10-Q 1 chct-2019q1x10q.htm 10-Q Document
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 MARCH 31, 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 18,862,792 shares of Common Stock, $0.01 par value per share, outstanding as of April 30, 2019.

1

COMMUNITY HEALTHCARE TRUST INCORPORATED
FORM 10-Q
March 31, 2019
TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 

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)
 
 
 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
Real estate properties
 
 
 
Land and land improvements
$
52,520

 
$
50,270

Buildings, improvements, and lease intangibles
425,763

 
394,527

Personal property
135

 
133

Total real estate properties
478,418

 
444,930

Less accumulated depreciation
(60,544
)
 
(55,298
)
Total real estate properties, net
417,874

 
389,632

Cash and cash equivalents
3,868

 
2,007

Restricted cash
166

 
385

Other assets, net
34,822

 
34,546

Total assets
$
456,730

 
$
426,570

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities
 
 
 
Debt, net
$
179,117

 
$
147,766

Accounts payable and accrued liabilities
3,351

 
3,196

Other liabilities
4,579

 
3,949

Total liabilities
187,047

 
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; 18,862,792 and 18,634,502 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
189

 
186

Additional paid-in capital
342,654

 
337,180

Cumulative net income
10,628

 
9,178

Accumulated other comprehensive (loss) income
(642
)
 
633

Cumulative dividends
(83,146
)
 
(75,518
)
Total stockholders’ equity
269,683

 
271,659

Total liabilities and stockholders' equity
$
456,730

 
$
426,570


See accompanying notes to the condensed consolidated financial statements.

3

COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(Unaudited; Dollars in thousands, except per share amounts)
 
Three Months Ended March 31,
 
2019
 
2018
REVENUES
 
 
 
Rental income
$
12,898

 
$
11,075

Other operating interest
543

 
354

 
13,441

 
11,429

 
 
 
 
EXPENSES
 
 
 
Property operating
3,075

 
2,364

General and administrative
1,785

 
1,193

Depreciation and amortization
5,246

 
4,916

 
10,106

 
8,473

 
 
 
 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND OTHER ITEMS
3,335

 
2,956

Interest expense
(2,054
)
 
(1,268
)
Interest and other income, net
169

 
184

INCOME FROM CONTINUING OPERATIONS
1,450

 
1,872

NET INCOME
$
1,450

 
$
1,872

 
 
 
 
NET INCOME PER COMMON SHARE:
 
 
 
Net income per common share – Basic
$
0.06

 
$
0.09

Net income per common share – Diluted
$
0.06

 
$
0.09

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-BASIC
17,954,670

 
17,573,683

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-DILUTED
17,954,670

 
17,573,683


See accompanying notes to the condensed consolidated financial statements.

4

COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(Unaudited; Dollars in thousands)

 
 
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
 
 
 
 
 
NET INCOME
$
1,450

 
$
1,872

 
Other comprehensive income (loss):
 
 
 
 
 
(Decrease) increase in fair value of cash flow hedges
(1,213
)
 
906

 
 
Reclassification for amounts recognized as interest expense
(62
)
 
68

 
Total other comprehensive (loss) income
(1,275
)
 
974

COMPREHENSIVE INCOME
$
175

 
$
2,846


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 Income (loss)
 
Cumulative Dividends
 
Total Stockholders' Equity
 
Shares
Amount
 
Shares
Amount
 
Balance at December 31, 2017
—

$
—

 
18,085,798

$
181

 
$
324,303

 
$
4,775

 
$
258

 
$
(46,143
)
 
$
283,374

Stock-based compensation
—

—

 
94,001

1

 
615

 
—

 
—

 
—

 
616

Unrecognized gain on cash flow hedges
—

—

 
—

—

 
—

 
—

 
906

 
—

 
906

Reclassification adjustment for losses included in net income (interest expense)
—

—

 
—

—

 
—

 
—

 
68

 
—

 
68

Net income
—

—

 
—

—

 
—

 
1,872

 
—

 
—

 
1,872

Dividends to common stockholders ($0.3975 per share)
—

—

 
—

—

 
—

 
—

 
—

 
(7,226
)
 
(7,226
)
Balance at March 31, 2018
—

$
—

 
18,179,799

$
182

 
$
324,918

 
$
6,647

 
$
1,232

 
$
(53,369
)
 
$
279,610

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
—

—

 
143,600

2

 
4,622

 
—

 
—

 
—

 
4,624

Stock-based compensation
—

—

 
84,690

1

 
852

 
—

 
—

 
—

 
853

Unrecognized loss on cash flow hedges
—

—

 
—

—

 
—

 
—

 
(1,213
)
 
—

 
(1,213
)
Reclassification adjustment for gains included in net income (interest expense)
—

—

 
—

—

 
—

 
—

 
(62
)
 
—

 
(62
)
Net income
—

—

 
—

—

 
—

 
1,450

 
—

 
—

 
1,450

Dividends to common stockholders ($0.4075 per share)
—

—

 
—

—

 
—

 
—

 
—

 
(7,628
)
 
(7,628
)
Balance at March 31, 2019
—

$
—

 
18,862,792

$
189

 
$
342,654

 
$
10,628

 
$
(642
)
 
$
(83,146
)
 
$
269,683


See accompanying notes to the condensed consolidated financial statements.

6

COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
OPERATING ACTIVITIES
 
 
 
Net income
$
1,450

 
$
1,872

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
5,421

 
5,133

Stock-based compensation
853

 
616

Straight-line rent receivable
(336
)
 
(415
)
Deferred income tax expense (benefit)
17

 
(132
)
Changes in operating assets and liabilities:
 
 
 
Other assets
(194
)
 
(696
)
Accounts payable and accrued liabilities
155

 
(309
)
Other liabilities
(36
)
 
(121
)
Net cash provided by operating activities
7,330

 
5,948

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Acquisitions of real estate
(32,743
)
 
(12,721
)
        Acquisitions of notes receivable
—

 
(2,201
)
Proceeds from the repayment of notes receivable
31

 
17

Capital expenditures on existing real estate properties
(622
)
 
(1,444
)
Net cash used in investing activities
(33,334
)
 
(16,349
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Net repayments on revolving credit facility
(43,000
)
 
(22,000
)
Term loan borrowings
75,000

 
40,000

Mortgage note repayments
(27
)
 
—

Dividends paid
(7,628
)
 
(7,226
)
Net proceeds from issuance of common stock
4,724

 
—

Equity issuance costs
(100
)
 
—

Debt issuance costs
(1,323
)
 
(218
)
Net cash provided by financing activities
27,646

 
10,556

Increase in cash and cash equivalents and restricted cash
1,642

 
155

Cash and cash equivalents and restricted cash, beginning of period
2,392

 
2,130

Cash and cash equivalents and restricted cash, end of period
$
4,034

 
$
2,285

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Interest paid
$
1,783

 
$
1,105

Invoices accrued for construction, tenant improvement and other capitalized costs
$
81

 
$
712

Reclassification between accounts and notes receivable
$
40

 
$
—

Reclassification of registration statement costs incurred in prior year to equity issuance costs
$
100

 
$
—

(Decrease) increase in fair value of cash flow hedges
$
(1,213
)
 
$
906

See accompanying notes to the condensed consolidated financial statements.

7

COMMUNITY HEALTHCARE TRUST INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 March 31, 2019, the Company had investments of approximately $478.4 million in 105 real estate properties, located in 29 states, totaling approximately 2.3 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 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 $1.4 million on the Company's Condensed Consolidated Statements of Income for the three months ended March 31, 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 standards 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 do not need to be 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 Income Statements. 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 right of use 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 right of use lease asset is included in other assets and the operating lease liability is included in other liabilities on the Company's Condensed Consolidated Balance Sheet.

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.



10

Note 2. Real Estate Investments

At March 31, 2019, the Company had investments of approximately $478.4 million in 105 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

 
$
4,608

 
$
29,285

 
$
—

 
$
33,893

 
$
4,515

Ohio
6

 
3,638

 
26,483

 
—

 
30,121

 
5,508

Texas
3

 
3,115

 
15,591

 
—

 
18,706

 
4,456

Illinois
2

 
1,136

 
11,831

 
—

 
12,967

 
2,664

Kansas
3

 
2,455

 
14,933

 
—

 
17,388

 
4,189

Iowa
1

 
2,241

 
9,014

 
—

 
11,255

 
2,468

Other states
15

 
4,355

 
35,828

 
—

 
40,183

 
4,649

 
35

 
21,548

 
142,965

 
—

 
164,513

 
28,449

Physician clinics:
 
 
 
 
 
 
 
 
 
 
 
Kansas
2

 
610

 
6,921

 
—

 
7,531

 
1,485

Illinois
6

 
2,888

 
9,539

 
—

 
12,427

 
540

Florida
4

 
253

 
9,484

 
—

 
9,737

 
912

Other states
9

 
2,903

 
21,462

 
—

 
24,365

 
3,459

 
21

 
6,654

 
47,406

 
—

 
54,060

 
6,396

Surgical centers and hospitals:
 
 
 
 
 
 
 
 
 
 
 
Louisiana
1

 
1,683

 
21,353

 
—

 
23,036

 
1,244

Michigan
2

 
637

 
8,278

 
—

 
8,915

 
2,434

Illinois
2

 
2,349

 
8,222

 
—

 
10,571

 
1,411

Florida
1

 
271

 
7,069

 
—

 
7,340

 
810

Arizona
2

 
576

 
5,389

 
—

 
5,965

 
1,603

Other states
7

 
2,130

 
17,857

 
—

 
19,987

 
4,074

 
15

 
7,646

 
68,168

 
—

 
75,814

 
11,576

Specialty centers:
 
 
 
 
 
 
 
 
 
 
 
Illinois
3

 
3,489

 
24,733

 
—

 
28,222

 
2,117

Other states
22

 
5,170

 
38,344

 
—

 
43,514

 
7,331

 
25

 
8,659

 
63,077

 
—

 
71,736

 
9,448

Behavioral facilities:
 
 
 
 
 
 
 
 
 
 
 
West Virginia
1

 
2,138

 
22,897

 
—

 
25,035

 
880

Illinois
1

 
1,300

 
18,803

 
—

 
20,103

 
1,332

Indiana
2

 
1,126

 
6,040

 
—

 
7,166

 
351

Other states
3

 
1,411

 
12,840

 
—

 
14,251

 
499

 
7

 
5,975

 
60,580

 
—

 
66,555

 
3,062

Inpatient rehabilitation facilities:
 
 
 
 
 
 
 
 
 
 
 
Texas
1

 
1,515

 
27,001

 
—

 
28,516

 
82

 
1

 
1,515

 
27,001

 
—

 
28,516

 
82

Long-term acute care hospitals:
 
 
 
 
 
 
 
 
 
 
 
Indiana
1

 
523

 
14,405

 
—

 
14,928

 
1,222

 
1

 
523

 
14,405

 
—

 
14,928

 
1,222

Corporate property
—

 
—

 
2,161

 
135

 
2,296

 
309

  Total real estate investments
105

 
$
52,520

 
$
425,763

 
$
135

 
$
478,418

 
$
60,544




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 March 31, 2019, are as follows (in thousands):
2019 (nine months ending December 31)
$
32,823

2020
41,304

2021
38,200

2022
34,688

2023
30,177

2024 and thereafter
156,754

 
$
333,946


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 $0.3 million and $0.4 million, respectively, for the three months ended March 31, 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 $1.5 million and $1.6 million, respectively, at March 31, 2019 and December 31, 2018.

Note 4. Real Estate Acquisitions

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 three months ended March 31, 2019 for these properties were approximately $0.4 million and $0.2 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.

Note 5. Mortgage and Other Notes Receivable

The Company had one mortgage note receivable outstanding as of December 31, 2017 with a principal balance of $10.6 million and interest receivable of $0.6 million, which is included in other assets. The borrower and several related entities (the "Borrower") filed for voluntary bankruptcy on June 23, 2017. At the time of filing for bankruptcy, the Borrower was current on all obligations to the Company, but no payments were received during the bankruptcy.

On December 28, 2017, the Company purchased $11.45 million face value of certain promissory notes, secured by accounts receivable of the Borrower, for $8.75 million from a syndicate of banks, a $2.7 million discount to face

12
Notes to Condensed Consolidated Financial Statements - Continued

value, and in the first quarter of 2018 acquired $2.2 million of certain promissory notes, secured by the operations of two facilities related to the Borrower, but were not included in the bankruptcy, for a total investment in these promissory notes of approximately $10.95 million.

On April 25, 2018, the Company provided a $23.0 million loan, included in other assets, to a newly formed company (Newco), secured by all assets and ownership interests in seven long-term acute care hospitals and one inpatient rehabilitation hospital that, along with a series of investments by the management of Newco, allowed Newco to acquire certain assets of the Borrower.

Also on April 25, 2018, $10.95 million of the promissory notes discussed above, approximately $0.26 million of interest on those promissory notes, approximately $0.25 million in fees and reimbursement of expenses, and approximately $6.7 million principal and accrued interest related to its mortgage note receivable were satisfied with proceeds from the loan. In addition, the Company received title to the property previously financed by the mortgage note receivable at an approximate $4.5 million valuation. No impairment was recognized by the Company.

Note 6. Debt, net

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

$
43,000

3/23
A-1 Term Loan, net
49,778

49,759

3/22
A-2 Term Loan, net
49,735

49,722

3/24
A-3 Term Loan, net
74,341

—

3/26
Mortgage Note Payable
5,263

5,285

5/24
 
$
179,117

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

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.


13
Notes to Condensed Consolidated Financial Statements - Continued

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 repaid the amounts outstanding under its Revolving Credit Facility with proceeds from the A-3 Term Loan and therefore had the full borrowing capacity under the Revolving Credit Facility of $150.0 million at March 31, 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 7 for more details on the interest rate swaps. At March 31, 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 March 31, 2019.

Note 7. 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.

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 this objective, the Company primarily uses interest rate swaps and/or caps 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. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates rise above the cap strike rate on the contract.


14
Notes to Condensed Consolidated Financial Statements - Continued

As of March 31, 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 March 31, 2019 and December 31, 2018.

 
Asset Derivatives Fair Value at
 
Liability Derivatives Fair Value at
 
March 31, 2019
December 31, 2018
Balance Sheet Classification
 
March 31, 2019
December 31, 2018
Balance Sheet Classification
Interest rate swaps
$
215

$
902

Other assets
 
$
857

$
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 income and are subsequently reclassified to interest expense in the period that the hedged forecasted transaction affects earnings.

Amounts reported in accumulated other comprehensive income 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 $0.2 million will be reclassified from other comprehensive income ("OCI") as a decrease 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 months ended March 31, 2019 and 2018.

 
Three Months Ended March 31,
(Dollars in thousands)
2019
2018
Amount of unrealized (loss) gain recognized in OCI on derivative
$
(1,213
)
$
906

Amount of (gain) loss reclassified from accumulated OCI into interest expense
$
(62
)
$
68

Total Interest Expense presented in the Condensed Consolidated Statements of Income in which the effects of the cash flow hedges are recorded
$
2,054

$
1,268


Credit-risk-related Contingent Features
As of March 31, 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 $0.7 million. As of March 31, 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 $0.7 million at March 31, 2019.

Note 8. Stockholders’ Equity

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

18,085,798

Issuance of common stock
143,600

334,700

Restricted stock-based awards
84,690

214,004

Balance, end of period
18,862,792

18,634,502



15
Notes to Condensed Consolidated Financial Statements - Continued

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.

During the first quarter of 2019, the Company issued, through its ATM Program, 143,600 shares of common stock at an average gross sales price of $33.57 per share and received net proceeds of approximately $4.7 million. As of March 31, 2019, the Company had approximately $84.8 million remaining that may be issued under the ATM Program.

Note 9. Net Income Per Common Share

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



Three Months Ended
March 31, 2019
(Dollars in thousands, except per share data)
2019
 
2018
Net income
$
1,450

 
$
1,872

          Participating securities' share in earnings
(324
)
 
(241
)
Net income, less participating securities' share in earnings
$
1,126

 
$
1,631

 
 
 
 
Weighted average Common Shares outstanding
 
 
 
Weighted average Common Shares outstanding
18,735,673

 
18,164,132

Unvested restricted shares
(781,003
)
 
(590,449
)
Weighted average Common Shares outstanding–Basic
17,954,670

 
17,573,683

Dilutive potential common shares
—

 
—

Weighted average Common Shares outstanding –Diluted
17,954,670

 
17,573,683

 
 
 
 
Basic Net Income per Common Share
$
0.06

 
$
0.09

 
 
 
 
Diluted Net Income per Common Share
$
0.06

 
$
0.09


Note 10. 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 March 31, 2019 and 2018 was approximately $0.9 million and $0.6 million, respectively.


16

A summary of the activity under the 2014 Incentive Plan for the three months ended March 31, 2019 and 2018 is included in the table below.
 
 
Three Months Ended March 31,
 
 
2019
2018
Stock-based awards, beginning of period
709,487

512,115

 
Stock in lieu of compensation
42,525

47,027

 
Stock awards
42,165

46,974

 
   Total stock granted
84,690

94,001

 
Vested shares
—

—

Stock-based awards, end of period
794,177

606,116


Note 11. Other Assets

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

 
Balance as of
(Dollars in thousands)
March 31, 2019
December 31, 2018
Notes receivable
$
24,119

$
24,110

Accounts and interest receivables
2,092

2,158

Straight-line rent receivables
3,593

3,254

Prepaid assets
515

487

Deferred financing costs, net
848

318

Leasing commissions, net
862

790

Deferred tax asset
2,008

2,024

Fair value of interest rate swaps
215

902

Above-market intangible assets, net
162

168

Right of use leased asset
141

—

Other
267

335

 
$
34,822

$
34,546


The Company's $24.1 million in notes receivable at March 31, 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 (Newco), 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. See Note 5 for more detail.

•
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

17

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 March 31, 2019 are summarized in the table below.

Classification
Carrying Amount
(in millions)
Maximum Exposure to Loss
(in millions)
Notes receivable
$
0.9

$
0.9

Note receivable
$
23.0

$
23.0


Highlands Transition Update
As previously announced, the Company experienced payment issues with the old operator of Highlands Hospital ("Highlands"). Effective February 11, 2019, the Company signed a transition agreement (the "Transition Agreement"), to transition the property to a new operator and signed a lease with a new operator.

The old operator and new operator have signed an asset purchase agreement pursuant to which the new operator will take over the facility. In addition, the old operator and new operator have signed a management agreement and the new operator is currently managing Highlands pursuant to the management agreement. The new operator continues to perform due diligence and is in the process of preparing for transfer of licenses and related items customary for these types of transactions. We cannot provide assurance as to the timing, or whether, this transaction will actually close.

The new lease will be effective upon the transfer of the licenses to the new operator, which is anticipated to happen in the second half of 2019. The new lease provides for rental payments approximately equal to the amounts due under the previous agreements with the old operator.

The Company is receiving monthly payments under the Transition Agreement which approximate the amounts due from the old operator under the previous agreements. These payments are to continue as long as the Transition Agreement is in place. The Transition Agreement will terminate when the licenses are transferred to the new operator, at which time the new lease will become effective.

Since the Transition Agreement became effective in February, the Company only received payments during the first quarter for February and March and thus did not recognize revenue for the month of January representing approximately $0.3 million.

In addition, the Company incurred professional fees (legal and accounting) totaling over $0.1 million related to the workout and transition.

The Transition Agreement includes provisions for the Company to receive payment for the amounts due from the old operator that remain unpaid. The Company anticipates collecting all amounts due.

Note 12. 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.


18

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 March 31, 2019 and December 31, 2018, using level 2 inputs.

 
March 31, 2019
 
December 31, 2018
(Dollars in thousands)
Carrying Value
Fair Value
 
Carrying Value
Fair Value
Notes receivable
$
24,119

$
23,948

 
$
24,110

$
23,936

Interest rate swap asset
$
215

$
215

 
$
902

$
902

Interest rate swap liability
$
857

$
857

 
$
269

$
269

Mortgage note payable
$
5,365

$
5,277

 
$
5,391

$
5,307


Note 13. Subsequent Events

Dividend Declared
On May 1, 2019, the Company’s Board of Directors declared a quarterly common stock dividend in the amount of $0.41 per share. The dividend is payable on May 31, 2019 to stockholders of record on May 17, 2019.

Subsequent Acquistion
On April 30, 2019, the Company acquired one real estate property that was newly constructed totaling approximately 81,000 square feet for an aggregate purchase price and cash consideration of approximately $27.0 million. Upon acquisition, the property was 100.0% leased with lease expiration in 2034. The Company funded the acquisition with proceeds from the Company's Revolving Credit Facility totaling $23.0 million with the remainder from cash on hand.


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 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.

2nd Quarter 2019 Acquisition

On April 30, 2019, the Company acquired one real estate property that was newly constructed totaling approximately 81,000 square feet for an aggregate purchase price and cash consideration of approximately $27.0 million. Upon acquisition, the property was 100.0% leased with lease expiration in 2034. The Company funded the acquisition with proceeds from the Company's Revolving Credit Facility totaling $23.0 million with the remainder from cash on hand.

Acquisition Pipeline

The Company has two properties under definitive purchase agreements for an aggregate expected purchase price of approximately $4.9 million. The Company's expected aggregate returns on these investments range from approximately 9.3% to 9.4%. The Company anticipates the properties will close during the second quarter of 2019. However, the Company is currently performing due diligence procedures customary for these types of transactions and cannot provide assurance as to the timing of when, or whether, the transaction will actually close.

The Company also has four properties under definitive purchase agreements, to be acquired after completion and occupancy, for an aggregate expected purchase price of approximately $76.0 million. The Company's expected aggregate returns on these investments is approximately 11.0%. The Company expects to close these properties through the end of 2019; 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 March 31, 2019, our real estate portfolio was approximately 88.9% leased. During the first three months of 2019, we had expiring or terminated leases related to approximately 42,000 square feet and leased or renewed leases relating to approximately 50,000 square feet.

Highlands Transition Update

As previously announced, the Company experienced payment issues with the old operator of Highlands Hospital ("Highlands"). Effective February 11, 2019, the Company signed a transition agreement (the "Transition Agreement"), to transition the property to a new operator and signed a lease with a new operator.

The old operator and new operator have signed an asset purchase agreement pursuant to which the new operator will take over the facility. In addition, the old operator and new operator have signed a management agreement and the new operator is currently managing Highlands pursuant to the management agreement. The new operator continues

21

to perform due diligence and is in the process of preparing for transfer of licenses and related items customary for these types of transactions. We cannot provide assurance as to the timing, or whether, this transaction will actually close.

The new lease will be effective upon the transfer of the licenses to the new operator, which is anticipated to happen in the second half of 2019. The new lease provides for rental payments approximately equal to the amounts due under the previous agreements with the old operator.

The Company is receiving monthly payments under the Transition Agreement which approximate the amounts due from the old operator under the previous agreements. These payments are to continue as long as the Transition Agreement is in place. The Transition Agreement will terminate when the licenses are transferred to the new operator, at which time the new lease will become effective.

Since the Transition Agreement became effective in February, the Company only received payments during the first quarter for February and March and thus did not recognize revenue for the month of January representing approximately $0.3 million.

In addition, the Company incurred professional fees (legal and accounting) totaling over $0.1 million related to the workout and transition.

The Transition Agreement includes provisions for the Company to receive payment for the amounts due from the old operator that remain unpaid. The Company anticipates collecting all amounts due.

Though the Company has experienced some short-term effects from the timing of receipts or reimbursement of expenses, 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.

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 months ended March 31, 2019 compared to the same period in 2018 have most significantly been impacted by its real estate acquisitions. As of March 31, 2019 and 2018, the Company had investments in real estate properties totaling approximately $478.4 million and $413.3 million, respectively.

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

The table below shows our results of operations for the three months ended March 31, 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 March 31,
 
Increase (Decrease) to
Net Income
(dollars in thousands)
2019
 
2018
 
$
%
REVENUES
 
 
 
 
 
 
Rental income
$
12,898

 
$
11,075

 
$
1,823

16.5
 %
Other operating interest
543

 
354

 
189

53.4
 %
 
13,441

 
11,429

 
2,012

17.6
 %
EXPENSES
 
 
 
 
 
 
Property operating
3,075

 
2,364

 
(711
)
(30.1
)%
General and administrative
1,785

 
1,193

 
(592
)
(49.6
)%
Depreciation and amortization
5,246

 
4,916

 
(330
)
(6.7
)%
 
10,106

 
8,473

 
(1,633
)
(19.3
)%
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND OTHER ITEMS
3,335

 
2,956

 
379

12.8
 %
Interest expense
(2,054
)
 
(1,268
)
 
(786
)
(62.0
)%
Other income
169

 
184

 
(15
)
(8.2
)%
INCOME FROM CONTINUING OPERATIONS
1,450

 
1,872

 
(422
)
(22.5
)%
NET INCOME
$
1,450

 
$
1,872

 
$
(422
)
(22.5
)%

Revenues

Revenues increased approximately $1.8 million, or 16.5%, for the three months ended March 31, 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 30.1%, for the three months ended March 31, 2019 compared to the same period in 2018 mainly due to acquisitions of real estate.

General and administrative expenses increased approximately $0.6 million, or 49.6%, for the three months ended March 31, 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 $0.3 million; and state and federal income taxes and franchise taxes increased approximately $0.3 million in the first quarter of 2019 compared to the same period in 2018.


23

Depreciation and amortization expense increased approximately $0.3 million, or 6.7%, for the three months ended March 31, 2019 compared to the same period in 2018. Acquisitions accounted for an increase of approximately $1.0 million, offset by a decrease of approximately $0.7 million in amortization due to fully depreciated real estate lease intangibles which generally have a shorter depreciable life than a building.

Interest expense

Interest expense increased approximately $0.8 million, or 62.0%, for the three months ended March 31, 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 weighted average interest rate on the Revolving Credit Facility in the first quarter of 2019 compared to the same period in 2018.


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.


24

The table below reconciles FFO to net income for the three months ended March 31, 2019 and 2018, respectively.
 
Three Months Ended
March 31,
(Dollars in thousands, excepts per share amounts)
2019
 
2018
Net income
$
1,450

 
$
1,872

Real estate depreciation and amortization
5,282

 
4,911

Total adjustments
5,282

 
4,911

Funds from Operations
$
6,732

 
$
6,783

Funds from Operations per Common Share-Basic
$
0.38

 
$
0.39

Funds from Operations per Common Share-Diluted
$
0.37

 
$
0.38

Weighted Average Common Shares Outstanding-Basic
17,954,670

 
17,573,683

Weighted Average Common Shares Outstanding-Diluted (1)
18,343,051

 
17,791,436

(1) Diluted weighted average common shares outstanding for FFO are calculated based on the treasury method, rather than the 2-class method used to calculate earnings per share.

Liquidity and Capital Resources

The Company monitors its liquidity and capital resources and relies on several key indicators in its assessment of capital markets for financing acquisitions and other operating activities as needed, including the following:

•
Leverage ratios and financial covenants included in our Credit Facility;

•
Dividend payout percentage; and

•
Interest rates, underlying treasury rates, debt market spreads and equity markets.

The Company uses these indicators and others to compare its operations to its peers and to help identify areas in which the Company may need to focus its attention.

Sources and Uses of Cash

The Company derives most of its revenues from its real estate property and notes portfolio, collecting rental income, operating expense reimbursements and interest based on contractual arrangements with its tenants and borrowers. These sources of revenue represent our primary source of liquidity to fund our dividends, general and administrative expenses, property operating expenses, interest expense on our Credit Facility and other expenses incurred related to managing our existing portfolio and investing in additional properties. To the extent additional resources are needed, the Company will fund its investment activity generally through equity or debt issuances either in the public or private markets or through proceeds from our Credit Facility.

The Company expects to meet its liquidity needs through cash on hand, cash flows from operations and cash flows from sources discussed above. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs.

The Company's Credit Facility, as amended on March 29, 2019, provides for a $150.0 million Revolving Credit Facility and $175.0 million in Term Loans, as well as an accordion feature which allows borrowings up to a total of $525.0 million, including the ability to add and fund additional term loans. Note 6 to the Condensed Consolidated Financial Statements provides more details on the Company's Credit Facility and the amendment on March 29, 2019. At March 31, 2019, the Company had borrowed $175.0 million in Term Loans and had its full borrowing capacity under the Revolving Credit Facility of $150.0 million. At March 31, 2019, our debt to total book capitalization ratio was approximately 39.9%.

25


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. Also, the Company’s present financing policy prohibits incurring debt (secured or unsecured) in excess of 40% of its total book capitalization. The Company was in compliance with its financial covenants under its Credit Facility as of March 31, 2019.

2nd Quarter 2019 Acquisition

On April 30, 2019, the Company acquired one real estate property that was newly constructed totaling approximately 81,000 square feet for an aggregate purchase price and cash consideration of approximately $27.0 million. Upon acquisition, the property was 100.0% leased with lease expiration in 2034. The Company funded the acquisition with proceeds from the Company's Revolving Credit Facility totaling $23.0 million with the remainder from cash on hand.

Acquisition Pipeline

The Company has two properties under definitive purchase agreements for an aggregate expected purchase price of approximately $4.9 million. The Company's expected aggregate returns on these investments range from approximately 9.3% to 9.4%. The Company anticipates the properties will close during the second quarter of 2019. However, the Company is currently performing due diligence procedures customary for these types of transactions and cannot provide assurance as to the timing of when, or whether, the transaction will actually close.

The Company also has four properties under definitive purchase agreements, to be acquired after completion and occupancy, for an aggregate expected purchase price of approximately $76.0 million. The Company's expected aggregate returns on these investments is approximately 11.0%. The Company expects to close these properties through the end of 2019; 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.

Universal Shelf S-3 Registration Statement

The Company has approximately $620.2 million remaining to be issued under its Form S-3 registration statement filed on September 13, 2016 with the Securities and Exchange Commission, and declared effective on September 26, 2016. The registration statement allows us to offer debt or equity securities (or a combination thereof) from time to time.

ATM Program

During the first quarter of 2019, the Company issued, through its ATM Program, 143,600 shares of common stock at an average gross sales price of $33.57 per share and received net proceeds of approximately $4.7 million, as discussed in more detail in Note 8 to the Condensed Consolidated Financial Statements. The proceeds were used to repay outstanding balances under the Company's Credit Facility and for general corporate purposes.

Operating Activities

Cash flows provided by operating activities for the three months ended March 31, 2019 and 2018 were approximately $7.3 million and $5.9 million, respectively. Cash flows provided by operating activities were generally provided by contractual rents, net of expenses, on our real estate property portfolio.


26

Investing Activities

Cash flows used in investing activities for the three months ended March 31, 2019 and 2018 were approximately $33.3 million and $16.3 million, respectively. During the three months ended March 31, 2019, the Company invested in two properties for an aggregate cash consideration of approximately $32.7 million. During the three months ended March 31, 2018, the Company invested in three properties for an aggregate cash consideration of approximately $12.7 million. In addition, the Company acquired $2.2 million of certain promissory notes secured by two facilities related to its Borrower, discussed in more detail in Note 5 to the Condensed Consolidated Financial Statements.

Financing Activities

Cash flows provided by financing activities for the three months ended March 31, 2019 and 2018 were approximately $27.6 million and $10.6 million, respectively. During the three months ended March 31, 2019, the Company amended its Credit Facility which provided an additional $75.0 million Term Loan. The Company used the net proceeds from the Term Loan to repay outstanding balances under its Revolving Credit Facility. The Company also sold shares under its ATM Program and received net proceeds of approximately $4.7 million, and paid dividends totaling $7.6 million. During the three months ended March 31, 2018, the Company borrowed $40.0 million under its Term Loans, which was used to repay outstanding amounts on its Revolving Credit Facility, and paid dividends totaling $7.2 million.

Security Deposits

As of March 31, 2019, the Company held approximately $1.1 million in security deposits for the benefit of the Company in the event the obligated tenant fails to perform under the terms of its respective lease. Generally, the Company may, at its discretion and upon notification to the tenant, draw upon the security deposits if there are any defaults under the leases.

Dividends

The Company is required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to maintain its qualification as a REIT.

On May 1, 2019, the Company’s Board of Directors declared a quarterly common stock dividend in the amount of $0.41 per share. The dividend is payable on May 31, 2019 to stockholders of record on May 17, 2019. This rate equates to an annualized dividend of $1.64 per share.

The ability of the Company to pay dividends is dependent upon its ability to generate cash flows and to make accretive new investments.


27

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We may use certain derivative financial instruments to manage, or hedge, interest rate risks related to our borrowings. We will not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based upon their credit rating and other factors. An interest rate swap is a contractual agreement entered into by two counterparties under which each agrees to make periodic payments to the other for an agreed period of time based on a notional amount of principal. Under the most common form of interest rate swap, known from our perspective as a floating-to-fixed interest rate swap, a series of floating, or variable, rate payments on a notional amount of principal is exchanged for a series of fixed interest rate payments on such notional amount.


ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on this evaluation, Company’s management has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports it files or submits under the Exchange Act.

Changes In Internal Control Over Financial Reporting
There were no changes in our system of internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II. OTHER INFORMATION


ITEM 1.    LEGAL PROCEEDINGS

The Company may, from time to time, be involved in litigation arising in the ordinary course of business or which may be expected to be covered by insurance. The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.


ITEM 1A.    RISK FACTORS

In addition to the other information set forth in this quarterly report, an investor should consider the risk factors included in its Annual Report on Form 10-K for the year ended December 31, 2018, and other reports that may be filed by the Company.


ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

28


ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.   MINE SAFETY DISCLOSURES

None.

ITEM 5.   OTHER INFORMATION

None.
ITEM 6.    EXHIBITS
The exhibits required by Item 601 of Regulation S-X which are filed with this report are listed in the Exhibit Index and are hereby incorporated in by reference.



29

EXHIBIT INDEX
Exhibit
Number
Description
3.1
3.2
10.1 *
10.2
10.3
10.4
10.5
10.6
31.1 *
31.2 *
32.1 **
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 

(1)
Filed as Exhibit 3.1 to Amendment No. 2 to the Registration Statement on Form S-11 of the Company filed with the Securities and Exchange Commission on May 6, 2015 (Registration No. 333-203210) and incorporated herein by reference.
(2)
Filed as Exhibit 3.2 to the Registration Statement on Form S-11 of the Company filed with the Securities and Exchange Commission on April 2, 2015 (Registration No. 333-203210) and incorporated herein by reference.
(3)
Filed as Exhibit 10.1 to the Form 8-K of the Company filed with the Securities and Exchange Commission on January 3, 2019 (File No. 001-37401) and incorporated herein by reference.
(4)
Filed as Exhibit 10.2 to the Form 8-K of the Company filed with the Securities and Exchange Commission on January 3, 2019 (File No. 001-37401) and incorporated herein by reference.
(5)
Filed as Exhibit 10.2 to the Form 8-K of the Company filed with the Securities and Exchange Commission on March 11, 2019 (File No. 001-37401) and incorporated herein by reference.
(6)
Filed as Exhibit 10.1 to the Form 8-K of the Company filed with the Securities and Exchange Commission on March 11, 2019 (File No. 001-37401) and incorporated herein by reference.
(7)
Filed as Exhibit 10.3 to the Form 8-K of the Company filed with the Securities and Exchange Commission on January 3, 2019 (File No. 001-37401) and incorporated herein by reference.
_________
*
Filed herewith.
**
Furnished herewith.


30

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 7, 2019
 
COMMUNITY HEALTHCARE TRUST INCORPORATED
 
 
 
 
By:
/s/ Timothy G. Wallace
 
 
Timothy G. Wallace
 
 
Chief Executive Officer and President
 
 
 
 
By:
/s/ David H. Dupuy
 
 
David H. Dupuy
 
 
Executive Vice President and Chief Financial Officer

31