Welcome to Community Healthcare Trust's 2022 Fourth Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2022 fourth 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, February 15, 2023, and may contain forward-looking statements that involve risks and uncertainties. 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 Dave Dupuy, Interim CEO of Community Healthcare Trust.

Great. Thank you very much. And good morning. Thank you for joining us today for the 2022 4th quarter conference call. On the call with me today is Leigh Ann Stach, our Chief Accounting Officer; and Tim Meyer, our Executive Vice President of Asset Management. As we disclosed in an 8-K released on Monday, February 13, Tim Wallace is on a medical leave to deal with complications from a peptic ulcer, and the board has asked me to step in as the Interim CEO. I know everyone will join me in wishing Tim a quick recovery. Now to other matters. 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 filed last night. In addition, an updated investor presentation was posted to our website last night as well. We had a busy fourth quarter both from an operations and an acquisitions perspective. At year-end, our occupancy had risen to 91.7%, and we continue to see good leasing activity. Our weighted average remaining lease term was relatively stable at 7.6 years. We continue to have five properties or significant portions of them that are undergoing redevelopment or significant renovations with long-term tenants in place when the renovations or redevelopment is complete. During the fourth quarter, we acquired 13 properties in four transactions with a total of approximately 241,000 square feet for a purchase price of $50.2 million. The properties were 97.8% leased with leases running through 2034 and anticipated annual returns of approximately 9.26% to 10.21%. For the year, we acquired 18 properties with a total of 423,000 square feet for an aggregate purchase price of $97.1 million which were approximately 98.9% leased with leases running through 2037 and anticipated annual returns of 9% to 10.25%. Subsequent to December 31, we acquired three properties in two separate transactions totaling 99,000 square feet for an aggregate purchase price of approximately $12.5 million. Upon acquisition, the properties were 100% leased with expirations through 2029. The company has four properties under definitive purchase agreements for an aggregate expected purchase price of $20.1 million and expected returns of approximately 9.2% to 9.5%. The company is currently performing due diligence and expects to close these properties in the next few months. We also have signed definitive purchase and sale agreements for six properties to be acquired after completion and occupancy for an aggregate expected investment of $141 million. The anticipated return on these investments should range up to 10.25%. We expect to close on these properties throughout 2023 and 2024. We continue to have many properties under review and have term sheets out on several properties and anticipated returns of 9% to 10%. On November 2, 2022, the company filed an automatic shelf registration statement on Form S-3 with the SEC. Simultaneously, the company entered into a sales agency agreement with various banks for the sale of up to 500 million of common stock, including the issuance of ATM shares. Also, we declared our dividend for the fourth quarter and raised it to $0.4475 per common share. This equates to an annualized dividend of $1.79 per share, and we continue to be proud to say we have raised our dividend every quarter since our IPO. Before jumping into the financials, I wanted to highlight our recent refinancing, SOFR transition and swap activity. Given the tightening bank market, we thought it prudent to move forward our refinancing plans, and our banks were very supportive. Although we were seeking $125 million seven-year three-month term loan, the transaction was oversubscribed so we decided to increase to $150 million. The three-month stub period was added to make the maturity towers consistent with our existing term loans, which occur every two years beginning in March of 2026. The proceeds were used to refinance the $50 million term loan due 2024, pay down the revolver and fund acquisitions. Simultaneous with the refinancing, we transitioned our borrowings from LIBOR to SOFR. Shortly thereafter, we swapped floating rate exposure to fixed through SOFR-based swaps. And finally, in January, we transitioned all our remaining swaps from LIBOR to SOFR. After this refinancing, we anticipate having enough availability on our credit facilities to fund our acquisitions, and we expect to continue to opportunistically utilize the ATM to strategically access the equity markets. Now on to the numbers. I am pleased to report that total revenue for 2022 was $97.7 million compared to $90.6 million for 2021, representing 7.8% growth over the prior year. Meanwhile, total revenue for the fourth quarter of 2022 was approximately $25.3 million versus $23.2 million for the same period in 2021, representing 9% growth over the fourth quarter of 2021, while quarter-over-quarter revenue grew 2.2%. And on a pro forma basis, if all the 2022 fourth quarter acquisitions had occurred on the first day of the fourth quarter, total revenue would have increased by an additional $1.1 million to a pro forma total of $26.5 million in the fourth quarter. From an expense perspective, property operating expenses increased year-over-year from $15.2 million in 2021 to $16.6 million in 2022 or 9.8%. During the fourth quarter, property operating expenses increased from $3.5 million in 2021 to $4.2 million or 17.6% for the same period in 2022. Sequentially, property operating expense decreased from $4.3 million in the third quarter to $4.2 million in the fourth quarter or 4% due to normal fluctuations in property operating expenses that occur quarter-over-quarter. And for the year, G&A increased from $12.1 million in 2021 to $14.8 million in 2022 or 22.5%. And the fourth quarter G&A expense increased from $3.2 million in 2021 to $4.1 million in 2022 or 31.5% and increased 10.3% sequentially. For the year, cash G&A increased from approximately $4.9 million in 2021 to $5.4 million in 2022 or 9.6%. While in the fourth quarter, cash G&A increased from approximately $1.2 million in '21 to $1.5 million in '22 or 29.8% while increasing 15.8% quarter-over-quarter. Increases in G&A were driven by compensation expenses related to both new and existing employees, increases in professional fees expense and increases in amortization of deferred compensation from the issue of restricted stock, including a compressed amortization schedule based on retirement eligibility dates. Please refer to Page 8 in the supplemental information report as included with our 8-K filing for more details on cash versus noncash G&A expenses. Interest expense increased year-over-year from $10.5 million in '21 to $11.9 million in '22 or 12.6%. Quarter-over-quarter interest expense increased from $3 million to $3.5 million or 14.4%. The increase in interest expense was driven by an increase in interest rates, borrowings under our credit facility to fund acquisitions and the addition of the new $150 million term loan which closed December 14, 2022. For the year, our net debt to total capitalization remained conservative at 34.8%. Our net income decreased from $22.5 million in '21 to $22 million in '22 or 2.1%. For the quarter, net income decreased from $6.1 million in '21 to $5.2 million in '22 or 14.3%, and sequentially, net income decreased from $5.7 million to $5.2 million or 7.7%. For the year, funds from operations, FFO, increased from $52.9 million or $2.20 per diluted share in 2021 to $54.6 million or $2.24 per diluted share or $0.04, representing per share FFO growth of 1.8%. For the fourth quarter, FFO decreased from $13.8 million or $0.57 per diluted share in 2021 to $13.6 million or $0.56 per diluted share in 2022. On an annual basis, adjusted funds from operations, which adjusts for straight-line rent and stock-based compensation, grew from $56.5 million or $2.35 per diluted share to $60.6 million or $2.49 per diluted share or $0.14, representing per share AFFO growth of 6%. On a quarterly basis, AFFO increased from $14.9 million or $0.61 per diluted share in the fourth quarter of '21 to $15.4 million or $0.63 per diluted share in the fourth quarter of 2022. And from a pro forma perspective, if all the fourth quarter acquisitions occurred on the first day of the fourth quarter, AFFO would have increased by approximately $576,000 to a pro forma total of $16 million, increasing fourth quarter AFFO to $0.65 per share.

We will now begin the question-and-answer session. The first question is from Rob Stevenson of Janney. Please go ahead.

Hi, good morning, guys. Dave, any in the '23 or '24 lease expirations and known move-out or likely downsize at this point? Or do you expect them all to renew in place?

Thank you for the question, Rob. We have a limited number of leases expiring in 2023. We believe we have a good understanding of whether those will be re-leased. Tim, if you have any additional insights, please feel free to share.

We are fairly confident in our lease pipeline for both renewals and new leases. There is a natural churn rate in the portfolio, as leases expire and tenants move out. However, we have seen strong retention rates, especially through 2022, and we expect that to continue in 2023. Even if tenants do move out, we are confident in our ability to lease those spaces to new tenants.

And Rob, that's showing up in our occupancy, what we've seen in terms of momentum and growing occupancy over the last few quarters.

Okay. And I guess on that standpoint, I mean, what is the outlook? You guys are just a shade under 92% leased as of year-end. In terms of incremental leasing within the portfolio, what's the outlook for that in terms of what you have visibility on today?

Yeah. I think historically what we've messaged, and I don't think that would change based on what we're seeing, is we think it's tough for this portfolio to be leased any more than kind of 93%. There's always going to be a natural piece of vacancy in the portfolio. So I think we've got an ability to continue to increase our occupancy and continue to build that. But I think anything beyond 93%, we certainly wouldn't expect. And so continue to see good leasing activity. And what we've always said is when you see good leasing activity, you see good leasing. So I think we're confident that we will continue to post solid leasing results going forward.

Okay. And then the last one for me. Your average property acquisition cost in '22 was a little under $5 million, and you're basically right there again with the stuff that you either have closed or have under contract for '23. Other than the six properties for the $141 million in the pipeline, are there other deals that you guys are starting to look at these days? Are they still in that sort of $5 million-ish on average range? Or are some of these larger deals moving up the scale pipeline?

I think we see a mix. The average is likely around $5 million to $10 million, which we consistently observe. However, if the right opportunity arises, we might consider acquisitions in the range of $2.5 million or $3 million, especially if there's potential for repeat business. Overall, we're exploring various opportunities and I anticipate that the average could trend slightly higher due to upcoming larger inpatient rehab facility closures, which might increase that average just a bit.

Okay. Thanks, guys. Appreciate the time.

Thanks, Rob.

The next question is from Alexander Goldfarb of Piper Sandler. Please go ahead.

Good morning, everyone. Please send our best wishes for a speedy recovery to Tim; we definitely need him back. I have two questions for you, Dave. First, it seems like everyone in the real estate sector is discussing the transaction market and the significant gap between buyers and sellers, which appears to be frozen. However, you made considerable progress in the fourth quarter and have restocked the pipeline. Given the unique nature of your target sellers, often medical practices or presales, does the frozen transaction market and the gap between buyers and sellers apply to you, or are you still facing the same challenges that other sectors in real estate are experiencing despite your progress in restocking?

Thank you for the question, Alex. It's challenging right now as we're still exploring opportunities in real-time, but we're quite optimistic to see a significant amount of activity continuing in acquisitions. You accurately described our typical clients, which are mostly smaller physician-based medical office buildings and practices. They tend to be less affected by market dynamics. Since we're targeting opportunities with a 9% to 10% cap rate, we believe that the rise in rates is actually beneficial for our business because it has reduced the occurrence of extreme transactions for those kinds of assets. Overall, we're feeling positive and observing good activity.

Okay. My second question is regarding your comments on funding transactions. It seems like you prefer line of credit over ATM. However, in the last quarter, you issued shares at an average of $35, and your stock price has since increased. I'm curious if there was a specific reason you mentioned line of credit first and then ATM, or if there's something about your balance sheet that leads you to favor line of credit over ATM, especially considering your stock's performance since the quarter.

We will continue to access the ATM market as we have in the past. I believe there may be some misinterpretation of my earlier comments. The discussion was primarily about our recent refinancing, which can often be significant in nature. We took advantage of favorable conditions, and our banks were very supportive, allowing us to increase our term loan from $125 million to $150 million. It’s crucial for us to maintain a low-leverage business model, which is fundamental to our company. Therefore, you can expect us to continue utilizing the ATM in the future, rather than solely depending on the line of credit.

And that's why I asked because I know what your strategy is in general, and I wasn't sure if I might have misinterpreted your comments. It seems I did, so I appreciate the clarification.

Sure. Thanks, Alex.

Thank you.

The next question is from Michael Lewis of Truist. Please go ahead.

Thank you. I would like to express our wishes for Tim's full and speedy recovery. Dave, if I'm mistaken, please let me know. Last quarter, I believe you mentioned that you anticipated closing about $72 million in acquisitions by the end of the year. If that's accurate, what led to some of those slipping into this year? I'm curious if there were any that were under contract that ended up not going forward, or if this is just a matter of timing.

Michael, thanks again for your words about Tim. As far as the acquisitions are concerned, we were really highly motivated. We wanted to get those closed in the fourth quarter. But I think we just ran into some issues. Once you get past Thanksgiving, it's kind of a sprint to get things closed, and there were just a handful that ended up not getting closed. But as you point out, we ended up acquiring a couple of those so far this year that we talked about subsequent to the year-end. And then we have four additional properties, as we mentioned, at $20.1 million that we're looking to close here over the next few months. So nothing was scuttled. And so what we're doing is just continuing to work on getting those properties closed through due diligence and done. And I think we just ran out of time a little bit. Some of the third-party diligence folks started shutting things down a couple of weeks before Christmas, and that resulted in us not getting where we wanted to get to.

Okay. Great. And then I've asked you about this before. In each of the past several quarters, your presentation slides have included these dialysis center developments for a potential $60 million. I don't think you've closed on any since that program was announced. Are there projects underway? Or what's happening with that pipeline? I don't think any anticipated timing was provided like you've done for some of your other identified acquisition targets.

We are somewhat disappointed that progress has been slow. This delay stems from the operator receiving private equity funding, which has shifted their focus towards acquisitions rather than development, where our previous collaborations and term sheets were targeted. Although we currently have a term sheet for a development project that we are negotiating, the process has not moved as quickly as we anticipated. It's important to note that the acquisitions the operator is pursuing do not include real estate, as they pertain to leased properties. We are optimistic about starting to see results from their development efforts, but we are not committing to a specific timeline since we lack clarity on how soon these projects will come to fruition. Additionally, there may be a potential acquisition that incorporates real estate, which we hope to be involved in, but right now we don’t have much visibility on that term sheet.

Okay. Got it. And then my last question, also dialysis related. I saw Fresenius is considering selling its dialysis business. So I don't know if you've been following that, but I was wondering if you thought there were any read-throughs to the future of the industry or any impact or opportunity or anything in terms of your company.

I believe dialysis is set to experience a transition and transformation in the coming years. We are likely to see an increase in home dialysis. We appreciate our partnership with this entity, as they have a business model that supports both home and clinic dialysis treatments, which I believe will be relevant for many years. Home dialysis can be very effective when there is a caregiver or the necessary infrastructure at home to assist the patient. Unfortunately, many patients lack these resources. There is a segment of patients who could potentially receive effective treatment at home, and we are aware of that. However, there will always be a portion of patients who need to visit clinics. While the growth of clinics may not mirror past trends, I remain optimistic about the future of dialysis, provided we partner wisely in the right markets with the appropriate operators. We will continue to be very selective in this area moving forward.

Hey, great. Thank you.

Thanks, Michael.

The next question is from Dave Rodgers of Baird. Please go ahead.

Yeah, good morning, Dave. Tim, I wanted to echo the same comment. Obviously, hoping for study recovery for him. I guess two questions for you, Dave. As you look at the acquisitions, I know there was a little bit of delay you just kind of answered in that question. But I guess, looking forward to the next set of acquisitions, are you seeing more construction delays, difficulties getting materials that could kind of further prolong any of these additional acquisitions that you've already tied up in terms of timing? Or do you feel like that timing is pretty secure for you guys?

Thanks for the question, Dave. I think Tim has addressed this before. The supply chain delays have been somewhat frustrating for us and certainly for our operator who's trying to get these projects started. We are optimistic that the six projects we have under the purchase and sale agreement will close in 2023 and 2024. In 2023, we're aiming for at least two, ideally three, and then in 2024, we expect the remaining three to be operational. However, we are still experiencing some delays due to supply chain issues. Additionally, we face delays related to due diligence and fulfilling all requirements with the municipalities to initiate these projects. While it's been frustrating for both us and our operator, we remain confident about these projects. We'll keep everyone updated as we receive more accurate information on the timeline for these closures. We're very busy and focused on completing the construction, but we have been somewhat disappointed with the slowdown we've encountered. I wish I could provide more specifics on when those facilities will open, but we'll certainly keep you informed as we gain more clarity.

Great. Appreciate that. And then the last question, maybe a little more nuanced. Obviously, Tim is instrumental in kind of sourcing your acquisitions and the relationships that he has and something obviously investors are going to focus on as well. So curious if you can give us a little bit more detail on just kind of the breadth of the relationships across the company that you guys have with the partners and in creating new partners just to assuage any potential fears obviously of Tim not being there for some period of time.

I appreciate your understanding. Over the past four years, Tim has deliberately expanded the team. We have a VP of Investments who is active in our business development but doesn’t typically participate in these calls. The key relationships are primarily managed by him, Tim Meyer, and me, and they span across the organization. We are very focused on acquisition activities and, as a growth-oriented company, we prioritize AFFO and FFO growth. We have been diligent in institutionalizing those important relationships. Tim has done well in getting everyone involved in this process. While we recognize there is a gap and we hope Tim returns soon, we are still actively engaged with our long-standing contacts who have historically provided us with acquisition opportunities. We remain very active in building our acquisition pipeline, and I believe this momentum will continue. It will be our responsibility to bridge any gaps, but we have the right team in place to do so.

Okay, thank you.

Thank you, Dave.

The next question comes from Steve Sakwa of Evercore ISI. Please go ahead.

Yeah. Thanks, good morning. Dave, yeah, please send our best wishes to Tim and hope he's back.

Thanks, Steve.

So a lot of my questions have been asked. I just wanted to maybe focus back on the leasing, and you talked about the 93%. I'm just curious, for the leases that are kind of turning over in '23 and maybe '24, what sort of pricing power do you guys see on the renewals or on the new leasing front? I'm just trying to get a better handle on contractual rent bumps and what happens as leases turn or rents kind of going up, down, flat on, say, the '23 and potential '24 expirations.

Thank you for the question, Steve. I appreciate it and understand your concerns. What we're experiencing is highly specific to the market regarding whether lease rates are increasing or decreasing slightly. Overall, it seems to be relatively consistent. We're not observing a significant difference between our lease rates and the general market rates across all of our locations. In some areas, we are securing better rates, while in others, the rates are lower. It's very much tied to individual markets and even specific buildings. That’s why we're investing in our properties to prepare them for new tenants. Generally, I don't think we're seeing any major fluctuations one way or another. While we don't have significant pricing power in our properties, we aren't encountering notable concessions either. Essentially, we're aligned with the market conditions.

So you'd say you're kind of flattish on rollover on an annual basis.

Correct, yeah.

Okay. Can you remind me if you have contractual rent increases in the leases? Is the average increase around 1% to 2% per year?

I would say they're on average 1.5% to 2%. I mean, we have, as you might expect because we're buying existing buildings with existing leases, so we see everything, everything from CPI-based to fixed to fixed with a cap. But I would say, in general, you could assume that the portfolio is 1.5% to 2% in terms of rent bumps per year.

Okay. Regarding the financing, I understand you're aiming for low leverage. I'm trying to grasp your marginal borrowing cost, which seems to be based on SOFR plus some spread, similar to the bank debt market. So, would it be accurate to say your overall borrowing cost on the debt side is at least 6% today, and possibly increasing?

We are very excited about successfully reducing our debt; the cost of our term loan is now 5.1%. Additionally, I believe we are around 6% for incremental borrowings under the revolver. I would need to verify the spread, but that seems to be accurate.

I understand you're asking about the mix of debt and equity. If your stock is trading at a six cap and borrowing costs are also six, the impact on earnings is roughly the same whether you choose debt or equity. Would you consider favoring equity more heavily to maintain a stronger balance sheet instead of using leverage when the initial borrowing costs are comparable? I recognize that over time, there could be dividend growth and increased shareholder returns. However, from the perspective of earnings impact, it appears to be roughly equivalent between equity and debt.

I believe that point is valid. It has always been important for us to maintain that balance. Our net debt to book capital has consistently stayed within the 30% to 40% range. Incremental debt is usually added gradually, which we have just done. It's reasonable to say that we will consider accessing the ATM over time to further reduce leverage. From our viewpoint, we expect that balance to continue in the future.

Okay. And then just one last question. Is there anything you’re noticing regionally or within specific market areas that stands out positively or negatively, or is performing better or worse than you anticipated? Anything noteworthy regarding regional operations, leasing, or acquisition opportunities?

No, I don't think we're encountering anything unusual. We continue to witness significant growth and new construction activity in the Southeast, which aligns with the strong population migration to that region. This trend remains a positive factor for our development opportunities. Regarding acquisitions, we're observing consistency across the country and will focus on markets that are appealing to us. We're not identifying anything negative. Historically, we haven't pursued many acquisitions in the New York and California markets, but that shouldn't imply we wouldn't consider attractive real estate opportunities in those areas. Each deal is unique, and since this is a vast country with many outstanding markets, overall, we're not seeing anything that would deter us from any specific market.

Great. That's it for me.

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

Well, great. Thanks, Kate, and thanks, everybody, for joining us today. We really appreciate everyone's positive message to Tim. And look forward to continuing to grow, and appreciate everybody's support. Thank you so much.

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