specialty centers:
 
 
 
 
 
 
 
 
 
 
 
Illinois
3

 
3,489

 
24,733

 

 
28,222

 
2,916

Other states
22

 
5,207

 
38,623

 

 
43,830

 
8,365

 
25

 
8,696

 
63,356

 

 
72,052

 
11,281

Behavioral facilities:
 
 
 
 
 
 
 
 
 
 
 
Massachusetts
1

 
3,835

 
23,303

 

 
27,138

 
177

West Virginia
1

 
2,138

 
22,897

 

 
25,035

 
1,171

Illinois
1

 
1,300

 
18,803

 

 
20,103

 
1,568

Washington
1

 
2,725

 
25,064

 

 
27,789

 
120

Other states
5

 
2,538

 
18,880

 

 
21,418

 
1,097

 
9

 
12,536

 
108,947

 

 
121,483

 
4,133

Inpatient rehabilitation facilities:
 
 
 
 
 
 
 
 
 
 
 
Texas
2

 
3,023

 
44,530

 

 
47,553

 
548

 
2

 
3,023

 
44,530

 

 
47,553

 
548

Long-term acute care hospitals:
 
 
 
 
 
 
 
 
 
 
 
Indiana
1

 
523

 
14,405

 

 
14,928

 
1,566

 
1

 
523

 
14,405

 

 
14,928

 
1,566

Corporate property

 

 
2,701

 
202

 
2,903

 
348

  Total real estate investments
111

 
$
63,015

 
$
503,110

 
$
202

 
$
566,327

 
$
71,617



11

Notes to Condensed Consolidated Financial Statements - Continued

Note 3. Real Estate Leases

The Company’s properties are generally leased pursuant to non-cancelable, fixed-term operating leases with expiration dates through 2034. The Company’s leases generally require the lessee to pay minimum rent, with fixed rent renewal terms or increases based on a Consumer Price Index and and may also include additional rent, which may include taxes (including property taxes), insurance, maintenance and other operating costs associated with the leased property.

Some leases provide the lessee, during the term of the lease, with an option or right of first refusal to purchase the leased property. Some leases also allow the lessee to renew or extend their lease term or in some cases terminate their lease, based on conditions provided in the lease.

Future minimum lease payments under the non-cancelable operating leases due the Company for the years ending December 31, as of September 30, 2019, are as follows (in thousands):
2019 (three months ending December 31)
$
12,889

2020
49,652

2021
46,663

2022
43,440

2023
39,016

2024 and thereafter
247,654

 
$
439,314


Straight-line rental income
Rental income is recognized as earned over the life of the lease agreement on a straight-line basis. Straight-line rent included in rental income was approximately $0.6 million and $0.4 million, respectively, for the three months ended September 30, 2019 and 2018 and was approximately $1.4 million and $1.2 million, respectively, for the nine months ended September 30, 2019 and 2018.

Deferred revenue
Rent received but not yet earned is deferred until such time it is earned. Deferred revenue, included in other liabilities, was approximately $2.0 million and $1.6 million, respectively, at September 30, 2019 and December 31, 2018.

Note 4. Real Estate Acquisitions

During the third quarter of 2019, the Company acquired three real estate properties totaling approximately 130,000 square feet for an aggregate purchase price of approximately $52.6 million and cash consideration of approximately $52.2 million. Upon acquisition, the properties were 100% leased in the aggregate with lease expirations through 2034. Amounts reflected in revenues and net income for the nine months ended September 30, 2019 for these properties were approximately $1.0 million and $0.7 million, respectively. Transaction costs totaling approximately $0.4 million related to these asset acquisitions were capitalized in the period and included in real estate assets.

During the second quarter of 2019, the Company acquired three real estate properties totaling approximately 110,000 square feet for an aggregate purchase price of approximately $31.9 million and cash consideration of approximately $30.7 million. Upon acquisition, the properties were approximately 97.1% leased in the aggregate with lease expirations through 2034. Amounts reflected in revenues and net income for the nine months ended September 30, 2019 for these properties were approximately $1.4 million and $1.0 million, respectively. Due to the original structuring of one of the acquisitions in April 2019, the Company recorded interest income for the second quarter of 2019 totaling approximately $0.4 million that was included in other operating interest on the Condensed Consolidated Statements of Income, rather than rental income. Transaction costs totaling approximately $0.2 million related to these asset acquisitions were capitalized in the period and included in real estate assets.

12

Notes to Condensed Consolidated Financial Statements - Continued


During the first quarter of 2019, the Company acquired two real estate properties totaling approximately 83,000 square feet for an aggregate purchase price and cash consideration of approximately $32.7 million. Upon acquisition, the properties were 100% leased in the aggregate with lease expirations in 2029. Amounts reflected in revenues and net income for the nine months ended September 30, 2019 for these properties were approximately $2.0 million and $1.5 million, respectively. Transaction costs totaling approximately $0.1 million related to these asset acquisitions were capitalized in the period and included in real estate assets.

The following table summarizes the relative fair values of the assets acquired and liabilities assumed in the property acquisitions for the nine months ended September 30, 2019.
 
 
 
Relative Fair Value
Estimated Useful Life
 
 
 
(in thousands)
(In years)
Land and land improvements
$
12,497

4.7-18.4
Building and building improvements
103,253

20-40
Intangibles:
 
 
 
At-market lease intangibles
2,186

3.8-10.8
 
Below-market lease intangibles
(44
)
8.3
 
 
Total intangibles
2,142

 
Accounts receivable and other assets assumed
15

 
Accounts payable, accrued liabilities and other liabilities assumed
(2,198
)
 
Prorated rent, interest and operating expense reimbursement amounts collected
(85
)
 
 
Total cash consideration
$
115,624

 

Note 5. Debt, net

The table below details the Company's debt as of September 30, 2019 and December 31, 2018.
 
Balance as of
 
(Dollars in thousands)
September 30, 2019
December 31, 2018
Maturity Dates
 
 
 
 
Revolving Credit Facility
$
36,250

$
43,000

3/23
A-1 Term Loan, net
49,815

49,759

3/22
A-2 Term Loan, net
49,761

49,722

3/24
A-3 Term Loan, net
74,411


3/26
Mortgage Note Payable
5,223

5,285

5/24
 
$
215,460

$
147,766

 

The Company's second amended and restated credit facility (the "Credit Facility") is by and among Community Healthcare OP, LP, the Company, the lenders from time to time party thereto, and SunTrust Bank, as Administrative Agent. The Company’s material subsidiaries are guarantors of the obligations under the Credit Facility. The Company entered into a third amendment to its Credit Facility (the "Third Amendment") on March 29, 2019, which added a $75.0 million term loan (the "A-3 Term Loan"), which matures on March 29, 2026, extended the maturity of the revolving credit facility (the "Revolving Credit Facility") to March 29, 2023, improved pricing on the Credit Facility, and adjusted certain financial covenants. The Company paid approximately $1.3 million in fees and expenses related to the Third Amendment, of which $0.7 million was related to the Revolving Credit Facility and was recorded as deferred financing costs, included in Other Assets, and $0.6 million was related to the A-3 Term

13

Notes to Condensed Consolidated Financial Statements - Continued

Loan and was recorded as deferred financing costs, included in Debt, net, on the Company's Condensed Consolidated Balance Sheets.

The Credit Facility, as amended, provides for a $150.0 million Revolving Credit Facility and $175.0 million in term loans (the "Term Loans"). The Credit Facility, through the accordion feature, allows borrowings up to a total of $525.0 million including the ability to add and fund additional term loans. The Revolving Credit Facility matures on March 29, 2023 and includes one 12-month option to extend the maturity date of the Revolving Credit Facility, subject to the satisfaction of certain conditions. The Term Loans include a five-year term loan facility in the aggregate principal amount of $50.0 million (the "A-1 Term Loan"), which matures on March 29, 2022, a seven-year term loan facility in the aggregate principal amount of $50.0 million (the "A-2 Term Loan"), which matures on March 29, 2024 and the new seven-year, $75.0 million A-3 Term Loan, which matures on March 29, 2026.

Amounts outstanding under the Revolving Credit Facility, as amended, bear annual interest at a floating rate that is based, at the Company’s option, on either: (i) LIBOR plus 1.25% to 1.90% or (ii) a base rate plus 0.25% to 0.90% in each case, depending upon the Company’s leverage ratio. In addition, the Company is obligated to pay an annual fee equal to 0.25% of the amount of the unused portion of the Revolving Credit Facility if amounts borrowed are greater than 33.3% of the borrowing capacity under the Revolving Credit Facility and 0.35% of the unused portion of the Revolving Credit Facility if amounts borrowed are less than or equal to 33.3% of the borrowing capacity under the Revolving Credit Facility. The Company had $36.3 million outstanding under the Revolving Credit Facility with a borrowing capacity remaining of approximately $113.8 million at September 30, 2019.

Amounts outstanding under the Term Loans, as amended, bear annual interest at a floating rate that is based, at the Company’s option, on either: (i) LIBOR plus 1.25% to 2.30% or (ii) a base rate plus 0.25% to 1.30%, in each case, depending upon the Company’s leverage ratio. In addition, the Company is obligated to pay an annual fee equal to 0.35% of the amount of the unused portion of the Term Loans. The Company has entered into interest rate swaps to fix the interest rates on the Term Loans. See Note 6 for more details on the interest rate swaps. At September 30, 2019, the Company had drawn the full $175.0 million under the Term Loans which had a fixed weighted average interest rate under the swaps of approximately 4.569%.

The Company’s ability to borrow under the Credit Facility is subject to its ongoing compliance with a number of customary affirmative and negative covenants, including limitations with respect to liens, indebtedness, distributions, mergers, consolidations, investments, restricted payments and asset sales, as well as financial maintenance covenants. The Company was in compliance with its financial covenants under its Credit Facility as of September 30, 2019.

Note 6. Derivative Financial Instruments

Risk Management Objective of Using Derivatives
The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations.


14

Notes to Condensed Consolidated Financial Statements - Continued

Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

As of September 30, 2019, the Company had seven outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk for notional amounts totaling $175.0 million. The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018.
 
Asset Derivatives Fair Value at
 
Liability Derivatives Fair Value at
 
September 30, 2019
December 31, 2018
Balance Sheet Classification
 
September 30, 2019
December 31, 2018
Balance Sheet Classification
Interest rate swaps
$

$
902

Other assets
 
$
6,826

$
98

Other Liabilities

The changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive (loss) income ("AOCI") and are subsequently reclassified to interest expense in the period that the hedged forecasted transaction affects earnings.

Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s Term Loans. During the next twelve months, the Company estimates that an additional $1.1 million will be reclassified from other comprehensive (loss) income ("OCI") as an increase to interest expense.

The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three and nine months ended September 30, 2019 and 2018.
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
(Dollars in thousands)
2019
2018
 
2019
2018
Amount of unrealized (loss) gain recognized in OCI on derivative
$
(2,060
)
$
527

 
$
(7,305
)
$
2,152

Amount of (gain) loss reclassified from accumulated OCI into interest expense
$
3

$
46

 
$
(154
)
$
201

Total Interest Expense presented in the Condensed Consolidated Statements of Income in which the effects of the cash flow hedges are recorded
$
2,483

$
1,643

 
$
6,788

$
4,482


Credit-risk-related Contingent Features
As of September 30, 2019, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $7.2 million. As of September 30, 2019, the Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value of approximately $7.2 million at September 30, 2019.



15

Notes to Condensed Consolidated Financial Statements - Continued

Note 7. Stockholders’ Equity

Common Stock
The following table provides a reconciliation of the beginning and ending common stock balances for the nine months ended September 30, 2019 and for the year ended December 31, 2018:
 
Nine Months Ended
September 30, 2019
Year Ended
December 31, 2018
Balance, beginning of period
18,634,502

18,085,798

Issuance of common stock
1,321,362

334,700

Restricted stock-based awards
221,829

214,004

Balance, end of period
20,177,693

18,634,502


ATM Program
On August 7, 2018, the Company entered into an at-the-market offering program ("ATM Program") with Sandler O’Neill & Partners, L.P., Evercore Group L.L.C., SunTrust Robinson Humphrey, Inc., BB&T Capital Markets, a division of BB&T Securities, LLC, Fifth Third Securities, Inc. and Janney Montgomery Scott LLC, as sales agents (collectively, the “Agents”), under which the Company may issue and sell shares of its common stock, par value $0.01 per share (the “Common Stock”), having an aggregate gross sales price of up to $100.0 million (the “Shares”) from time to time through or to one or more of the Agents, as may be determined by the Company in its sole discretion, subject to the terms and conditions of the Agreement and applicable law.

The Company's activity under the ATM Program for the three and nine months ended September 30, 2019 is detailed in the table below. As of September 30, 2019, the Company had approximately $36.9 million remaining that may be issued under the ATM Program.
 
Three Months Ended
September 30, 2019
 
Nine Months Ended
September 30, 2019
Shares issued
680,309

 
1,321,362

Proceeds received (in millions)
$
28.5

 
$
51.6

Average gross sales price per share ($)
$
42.70

 
$
39.88




16

Notes to Condensed Consolidated Financial Statements - Continued

Note 8. Net Income Per Common Share

The following table sets forth the computation of basic and diluted net income per common share.


Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Dollars in thousands, except per share data)
2019
 
2018
 
2019
 
2018
Net income
$
2,647

 
$
1,999

 
$
6,163

 
$
6,288

          Participating securities' share in earnings
(373
)
 
(287
)
 
(1,024
)
 
(769
)
Net income, less participating securities' share in earnings
$
2,274

 
$
1,712

 
$
5,139

 
$
5,519

 
 
 
 
 
 
 
 
Weighted average Common Shares outstanding
 
 
 
 
 
 
 
Weighted average Common Shares outstanding
19,697,574

 
18,330,340

 
19,166,309

 
18,228,006

Unvested restricted shares
(864,672
)
 
(660,659
)
 
(818,679
)
 
(532,318
)
Weighted average Common Shares outstanding–Basic
18,832,902

 
17,669,681

 
18,347,630

 
17,695,688

Dilutive potential common shares

 

 

 

Weighted average Common Shares outstanding –Diluted
18,832,902

 
17,669,681

 
18,347,630

 
17,695,688

 
 
 
 
 
 
 
 
Basic Net Income per Common Share
$
0.12

 
$
0.10

 
$
0.28

 
$
0.31

 
 
 
 
 
 
 
 
Diluted Net Income per Common Share
$
0.12

 
$
0.10

 
$
0.28

 
$
0.31


Note 9. Incentive Plan

Under the Company's 2014 Incentive Plan, as amended, awards may be made in the form of restricted stock, cash or a combination of both. Compensation expense recognized from the amortization of the value of the Company's officer, employee and director shares over the applicable vesting periods during the three months ended September 30, 2019 and 2018 was approximately $1.0 million and $0.7 million, respectively, and during the nine months ended September 30, 2019 and 2018 was approximately $2.8 million and $2.1 million, respectively. Included in general and administrative expense for the nine months ended September 30, 2018 was approximately $0.2 million related to fully amortized shares previously granted to a board member who did not stand for re-election to the Company's board. A summary of the activity under the 2014 Incentive Plan for the three and nine months ended September 30, 2019 and 2018 is included in the table below.
 
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
 
2019
2018
 
2019
2018
Stock-based awards, beginning of period
813,752

609,660

 
709,487

512,115

 
Stock in lieu of compensation
14,862

17,420

 
72,391

69,767

 
Stock awards
81,278

82,407

 
149,438

144,237

 
   Total stock granted
96,140

99,827

 
221,829

214,004

 
Vested shares


 
(21,424
)
(16,632
)
Stock-based awards, end of period
909,892

709,487

 
909,892

709,487




17


Note 10. Other Assets

Items included in Other assets, net on the Company's Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 are detailed in the table below.

 
Balance as of
(Dollars in thousands)
September 30, 2019
December 31, 2018
Notes receivable
$
23,402

$
24,110

Accounts and interest receivables
3,573

2,158

Straight-line rent receivables
4,567

3,254

Prepaid assets
688

487

Deferred financing costs, net
746

318

Leasing commissions, net
900

790

Deferred tax asset
2,016

2,024

Fair value of interest rate swaps

902

Above-market intangible assets, net
150

168

Right-of-use leased asset
140


Other
232

335

 
$
36,414

$
34,546


The Company's $23.4 million in notes receivable at September 30, 2019 include mainly the following notes. Interest related to these notes is included in Other Operating Interest on the Company's Condensed Consolidated Statements of Income.

On April 25, 2018, the Company provided a $23.0 million loan to a newly formed company, secured by all assets and ownership interests in seven long-term acute care hospitals and one inpatient rehabilitation hospital. The loan, which matures on May 1, 2031, currently bears interest at 9% per annum, with principal payments beginning in May 2021.

On December 31, 2018, the Company entered into notes with a tenant totaling $0.9 million. The notes bear interest at 9% per annum and mature on December 31, 2019.

The Company identified the borrowers of these notes as variable interest entities ("VIEs"), but management determined that the Company was not the primary beneficiary of the VIEs because we lack either directly or through related parties any material impact in the activities that impact the borrowers' economic performance. We are not obligated to provide support beyond our stated commitment to the borrowers, and accordingly our maximum exposure to loss as a result of this relationship is limited to the amount of our outstanding notes receivable. The VIEs that we have identified at September 30, 2019 are summarized in the table below.
Classification
Carrying Amount
(in millions)
Maximum Exposure to Loss
(in millions)
Notes receivable
$
0.4

$
0.4

Note receivable
$
23.0

$
23.0




18


Note 11. Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate the fair value.

Cash and cash equivalents and restricted cash - The carrying amount approximates the fair value.

Notes receivable - The fair value is estimated using cash flow analyses, based on an assumed market rate of interest or at a rate consistent with the rates on notes carried by the Company and are classified as level 2 in the hierarchy.

Borrowings under our Credit Facility - The carrying amount approximates the fair value because the borrowings are based on variable market interest rates.

Derivative financial instruments - The fair value is estimated using discounted cash flow techniques. These techniques incorporate primarily level 2 inputs. The market inputs are utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation model for interest rate swaps are observable in active markets and are classified as level 2 in the hierarchy.

Mortgage note payable - The fair value is estimated using cash flow analyses which are based on an assumed market rate of interest or at a rate consistent with the rates on mortgage notes assumed by the Company and are classified as level 2 in the hierarchy.

The table below details the fair values and carrying values for our notes receivable, interest rate swaps, and mortgage note payable at September 30, 2019 and December 31, 2018, using level 2 inputs.
 
September 30, 2019
 
December 31, 2018
(Dollars in thousands)
Carrying Value
Fair Value
 
Carrying Value
Fair Value
Notes receivable
$
23,402

$
23,494

 
$
24,110

$
23,936

Interest rate swap asset
$

$

 
$
902

$
902

Interest rate swap liability
$
6,826

$
6,826

 
$
269

$
269

Mortgage note payable
$
5,314

$
5,323

 
$
5,391

$
5,307


Note 12. Subsequent Events

Dividend Declared
On October 31, 2019, the Company’s Board of Directors declared a quarterly common stock dividend in the amount of $0.4150 per share. The dividend is payable on November 29, 2019 to stockholders of record on November 15, 2019.

Subsequent Acquisitions
Subsequent to September 30, 2019, the Company acquired seven real estate properties, including one that was previously under construction, totaling approximately 114,000 square feet for a purchase price of approximately $34.8 million and cash consideration of approximately $34.4 million. Upon acquisition, the properties were 100% leased in the aggregate with lease expiration through 2034. The Company funded the acquisitions with cash from operations, net proceeds from the ATM Program, and proceeds from the Company's Revolving Credit Facility.



19


ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Disclosure Regarding Forward-Looking Statements
This report and other materials that Community Healthcare Trust Incorporated (the "Company") has filed or may file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made, or to be made, by management of the Company, contain, or will contain, contains statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “believes”, “expects”, “may”, “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates”, “anticipates” or other similar words or expressions, including the negative thereof. Forward-looking statements are based on certain assumptions and can include future expectations, future plans and strategies, financial and operating projections or other forward-looking information. Such forward-looking statements reflect management’s current beliefs and are based on information currently available to management. Because forward-looking statements relate to future events, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Company’s control. Thus, the Company’s actual results and financial condition may differ materially from those indicated in such forward-looking statements. Some factors that might cause such a difference include the following: general volatility of the capital markets and the market price of the Company’s common stock, changes in the Company’s business strategy, availability, terms and deployment of capital, the Company’s ability to refinance existing indebtedness at or prior to maturity on favorable terms, or at all, changes in the real estate industry in general, interest rates or the general economy, adverse developments related to the healthcare industry, the degree and nature of the Company’s competition, the ability to consummate acquisitions under contract and the other factors described in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, and the Company’s other filings with the Securities and Exchange Commission from time to time. Readers are therefore cautioned not to place undue reliance on the forward-looking statements contained herein which speak only as of the date hereof. The Company intends these forward-looking statements to speak only as of the time of this report and 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.

The purpose of this Management's Discussion and Analysis ("MD&A") is to provide an understanding of the Company's consolidated financial condition, results of operations and cash. MD&A is provided as a supplement to, and should be read in conjunction with, the Company's Condensed Consolidated Financial Statements and accompanying notes.

Overview
References such as "we," "us," "our," and "the Company" mean Community Healthcare Trust Incorporated, a Maryland corporation, and its consolidated subsidiaries.

We were organized in the State of Maryland on March 28, 2014. We are a self-administered, self-managed healthcare real estate investment trust, or REIT, that acquires and owns properties that are leased to hospitals, doctors, healthcare systems or other healthcare service providers in our target submarkets.




20


Trends and Matters Impacting Operating Results
Management monitors factors and trends that it believes are important to the Company and the REIT industry in order to gauge their potential impact on the operations of the Company. Certain of the factors and trends that management believes may impact the operations of the Company are discussed below.

Real estate acquisitions
During the third quarter of 2019, the Company acquired three real estate properties totaling approximately 130,000 square feet for an aggregate purchase price of approximately $52.6 million and cash consideration of approximately $52.2 million. Upon acquisition, the properties were 100% leased in the aggregate with lease expirations through 2034.

During the second quarter of 2019, the Company acquired three real estate properties totaling approximately 110,000 square feet for an aggregate purchase price of approximately $31.9 million and cash consideration of approximately $30.7 million. Upon acquisition, the properties were approximately 97.1% leased in the aggregate with lease expirations through 2034.

During the first quarter of 2019, the Company acquired two real estate properties totaling approximately 83,000 square feet for an aggregate purchase price and cash consideration of approximately $32.7 million. Upon acquisition, the properties were 100% leased in the aggregate with lease expirations in 2029.

See Note 4 to the Condensed Consolidated Financial Statements for more details on these acquisitions.

4th Quarter 2019 Acquisitions
Subsequent to September 30, 2019, the Company acquired seven real estate properties, including one that was previously under construction, totaling approximately 114,000 square feet for a purchase price of approximately $34.8 million and cash consideration of approximately $34.4 million. Upon acquisition, the properties were 100% leased in the aggregate with lease expiration through 2034. The Company funded the acquisitions with cash from operations, net proceeds from the ATM Program, and proceeds from the Company's Revolving Credit Facility.

Acquisition Pipeline
The Company has three properties under definitive purchase agreements, to be acquired after completion and occupancy, for an aggregate expected purchase price of approximately $68.0 million. The Company's expected aggregate returns on these investments range from approximately 9.5% to 11.0%. The Company expects to close these properties through 2020; however, the Company cannot provide assurance as to the timing of when, or whether, these transactions will actually close. The Company anticipates funding these investments with cash from operations, through proceeds from its Credit Facility or from net proceeds from additional debt or equity offerings.

Leased square footage
As of September 30, 2019, our real estate portfolio was approximately 89.3% leased. During the first nine months of 2019, we had expiring or terminated leases related to approximately 134,000 square feet, and we leased or renewed leases relating to approximately 170,000 square feet.

Highland Transition Update
A new operator is currently managing Highland Hospital pursuant to a management agreement and is in the process of preparing for transfer of licenses and other assets.

Highland Hospital will likely be the subject of a pre-packaged bankruptcy, with an anticipated sale to the new operator, to expedite and facilitate the transfer of licenses.

The Company has received and anticipates continuing to receive monthly payments of approximately $0.3 million.


21


The Company's lease with the new operator will become effective upon the transfer of the licenses to the new operator.

The Company does not anticipate any material adverse long-term effect to its cash flows or net income related to the transition or subsequent leasing of this facility.

The Company cannot provide assurance as to the timing or whether, this transaction will actually close.

Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that are reasonably likely to have a material effect on the Company's consolidated financial condition, results of operations or liquidity.

Inflation
We believe inflation will have a minimal impact on the operating performance of our properties. Many of our lease agreements contain provisions designed to mitigate the adverse impact of inflation. These provisions include clauses that enable us to receive payment of increased rent pursuant to escalation clauses which generally increase rental rates during the terms of the leases. These escalation clauses often provide for fixed rent increases or indexed escalations (based upon the Consumer Price Index or other measures). However, some of these contractual rent increases may be less than the actual rate of inflation. Generally, our lease agreements require the tenant to pay property operating expenses, including maintenance costs, real estate taxes and insurance. This requirement reduces our exposure to increases in these costs and property operating expenses resulting from inflation.

Seasonality
We do not expect our business to be subject to material seasonal fluctuations.

New Accounting Pronouncements
See Note 1 to the Company’s Condensed Consolidated Financial Statements accompanying this report for information on new accounting standards not yet adopted.




22


Results of Operations
The Company's results of operations for the three and nine months ended September 30, 2019 compared to the same periods in 2018 have most significantly been impacted by its real estate acquisitions. As of September 30, 2019 and 2018, the Company had investments in real estate properties totaling approximately $566.3 million and $424.2 million, respectively.

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018
The table below shows our results of operations for the three months ended September 30, 2019 compared to the same period in 2018 and the effect of changes in those results from period to period on our net income.
 
Three Months Ended September 30,
 
Increase (Decrease) to
Net Income
(dollars in thousands)
2019
 
2018
 
$
%
REVENUES
 
 
 
 
 
 
Rental income
$
15,718

 
$
11,858

 
$
3,860

32.6
 %
Other operating interest
541

 
679

 
(138
)
(20.3
)%
 
16,259

 
12,537

 
3,722

29.7
 %
EXPENSES
 
 
 
 
 
 
Property operating
3,327

 
2,627

 
(700
)
(26.6
)%
General and administrative
2,041

 
1,395

 
(646
)
(46.3
)%
Depreciation and amortization
5,774

 
4,925

 
(849
)
(17.2
)%
 
11,142

 
8,947

 
(2,195
)
(24.5
)%
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND OTHER ITEMS
5,117

 
3,590

 
1,527

42.5
 %
Interest expense
(2,483
)
 
(1,643
)
 
(840
)
(51.1
)%
Other income
13

 
52

 
(39
)
(75.0
)%
INCOME FROM CONTINUING OPERATIONS
2,647

 
1,999

 
648

32.4
 %
NET INCOME
$
2,647

 
$
1,999

 
$
648

32.4
 %

Revenues
Revenues increased approximately $3.7 million, or 29.7%, for the three months ended September 30, 2019 compared to the same period in 2018 mainly due to acquisitions of real estate.

Expenses
Property operating expenses increased approximately $0.7 million, or 26.6%, for the three months ended September 30, 2019 compared to the same period in 2018 mainly due to acquisitions of real estate of approximately $0.5 million, as well as an increase in overall expenses on our existing portfolio of approximately $0.2 million.

General and administrative expenses increased approximately $0.6 million, or 46.3%, for the three months ended September 30, 2019 compared to the same period in 2018 due mainly to compensation-related expenses and occupancy costs related to to the addition of employees, including the amortization of non-vested restricted common shares issued under our 2014 Incentive Plan.

Depreciation and amortization expense increased approximately $0.8 million, or 17.2%, for the three months ended September 30, 2019 compared to the same period in 2018. Acquisitions accounted for an increase of approximately $1.3 million, offset by a decrease of approximately $0.5 million in amortization due to fully depreciated real estate lease intangibles which generally have a shorter depreciable life than a building.


23


Interest expense
Interest expense increased approximately $0.8 million, or 51.1%, for the three months ended September 30, 2019 compared to the same period in 2018 due mainly to additional Term Loan borrowings under its Credit Facility in the first quarters of 2018 and 2019, as well as a higher weighted average debt balance and a higher weighted average interest rate on the Revolving Credit Facility in the third quarter of 2019 compared to the same period in 2018.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
The table below shows our results of operations for the nine months ended September 30, 2019 compared to the same period in 2018 and the effect of changes in those results from period to period on our net income.
 
Nine Months Ended September 30,
 
Increase (Decrease) to
Net Income
(dollars in thousands)
2019
 
2018
 
$
%
REVENUES
 
 
 
 
 
 
Rental income
$
41,977

 
$
34,743

 
$
7,234

20.8
 %
Other operating interest
2,039

 
1,625

 
414

25.5
 %
 
44,016

 
36,368

 
7,648

21.0
 %
EXPENSES
 
 
 
 
 
 
Property operating
9,395

 
7,497

 
(1,898
)
(25.3
)%
General and administrative
5,602

 
4,092

 
(1,510
)
(36.9
)%
Depreciation and amortization
16,319

 
14,471

 
(1,848
)
(12.8
)%
 
31,316

 
26,060

 
(5,256
)
(20.2
)%
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND OTHER ITEMS
12,700

 
10,308

 
2,392

23.2
 %
Interest expense
(6,788
)
 
(4,482
)
 
(2,306
)
51.5
 %
Other income
251

 
462

 
(211
)
(45.7
)%
INCOME FROM CONTINUING OPERATIONS
6,163

 
6,288

 
(125
)
(2.0
)%
NET INCOME
$
6,163

 
$
6,288

 
$
(125
)
(2.0
)%

Revenues
Revenues increased approximately $7.6 million, or 21.0%, for the nine months ended September 30, 2019 compared to the same period in 2018 mainly due to acquisitions of real estate. Due to the original structuring of an acquisition in April 2019, the Company recorded interest income of approximately $0.4 million, included in other operating interest, rather than rental income, which was recorded for the second quarter of 2019.

Expenses
Property operating expenses increased approximately $1.9 million, or 25.3%, for the nine months ended September 30, 2019 compared to the same period in 2018 mainly due to acquisitions of real estate of approximately $1.2 million, as well as an increase in overall expenses on our existing portfolio of approximately $0.7 million.

General and administrative expenses increased approximately $1.5 million, or 36.9%, for the nine months ended September 30, 2019 compared to the same period in 2018. Compensation-related expenses and occupancy costs related to our employees, including the amortization of non-vested restricted common shares issued under our 2014 Incentive Plan, and expenses related to the addition of employees increased approximately $1.2 million. Further, state and federal income taxes and franchise taxes increased approximately $0.4 million.

Depreciation and amortization expense increased approximately $1.8 million, or 12.8%, for the nine months ended September 30, 2019 compared to the same period in 2018. Acquisitions accounted for an increase of approximately $2.9 million, offset by a decrease of approximately $1.6 million in amortization due to fully depreciated real estate

24


lease intangibles which generally have a shorter depreciable life than a building. Also, land, building and tenant improvements accounted for an increase of approximately $0.4 million.

Interest expense
Interest expense increased approximately $2.3 million, or 51.5%, for the nine months ended September 30, 2019 compared to the same period in 2018 due mainly to additional Term Loan borrowings under its Credit Facility in the first quarters of 2018 and 2019, as well as a higher weighted average debt balance and a higher weighted average interest rate on the Revolving Credit Facility in the first nine months of 2019 compared to the same period in 2018. The Company also assumed a mortgage relating to one of its real estate acquisitions in the fourth quarter of 2018 resulting in mortgage note interest of approximately $0.2 million for the nine months ended September 30, 2019.


Funds from Operations
Funds from operations (“FFO”) and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to net income (calculated in accordance with GAAP), excluding gains or losses from the sale of certain real estate assets and gains or losses from change in control, plus depreciation and amortization related to real estate, plus impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity, and after adjustments for unconsolidated partnerships and joint ventures, as well as other items discussed in NAREIT's Funds From Operations White Paper - 2018 Restatement.

Management believes that net income, as defined by GAAP, is the most appropriate earnings measurement. However, management believes FFO and FFO per share to be supplemental measures of a REIT’s performance because they provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. The Company believes that by excluding the effect of depreciation, amortization and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, FFO and FFO per share can facilitate comparisons of operating performance between periods. The Company reports FFO and FFO per share because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs and because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and publications about REITs. For these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per share. However, FFO does not represent cash generated from operating activities determined in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income attributable to common stockholders as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure of liquidity.


25


The table below reconciles FFO to net income for the three and nine months ended September 30, 2019 and 2018, respectively.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Dollars in thousands, excepts per share amounts)
2019
 
2018
 
2019
 
2018
Net income
$
2,647

 
$
1,999

 
$
6,163

 
$
6,288

Real estate depreciation and amortization
5,812

 
4,918

 
16,434

 
14,453

Total adjustments
5,812

 
4,918

 
16,434

 
14,453