Community Healthcare Trust Incorporated

Welcome to the Community Health Care 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 opened 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 31st, 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 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 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 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 Stack, 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 8K, along with our quarterly report on Form 10Q. 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 had 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. And during this time, the tenant was in process of expanding locations, which led to a more pronounced impact. In 2023, the company approved census, installed a 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 to stabilize the business. PHCT 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 ten tenant where we are also a lender. To improve transparency of our top tenants, we are now including in our supplemental data report An 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. During time, we had also recently expanded locations. And because this tenant is a private founder-owned business, CHCT helped finance the tenant's expansion, leading to CHCT's $22.7 million in notes receivable across a 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 remaining 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 30th, 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 had 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 25, 26, and 27. 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 and attractive yields. To wrap up, we declared our dividend for the second quarter and raised it to 46.25 cents 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 rent. 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 the second quarter of total revenue I just described, only approximately $1.5 million is the 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 and 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-deleted common share basis over these periods, FFO declined from 53 cents to 43 cents 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 ASFO, 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 59 cents to 53 cents 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 53 cents, our dividend remains well covered with a current payout ratio of 87%. That concludes our prepared remarks. Borwin, we are now ready to begin the question and answer session.

Certainly. Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from the line of Rob Stevenson with Channy. Please go ahead.