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Community Healthcare Trust Inc (NYSE:CHCT)
Q4 2019 Earnings Call
Feb 26, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Community Healthcare Trust's 2019 Fourth Quarter and Year-end Earnings Release Conference Call. On the call today, the Company will discuss its 2019 fourth quarter and year-end financial results. It will also discuss progress made in various aspects of its business. Following the remarks, the phone lines will be opened for a question-and-answer session. The Company's earnings release was distributed last evening and has also been posted on its website www.chct.reit.

The Company wants to emphasize that some of the information that may be discussed on this call will be based on information as of today, February 26th, 2020, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Company's disclosures regarding forward-looking statements in its earnings release as well as its risk factors and MD&A in its SEC filings. The Company undertakes no obligation to update forward-looking statements, whether as the result of new information, future developments or otherwise, except as may be required by law.

During this call, the Company will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in its earnings release, which is posted on its website. Call participants are advised that this conference call is being recorded for playback purposes. An archive of the call will be made available on the Company's Investor Relations website for approximately 30 days and is the property of the Company. This call may not be recorded or otherwise reproduced or distributed without the Company's prior written permission.

Now I would like to turn the call over to Timothy Wallace, Chairman, Chief Executive Officer and President of Community Healthcare Trust Incorporated.

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Good morning and thank you everyone for joining us today for our 2019 fourth quarter conference call. On the call with me today is Dave Dupuy, our Chief Financial Officer; Page Barnes, our Chief Operating Officer and Leigh Ann Stach, our Chief Accounting Officer.

Again as is our normal process, our earnings announcement and supplemental data report were released last night and filed with an 8-K and our Annual Report on Form 10-K was also filed last night. Once again, as usual, we were very busy during the fourth quarter. However, it was basically business as usual. As you know we have an active ATM program in place. During the fourth quarter, the Company sold 1,352,985 shares of stock through its [Phonetic] ATM program at an average gross sales price of $45.73 per share. We received net proceeds of approximately $60.6 million at an approximate 3.63% current equity yield.

During all of 2019, the company through its ATM program sold 2,674,347 shares of common stock at an average sales price of $42.84 per share and received net proceeds of approximately $112 million -- $112.3 million. During the fourth quarter, we acquired seven properties with a total of approximately 113,000 square feet for a purchase price of approximately $34.8 million. These properties were 100% leased with leases running through 2034 and anticipated annual returns of 9.23% to 11%.

During 2019 the Company acquired 15 properties for an aggregate purchase price of approximately $152 million. The properties were approximately 99.5% leased with lease expirations through 2034. So far in the first quarter we have acquired three properties with a total of approximately 56,000 square feet for a purchase price of approximately $11.7 million. These properties are approximately 96.1% leased with leases running through 2026 and anticipated annual returns of 9.1% to 9.5%. The Company has two properties under definitive purchase agreements for an aggregate expected purchase price of approximately $6.3 million and expected aggregate returns from approximately 9.4% to 9.9%. The Company is currently performing due diligence and expects to close these properties in the first quarter.

We also have four additional properties under definitive purchase and sale agreement to be acquired after completion and occupancy. That's for an aggregate expected investment of $73.4 million. The expected return on these investments should range from approximately 9.5% to 11%. We expect to close on one of these in the first quarter of 2020, representing an investment of approximately $19 million and a return of approximately 11%. We anticipate the rest to be completed and closed from the third quarter of 2020 through the first quarter of '21. And let me go into a little more detail on this because I think our release was confusing to at least a couple of people, but basically we're closing -- of the four properties we're closing one in the first quarter. We anticipate closing one in the third quarter of 2020, one in the fourth quarter of 2020 and one in the first half of 2021 and that one has gotten pushed because there was a fire at the facility during the construction process, and they are having to go back and redo several things. So that's the reason that that kind of got pushed out into 2021.

We continue to have many properties under review and have signed term sheets on several properties with anticipated returns of 9% to 10%. We anticipate having enough availability on our revolver to fund our acquisitions and we expect to continue to opportunistically utilize the ATM to strategically access the equity market.

Occupancy was up slightly during the fourth quarter. We continue to see a lot of activity on the leasing front and believe we will see the occupancy level pick up over the next few quarters. Through a combination of new and extended leases and our acquisitions, we have been able to increase and maintain our weighted average remaining lease term at approximately 7.7 years.

On another front, we declared our dividend for the third quarter and raised it to $0.4175 per common share. This equates to an annualized dividend of $1.67 per share and I continue to be proud to say we have raised our dividend every quarter since our IPO. After this dividend is paid, we will have paid almost $120 million in dividends in about 4.5 years of operations. The important point of this is that basically we will have paid out about what we raised in the IPO after we make this dividend payment. So in 4.5 years, we've been able to return to our investors what they originally invested with us.

Now before I finish my comments, I would like to comment on a couple of items. First, on Highland Hospital, the filing of a pre-packaged bankruptcy to expedite and facilitate the transfer of license is imminent with an anticipated sale to the new operator that continues to manage the facility. We do not expect our cash flow from Highland to change as we continue to collect monthly payments roughly equivalent to what we should be collecting. Obviously there are various contingencies that might still occur such that the outcome could be different than what we think now, but we believe we have addressed the situation as best we can.

Second, you will note that we have recorded a valuation allowance related to the deferred tax asset that was generated last year by the impairment of the Highland mezzanine loan. The recording of the deferred tax asset last year was generated by certain technical accounting rules based on the facts that existed at that time and the valuation allowance this year was generated in essence by change in those facts basically related to in which entities we hold various assets. Of course the loan impairment, generation of the deferred tax asset and the valuation allowance are all non-cash items. Based on consultations with NAREIT and our auditors, it was determined that all of these items should be added back to net income to arrive at AFFO. Therefore, we have reclassed the amounts for 2018 to adjustments to arrive at FFO from adjustments to arrive at AFFO in the reconciliation from net income to FFO and then to AFFO.

That was the last set [Phonetic]. I believe that takes care of the items I wanted to cover. So I will hand things off to Dave to cover the numbers.

David H. Dupuy -- Executive Vice President and Chief Financial Officer

Great. Thanks, Tim. Before covering the financial results, I wanted to provide a couple of quick updates. First as it relates to environmental, social and governance, or ESG, very shortly we will be adding a new section to our website at www.chct.reit under the Investor Relations tab that will include ESG guidelines and policies. Feel free to reach out directly to me should you have any questions about these guidelines and policies.

Second, as many of you are aware, we achieved large accelerated filer status, which required us to expand our audit to include an internal control over financial reporting or ICFR audit in compliance with SOX 404. I am proud of how well the team worked together to comply with this expanded audit and pleased to say that we are fully in compliance with these additional SEC requirements.

Now onto the financial results for the fourth quarter and year ended December 31st, 2019. Total revenue for the fourth quarter of 2019 was approximately $16.8 million versus $12.2 million for the same period in 2018, representing 38% growth over the fourth quarter of 2018. Total revenue for 2019 was $60.8 million compared to $48.6 million for 2018, representing 25.3% growth over the prior year. In addition, our real estate portfolio was approximately 90% leased at year-end.

On a pro forma basis, if all the 2019 fourth quarter acquisitions had occurred on the first day of the fourth quarter, total revenue would have increased by an additional $294,000 to a pro forma total of $17.1 million for the quarter. From an expense perspective, property operating expenses, or POE, increased in the fourth quarter from $2.4 million in 2018 to $2.8 million in 2019 or approximately 16%. For the year POE was $12.2 million in 2019 compared with $9.9 million in the prior year resulting in growth of approximately 23%. It should be noted, however, that the increase in POE is in line with the growth we are experiencing in total revenue period to period.

In the fourth quarter G&A increased from $1.5 million in 2018 to $2.1 million in 2019. For the year, G&A grew from $5.6 million to $7.7 million or approximately 37%. This was driven primarily by increases in amortization of deferred compensation, new employee-related costs, as well as increased legal and accounting professional fees incurred to comply with the additional SEC requirements of being a large accelerated filer. Although G&A will continue to grow as we add properties, we expect the level of growth to moderate in 2020.

The Company reported net income of $2,213,000 for the fourth quarter of 2019 versus a net loss of $1,885,000 for the same period in 2018. As discussed earlier in the call, the prior year's net loss related to the impairment of the $5 million note receivable having to do with Highland Hospital. For the year 2019 net income was $8.4 million versus $4.4 million in 2018. I am pleased to report that funds from operations, or FFO, for the fourth quarter of 2019 grew to $9.5 million or $0.47 per diluted share compared to $6.6 million or $0.37 per diluted share in the fourth quarter of 2018. Adjusted funds from operations or AFFO, which adjusts for straight-line rent and stock-based compensation, totaled $9.9 million or $0.49 per diluted share, compared with the fourth quarter of 2018 of $7.2 million or $0.41 per diluted share.

And from a pro forma perspective, if all of 2019 fourth quarter acquisitions occurred on the first day of the fourth quarter, AFFO would have increased by approximately $258,000 to a pro forma total of $10.1 million, increasing AFFO $0.50 per share.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Nate Crossett with Berenberg. Please go ahead.

Nate Crossett -- Berenberg -- Analyst

Hey. Good morning, guys.

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Good morning, Nate.

Nate Crossett -- Berenberg -- Analyst

Hi. Maybe you can help us size the pipeline outside of what you've already announced, what does the deal flow look like, maybe you can give us some guideposts for acquisition volumes in 2020.

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Basically Nate, and thanks for the question, we haven't changed kind of our approach to this from the very beginning. We are still anticipating that in 2020 we'll close somewhere between $120 million and $150 million. We anticipate doing that in 2021. We feel like with where we've got our cost of capital at this point, thanks to all of our investors and the support of our banks that are investing in the properties that we are the margins that we are that we can generate significant returns. So we don't see any need to change what we're doing. So the answer still is $120 million to $150 million a year.

Nate Crossett -- Berenberg -- Analyst

Okay. What about just velocity of deal flow this year? Has it picked up or are there certain property types you're seeing more or less opportunities?

Timothy G. Wallace -- Community Healthcare Trust Incorporated

I mean -- I think we're still seeing about the same amount of opportunities. And we will say, I think probably it's shifted some to what we've started calling a specialty behavior -- specialty behavioral type emphasis. We see a lot of stuff like autism and other things that are kind of a specialty behavioral. We are still seeing a lot of stuff on the rehab side. We still see a lot of physician office in those types. I mean, we've got what I'd consider probably fairly consistent deal flow. And again, the only kind of internal change that might be to it is seeing more of this specialty behavioral.

Nate Crossett -- Berenberg -- Analyst

Okay and then just one lastly on yields. I mean you continue to quote these very high yields. We've seen a 10-year essentially collapsing. Do you -- what's your expectation as we look farther into the year? The numerator staying the same, even though funding costs continue to go lower?

David H. Dupuy -- Executive Vice President and Chief Financial Officer

We like our margins increasing.

Nate Crossett -- Berenberg -- Analyst

Yeah.

David H. Dupuy -- Executive Vice President and Chief Financial Officer

I mean, people ask me that -- people have asked me that for the last five years basically from the time that we did the IPO and the answer is I really don't see that changing that much. I mean -- and I know for a lot of people, it's hard to believe but most doctors in America don't keep up with what the 10-year treasury is on a daily basis and there are a lot of people out there like that that own properties that we are very interested in that are using different metrics to determine when and how they sell versus what the 10-year treasury is. So we feel very comfortable right now that we can continue investing and generating the margins that we're generating.

Nate Crossett -- Berenberg -- Analyst

Okay. Thanks guys. I'll get back in the queue.

David H. Dupuy -- Executive Vice President and Chief Financial Officer

Thanks, Nate.

Operator

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

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Good morning, guys.

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Good morning, Rob.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Tim, the four properties -- good morning. The four properties under definitive purchase agreements to be -- the tech side [Phonetic] acquired to be after completion and occupancy, and you talked about the fire at the one, are all four of those build-to-suits?

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Yes, they are brand new properties with three different healthcare providers.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Okay. And -- so basically when you gave the first quarter, third quarter, fourth quarter and then first half of 2021, does the rent commence there or is that just when they get -- when they close?

Timothy G. Wallace -- Community Healthcare Trust Incorporated

That's -- well, it's the same thing.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Okay.

Timothy G. Wallace -- Community Healthcare Trust Incorporated

They are single tenant, so when we close, the rent starts.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Okay. So there's no free rent?

Timothy G. Wallace -- Community Healthcare Trust Incorporated

I don't believe in free rent.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Okay. All right. That's always a good thing. I wish some of your office peers felt the same way. You've got around 15% of your leases rolling over the next couple of years. Any known vacates among the 2020 and 2021 lease rollovers of note?

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Yeah, I think we probably have a couple that are probably going to vacate that's probably a total of about 15,000 square feet, 20,000 square feet. But we're releasing stuff as we go. So I mean I think what you're going to see is the occupancy stays pretty stable at right around 90%.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Okay. And then, Dave, appreciate your comments on the -- some of the factors that drove the 37% year-over-year increase in G&A. But how should we be thinking about growth for 2020? Is that -- even if it moderates, are we still talking about a number that's roughly $10 million at 30% growth, something closer to 20%? I mean what's in the budget for you guys for this year and are you guys needing to add any material people this year to continue to grow the business?

David H. Dupuy -- Executive Vice President and Chief Financial Officer

Yeah, most of the additions that you saw in 2019 were directly related to some of the additional costs that we had in our dealing with the requirements for 404. And so those are behind us. We will continue to add accountants and other staff based on adding buildings. But the G&A as a percentage of our revenue is going to continue to moderate into 2020 and we don't see any big adds coming up in 2020. So I think suffice it to say we don't give specifics with regard to projections in terms of what that number is going to be, but it is going to continue to be -- come down, I would say as a percentage of revenue over 2020. So we don't expect any big adds.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Okay. I mean if I look at 2018, it was around 11.6% of revenue and in 2019 it was about 12.7%. So do you think it trends closer to back to where it was as a percentage of revenue in 2018 then?

David H. Dupuy -- Executive Vice President and Chief Financial Officer

I think that 11% to 13% is a good range and from quarter to quarter we're going to have ebbs and flows. As you know -- I mean, the way our business works when we add properties we add chunks of G&A. And so it's tough to get very precise, but I think that 11% to 13% range is a good range to use and we can -- so I would just guide you there.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Okay. Thanks guys.

Operator

Our next question comes from Drew Babin with Baird. Please go ahead.

Drew Babin -- Baird -- Analyst

Hey. Good morning.

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Good morning, Drew.

Drew Babin -- Baird -- Analyst

Appreciate the accounting lesson. I have a lot to learn. But moving on to the corporate finance items, 9% of revenues expiring this year. I know you talked about kind of vacates that you are expecting. As far as leases that you expect to be renewed, can you just give an update on kind of where you expect those renewal rents to be? Should we model them as kind of just a continuation of the leases that are currently in place or do you expect any change there?

Timothy G. Wallace -- Community Healthcare Trust Incorporated

We don't expect any significant change. I mean, we basically have already taken care of a lot of those and see an upward trend probably kind of like what we've always said, 1%, 2% a year type of thing. So -- I mean, we don't think there's any significant above market, below market in the portfolio and even the stuff that we're releasing where there's vacating doctors. We're seeing that basically at or slightly above where they were. So --

Drew Babin -- Baird -- Analyst

Okay, appreciate that color. And if you look at the acquisition opportunities, including the build-to-suits that are currently laid out and announced, could you talk just directionally, you probably can on specific buildings, but what medical segments those are most focused in or geographies or kind of give an indication of where that growth is occurring?

Timothy G. Wallace -- Community Healthcare Trust Incorporated

I don't think that we have disclosed that. But you can probably determine it by what we've talked about and what we've closed relative to our clients in the past. I mean it's going to be inpatient rehab, it's going to be acute care side, it's going to be dialysis, it's going to be those types of things that from a sub-segment standpoint as it relates to geography, I don't think we've ever said where those properties are. So -- and I don't know that I can quote it of the top of my head right now. So I'm not going to try to do that.

Drew Babin -- Baird -- Analyst

Understood. And just one question for Dave on the balance sheet side. Obviously most of your funding comes from the equity side and obviously the revolver and term loans. Do you expect anything to potentially occur as far as just new forms of unsecured financing or I know secured financing is something you probably don't want to turn off [Phonetic], but should we expect to see anything kind of new as far as the pattern goes this year?

David H. Dupuy -- Executive Vice President and Chief Financial Officer

No, I mean I think one of the things that we believe is a strength of the Company is keeping our balance sheet simple and that's really a tenant that from the beginning of the founding of the business with Page and with Tim is to keep the balance sheet as clean and as simple as possible and I think that's going to continue. We've been opportunistic as everyone can see in terms of issuing shares under the ATM. When you look at those equity yields, you think those are approaching our cost of debt. I mean right now one month LIBOR is 1.65%. Our cost of debt is right around 3.45%. That could come down a little bit, but that's really right on top of where our yield is in terms of issuing shares.

So I think what we like to do is, we like to stay under-levered. We like to be conservative with our balance sheet, but don't expect any meaningful changes or bells and whistles in terms of how we do that. We think keeping things simple is something that the market likes and frankly we like.

Drew Babin -- Baird -- Analyst

Great. I appreciate all the color. That's all for me.

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Thanks, Drew.

Operator

Our next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Alexander Goldfarb -- Piper Sandler -- Analyst

Hey, morning. Good morning down there.

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Good morning, Alex.

Alexander Goldfarb -- Piper Sandler -- Analyst

So one, Tim -- hey, good morning. First thank you for the explanation on the cadence of the presale acquisition. So that was helpful. Just a few questions, it sounds like -- I don't know if the Highland is taking that length of time that you expected or not, but good to see it progressing. There was a reference that you guys would be available for financing if that was needed to facilitate the process. So can you just give a little bit more color on what may be needed for you guys to step in and if the process is going according to what you guys expected or is it taking longer?

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Well maybe there's hopes and there is expectations. It is taking longer than we would have hoped and it's, yeah, complicated in a number of different ways. But basically it's at the inland of where it needs to be we think to move it forward. So the answer is yes it's taking longer. I think the outcome is going to be the same one way or the other.

As it relates to the potential exit financing out of the pre-packaged bankruptcy, yeah, we may end up needing to advance up to $2.5 million something like that to get it out. They've currently got over $3 million of receivables. It's generating a lot of cash. It's actually -- the new manager has done wonders with it. It was generating cash before. And if you recall, the old operator was taking that cash and doing something else with it. Well the new operator has got to [Phonetic] generating more cash. So it's something that we're really looking forward to having out of the situation that it is and we feel very comfortable that whatever it is that it takes if it takes $2.5 million, then we'll get that paid back in a very short period of time.

Alexander Goldfarb -- Piper Sandler -- Analyst

And why -- just to explain, why would you need to get involved in financing? Doesn't the guy have banks or lenders or just if you could just walk us through why you'd need to do the $2.5 million.

Timothy G. Wallace -- Community Healthcare Trust Incorporated

The new people want to stay as far away from the old problems as possible and we are heavily involved in the old problems. So basically we're going to provide a bridge from the old to the new. And again we're going to earn 9% on it, so we don't view it as being a significant issue. $2.5 million likely that is -- the kind of what it would be. So if we invest $2.5 million be secured by all of the assets of the facility and make a 9% return on it for three to six months, we don't see significant issues with it.

Alexander Goldfarb -- Piper Sandler -- Analyst

Okay. And then switching to one of your favorite topics, compensation. You guys have been making an effort to cite the fact that you're off stock comp, including Dave. This quarter you also included a thing on the CEO pay ratio to the average employee. Maybe you could just a little expand is there -- again is there a pushback from like ISS/Glass Lewis or you guys stand out as one of the few REITs that I know of that actively publishes this stuff regularly, not just as part of a proxy? So is this ISS/Glass Lewis or what's driving this?

Timothy G. Wallace -- Community Healthcare Trust Incorporated

It's good ESG. I mean the CEO pay ratio is something that's required by being a large accelerated filer. So that's going to be something that shows up in the proxy. We decided if we're going to put it in the proxy we may as well as put it in other places and because -- again we're proud of -- we're proud of the way that we compensate ourselves, we're proud of the way that we compensate all of our employees. And so -- I mean -- I know very seriously if what we were required to do was disclosed, CEO pay and the median pay we weren't -- we weren't required to disclose the average pay or the lowest pay. But when we got to looking at it we said we think we're proud of this. I mean -- and I forget the exact number, but I think I only make like eight times what the average employee makes. So we're very proud of that and we decided we just wanted to highlight it and -- so hopefully Glass Lewis and ISS don't have any more questions about it.

Alexander Goldfarb -- Piper Sandler -- Analyst

Excellent. Thank you.

David H. Dupuy -- Executive Vice President and Chief Financial Officer

Yeah, and I would just -- yeah, I would just say, Alex, building on that, because we are different than the norm, we feel like the more disclosure we can have around that the easier it will be for the firms out there that look at it to better understand what our approach is. And so we're just trying to air on the side of more disclosure and trying to be very -- as transparent about that kind of thing as we can. And it's part of the ESG and it's just part of our effort to make sure we're communicating in the right way to all involved, all stakeholders.

Alexander Goldfarb -- Piper Sandler -- Analyst

Great. Thank you. Thank you.

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Thanks, Alex.

Operator

Our next question comes from Michael Lewis with SunTrust. Please go ahead.

Michael Lewis -- SunTrust -- Analyst

Great. Thank you. So you kind of addressed the questions on my list. So I have -- I thought I would ask two hypotheticals that I think could be a big deal several months from now or maybe no deal at all. And the first one is coronavirus and specifically the potential for a widespread outbreaks in the US, which I guess the CDC thinks might be inevitable, certainly for most companies that's been -- that's kind of rattled the markets. I would think for you guys not so much, maybe even more people seeing the doctor. But do you have any thoughts around that, risks of that or how CHCT would hold up in that scenario?

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Well -- and I am going to go with a personal opinion for a moment and then I'll discuss some of the things that we've done related to it. But my view is we have some of these periodically throughout our lifetimes. I mean in my lifetime, I can probably name six or eight of these things that have come up. And what I keep scratching my head about is in America this year, I forget exactly what the numbers are, but I think there has been like 50 million cases of the flu and almost 30,000 people in America have bad this flu season of the flu. And yet we're seeing all of this uproar about the coronavirus when it's like we're talking about tens of thousands of people that have been infected with it and a couple of thousand people have died. I'm not trying to downplay. That's not a good thing. But on a relative basis, it's kind of like, OK, so it's hard to put that into perspective.

Now how it affects CHCT, we think if it [Indecipherable] go along with it, it will make it to the United States, I believe that, and when that happens there will be a slight uptick in the use of the medical system, which is not a bad thing for CHCT generally speaking. We have had discussions with various of our operators of what they're doing to prepare themselves for it. As it relates to how they're going to continue to provide patient service, how they're going to continue to keep their facility open etc., because that's probably where our risk is, if it affects our tenants' employees so that our tenants can't keep the doors open on their healthcare facilities. And so we've done that, we've talked to some of the larger, larger clients and tenants on that and gotten reasonably comfortable that they do have a plan in place. They are preparing, they do have mass. They do have other things that they're doing. So that's kind of, I guess, my view and kind of how I see it affecting us and what we're doing related to it. Does that answer your question?

Michael Lewis -- SunTrust -- Analyst

Yeah, [Indecipherable] a thorough answer. My second hypothetical which may be it's less -- well, maybe I shouldn't say it's less likely, I guess it depends who you talk to, but Bernie Sanders Presidency where you get a real push for universal healthcare and we talked about universal healthcare a little bit in the past, again that's another thing where you might see more doctor visits but maybe -- no maybe the reimbursement is in it that's favorable this could be a broader conversation for another time. But thoughts on that and how it might affect the Company?

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Yeah, I almost want to ask the same question burning IFRS 9 is like how much time do we have, on a general basis, number one. I think the likelihood of it whether it's Bernie, Elizabeth, Pete whoever that the ability to actually get something implemented I think is extremely small regardless of what you think their ability to get elected is.

If it didn't happen, again probably amount positive because you will see an uptick in the utilization of the system. There will probably be a downtick in physician and provider net income. But regardless, they're going to need real estate to practice in. And real estate, generally speaking, occupancy cost is a relatively small percentage of their overall cost of practice. So I don't think you're going to see a significant pushdown in rates, particularly in the types of assets that we have because -- we don't have the higher cost assets to begin with. I mean we don't have $40, $50 a square foot on campus MOB space. We've got $12, $15, $18 space out close to where the community is. So if anything I think it's probably a slight uptick in the utilization of the system, a slight downtick in provider net incomes and close to a push on what happens with rent and real estate utilization.

Michael Lewis -- SunTrust -- Analyst

Great. Thank you.

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Thank you.

Operator

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

Sheila McGrath -- Evercore ISI -- Analyst

Yes. Good morning. I was wondering, Tim, with your cost of equity at a very attractive FFO yield, what are your thoughts on the mix of equity and debt or managing leverage levels right now? Should we expect more ATM than typical?

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Good morning, Sheila.

Sheila McGrath -- Evercore ISI -- Analyst

Good morning.

Timothy G. Wallace -- Community Healthcare Trust Incorporated

And that's an excellent question and one that we've kicked around some with it as it is. Basically what we've said from the beginning is that we put a 40% limit on debt to equity. We anticipate managing over the long term debt to equity and the equity being 65%, 70% of our capital structure with that being 30% to 35%. From a long-term standpoint, I don't think that's changed.

Now, in the short term, in the short run as long as we have the ability that we have, you may see us manage that debt band to 20%, 25%. But I don't think it changes over the long run. I mean, obviously, what it does, the more we issue and are able to invest at the rates that we can, the more great margins we lock ourselves into over the long term. So we anticipate accessing the ATM as much as it makes sense. [Indecipherable] access the ATM and leave cash sitting on the balance sheet or anything like that, but over the short term you will probably see the debt that go down as a percent of the total capital structure.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, makes sense. And then on the strategic relationship side of the acquisition, it appears to be a very good way to add new product with long-term leases. Any progress securing additional strategic relationships for the pipeline and is that a like focus right now?

Timothy G. Wallace -- Community Healthcare Trust Incorporated

It is definitely a focus. There is nothing that we can announce at this point in time, but we do have several ongoing discussions and that was with Dave's background being in the investment banking side and dealing with the PE firms and some of those emerging providers, we're trying to access his role action and I have challenged him and he's challenged himself over the next three to six months to try to access some of those and get some moving. So it's very much a focus. We don't have anything to announce right now, but hopefully in the next few quarters we will.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, great. And one last one, just on the larger acquisition in the quarter [Indecipherable] for 19 million, was that part of the strategic relationship pipeline or -- and if not, was there much competition for that acquisition?

Timothy G. Wallace -- Community Healthcare Trust Incorporated

It was part of the strategic relationship.

Sheila McGrath -- Evercore ISI -- Analyst

Pipeline. Okay, great. Thank you.

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Thanks, Sheila.

Operator

Our next question comes from Matt Boone with B. Riley FBR. Please go ahead.

Matt Boone -- B. Riley FBR -- Analyst

Hey guys, good morning. I'm on for Bryan. Just going back to your acquisition pipeline, as you guys are feeling that out for 2020, how should we be thinking about the split between acquisition of existing product versus adding more of that new-build product to your portfolio?

Timothy G. Wallace -- Community Healthcare Trust Incorporated

For 2020, I'd probably say it's 50-50 kind of, I mean, with what we know that we're doing and what we can say just of the top of my head I'd say pretty close to 50-50.

Matt Boone -- B. Riley FBR -- Analyst

Okay. And then which markets are you seeing the, I guess, most compelling investment opportunities?

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Well -- and we don't quite look at it like that. We -- again, what we try to do is be opportunistic. We don't choose the geographic area and say OK, we're going to invest here what we will do is we try to choose some operators. And obviously the lower cost environment whether that's surgery centers, whether that's surgical hospitals, whether that's the inpatient rehab even as a lower cost environment is kind of what we target and what we look for. But we don't have any geographic markets that we're targeting right now.

Matt Boone -- B. Riley FBR -- Analyst

Okay. Got it. And then lastly from me, it sounds like we're going to see some resolution with the Highland situation here pretty soon. I'm sorry if I missed this, but are there any other tenants that have kind of popped up that might be on an internal watch list that you could share with us?

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Well, we've had -- we have always watching tenants, I mean there is basically one other that's working through some issues, but we feel very confident on it and they're making payments and so we feel very good about it. But their own a close watch list, I guess you call it.

Matt Boone -- B. Riley FBR -- Analyst

Okay. Thank you very much.

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Thank you.

Operator

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

Timothy G. Wallace -- Community Healthcare Trust Incorporated

Well, we would like to thank everybody for being on the call and keeping up with us and showing the interest that you do and we'll talk to you next quarter. Thanks.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Timothy G. Wallace -- Community Healthcare Trust Incorporated

David H. Dupuy -- Executive Vice President and Chief Financial Officer

Nate Crossett -- Berenberg -- Analyst

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Drew Babin -- Baird -- Analyst

Alexander Goldfarb -- Piper Sandler -- Analyst

Michael Lewis -- SunTrust -- Analyst

Sheila McGrath -- Evercore ISI -- Analyst

Matt Boone -- B. Riley FBR -- Analyst

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