Welcome to Community Healthcare Trust 2021 First Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2021 first quarter financial results. It will also discuss progress made in various aspects of its business. Following the remarks, the phone lines will be open for a question and answer session. The company's earnings release was distributed last evening and has also been posted on its website, www.chct.reit. The company wants to emphasize that some of the information that may be discussed on this call will be based on information as of today, May 5, 2021, and may contain forward looking statements that involve risks and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the company's disclosures regarding forward looking statements in its earnings release as well as its risk factors and MD&A in its SEC filings.

Thanks Garrett. Good morning everyone and thank you for joining us today for our 2021 first quarter conference call. On the call with me today is Dave Dupuy, our Chief Financial Officer, and Leigh Stach, our Chief Accounting Officer. As is our normal process, our earnings announcement and supplemental data report were released last night and filed with an 8-K and our quarterly report on Form 10-Q was also filed last night. We had a busy quarter, both from an operations standpoint and from an acquisition standpoint. Healthcare providers have been impacted by the COVID-19 pandemic. Some saw a reduced number of procedures and/or patient visits. However, most of our tenant operations are basically back to pre-pandemic levels. As of March 31, the company had one remaining rent deferral with one tenant representing less than $50,000. Our receivables are in great shape. Our asset management group has done a great job related to collections during the pandemic. This will probably be my last update on COVID issues, hopefully. Now onto more normal issues. As you know, we have an active ATM program in place. During the first quarter, the company issued 435,272 shares of stock through its ATM program at an average gross sales price of $46.70 per share. We received net proceeds of approximately $19.9 million at an approximately 3.74% current equity yield. As was previously announced, we increased, extended, and modified our credit facilities. I will not steal Dave's part here as I am sure he will give a lot more color on that later. During the first quarter, we acquired six properties with a total of approximately 159,000 square feet for a purchase price of approximately $59.8 million. These properties were 100% leased with leases running through 2036 and anticipated annual returns of 9.1% to 10.83%.

Great. Thanks Tim, and good morning everyone. Before jumping into the financial results, I wanted to highlight some key aspects of our recent refinancing, the details of which are included in our SEC filings. In addition to adding a new seven-year $125 million term loan and extending our revolver maturity for five years, the credit facilities are now unsecured and have provisions that make it consistent with an investment grade financing and pricing grid.

The first question comes from Amanda Sweitzer from Baird.

On the two larger transactions that you signed term sheets on, can you just talk a little bit more about how those partnerships came about? And then I think in the past, you've talked about targeting serial entrepreneurs as partners. Do you view those agreements as falling into that bucket? And is there a potential for a credit upgrade on those properties in the future?

So Amanda, thanks for the question. And I have to give you the prize because you're the only one that went back to Page 7 of the investor presentation and found that information. So you get the prize this quarter for doing the best due diligence before the call. But yes, they are a part of our ongoing client relationships, serial entrepreneur program, and we look at this as a way to fill out the pipeline. These properties probably won't close this year; one might. But they're probably more 2022 and first half of 2023. But we really like having that ability to look at and see what that pipeline looks like. And we are continuing to focus on that. We had a meeting yesterday where that was basically the significant focus of the meeting was where we are on some of these discussions and how do we bring them forward? And it takes time to do some of them. But we feel very good about it. And yes, we anticipate at some point the serial entrepreneurs, they have a history of building companies and then selling them to larger companies. So we anticipate that that's going to happen. Although we do our underwriting as if it's not going to happen, and then when it does, we have a nice step up in credit and in value.

That's great and helpful. And so with those deals and kind of the lineups that you have into your pipeline in 2022 and 2023, do you expect to raise your $120 million to $150 million targeted acquisition guidance on a go-forward basis? Or do you expect kind of a two- to three-year step-up in acquisitions that might moderate over time?

I mean I always caution anybody from increasing it. We feel very comfortable in the $120 million to $150 million range. We think that can produce consistently growing returns. It's something that we feel comfortable with. And so, I mean, as I've said, over time, as we get bigger, it may go to $130 million to $160 million or $140 million to $170 million, but we do not see any significant step-up in that. And the main reason is we look to optimize our profit, and if we're buying a $0.5 million a quarter or $0.5 billion a year, we wouldn't be able to maintain the profit margin on the deals.

Our next question comes from Alexander Goldfarb of Piper Sandler.

And hey, I guess it's typical of your understated style to – and kudos to Amanda for digging through Page 7. But I would've thought that that would have been something that you would have highlighted in the press release, but again, I guess that leaves us for future things to dig for. Two questions for you, first.

But let me address that for just a second because we never have announced term sheets in the earnings press release or in the Q. We always put term sheets just in the investor presentation. And the main reason is the investor presentation is not filed with the SEC, but it is made available on the website on a widely available basis. So we're just following historic norms on that, and we've never put term sheets in anything other than the investor presentation.

Okay. Well, hopefully if the attorneys should be comfortable with it. I mean, it's great stuff that you guys have, and it'd be great to just publicize it more. So if the attorneys are comfortable with it going into the press release, awesome. But good to know, Tim, and thank you for pointing out that the investor presentation could have acquisition material that may not be in the press release. So appreciate that. So two questions. First, Dave, you mentioned the line of credit is going to drive higher interest costs. And I think you mentioned because of the terms or the size of the facility, and I didn't know if you just meant that you have more drawn on the facility, therefore the interest rate is higher, or if the actual interest rates, the spreads, are higher on the new facility. And if that's the case, I'm just sort of curious; I would think as the company gets bigger, more credit-worthy, closer to investment grade, I would figure that the spreads would go down. So I wasn't sure if it was just a comment about spreads or if it was a comment about just the absolute level of interest.

So it's two things, really, Alex. The first is we added the $125 million term loan. And simultaneous with that, we refinanced a short-dated $50 million term loan. So incrementally, we've added $75 million of debt that we then swapped. So we've got some additional fixed-rate debt at higher costs from an interest perspective there. But the second thing is our pricing grid is the same in terms of how it works. We've added an investment grade component. So to the extent there's a time two, three years from now when we achieve investment grade ratings and the details are included in our filings, then we have the ability to transition to that investment grade grid. Our grid currently is the same, but because we put some incremental leverage on the business, we're just in a higher pricing tier. So nothing has – our pricing has not gone up. In fact, we've got a pathway for our pricing to go down as we get more investment-grade sort of metrics, but it's just we're in a higher tier, and so as a result, we're paying slightly higher spreads.

Yes. I mean, two things I'd add, Alex. So 30% debt to capital is a bright line in the agreement. And before we were at 28.5%. So we were in a lower tier, as Dave was mentioning. Now we're at 31.5%. So we're in the upper tier. But as we raise more equity, we'll probably slide back down under the 30%. The other thing, Dave, and I don't know. Did you go into what the fixed rate was on the new debt?

Yes. No. I haven't gone into details there, but we do have a 3.6% fixed rate, blended fixed rate, on the new $125 million term loan, which is, of course, higher than the LIBOR-based drawings on our revolver. So that's part of the issue as well.

But lower than.

But lower than our.

Okay. Okay. Cool. And then the second question is on the relationships that you guys have with your serial entrepreneurs, the presale developers and everyone else. Obviously, Tim, you're a wonderful person to do business with, but are you sensing that there's more competition out there? I mean, it's just hard to believe that others haven't noticed the success that CHCT has had. So are you coming across more competitors? Or is this a situation where, because there's a lot of individual asset due diligence and a lot of this is sort of out of the major markets, that you still have a lot of runway to yourself and you're not really seeing much in the way of competition form?

I'd like to say we're just really smart, but I just don't think other people have focused on it. I mean, I think we do individual due diligence on assets. We do individual due diligence on the operators and we don't look to do the big transactions, and everybody else looks to do the big transactions. So I scratch my head probably once a week and say, I don't understand why other people haven't kind of picked up on what we're doing. And we had a discussion at the Board meeting. And if you get to our point, doing what we're doing looks relatively easy, but the issue is getting to our point and it takes a unique set of people and a unique set of constituents helping to get to where we are today. And I think that's a lot of it because it just isn't the easiest thing to do to execute from nothing to where we are today.

Our next question comes from Gaurav Mehta of National Securities.

First question on your lease expiration. I think in your prepared remarks, you said that you've seen some pickup in the leasing activity. I was hoping if you could maybe comment on your 2021 lease expirations. Are you expecting 100% tenant renewals, and what kind of renewal spreads are you expecting for 2021?

Well, we never expect – and good morning. Appreciate the question. We never expect 100% renewals. But actually, 2021 is one of the easiest years we've had from a leasing standpoint. And I forget exactly how much is coming due this year, but it's less than 5%, I believe.

4.3%.

Dave tells me it's 4.3%. So we're actually already working on 2022 renewals. And we're excited about what we're seeing from the providers because all last year after the pandemic started, basically providers just kept their nose down and took care of the business and didn't have a lot of time to talk about leasing. But we have several good-sized leasing transactions that are real close to being signed. And so we're excited about what we're seeing from a leasing standpoint.

Great. Second question on your G&A. It seems like your G&A this quarter as a percentage of revenue was a little higher than historically. You've talked about 12% to 13% range G&A as a percentage of revenue. So are you guys expecting G&A to maybe go down over the next few quarters, or I guess, what kind of run rate are you expecting going forward?

Yes, so a couple of things on G&A that I'd say. First of all, in the supplemental information on Page 8, I think everyone knows we sort of provide a ratio of cash versus noncash G&A. And so a significant portion of our G&A every quarter is noncash. And so what I would say on the cash portion of G&A, as I mentioned in the comments, every year in the first quarter, we tend to have a little bit higher G&A expense because we do salary increases. As part of that, we're funding everybody's HSA a little bit. There's some unusual one-time things that go into G&A in addition to what I mentioned with regard to the facility refinancing and everything. But from a cash perspective, I think it's safe to say we'd be somewhere in that 5% to 6% of revenue range from a G&A perspective. And also just to point out that, on a noncash basis, that G&A, we're taking kind of a double hit. Because we get the dilution in FFO regarding the shares that are issued in that first quarter, and then we're also increasing the amount of our deferred comp as well. So it's kind of a double hit against our FFO and against our earnings. But I think that 5% to 6% cash basis is sort of a good range. And you should probably expect to see that over the next few quarters.

And I'll add a comment or two on that, because what we've always said is focus on the cash G&A. Because the noncash, the deferred comp, the way that we take our comp, and everybody in the room here has always taken their comp 100% in stock. It's never a cash item. So therefore it's never going to affect the ability to pay a dividend, etc. And even though it's an expense, it's one that the shares are already outstanding. So as Dave pointed out, if you don't factor out the noncash, then we're getting a double hit on that analysis. And that's why we always focus on AFFO as opposed to just FFO because AFFO takes out the noncash deferred compensation.

Our next question comes from Bryan Maher of B. Riley FBR.

Quick question. And maybe you can kind of remind us as to why and I don't know how you want to classify them as the providers, the doctors, the owners, the tenants. Why would they be willing to do leases kind of in the most recent presentation at 9.5% to 10.25%, which is pretty rich in a near 0% interest rate environment? I would suspect that many of these people could probably borrow at a lot less and kind of capture that spread to their own pocketbooks. So can you just walk us through again why they're willing to pay these rates?

I mean the thing is we understand their business. And you say they could go borrow it, and they probably could on a one-off basis, but they would lose a lot of brain cells. What we offer is a one-stop program. And basically, either we're working with one of our banks. So the bank provides the construction loan; we provide the takeout by purchasing the property or in the case of one of them, we're going to actually provide the construction financing for the dialysis clinics. And it's basically a one-stop shop. And they don't have to stop doing what they're doing from an operations standpoint or from a growth standpoint, to go finance the properties on a one-off basis. The real benefit that they get is that if what their goal is, is to grow their company quickly from wherever they are, $20 million, $30 million, $50 million, wherever they are on an EBITDA basis to wherever they need to be to sell out. If we can provide the ability for them to do that and it turns out it's two years quicker, the internal rate of return on their investment goes up significantly. So basically, what we do is we provide them the ability to grow faster, being able to sell out faster. And then in turn, basically what that does for us is gives us a credit upgrade when that happens. So it works out to everybody's benefit. And the fact of the matter is most of this stuff is done; I mean most normal - we work with the developer, etc. - is done developing to a 9% yield to cost or an 8.5% yield to cost or whatever. So when it works out, 50 to 100 basis points is not a bad price to pay to get there. And then in turn, basically, they're not paying that but until they sell the company. So if you look at it from the entrepreneur's standpoint, who's trying to turn $5 million into $100 million, if they can do that two years quicker, it makes a lot of sense.

And you made a comment in the Q&A about how you scratch your head, that you don't understand why maybe other people aren't doing this. And I understand that there's a lot of diligence involved in cobbling up all these 9%, 10% cap rate properties. But why wouldn't a bigger healthcare REIT, MOB? I mean, we hear so often about REITs going and buying MOBs at 5%, 6%, 6.5% caps. Why wouldn't one of these guys just swallow you up and say, hey, Community Healthcare Trust is a division of this bigger REIT that's generally buying 5% and 6% caps, but hey, we've got this big chunk of an entity over here that's doing 9% and 10% caps for us, and juice their total returns? Why isn't that something we might see?

It's what I've said from the beginning. I mean, we're for sale every day. I mean, nobody's come and offered that yet. I mean, the fact of the matter is we're relatively expensive from a multiples standpoint for someone to do that. And the fact of the matter is, I mean, that's kind of the quandary that REITs have found themselves in at this point in time. And to me, it's an absolute silly thing that everybody has gotten into. But the concept of NAV makes it almost impossible for a REIT to buy something at a higher cap rate. If they've been acquiring stuff at 5% cap rates and people have been valuing their portfolios at a 5% cap rate, if all of a sudden they started buying 8% cap rates, they just devalued their stock. I mean, which is a very strange concept when you think about it, to buy something cheaper to get a better price for something and it reduces the value of your stock. But that's basically the situation we're in now with people paying attention to NAVs.

Well, I don't pay too much attention to NAV, but thanks for those comments. Appreciate it.

The next question comes from Nate Crossett of Berenberg.

This is Connor on for Nate. Thanks for having me on the call. Quick one on the general state of the acquisition pipeline. I'm wondering where you're seeing the best opportunities to fit your framework right now in terms of asset class and market positioning? And just to frame that question, I mean, we continue to see a lot of eyes on MOBs, LPACs to a certain degree. And we're seeing some news flow related to struggling operators in more rural areas. So I'm just wondering what you're looking at to hit these yield targets?

We're looking at basically what we've always looked at. I mean, we're buying from physicians. I mean that – other than the serial entrepreneurs, the physicians are probably the biggest source of our acquisitions. I'm thinking through what we've got currently in the pipeline and everything. And the biggest thing is the physicians. And there's a number of reasons why they're interested in doing it. And again, the reason why we're able to do it is because nobody else is buying $3 million to $6 million properties. So we go in, we set a price, and sometimes it takes months for them to come back and say, okay, we'll take your price. Because they got to go out and they got to reconcile that this is the price for the market, and nobody else is going to offer them anything better. I mean, it's kind of the same market that we've been in for the last five or six years.

It's physicians; I mean, that's a big chunk of it. We see a lot in behavioral health care, as I'm sure that won't surprise anybody on this line. Behavioral continues to be an area of significant growth. I will tell you, just like everything we do, we're very choosy. We look at a lot of transactions to find the operators and to find the subsectors that we're comfortable with. And so behavioral is a big area. Of course, we're continuing to look at in-patient rehab and LPACs on a very selective basis. But again, it gets down to that granular underwriting and just making sure that we feel comfortable with the operator in the markets. Because again, we're looking at things on a property-by-property basis, even for our clients. And the other area is dialysis. I mean, that continues to be an area of growth for us as well. But again, the common theme in all of this is they tend to be smaller projects. And as a result, they take a little bit more effort and time to sort of underwrite and acquire.

Okay, that's helpful color. And then just a little bit more on the underwriting framework. I know this has been brought up in a couple of the older conference calls, but can you give us a sense, at all, of how many assets are making it through the initial screening process? And how many targets are you underwriting? And what's the hit rate to actually close on one of these acquisitions?

We don't actually keep statistics like that because we see so much stuff, but the close rate versus what we see is a very small percentage. The close rate against what, if we actually get to a point where we issue a term sheet, that close rate's fairly high. And I would hesitate to put a percentages or anything on either one of those. But we probably look at, I don't know, it seems like it's 10 a day, or something, that we look at.

Well, and also, I think this goes back to Tim's comment earlier about how five years ago, it was a whole lot more difficult. There is a group of, call it, 8 to 10 brokers that know what we do and aren't going to bring us stuff that we're not going to engage around. And so that's helped the funnel a little bit. But yes, it's definitely a numbers game and we spend a lot of time on figuring out which ones we want to spend time on because it's just really three or four of us here that are doing that work.

Our next question comes from Sheila McGrath of Evercore.

Tim, AFFO growth has been very strong, such that the dividend payout ratio now is much more conservative. Just wondering what yours and the Board philosophy is. Do you want to get to a certain payout ratio or can shareholders expect a bigger increase on the horizon?

Good morning, Sheila. Thanks for the question. It's been a topic of discussion. And basically, I think the thought process is when we increase, it will probably increase the increase from $0.25 a quarter to $0.5 a quarter. But we want to make sure that we are comfortable, that we can maintain that $0.5 a quarter and maintain a very conservative payout ratio. So – and that's kind of the thing that we're looking at. And, as I've said, I think, in previous calls, that we're a lot closer to being there than what we have been. We're not quite there, but it is something that is being looked at and discussed.

Okay, great. And then just on the pipeline, or the term sheets, and I apologize if I missed this, what kind of time horizon are those the $94 million and the $60 million over it since their development? Is it a couple years?

Yes, yes, and as I've said, 24 months. I mean, the first one will probably close on it could be the fourth quarter of this year, much more likely first quarter next year. And so look for, basically, '22 through mid second, third quarter of '23 as being the time frame for those.

Okay. In both of those transactions, CHCT funds the development and then executes the takeout at the agreed-upon cap rates, correct?

No. In the inpatient rehab facilities, one of our banks is doing the construction lending and then we buy the facility after it has been constructed. And the reason for that is we didn't feel comfortable doing the construction lending because if – those are $20 million plus properties. We are doing the construction lending on the dialysis clinics, but those are $4 million to $6 million a piece so it's a lot more manageable. So there is a slight difference between the two, and that's kind of the reason for it.

Okay, great. And anything on the horizon in healthcare policy out of DC that you're watching that might have an impact on any of your tenants?

You mean other than everything? The odd thing is that we're concerned about everything happening in DC. However, I don't believe that anything occurring there will have a significant negative impact on our tenants. If the government is spending more money, it will likely benefit our tenants. David, do you have any thoughts on this?

No, I think that's correct. The government appears to be investing heavily across various sectors. Therefore, the short-term outlook looks promising for healthcare. We appreciate the ongoing discussions around pricing transparency, as we believe this benefits many of our tenants, who are typically low-cost providers. Overall, we expect the government's continued financial commitment, especially in healthcare, to be advantageous for our tenants.

Yes. Lord knows what happens to the dollar.

Thanks, Sheila.

Thanks, Sheila.

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

Well, I would like to thank everybody for being with us, spending the time with us today. And we'll look forward to talking to you all in three months. Plus, I think I've got several conferences in NAREIT between now and then. So we may talk to you sooner. Thanks.

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