Welcome to the Community Healthcare Trust’s 2024 Second Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2024 second 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, July 31, 2024, 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 a 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. All 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, CEO of Community Healthcare Trust.

Great, and good morning. Thank you for joining us today for our 2024 second quarter conference call. On the call with me today is Bill Monroe, our Chief Financial Officer; Leigh Ann Stach, our Chief Accounting Officer; and Tim Meyer, our EVP of Asset Management. Our earnings announcement and supplemental data report were released last night and furnished on Form 8-K, along with our quarterly report on Form 10-Q. In addition, an updated investor presentation was posted to our website last night. As disclosed in our filings, we determined that certain lease and interest payments from a geriatric inpatient psychiatric hospital tenant were not reasonably assured of collection. CHCT has six leases with the tenant, and it is the sole tenant in five of our properties with one lease in a multi-tenanted property, representing a total of approximately 79,000 square feet. As a geriatric psychiatric hospital operator, COVID had a significant impact on the tenant’s business through 2022. During this time, the tenant was in the process of expanding locations, which led to a more pronounced impact. In 2023, the company improved census, installed the new revenue cycle management system, and made other operational improvements resulting in improved performance. Unfortunately, recent management changes resulted in a decline in census, staff turnover, and ultimately impacted the tenant’s ability to consistently pay rent and interest. The tenant has hired a consulting team with significant behavioral operating experience to implement a turnaround plan and stabilize the business. CHCT has previous experience with this consulting team, and we have confidence in their ability to make the necessary changes to improve operations. We are working closely with the tenant and the consultants to monitor and evaluate progress with the turnaround. Bill will discuss in more detail the financial impacts from this tenant, but let me review what we believe to be the unique features of this tenant relationship compared to the rest of our portfolio. Most importantly, this tenant is the only top 10 tenant where we are also a lender. To improve transparency of our top tenants, we are now including in our supplemental data report and investor presentation, not just those tenants with greater than 4% of annualized rent, but a listing of all top 10 tenants. Another aspect of this tenant relationship that I mentioned earlier was that COVID significantly impacted this tenant given its geriatric patient base. At a time when it had also recently expanded locations. Because this tenant is a privately founded business, CHCT helped finance the tenant’s expansion leading to CHCT’s $22.7 million in notes receivable across the term loan and revolving credit facility. This $22.7 million is by far our largest lending relationship with our only other notes receivable currently outstanding consisting of a $4.5 million term loan to a long-term acute care and inpatient rehab hospital tenant and a $2.2 million revolving credit facility to a substance use and eating disorder mental health provider tenant. To conclude, we believe we can work closely with this tenant over the coming quarters to enhance returns on this unique investment within the portfolio. As for other components of the business, our occupancy increased slightly from 92.3% to 92.6% during the quarter, and we continue to see good leasing activity in the portfolio. In addition, we have five properties or significant portions of those properties that are undergoing redevelopment or significant renovations with long-term tenants in place when the renovations or redevelopment is completed. Also, our weighted average main lease term increased from 6.9 years to 7.1 years. During the second quarter, we acquired an inpatient rehabilitation facility for a purchase price of $23.5 million. We entered into a new lease with a lease expiration in 2039 and anticipated annual return of approximately 9.1%. Subsequent to June 30, we acquired one medical office building for a purchase price of approximately $6.2 million and expected returns of approximately 9.3%. The property is 100% leased with a lease expiration in 2027. Also, the company has signed definitive purchase and sale agreements for seven properties to be acquired after completion and occupancy for an aggregate expected investment of $169.5 million. The expected return on these investments should range from 9.1% to 9.75%. We expect to close on one of these properties in the fourth quarter of 2024, with the remaining six properties closing throughout 2025, 2026, and 2027. And we continue to have many properties under review with term sheets out on properties with indicative returns of 9% to 10%. With our modest leverage levels, we anticipate having enough availability on our credit facilities and through our banking relationships to fund our acquisitions and we expect to opportunistically utilize the ATM to strategically access the equity markets at favorable share prices. These traditional capital sources, combined with proceeds from selected asset sales, will provide sufficient capital for continued growth at attractive yields. To wrap up, we declared our dividend for the second quarter and raised it to $0.4625 per common share. This equates to an annualized dividend of $1.85 per share. We are proud to have raised our dividend every quarter since the IPO. That takes care of the items I wanted to cover. So I will hand things off to Bill to discuss the numbers.

Thank you, Dave. I will now provide more details on our second quarter financial performance. Let me start by detailing the impacts to our second quarter financials related to the geriatric inpatient behavioral hospital tenant that Dave described earlier. Rental income in the second quarter was negatively impacted by the reversal of $1.9 million of rent, which includes approximately $900,000 of non-cash straight-line rents. Also, other operating interest in the second quarter was negatively impacted by the reversal of $1.4 million of interest. Combined, these items reduced total revenue in the second quarter by approximately $3.2 million to $27.5 million. Compared to the second quarter of 2023, total revenue declined by $294,000, and compared to the first quarter of 2024, total revenue declined by $1.8 million. It is important to note that of the $3.2 million impact to second quarter total revenue I just described, only approximately $1.5 million is a result of rental income and interest we expected to receive in the second quarter of 2024 from the geriatric inpatient behavioral hospital tenant, with the remaining amount resulting from one-time out-of-period adjustments to prior period amounts outstanding, net of payments and security deposits. In addition to the reversals of rent and interest, we recorded an $11 million credit loss reserve on the $22.7 million notes receivable from the tenant. This credit loss reserve reduced net income and is based on an estimated value of the underlying collateral which we will continue to monitor. But any future credit loss reserve reversals or increases will not impact FFO or AFFO. Moving to expenses, property operating expenses decreased by $219,000 quarter-over-quarter to $5.6 million since the first quarter had higher seasonal expenses at several properties. General and administrative expenses increased by $206,000 quarter-over-quarter to $4.8 million as a result of increased professional fees, and interest expense increased by $924,000 quarter-over-quarter to $6 million because of increased borrowings under our revolving credit facility to fund the $23.5 million of acquisitions during the second quarter of 2024, as well as the $27.7 million of acquisitions during the final week of the first quarter of 2024. Moving to funds from operations, FFO was $11.6 million in the second quarter of 2024. On a quarter-over-quarter basis, FFO decreased from $14 million in the first quarter of 2024, and on a per diluted common share basis over these periods, FFO declined from $0.53 to $0.43 per share. These decreases are primarily the result of the $3.2 million of reversals of rent and interest described earlier. Adjusted funds from operations, or AFFO, which adjusts for straight-line rent and stock-based compensation, totaled $14.3 million in the second quarter of 2024. On a quarter-over-quarter basis, AFFO decreased from $15.7 million in the first quarter of 2024, and on a per diluted common share basis over these periods, AFFO declined from $0.59 to $0.53 per share. These decreases are also primarily the result of the $3.2 million of reversals of rent and interest described earlier, net of approximately $900,000 of straight-line rent, which was added back and that is why you see a smaller impact to AFFO quarter-over-quarter than FFO. I’ll note that even at $0.53, our dividend remains well covered with the current payout ratio of 87%. That concludes our prepared remarks. Darwin, we are now ready to begin the question-and-answer session.

Certainly. Thank you. We will now begin the question-and-answer session. The first question comes from Rob Stevenson with Janney. Please go ahead.

Good morning, guys. Could you talk a little bit about how many facilities in total this tenant has? And what percentage you represent of them? And sort of how these properties are performing versus maybe some of their others in case they were to file bankruptcy and look to give up some leases.

Yes. Hey, Rob, thanks for the question. This tenant has a total of six hospitals, and so the buildings that they have with us make up the entire complexion of their business. The reduction in census has been the catalyst for some of the issues they’re having in paying rent and interest. Did that answer your question?

Yes. I mean, I guess the follow-up to that would wind up being how much revenue would be at risk here if they were in bankruptcy from where we’ve adjusted to thus far? And are any of the acquisitions in the pipeline with this tenant?

There are no acquisitions in the pipeline with this tenant. The run rate amount of rent and interest associated with this tenant is approximately $1.5 million a quarter. So that gives you a sense. We’ve got consultants in there that we’ve worked with before that are familiar with this tenant, and our thought is that the consultant will be able to help effectuate the turnaround that should allow them to start paying us rent at some point. It’s difficult when you’re in the middle of the turnaround to identify exactly when that is, but we are monitoring progress on a weekly basis.

Okay. And I guess, how long were these guys on the watch list? I mean, was this a slow process to get to here, or was it basically a couple of weeks and it was like flipping a switch? Just trying to get a sense, these days, how quickly these problem assets appear on the radar screen, whether or not it’s something that there's a little bit more warning for basically, or if you've come in one day and found out that they’re having much more difficulties than you imagined?

Well, one of the things I mentioned in the prepared remarks is that this has been a relationship for the firm for a while. For 2020 to 2022 during COVID, they were very much on the watch list just given the nature of the business and the geriatric patient base and the challenges they were having ramping up the two new hospitals that we financed. They were on the watch list then, they fell off the watch list in 2023, and the business was performing very, very well. Then with these management changes late in the fourth quarter of 2023, we started seeing some late rents and some concerns with regard to census and performance. They came back on the watch list in the first quarter. They made partial payments in the first and second quarters, but ultimately, it wasn’t enough to make us comfortable that the rent was going to be collectible, and that’s why we moved them to cash basis.

Okay. And speaking of the watch list, how significant is that overall today? And anybody else, any other of the top tenants on that list today?

None of the other top tenants are currently on our watch list. The watch list is similar today in terms of numbers compared to before. But obviously, this is very disappointing to us, as it's such a large tenant on the heels of what we had to get through with Genesis Care last year is having this issue and these problems. But again, we feel good about the top 10 list currently. We’re very well diversified beyond these other tenants, so we feel good about the portfolio overall.

Okay. And then just one last one for me. Bill, how should we be thinking about the $0.53 of AFFO per share going forward? I know that, that didn’t get adjusted as much as the FFO, but is there other stuff that either has to come out of that or be added back to that in future quarters? Or is that still a ballpark run rate for where the company is today, given the reductions with this one tenant?

Yes. I think until we see improvement from this tenant, we’re kind of in the right ballpark. I mean, the short answer is of the charges we took in the second quarter that were out of period charges, you’d say approximately $750,000, $800,000 of AFFO should kind of be added back on a run rate basis compared to where our second quarter AFFO was. As we move forward, we don’t provide guidance, but interest expense, G&A, and other things will also be taken into account as far as what AFFO will be. But clearly, the biggest impetus for an increase quarter-over-quarter on an AFFO basis will be improved performance and the payment of rent and interest from this tenant.

Okay. That’s helpful, guys. Thank you. Appreciate the time this morning.

Thanks, Rob.

Thank you. The next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey, good morning down there. Dave, I mean, as you have this tenant, and obviously, as you said, it’s on the heels of Genesis, clearly something you guys didn’t need. But one, these were all deals that were done before you guys took over, not casting blame, but clearly, these were deals done years ago, not recently. So as you look at the portfolio and at your underwriting, what are some of the lessons learned from Genesis and now here that as you look at your acquisition pipeline and existing tenants, you go, hey, maybe we want to kick these deals out or we have other tenants that look like Genesis or this tenant in terms of payment history or coming up a little light in their envelope when they pay the monthly rent? What are some of the things that you’ve seen and reassessments of existing tenants and acquisition pipeline?

Thanks, Alex. That’s a great question. I will say, in the wake of Genesis Care in this latest situation, we have tightened our underwriting standards. The bar is higher. You won’t see us lend at these levels to a single tenant again, that just won’t happen. COVID was a unique situation. Everyone who went through it, especially the geriatric population, faced a very unique situation. It drove significant borrowings from this tenant, and at the end of the day, any slip in census had an impact on their ability to pay rent and interest. From our perspective, we’re just going to be more rigorous with our underwriting, and you’re not going to see the same levels of loans to a single tenant going forward because that is not in sync with our diversification strategy as a firm.

But as far as it’s not just the loan that went bad, it was the tenant as well, and certainly it happened with Genesis. So does this mean that you want to shy away from doing portfolio deals and stick to single asset deals? Or how is this changing? And then also, why even lend anything to a tenant? Why not just keep it a purely rental relationship?

Well, every situation is unique. Sometimes there are competitive reasons. Sometimes there are very good reasons for us wanting to lend as part of an overall relationship. What I would say, Alex, relative to portfolio deals, historically, we have been reluctant to do portfolio deals in a meaningful way. Going back to Genesis Care, that was a portfolio deal. Ultimately, it wasn’t a fun process, and you're disappointed that the holdco was overleveraged and didn’t perform. However, the performance at our facilities largely worked out. It’s important that we underwrite each individual market and property because that will drive rent and interest payment to us, whether from that tenant or a new tenant. I’m not going to say we won’t do a portfolio deal because there could be opportunities for us, but our underwriting standards are going to be more rigorous.

Okay. Just the final question is, obviously, the stock has taken a bit of a hit. Do you reconsider the committed acquisition pipeline? Or how does where the stock is now trading change the goal of getting the pipeline back up to sort of that $130 million, $150 million a year?

Listen, we’re very focused on looking at all sources of capital. We continue to have a modestly leveraged balance sheet. We don’t think this will impact in any way our commitments in our pipeline. We recognize as a small REIT, even though we are definitely going to be judicious with our capital, growth is what’s going to drive our performance from a share price perspective. It’s all about driving AFFO and FFO. We’re just going to be very strategic in how we do that, and we’ve got other levers than just the stock. We can do some capital recycling in the portfolio. We can borrow given our leverage levels and the support from our banks. Overall, we feel positive in our ability to access the various markets to continue to fund our growth.

Thank you.

Thanks, Alex.

Thank you. The next question comes from Michael Lewis with Truist. Please go ahead.

Great. Thank you. So Alex just asked one of the questions that I think has one of the more important questions, right? So the stock over the last 12 months was already down 18% or 20%. Investors were asking at what point is the cost of equity no longer acceptable to issue shares to fund new investments at nine handle cap rates? It’s obviously taken another leg down this morning. I know it’s a tough question to answer. You don’t want to put yourself in a box, but when does the cost of equity become prohibitive? I think there’s a danger here if you lose access to that capital or that spread over your investment yield. I don’t know what more you could say on that. Maybe you already answered it.

It is a tough one to answer. What I would tell you is we’re looking to make accretive acquisitions. Those acquisitions need to drive overall revenue and AFFO growth for the company. We’re highly sensitive as shareholders in the company to doing a dilutive equity raise, particularly in the ATM. We’re going to be very mindful of that, as I mentioned earlier. We’ve got opportunities within the portfolio to do some capital recycling to fund some growth, so we have other tools to continue to grow without putting pressure on the stock. We recognize that’s not good for us, and ultimately, it’s not good for driving AFFO growth. Bill, I don’t know if you want to comment.

No, I agree.

Okay. Thanks. And then you talked about your expectations; hopefully, the consultant helps and the tenant gets paying again. Worst-case scenario, where the tenant doesn’t recover, are these properties easy to re-tenant or sell or what kind of the plan would be? I don’t mean to jump right for the worst case, but I think it’s important to judge what that might look like.

Yes. One benefit from having been in the healthcare services sector for a number of years is we know a lot of operators in this space. Some tenants that are operators would be interested in these assets. Without jumping to that scenario, there are many potential buyers or operators that we think will be interested in these hospitals. There is a scarcity value to these businesses, and so we think the individual hospitals would be attractive to a potential buyer.

And Michael, it’s Bill. I’ll add that we have not seen and do not believe there’s been a change in the competitive landscape in these local markets where this tenant operates, such that it is more of an execution issue. I think that helps preserve what is the value of these properties as we think about it.

Okay. For whatever it’s worth, we do see REITs and other healthcare sectors lose significant tenants, and the stocks don’t take a hit like this. I think it has to do with being able to reposition assets. My last question, just on the acquisition pipeline. I think the deal that you closed in the first quarter – or I’m sorry, closed in the second quarter you had already mentioned on the first quarter call. So has there not been any new activity over the last few months? And does the pipeline still seem full? Do you think you’re still on target for your acquisition goals for the year?

We have continued to be active and are seeing a number of deals. We’ve got term sheets outstanding, as I mentioned in the prepared remarks. Sometimes we’ve seen in the past that closings are a little slower in the third quarter due to vacation schedules, etc. However, we believe that hitting our acquisition target is still achievable this year. We’re still seeing good activity from an acquisition standpoint, which doesn’t always translate into closed deals, but it’s certainly better than not seeing the activity. Yes, we still feel like that’s achievable.

And Michael, I’ll note we did include that we closed a $6.2 million property early in the third quarter, so it didn’t show up in the second quarter closed numbers, but we did mention it in our investor presentation that we did close an additional property early this quarter, just this month.

Okay. Thank you.

Thank you. Next question comes from Wes Golladay with Baird. Please go ahead.

Hey, good morning, guys. It’s actually Baird Capital. When you look at the lease expiration schedule, you have $107 million of rent annually. Does that include the tenant that is having issues right now? And is that a cash number?

I have to look. So I would think that it would include those leases in the number, but those leases that we have with the tenant have maturities between 2030 and 2036. So no upcoming maturities with that tenant.

Okay. I just want to make sure the $107 million incorporates that. And then when you look at what they’re paying on cash accounting now, did they pay anything in the second quarter?

Just a little bit, not much. Just some small payments. We’re not necessarily expecting to get meaningful payments in the third quarter either. I mean, they’re in the middle of this turnaround.

Okay. And then when you look at the line of credit, the utilization is getting higher, but then you could probably issue another term loan. How are you looking at that?

Yes. We had $41 million available under our revolver at the end of the quarter. The next maturity is not until March of 2026. Typically, we look to term out those revolver borrowings when we get within a year or so of those maturities, and we’d anticipate taking a look at that, again, having had success with our bank group doing that historically.

Okay. Thanks for the time.

Thanks, Wes.

Thank you. The next question comes from Jim Kammert with Evercore. Please go ahead.

Hey, good morning. Thank you. Do you have the ability under the lease with this tenant in question to replace them, meaning they’re in default? I presume they’re not paying the rent. Obviously, why wait? In other words, if these are desirable assets, try to parallel path and look for a replacement tenant or a new owner, meaning a new operator?

Hey Jim, thanks for the question. Yes, we absolutely do have the ability to replace them. They’re in default of our lease, and we are taking multiple paths. We’re not just wed to the consultants, and we’re looking at other options. Given that this tenant has outstanding loans to us, we want to try to preserve options with this tenant. But they’re on a short lease, and we have a number of folks we think could operate these facilities. We want to make sure that we get a paying tenant. Hopefully, it’s this tenant, but if not, we’ll evaluate others.

Great. Because I’m just trying to reconcile that with the prior comments, but that’s very helpful. Thanks. You’ve taken basically a 50% reserve against the loan balance. If these are just basically the business's entire network of hospitals, could you just help me understand why such a large hit on the receivable? If there’s any additional color you can provide there, it seems sort of inconsistent with the premise that these are salable, marketable assets.

Yes. No, listen, I hear you. It’s just one of those processes you have to go through that CECL requires, and it’s a structured accounting process that we have to follow. You're trying to come up with a value for the business and be conservative given the current environment. That’s what you’re seeing in terms of the reserve. There’s no question we think there is value in the operations here. We’re trying to stabilize the business and make sure we can drive as much value from those operations as we can.

Great. So you worked it with your accountants, so CECL really did drive that determination. It was not an in-house decision?

Yes.

Okay. Perfect. That’s helpful. Thank you.

Thanks.

Thanks, Jim.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Dave Dupuy for any closing remarks.

Listen, thank you, operator, and thank you, everyone, for joining us this morning. We hope everyone has a good day, and look forward to talking to you next quarter. Thank you.

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