CHCT @ STRH - Quick Thoughts: Soft 3Q16 Investment Activity But Pipeline Helps Maintain Conviction

10b5-1 Activity Adds Another Level of Confidence

Rating: Buy

Market Cap (M): $274; Price: $21.81 as of 10/13/2016

Price Target: $26.00
Sector: Healthcare REITs

Last night, CHCT released its 3Q16 investment activity below our expectations, but also disclosed a sizable pipeline and significant insider buying. The $12.1M investment activity in 3Q16 came in well below our $30M estimate. However, we would highlight that the company has already closed one deal subsequent to 3Q ($3.3M), has ~$27.2M aggregate activity under definitive purchase agreements and ~$18.6M aggregate activity with signed term sheets.
While there may be some softness on the lower investment activity, the strong pipeline gives us confidence to maintain our conviction in the name. Also, management has previously communicated the potential for quarterly lumpiness with a longer term $25M-$30M quarterly average. Should the company close all of the definitive purchase agreements and signed term sheets in 4Q16, it would modestly exceed our 2H16 investment estimate ($61.2M vs. our $60ME).
Our confidence level is further strengthened through the CEO Tim Wallace's stock purchase plan activity. In 3Q16 and 4Q16-to-date, he has acquired 91,851 shares for ~$2M. CEO Wallace established this trading plan early in 2016 with the ability to purchase up to the lesser of $4M or 200,000 shares. With the completed activity, he is ~50% complete on his 10b5-1 plan.
In 3Q16, the company acquired four properties for an aggregate $12.1M with expected returns in the 9.2%-10.0% range. The pipeline post-3Q16 is robust, with one additional property closed ($3.3M with a 9.3% expected return), six properties under definitive purchase agreements for an aggregate $27.2M (9.0%-9.7% expected return range) and two properties with signed term sheets for an aggregate $18.6M (9.2%-9.6% expected return range).
On the renewal front, 90.46% of leases maturing in the first three quarters of 2016 were renewed, and 100% of the 4Q16 lease maturities have been renewed or released.
We await further details from management on the investment activity trends following the release of 3Q16 earnings on November 10th.