Welcome to Community Healthcare Trust 2020 Third Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2020 third quarter financial results. It will also discuss progress made in various aspects of its business. [Operator Instructions].

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, November 4, 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 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 2 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 this call will be made available on the company's Investor Relations website for approximately 30 days and is the company -- 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 Inc. Please go ahead. .

Thank you, operator. Good morning, everyone. Thank you for joining us today for our 2020 third 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. .

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. As it relates to the supplemental data report, you will notice it has a different look.

Also, when you have a chance, go to our website and take a look at our investor presentation. Dave and Leigh Ann did a great job of updating both of these documents. Dave will probably discuss these later. .

While the third quarter was somewhat unusual, we had a busy quarter, both from an operation standpoint and an acquisition standpoint. Although the acquisitions were not consummated until after the end of the quarter. The topic of the quarter still seemed to be COVID-19. Healthcare providers are still being impacted by the COVID-19 pandemic.

Some are seeing a reduced number of procedures and/or patient visits while others' operations are basically back to pre-pandemic levels. As of October 31, the company had deferral agreements with 18 tenants representing less than 1% of our annualized rent and had collected approximately 50% of the amounts previously deferred.

Our receivables are in the best shape they have been in the company's history. Our asset management group has done a great job related to COVID-19. As I indicated last quarter, the most significant effect COVID-19 has had on the company is slowing down our acquisition process.

This pushed the properties we intended to close in the third quarter into October. .

Now on to more normal items. As you know, we have an active ATM program in place. During the third quarter, the company issued 536,839 shares of stock through its ATM program at an average gross sales price of $47.40 per share. We received net proceeds of approximately $24.9 million at an approximate 3.64% current equity yield. .

During the quarter, the company acquired a land parcel adjacent to one of our existing properties for a purchase price of approximately $1.1 million. During the fourth quarter, during November 3, we acquired 10 properties with a total of approximately 209,000 square feet for a purchase price of approximately $67.9 million.

These properties were 100% leased with leases running through 2035 and anticipated annual returns of 9.45% to 9.9%. This brings our acquisitions for the year to approximately $127.2 million through October. .

The company has 3 properties under definitive purchase agreements for an aggregate expected purchase price of approximately $12.8 million and expected aggregate returns of approximately 9.2% to 10.8%. The company is currently performing due diligence and expects to close these properties over the next 2 quarters.

We also continue to have additional properties under definitive purchase and sale agreements to be acquired after completion and occupancy for an aggregate expected investment of $38 million. The expected return on these investments should range up to 11%. We expect to close on these properties through the middle of 2021. .

We continue to have many properties under review and have term sheets out 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 markets. .

Occupancy dropped slightly during the quarter as leasing activity was somewhat muted due to the challenges caused by COVID-19. However, we have seen leasing activity and interest pick up over the last 6 to 8 weeks. Our weighted average remaining lease term remained relatively stable at approximately 7.8 years.

On another front, we declared our dividend for the third quarter and raised it to $0.425 per common share. This equates to an annualized dividend of $1.70 per share, and I continue to be proud to say we have raised our dividend every quarter since our IPO. .

As it relates to Highland Hospital, as previously disclosed, the company provided financing to facilitate the bankruptcy process. As of today, we do not have any net receivable balance. And due to that fact and the new operator has leased the property and is doing well, I do not anticipate giving any future updates on Highland.

I believe that takes care of the items I wanted to cover, so I'll hand things off to Dave to cover the numbers. .

Great. Thanks, Tim. Before covering the financial results, I wanted to provide a couple of quick updates. As Tim mentioned, we have updated and enhanced our supplemental information report, which was included with our 8-K filing last night.

It was our goal with this update to add additional metrics and depth to our financial disclosures to make it easier for our investors and analyst community to understand our growth and financial performance.

A few examples include a company snapshot section, financial highlights section as well as a more detailed reconciliation of non-GAAP measures, including FFO, AFFO, pro forma AFFO, NOI and EBITDAre. We hope you find the updated and expanded supplemental useful. In addition to that, we have updated our investor presentation.

Similar to the supplemental, we updated the design, added some new information, and we'll be updating that document on a quarterly basis. Both the supplemental information and the investor presentation may be found on our website, which is www.chct.reit. under the Investor Relations tab. .

Finally, as it relates to our website, we are in the process of updating it as well. The new website should be up and running in early 2021..

Now on to the numbers. I am pleased to report total revenue grew from $16.3 million in the third quarter of 2019 to $19.3 million in the third quarter of 2020 representing 19% growth over the same period last year. Revenue for the second quarter 2020 was $18.3 million, which represents 5.8% sequential growth. .

From an expense perspective, property operating expenses increased quarter-over-quarter from $3.223 million to $3.563 million or 10.5%. This was driven by new property acquisitions that occurred in the second quarter as well as normal fluctuations in property expenses experienced quarter-to-quarter.

In addition, G&A increased from $1.919 million to $2.211 million or 15.2%. The increase in G&A was a result of both an increase in deferred stock amortization as well as normal fluctuations in G&A experienced quarter-to-quarter. Interest expense declined $119,000 from $2.183 million in the second quarter to $2.064 million in the third quarter.

This decrease related to net proceeds raised through our ATM program used to pay off our revolver as well as moving to a new tier in our syndicated bank facilities pricing grid, which resulted in 25 basis point savings across all of our bank facilities. .

Our net income increased from $2.647 million for the third quarter of 2019 to $5.211 million in the third quarter of 2020, representing year-over-year growth of 96.9%. Net income for the second quarter of 2020 was $4.526 million representing 15.1% growth sequentially. .

Also I'm pleased to report that funds from operations for the third quarter of 2020 grew to $11.6 million from $8.5 million in the third quarter of 2019 or 37.1% year-over-year. On a per share basis, FFO increased from $0.44 per diluted share in the third quarter of 2019 to $0.52 per diluted share in the third quarter of 2020 or 18.2%.

Meanwhile, FFO for the second quarter of 2020 was $11 million, representing 5.4% growth sequentially. .

Adjusted funds from operations, which adjusts for straight-line rent and stock-based compensation, totaled $12 million compared with $8.9 million in the third quarter of 2019 or 35% growth year-over-year.

On a per share basis, AFFO increased from $0.46 per diluted share in the third quarter of 2019 to $0.53 per diluted share in the third quarter of 2020 or 15.2%. .

Finally, AFFO for the second quarter of 2020 was $11.4 million representing 5.4% growth on a sequential basis. .

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

[Operator Instructions] The first question comes from the line of Alexander Goldfarb with Peter Sandler (sic) [ Piper Sandler ]. .

Piper Sandler. So 2 questions. And Tim, we'll go back to Highland Hospital. And as you said, hopefully, it's the last time we talk about this. So just so that we're all clear, I think there were 2 tenants that you've had that you had to deal with restructurings, both you -- you were successful in both.

On Highland, is this asset now out of the portfolio, so your involvement with this asset is done? Or this now becomes a regular tenant?.

And two, remind me, the other restructuring that you're involved with, is that done now as well? Or is that still in the portfolio?.

Both of them are in the portfolio. Highlands, the new tenant has signed a long-term lease, and we anticipate being as part of the portfolio for a long time now. The other one that you're talking about was AMG, and we still have $15 million, $16 million outstanding. They have been doing wonderfully this year.

They are going through a process to see about refinancing as we're hoping that they can't do that just yet. But it has been a very good success story for those owners, and we feel very good about what we did there. .

Okay. And then the other question is on your acquisition guy who's traveling the country in the RV. Just a sense of what's going on with the pipeline.

Has there been a sort of a dearth of deals through COVID and especially on the presale, so on the development front? Or has there been a steady pace? Because from your comments, it sounds like the pipeline has been largely unaffected, like it's still a pretty good environment out there.

But just curious if as we get through longer into COVID, if we should expect sort of more activity on the pipeline and the presale front? Or the level of activity has never really deviated that much from what it was historically?.

The answer is, it really hasn't deviated that much from historical. I mean what we experienced at the end of the second quarter and through a large part of the third quarter was just a difficulty in getting things through the process of closing.

I mean, part of that was it takes longer for Mike to drive around in an RV and see 10 different properties than it did for him to fly around and see 10 different properties. Part of it is the titled companies, part of it is the court clerks, part of it -- so that was basically just a gumming of the works there for a period of time.

And the works are still grum some. I don't want to downplay that, but the thing is we kind of work through that, and we got things out the other end. And so instead of looking at what happened in the third quarter as being some aberration, if you look at what's happened in the second half of the year, we've kind of met our guidelines.

I mean we'd say $120 million to $150 million. Again, we sit here on November the 4, and we've done $127 million. .

So I don't think anything can be drawn a conclusion from the pipeline otherwise. Now the question of what happens if COVID lingers, COVID gets worse again, COVID whatever, your crystal ball is probably as good as my crystal ball. I really can't say, but we are still seeing deals come in, and we're still sending term sheets out on them. .

The next question comes from the line of Gaurav Mehta with National Securities. .

Following up on acquisition, I was hoping if you could comment on what you're seeing in different asset classes in the acquisition market. .

Could you repeat that?.

I was hoping if you could comment on what you are seeing in different asset classes in healthcare in the acquisition market. .

We're seeing assets kind of across the board on everything from behavioral to oncology, to physician clinics. I mean, we're still seeing kind of the same stuff that we've always seen from an asset class standpoint, and it could be because that's what we're still looking for. .

Okay. Great. Well, that's good to hear. And I guess a second question on lease expiration. You talked about occupancy dropping as a result of muted leasing activity.

Maybe talk about what you are expecting for 2020 and 2020 lease expirations? Are you speaking with tenants? And if you are, what kind of feedback are you getting?.

Yes. We're already addressing a lot of that. I mean there's only, I think, 6% of the portfolio rolling in 2021, but we're already addressing some of those leasing -- leases that are coming up for rolls. I mean, overall, we think the leasing market is actually pretty good.

I mean it went through kind of the same kind of process that we went through with the acquisitions. I mean in May, June, July, probably the first part of August, providers just were stretched too thin to think about their leasing situation. I mean, they only had so much bandwidth and it was going to other things.

And what we've seen it slowed it down too as they have brought in brokers where historically, there hadn't been brokers involved, and that tends to slow the process down also. So we're thinking that we're going to see a good fourth quarter as it relates to leasing. We believe the occupancy level is going to pop back up.

And we think we've got a good head of steam going into next year. .

The next question comes from the line of Nate Crossett with Berenberg. .

Maybe just following up on your comment at the end there about a full head of steam into next year. So I guess do you feel pretty comfortable that the range of the pipeline for next year will be within that kind of $120 million to $150 million.

Maybe you could just give us some color on the size of the deal flow outside of what you've already announced? And then my second question is, can you just give us some detail on the 10 properties you've already acquired so far in the quarter?.

Sure. As it relates to the deal flow, I mean, going from memory, I mean, I think what we disclosed was 12 -- a little over $12 million in 3 properties that we're currently working on. Actually, we've got a PSA in from a seller that go out probably today, fully executed for another $5.5 million property. So we're seeing good flow in the pipeline. .

Now I'm not saying -- historically, I might have said I thought some of those would close in the fourth quarter. Some of them might close in the fourth quarter, but probably several of them will end up closing in the first quarter. And so we've got several term sheets out again, the pipeline looks good.

I feel fairly comfortable saying that we'll do $120 million to $150 million next year, just like I've -- we did $127 million so far this year in the middle of the pandemic. So I hope we're able to do that next year. As it relates to the 10 properties, we've already acquired the behavioral properties. There is a group of oncology centers.

I don't think we've disclosed to the operator on those, probably shouldn't say -- I don't know what we have but again they're good operators and they are in good locations and we feel very comfortable with them. .

Okay. That's helpful. Have you seen any increase in competition in the last 3 months? I know normally, the stuff that you guys bid on isn't usually highly competitive bid. But any comments there would be good.

And then just on pricing, I guess, what's your kind of expectation for next year?.

I mean our view on competition is like it's always been. I mean, one of my favorite quotes is from Mr. Rockefeller, who said, the only problem with competition is it's [ run as a ] profit. So we try to stay away from it and tend to be rather successful at doing that. So we haven't seen any competition, any increased competition.

And if we feel competition on the other side or a competitive bid type of process going on, we'll tell them that we'll walk away from it. And if e the process doesn't work out, let us know, and we'll look at it, but we're not going to get in the middle of a competitive bid process. .

As it relates to pricing, I mean, we feel like the pricing can hold steady. I mean, we might be able to increase it in some situations. I mean, I think our history, at this point, 5 years ago, people questioned whether or not we could buy -- continuously buy assets at 9 caps or above, but we've done it for 5 years.

And I don't know at this point what would change related to that. So we're still anticipating being able get the 9-plus cap rate on the acquisitions that we do. .

The next question comes from the line of Rob Stevenson with Janney. .

Sorry if I missed it, but did you guys announce what the cap rate was on the $68 million of acquisitions thus far in the fourth quarter?.

I think that was part of my comments. I don't know if it was done in the thing, but it's 9.45% to 9.9%. .

Okay. And then, Tim, when we look back at the March, April, May, June period, what percentage of your tenants really felt real documented financial stress the closures and the bans on elective surgeries? Because a lot of that stuff was in the Northeast and the Mid-Atlantic and stuff like that or places where you don't have as much exposure.

So when you look back on that, what percentage of the tenants in the portfolio really had a lot of really demonstratable financial stress?.

A very small percent. I mean, as we've stated before, we deferred rent related to less than 1% of our annual adjusted -- annual base rent. 18 out of a couple of hundred tenants. And most of those were smaller ones where we saw doctors that had problems.

It was like dentists or optometrists, people who were working close to the face and they basically had to shut down. The majority of our properties didn't. I mean, the behavioral facilities basically had an increase through the process, generally speaking. And -- so I mean, it's really a very small percentage.

And as I said, we've already collected approximately half of what we originally deferred. So we feel very, very lucky in that scenario. .

Okay. Because the reason why I ask is, whereas earlier this year, the hardest hit areas were the Northeast, Mid-Atlantic and maybe you could argue maybe some on the West Coast, it seems like that the hardest hit areas right now seem to be the Midwest and some of the Sunbelt stuff where you do have much greater exposure.

And so some of these areas are starting to limit elective surgeries again.

So just trying to figure out, obviously, there's going to be some sort of -- could be -- I guess, there could be some sort of disruption, but just trying to figure out from an asset standpoint, this is it, to what extent that sort of goes through if this go around is more Midwest, Sunbelt than the coast?.

Well, I mean, actually, I mean, that's where our diversification comes into play.

I mean, the diversification of the industry segment, we've only probably got, I mean, I don't remember, what's the percentage of surgery centers we've got like 10% or something?.

I think less than that. .

It's a relatively small percentage of the surgery centers. And generally speaking, we are not hospital services dependent. A lot of our tenants are hospital related, but they're the physicians and those types of things.

And again -- and with oncology centers, with dialysis centers, with behavioral, with -- I mean, those types of things, we've seen consistent, basically, patient visits, et cetera, through the process. I mean there was a small dip with some of them back when the whole country shut down for a month or whatever it was.

But overall, we've seen very little stress in our system. .

Okay. And then last one for me.

Dave, how close are you guys these days to taxable net paying out 100% of taxable net earnings? I mean, is the dividend increase more of a function these days of what's reasonable? Or are you guys down to the sort of bare minimum and any type of growth is going to push the dividend up at a similar growth level?.

In other words, is there more room for the dividend payout ratio to come down? Or are you basically -- with these last few and the continued earnings growth, are you basically at sort of minimum payout at this point?.

Basically -- and I'll take that one, too. We're basically, have long ways to go. I mean, we're at 80% -- low -- high 70s on FFO. But you take our depreciation away from that, and then we still have a long ways to go.

So What we've said all along was that we would be looking when we got down into the 70s, we'd be looking at increasing the dividend at a faster pace. But right now, we're not facing anything that's a requirement to do it from a taxable income standpoint. .

The next question comes from the line of Amanda Sweitzer with Baird. .

Touched on this a bit with your previous comments about stable trends kind of across your portfolio. But what are you hearing from your behavioral tenants just from a telehealth perspective? I assume your acute behavioral inpatient facilities haven't seen that meaningful of an impact.

But are there any kind of post-COVID trends that you could point to from your broader subset of behavioral assets?.

Generally speaking, and you're absolutely right on the inpatient stuff. I mean, you really can't do inpatient behavioral by telehealth. What we have seen is that there is an uptick in telehealth with the behavioral, but there's an uptick in behavioral.

So I don't -- that's one of the uncounted costs related to this pandemic is keeping people isolated, et cetera, has substantially increased calls to suicide lines and those types of things.

So we're anticipating there's going to be a fairly good uptick in telehealth, but don't really think it's going to take anything away from the inpatient or office visit or outpatient type of behavioral health because you're going to see an overall increase, substantial increase in overall usage of the behavioral health system. .

Yes, that makes total sense.

And then it was small during the quarter, but what's your plan with that land parcel you acquired next to one of your existing assets?.

Well, basically, that asset is next to a mall in Florida, and our tenants there have long wished for an access to it other than being off of the mall road. I mean, basically, the only access right now is off of the mall ring -- the ring road around the mall.

So by doing this, what it allows us to do, it allows us to turn this property into -- we're calling in a medical campus. It used to be called Treasure Coast Plaza or I forgot what it is. But we're going to call it Treasure Coast Medical Campus. And we have the opportunity to build a couple of new building, I think up to 100,000 square feet.

But what it allows us to do is put a main drive up to our existing facilities. So we'll get immediate increase in value and visibility with our existing facility and then be able to drive additional growth through the new properties. .

The next question comes from the line of Sheila McGrath with Evercore. .

On the Highland, I'm glad we won't be able to talk about it anymore, but I'm just curious, Tim, you guys did a lot of work in terms of negotiating and then had a debtor in possession financing.

If you look back on how you navigated through that, do you think you came out breakeven for the REIT?.

Sheila, thanks for the question. And actually, we think we came out a little better than breakeven. There were several places through the process that we were able to take advantage of things like buying stuff at a discount and that type of thing that we feel very good with where we came out and we've got a very good tenant now.

So we feel like we had a great asset all along. We feel like it's a better asset now and we made some money along the way getting a better tenant. .

Okay. Great. And then on your -- in your supplemental, you distinguished between 2 types of behavioral facilities, acute inpatient and then behavior specialty. Just wondering if you could explain what the difference is. .

Yes. And we did that. I think we originally broke that apart last quarter. But when we were looking at it, what we try to do with the different industry segments is look at the risk that each one of them has. And the inpatient acute behavioral are large assets with very specific risks that are different than other assets.

I mean in the other behavioral, we've got stuff like autism centers, geriatric centers, those types of things. But the acute care, we -- those have a different risk profile, and we ought to talk about those differently than these others. .

So that's why we broke it out, and that's kind of the distinction. If it's an acute inpatient psych hospital that goes in that category, and basically, anything else goes in the behavioral specialty. .

[Operator Instructions] The next question comes from the line of Kyle Bauser with Colliers Securities. .

Maybe focusing beyond COVID here longer term. As you look at your diverse portfolio of assets, I'm curious which property types might become more compelling to you. Maybe it hasn't changed, but perhaps oncology centers, ASCs or within medical office buildings, maybe there's some therapeutic areas that might be more interesting.

We've, for example, seen some strength in the cash pay practices in medical aesthetics, which ironically have historically found strength during economic downturns. But again, I'm just kind of curious if your appetite for various therapeutic areas has changed over the past year or 2. .

My kind of reaction is no, but I'm going to let Dave chime in with some thoughts on that. .

I guess what I would say is we, as a firm, try to be opportunistic. We look at the dynamics in the healthcare market, what's changing, what's evolving.

And we as a team look at that and try to make decisions based on what we're seeing in the marketplace, always being mindful for the diversification that we've talked about, geographic, tenant as well as sector. .

So as we see opportunities in physician offices, for instance, or if we see opportunities in consolidation in various areas of healthcare where we think we can be additive and helpful from a property partnership perspective, then we'll try to jump on those right away.

So I think, obviously, a core tenet of the business is to forever be very disciplined in terms of diversification, but also to be opportunistic with regard to things we see developing in healthcare. .

Got it. That makes sense. Appreciate that. And I know you've targeted G&A at about 12% to 13% of rental income and that you plan to fill some important roles internally. Looks like that the headcount did go up in Q3, I believe.

Do you feel good about the headcount? Are there still some key positions you're still focused on?.

No. I think we're in pretty good shape with the key positions. We have added some people, and we added a new VP for Information Technologies and a new person in the acquisition phase. But I think we're probably in pretty good shape there. I mean, always -- we're always looking at accounting, the headcount and accounting.

And as we add properties, we'll need to add those. We're probably -- the only active search that I know that we have now is for an asset manager, a base level asset manager. So we're not looking to add anything significant right now. .

[Operator Instructions] At this time, it appears there are no further questions. I hand back to the speakers for any closing comments. .

Thank you, operator, and thank you, everyone, for joining us on the call today. We appreciate your time and interest in us, and we look forward to talking to you again in February. Thanks. .

Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye..