Welcome to Community Healthcare Trust 2022 Second Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2022 second quarter financial results. They will also discuss progress made in various aspects of its business. Following the remarks, the phone lines will be open for question-and-answer session.

The company's earnings release was distributed last evening and has also been posted on its website. 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, August 3, 2022, 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 and 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. 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 Tim Wallace, CEO of Community Healthcare Trust..

Good morning, and thank you for joining us today for our 2022 second quarter conference call. On the call with me today is Dave Dupuy, our Chief Financial 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. In addition, an updated investor presentation was posted to our website last night.

The second quarter was again busy from an operation standpoint, and again, a little slow albeit better than the first quarter from an acquisition standpoint.

As I indicated last quarter, we continue to have five different properties, or significant portions of them, that are undergoing redevelopment or significant renovations with long-term tenants in place when the renovation or redevelopment is done. Our occupancy has risen above 90%, and we have seen a continued pickup in leasing activity.

We continue to be encouraged by the activity we see on the part of health care providers. Our asset managers have been busy controlling expenses while maintaining tenant satisfaction. Our weighted average remaining lease term ticked up slightly at just less than 8 years.

During the second quarter, we acquired one property with a total of approximately 37,700 square feet for a purchase price of approximately $23.5 million. This property was 100% leased with the lease running through 2037 and an anticipated annual return of approximately 10.25%.

The company has three properties under definitive purchase agreements for an aggregate expected purchase price of approximately $23.4 million and expected returns of approximately 9.0% to 9.72%. The company is currently performing due diligence and expects to close on these properties in the second half of the year.

The company continues to have signed purchase and sale agreements for five properties to be acquired after completion and occupancy for an aggregate expected investment of $117.5 million. The expected return on these investments should range up to 10.25%.

We expect to close on one of these properties in the fourth quarter of 2022 and the other four throughout 2023. 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 credit facilities to fund our acquisitions, and we expect to continue to opportunistically utilize the ATM to strategically access the equity markets. On another front, we declared our dividend for the first quarter and raised it to $0.4425 per common share.

This equates to an annualized dividend of $1.77 per share. And I continue to be proud to say, we have raised our dividend every quarter since our IPO. I believe that takes care of the items I wanted to cover. So I will hand things off to Dave to cover the numbers..

Great. Thanks, Tim, and good morning, everybody. I am pleased to report that total revenue grew from $22.7 million in the second quarter of 2021 to $24 million in the second quarter of '22, representing 6% growth over the same period last year. Revenue for the first quarter of '22 was $23.5 million, representing 2.4% growth quarter-over-quarter.

On a pro forma basis, if the '22 second quarter acquisition had occurred on the first day of the second quarter, total revenue would have increased by an additional $302,000 to a pro forma total of $24.4 million in the second quarter. . From an expense perspective, property operating expenses remained flat quarter-over-quarter at $4.1 million.

G&A increased from $3.3 million in the first quarter to $3.6 million in the second quarter, or 8.9%. Increases in G&A were driven primarily by increases in employee and deferred compensation expenses as well as increases in travel and professional fees expense. Interest expense increased from $2.6 million to $2.8 million, or 4.9%.

This increase was due to increased borrowings under our revolving credit facility to fund acquisitions as well as an increase in floating interest rates.

I am pleased to report that funds from operations, FFO, for the second quarter of '22 grew to $13.7 million from $13.5 million in the first quarter of '22, representing 1.5% growth quarter-over-quarter.

On a per share basis, FFO increased from $0.56 per diluted share in the first quarter of '22 to $0.57 per diluted share in the second quarter of '22, an increase of 1.8%.

Adjusted funds from operations, or AFFO, which adjusts for straight-line rent and stock-based compensation, totaled $15 million in the second quarter of '22 compared with $13.9 million in the second quarter of '21, or 7.6% growth year-over-year.

On a per share basis, AFFO increased from $0.58 per diluted share in the second quarter of '21 to $0.62 per diluted share in the second quarter of '22, or 6.9%. Finally, AFFO for the first quarter of '22 was $14.8 million, representing a 1.1% increase quarter-over-quarter.

On a per share basis, AFFO increased from $0.61 per diluted share in the first quarter of '22 to $0.62 per diluted share in the second quarter of '22.

And on a pro forma basis, if the second quarter acquisition had occurred on the first day of the second quarter, AFFO would have increased by approximately $271,000 to a pro forma total of $15.3 million, or $0.63 per diluted share. Anyway, that's all I have from a numbers perspective. Danielle, we are ready to start the question-and-answer session..

. The first question comes from Sheila McGrath of Evercore..

Tim, I was wondering, you mentioned that you have capital that you're investing in redevelopment.

I was just wondering if you could give us some insight on how much capital is being invested, what kind of return and the timing so we could add to our models?.

It's approximately $8.5 million, and it will be spread out over probably the next 4 quarters. And it's in five projects that we already have leases for. These are being done specifically for existing tenants.

So does that provide any detail?.

Yes. Yes. And what kind of yield? Like is it similar like 10%? Or is it....

It's in the 9% to 10% range..

Okay. Great. And then on the acquisition this quarter, I'm assuming that was from your largest tenant since their exposure moved up, the rehab facility.

Just wondering if that opportunity came about given your relationship? Or was it like a widely marketed transaction?.

No, it's part of our relationship. It's one of the -- last quarter, we had six of these under purchase and sale agreement, and we closed on one of them. So now we've got five. So it's an existing relationship that's part of one of our clients..

Okay. Great. And last question. The dialysis letter, LOI, that you have, potentially over $60 million.

Just curious, are there major hurdles to get that to purchase or definitive agreement? Or just where that stands in the process?.

They're identifying properties. I mean -- as I said last quarter, they got funded, but their PE -- with their PE funding and now they're out in the market, acquiring the operation side, and that leads to our ability to do real estate transactions with them..

The next question comes from Alexander Goldfarb of Piper Sandler..

First of all, good to see the pipeline expand. So that's a good thing. Just a few questions, Tim. First, as far as the funding goes, you referenced line of credit. You also referenced the ATM. You guys still trade at a good premium to NAV. So that's positive for accretion.

But just given the disruption in both the equity markets and debt markets, how do you see your funding going forward, at least as long as we're in the current scenario?.

Thanks for the question. Basically, we don't think -- we don't see the situation has changed significantly. We are investing at nine-plus camps, and we have seen that market open up substantially after -- even after the first 75 basis point increase from the Fed. We anticipate it's going to open up more with the second 75 basis point increase.

A lot of the funding that other people had is dried up at cap rates that we're buying it. So we're anticipating seeing our market open up substantially more. But basically, if you look at our funding costs on both equity and debt, it's still very accretive to buying the 9%, 9.5% range. So our overall plan is still the same.

We plan on keeping the debt in the 30% to 35% range of total capitalization and using the ATM to offset it because, again, we think it's a $60 stock. I hate selling stock. The thought of selling stock where it is now, but the fact of the matter is we can make a lot of money..

Okay. And then that leads into the second question, which I think you partially answered. But from a lot of the other REITs in other sectors, apartments, retail, office, industrial, what have you, there's a lot of disruption going on in the transaction markets, just given what's going on in the cost of capital.

And a lot of the people have said that transaction markets have really slowed down and almost come to a stop, if you will. That doesn't sound like it's the case in your markets, or maybe it is.

So maybe just a bit more color on what's going on in the product that you transact in? And as you just described, is it just that, yes, a lot of deals are going to stop, and therefore, you're the recipient? Or as you look at your own pipeline, the deal flow has noticeably stopped because sellers are pulling back in general?.

No. Actually, the opposite. I mean we've seen a significant pickup in our potential pipeline. Fourth quarter, last year; first quarter, this year, there is a significant slowdown in that pipeline. But as I said, after the first 75 basis point increase, we saw a pickup in our pipeline.

And we anticipate there's going to be more of a pickup because there is a lag between the recognition of what the capital markets are saying and sellers processing that -- what they're saying.

So there is probably still some dislocation because buyers have cost of capital that makes them buy at a higher cap rate and sellers are still thinking they can get the old cap rate. But again, we've seen a significant pickup already. We're anticipating more of a pickup.

We think the fourth quarter will be back to the same deal flow that we saw prepandemic. So we're fairly excited about what we're seeing and think that it bodes well for us..

The next question comes from Rob Stevenson of Janney..

Tim, any property type looking more attractive to others in the marketplace today when you're sourcing stuff outside of the stuff that's already under contract?.

We continue to get asked that question, and we're very opportunistic. So there's -- I don't think we've ever thought that there was one particular property type that was better than another. We are there for a while. We were seeing a substantial number of behavioral facilities. We're still seeing some, but that's kind of slowed down a little bit.

We are seeing more kind of medical office building -- multi-tenanted medical office building here in the last couple of months as part of what I was just talking to Alex about, but all of them have good qualities that we like if they meet our parameters. So there's not one particular property type that we would favor over another..

Okay.

And then are there any -- at this point, are there any known move-outs or downsizings in the 2023 lease expirations at this point?.

I'm not as tied in to the 2023 lease expirations. I'm sure there are some that will end up moving out. Again, I think our historic retention rate is 85%, 90%. So we anticipate 10% to 15% of expirations to move out in any given year.

But we have a full pledged leasing effort on both vacancy, and the asset management people have already started on working on the 2023 expiration. So we feel very comfortable with where that is. And as I mentioned, the leasing activity that we've seen from health care providers has picked up substantially.

As noted, we picked up 40 bps in our occupancy, and we anticipate that continuing north over the next several quarters..

Okay. And then last one for me. Dave, did you guys buy back some stock in the second quarter? Page 9 of the supplemental shows the second quarter share count that's on a weighted average basis, is about 100,000 below what the first quarter was..

No, it's -- no share buybacks at all. We didn't issue any shares. That's just the way the shares are calculated. And because of the stock price was down, the share price calculation moved down very slightly. And so that's what you're seeing there..

The next question comes from Dave Rodgers of Baird..

Wanted to ask on the redevelopment assets. I guess two questions there.

Should we anticipate leases to commence then on those spaces by the end of 2023? Is that your expectation? Or will there be a delay or a lag before that happens? And can you remind me what percentage of the vacancy of the portfolio that, that redevelopment portfolio of companies today or account for today?.

Your first part of the question is we anticipate all of those being completed, and rent started sometime in 2022 or 2023. So by the end of 2023, all of those -- the rent should be started in all of those. And I think that answers the first part of the question. As it relates to the second part of the question, to be honest with you, I'm not sure.

I've never quite looked at it like that. It's probably -- I don't know, my guess it would be 20 basis points or something like that. It's just a guess. I mean, we've never looked at it like that..

Okay. Maybe I can follow up on square footage of redevelopment or something to that effect, if you have that number. But other than that, I guess my question would be around deploying new capital.

I mean, are you getting -- with a tighter capital market, are you seeing existing customers come to you for expansion projects or more capital that you can put to work in the existing portfolio to get returns off of that might be beneficial as well as the acquisition?.

Well, we've kind of seen that over the last 6 to 8 months, and that's what's generated these renovation and redevelopment projects. Will that continue? My gut reaction is it's a good possibility that, that will continue. We've got several discussions now ongoing with probably 30,000 to 50,000 square feet of space with that type of project.

So we're hopeful and we're very happy to invest new money in the existing properties and look forward to doing that..

. The next question comes from Michael Lewis of Truist Securities..

I wanted to follow up on Sheila's question about the dialysis program. Is there -- sorry about that. Is there any expectation for when you'll be putting capital to work in that program? And then taking it a step further, are you making progress on other programmatic investment pipelines like that one? I know you've talked about that in the past..

We've been slightly disappointed at how long it's taken to get capital invested in the dialysis side of it. We are still very confident that it will happen. It's still a very good tenant. I mean we've already got -- I mean, 4, 5 -- 4 or 5 projects with them already. But this particular thing is taking a long time.

Number one, they wanted to get their PE money done, and so they got that done, and now they're searching for stuff. We anticipate it happening, but I've kind of given up on saying when, and that's why I didn't put it in my comments today. And the answer to the other part of the question is, yes, we are working on several different other relationships.

And it's proven difficult to do. I mean, as I -- I think I previously said on one of these calls, or maybe several of them, that all there in the pandemic, we couldn't work on these relationships. The ones that we had started just kind of sit neutral for a period of time during the pandemic because nobody wanted us to come visit, talk to them.

They were focused on other things. Now they are focusing on growth, and we are having some of those discussions, but they take a while to mature. So we don't have anything else to announce at this point, but we do continue to work on it and look to increase that part of our business..

Okay. Great. And then lastly for me, I saw you have $28 million of properties under exercisable purchase options that have not been exercised.

Do you expect any of those options to be exercised and maybe share kind of what the pricing is, that might help us understand the likelihood of exercise?.

We really don't expect that, and particularly now that the cost of capital for everybody is going up. And basically, I think the majority of those are exercisable at an initial purchase price plus an inflation rate to the purchase price. So if interest rates were still zero, my answer might be different.

But with interest rates going up and the cost of capital for everybody going up, we really don't expect any of those to be exercised..

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

Thanks, everyone. We appreciate you taking the time to spend with us, and we'll talk to you next quarter..

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