Community Healthcare Trust Incorporated

Welcome to Community Health Care Trust 2023 Second Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2023 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, August 2, 2023, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For discussion of these risks and uncertainties, you should review the company's disclosures regarding forward-looking statements and 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. The 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 conference over to Dave Dupuy, CEO of Community Healthcare Trust.

Thanks, Jason, and good morning. Thank you for joining us today for our 2023 second quarter conference call. On the call with me today is Bill Monroe, our new chief financial officer, Leanne Stack, our chief accounting officer, and Tim Meyer, our EVP of asset management. As previously disclosed, Bill joined CHCT from Truist Securities on June 1st and spent his first full week on the job meeting many of our analysts, investors, and bankers at the NAREIT REIT Week Conference in New York City. We are excited to welcome Bill to the team where he brings a wealth of experience from his days as managing director responsible for both healthcare services and healthcare REIT investment banking at Truist. Our earnings announcement and supplemental data report were released last night and filed with an 8K. Our quarterly report on Form 10Q was filed last night. In addition, an updated investor presentation was posted to our website last night. Before I discuss more normal topics, I wanted to provide more details on a couple of items we disclosed in our 10Q. First, one of our tenants, Genesis Care, filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code on June 1. Genesis Care, which operates 440 cancer care clinics globally, has secured commitments for debtor and possession financing to support its business operations while exploring the separation of its U.S. business from its businesses in Australia, Spain, and the U.K. On June 27, 2023, the U.S. Bankruptcy Court approved Genesis Care's request to reject certain unexpired real property leases, including one lease of approximately 11,000 square feet with CHCT in Asheville, North Carolina. At June 30, 2023, Genesis Care was the sole tenant in seven of our properties and a tenant in two of our multi-tenanted properties, representing approximately 3.1% of our gross real estate properties, or approximately 119,000 square feet. Other than the one rejected lease in Asheville, Genesis Care has met substantially all of its lease payment obligations to the company through July 2023. We have engaged counsel to monitor the Genesis Care bankruptcy progress and any additional potential impacts to the company. Second, we incurred property damage due to vandalism at a vacant property in Houston, Texas, which was covered by our insurance policies. We estimate the amount of the casualty loss was approximately 1.6 million and received insurance proceeds totaling 2.3 million resulting in a net casualty gain of approximately 700,000. Now back to our core business. The second quarter was busy from an operations standpoint, but slowed slightly from an acquisition perspective as a couple of acquisitions anticipated to close in the second quarter slipped into the third quarter. Occupancy increased slightly from 91.6 to 91.7%, and we continue to see good leasing activity. Our weighted average remaining lease term declined slightly from 7.4 to 7.1 years. During the quarter, we acquired three properties in one land parcel with a total of approximately 76,000 square feet for a purchase price of $15.7 million. The properties were 98.3% leased with leases running through 2033 and anticipated annual returns of approximately 9.1 to 9.7%. Subsequent to June 30th, we acquired three medical office buildings and one inpatient rehab facility in two separate transactions for a purchase price of $35.6 million. The properties were 100% leased with leases running through 2038 And I am proud to announce that with the closing of these new acquisitions, we have surpassed a billion dollars in gross real estate properties. This is an important achievement in our company's history and a milestone we have celebrated with our team over the last week. We're not resting on our past success, however, as the company has three properties under definitive purchase agreements for an aggregate expected purchase price of $16.1 million. and expected returns of approximately 9.2 to 10.3 percent. The company is currently performing due diligence and expects to close these properties in the third quarter. Also, the company has eight properties to be acquired after completion and occupancy for an aggregate expected investment of $191 million. The expected return on these investments should range from 9.1 to 9.75 percent. We currently expect to close on one of these properties in late 2023 and the remaining throughout 2024 and 2025. We continue to have many properties under review and have term sheets out on several properties with indicative returns of 9 to 10%. We anticipate having enough availability on our credit facilities and through our bank relationships to fund our acquisitions. and we expect to continue to opportunistically utilize the ATM to strategically access the equity markets. Also, we declared our dividend for the second quarter and raised it to 45.25 cents per common share. This equates to an annualized dividend of $1.81 per share, and we're proud to have raised our dividend every quarter since our IPO. That takes care of the items I wanted to cover, so I'll hand things off to Bill to discuss the numbers. Thank you, Dave, and let me first say how excited I am to be joining the Community Healthcare Trust team. In my prior role as a healthcare investment banker covering the sector, it was always an honor to work alongside Tim Wallace, you, and the entire CHCT team. I look forward to helping build upon our company's foundation as Chief Financial Officer. I will now provide more details on our second quarter financial performance. I'm pleased to report that total revenue grew from $24 million in the second quarter of 2022 to $27.8 million in the second quarter of 2023, representing 15.6% annual growth over the same period last year. When compared to our $27.2 million of total revenue in the first quarter of 2023, we achieved 2.3% total revenue growth quarter over quarter. And on a pro forma basis, if the acquisitions we completed during the second quarter of 2023 had occurred on the first day of the second quarter, our total revenue would have increased by an additional $308,000 to a pro forma total of $28.1 million in the second quarter. From an expense perspective, property operating expenses declined by approximately $100,000 quarter over quarter to $4.8 million. General and administrative expenses decreased from $16.2 million in the first quarter of 2023 to $3.8 million in the second quarter of 2023. The $12.4 million decrease quarter over quarter was driven primarily by the accelerated amortization of stock-based compensation, totaling $11.8 million, recognized in the first quarter upon the passing of our former CEO and president. as well as a reduction in the second quarter's deferred compensation amortization due to the above-mentioned accelerated amortization in the first quarter, offset partially by a one-time increase in employer Medicare taxes paid in the second quarter from the vesting of our former CEO and President's shares. Interest expense increased from $4 million in the first quarter of 2023 to $4.1 million in the second quarter of 2023 due to a small increase in borrowings under our revolving credit facility to fund acquisitions, as well as higher interest rates under our revolving credit facility. Moving to funds from operations, FFO grew from $2.2 million in the first quarter of 2023 to $15.9 million in the second quarter of 2023. On a per diluted common share basis over these periods. FFO grew from $0.09 to $0.62 per share, but it's important to remember first quarter FFO was negatively impacted by the $11.8 million or $0.47 per share of non-cash amortization expenses related to the passing of our former CEO and president. Whereas our second quarter FFO includes a $700,000 or $0.03 per share net casualty gain from insurance proceeds received related to one property that was vandalized, as Dave mentioned earlier. Adjusted funds from operations, or AFFO, which adjusts for straight-line rent, stock-based compensation, and the net casualty gain in the second quarter, totaled $16 million in the second quarter of 2023, which compares to $15 million in the second quarter of 2022, or 7% growth year over year. On a per diluted common share basis, AFFO increased from 62 cents in the second quarter of 2022 to 63 cents in the second quarter of 2023. AFFO for the first quarter of 2023 was $15.6 million, so our AFFO grew by 2.8% quarter over quarter. And finally, on a pro forma basis, if the acquisitions we completed during the second quarter of 2023 had occurred on the first day of the second quarter, AFFO would have increased by approximately $169,000 to a pro forma total of $16.2 million, or 63 cents per diluted common share. That concludes our prepared remarks. Jason, we are now ready to begin the question and answer session.

Thank you. We'll now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Alexander Goldfarb from Piper Sandler. Please go ahead.