Welcome to Community Healthcare Trust 2021 Third Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2021 third quarter financial results. It will also discuss progress made in various aspects of its business. 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 3, 2021, 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 Incorporated.

Good morning. Thank you for joining us today for our 2021 third quarter conference call. On the call with me today is David Dupuy, our Chief Financial Officer; Leigh Ann Stach, our Chief Accounting Officer; and for the first time, Tim Meyer, our new Executive Vice President, Asset Management. And I'd like to take a moment -- and I apologize upfront because there could be some issues today because as a longtime Atlanta resident and Atlanta Braves fan, Dave's head is in the cloud today. And so I want to congratulate Dave and his Atlanta Braves on their victory last night before we get started. 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 has historically been the case, the third quarter was a little slow from both an operations and acquisition standpoint. And there are a few points I want to cover upfront that hopefully will answer some questions. We can have a couple of out-of-budget items in the property operating expense line item. First, utilities were significantly higher than budget in the third quarter. This is due to the heat wave that covered parts of the country this summer. Second, property taxes were unusually high because of aggressive stances many local municipalities are taking related to reassessments and tax rates. Our consultants advised us that we needed to increase our accruals for the year, so several quarters of adjustments were put into the third quarter on several properties. We anticipate being reimbursed for these for most, but not all of these expenses as they work through the operating expense reimbursements over the next few months. On the G&A front, we eliminated a position…

Great. Thanks, Tim. Good morning, everyone, and Go Braves. I am pleased to report that total revenue grew from $19.3 million in the third quarter of 2020 to $23.3 million in the third quarter of 2021, representing 20.2% growth over the same period last year. Revenue for the second quarter of 2021 was $22.7 million representing 2.5% sequential growth. On a pro forma basis, if all the 2021 third quarter acquisitions had occurred on the first day of the third quarter, total revenue would have increased by an additional $131,000 to a pro forma total of $23.4 million in the third quarter. As Tim mentioned in his comments, expenses increased in the third quarter. Property operating expenses increased quarter-over-quarter from $3.8 million to $4.1 million or 5.4%. As Tim discussed, the increase in property operating expenses is primarily driven by increases in property taxes and utilities expense. G&A expense for the third quarter increased quarter-over-quarter from $2.9 million to $3.2 million or 10.8%. However, as Tim mentioned previously, this increase was inflated in part by the approximately $200,000 noncash write-off of deferred compensation related to the elimination of a position. Adjusted for this onetime noncash expense, G&A would have increased 3.9% quarter-over-quarter. On the topic of stock-based compensation expense, I'd like to highlight a couple of new disclosure items we are now including in our supplemental materials. First, on Page 8, in addition to including the mix of G&A between cash and noncash, we are now disclosing those items as a percentage of revenue. You will note that the cash portion quarter-over-quarter has ranged between 5% and 6% of revenue and has trended down the last few quarters. Second, on Page 9, we are disclosing more detail around our amortization of deferred compensation. The table at the bottom of the…

The first question comes from Sheila McGrath from Evercore. Please go ahead.

Tim, you mentioned in your release -- or actually in the investor deck, the term sheet, the dialysis partner. I just wonder if that's closer to being a finalized deal? And are there any other discussions with other partners beyond that relationship?

Is it closer to being a finalized bill? Yes. That one is going to come in pieces, though, unlike the inpatient rehab facilities where we were able to do basically all of those purchase and sale agreements almost simultaneously. This is going to come in pieces over the next 24 months. So I mean, there's not going to be all of a sudden 10 of those that are out there, or at least, that's not my anticipation -- no, I shouldn't say there's not going to be -- that's not my anticipation. And the answer is, yes, we're continuing to have several discussions. Dave was out yesterday with one -- Dave is going to balance with another one next week. And we've got several of those that we're trying to tee up and bring to fruition.

And then is the Head of Asset Management, is that position a new one at the company? And is that just driven by the bigger size of the company or -- just a little more detail on that.

Tim has been with us now for a couple of years. He was the Senior Vice President, and we gave him a promotion to Executive Vice President kind of in recognition that it is a bigger part of what we're doing now. As we grow, the asset management piece is a significant piece of what we're doing.

And my last question. We're a month into fourth quarter, you mentioned $12 million slated to close. Just wonder, are there any other transactions in the works that could potentially hit in fourth quarter?

Well, we've already closed $3.5 million. So with the $12.2 million or whatever it is, that brings the total for the fourth quarter up to $15.7 million that we see, and we think it's very probable. There's one other possibility of stuff, but I'm not going to say that, that's an assurance. And several people have questioned how much we've invested, but with the notes and the announced purchase and sale agreements and what we've closed already, that would put us at about $108 million for the year, which is a little bit shy of the $120 million, but it's not totally shy, but -- it's in the range of what we what we say. And as I say, it's a lumpy business.

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

Dave, congratulations to you in Atlanta, especially with what happened earlier this year. Must be sweet to celebrate a baseball victory. So Tim, just going back to the stock. Obviously, since your IPO, the all stock comp has been a hallmark of you guys and has been definitely something that has separated you from peers and created a tremendous alignment of interest. But in fairness, it's hard to think of it not as an expense because Dave and others who work for you as well as yourself, you have to expect the stock as comp. If you didn't have that you have to pay cash. So I know NAREIT FFO is -- has was but at least it's a conflicting metric.

Alex, let me address that for just a second because -- the fault in that concept is, yes, if you look at it just like that, it is an expense. However, it's not a cash expense that affects dividends, and we are already getting being for it because we have stock outstanding. So it's already -- the stock is diluting the shares. So by looking at both the stock diluting shares and amortizing that into experience is like a double hit.

Living in New York with a double taxation, I can feel the -- I can sympathize. But let me ask -- the first question is, Dave, as we look to the fourth quarter, and you mentioned that there were some items on the expense side that you expect to be reimbursed for in time? There was also this onetime accelerated $200,000 on the G&A. What do you think is an appropriate run rate? Like, as we think about our model, how should we be adjusting the operating expenses and the G&A for the fourth quarter compared to the third quarter, given that it seems like there were some outsized items that really hit third quarter?

Yes. I would say the $200,000 is obviously the key thing that we called out here because that was an elimination of a position, and it truly inflated G&A. I think if you just look at the trends, I think in general, the cash portion of G&A has been trending a little bit down, but that 5% to 6% cash portion, I think, is a good proxy for what we've been seeing over the last several quarters. And then as we've pointed out in the additional disclosures on Page 9, you kind of see how the acceleration of amortization is impacting us from a noncash perspective. So I think the combination of those two things should give you a good sense of where we'll be.

And I'd take the $200,000 out of the third quarter for that -- when you look at that.

Right. And

And then the reimbursement side?

Yes. In the property operating expense side, that fluctuates a little bit quarter-over-quarter. And so it went up a little bit. Could it go down a little bit? It might. It's just -- it's basically timing differences between when we have to pay expenses and when we get the dollars from the tenant. So I don't have a crystal ball, so I can't give you a specific answer. But I think what you'll see, if you look at it over the long term, those go up and down 3% to 5% quarter-over-quarter. And it's -- ultimately, we feel good about those expenses getting reimbursed.

And then the second

On that, Alex, from a model standpoint, what I'd look at is like the last 4 quarters of property operating expenses on a per square foot basis or something because the reason we called out the property taxes and utilities this quarter is because there was such an outsized increase in the property operating expense line item. And it's not obvious where the reimbursements will be because that's all combined in real income. So we wanted to make sure people understood that it's kind of some onetime items in the property operating expenses that should get reimbursed.

And then the second question, Tim, is -- and I understand the accounting and the impact, but given that you guys are bigger and you have amazing disciplined in acquisitions, and I think you've said before, you could try more to still maintain that 9%, at what point would it make sense to increase instead of that targeted $120 million to $130 million, maybe go to something like $140 million to $150 million. So step it up a little bit, obviously, not blowing it out but stepping it up a little bit to help offset some of the accelerated comp expense given the retirement mandates of FASB, et cetera. So is that something that you would see as possible, maybe stepping up the acquisition pace a little bit?

Well, let me say this. I mean, we've -- the accounting has been doing what we've been doing, and we have been producing, I think, pretty good numbers for the last couple of years, 3 years, 5 years since inception. We've been producing good numbers and the accounting has been building over the last best 2, 3 years that we've been having to start amortizing stuff quicker. We're not afraid to be straight. We don't have fixed targets. We buy what we can. I mean if you look at our acquisitions over time, they run anywhere from, I think, $88 million to $160 million, something -- And it -- we will acquire things that we're comfortable with that we think can reduce the income that we're looking for, and it will be accretive. I mean, our goal is to have gross profit increases and look to get the spread between our investments and our weighted average cost of capital larger as opposed to adding assets to the balance sheet.

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

New York Mets fan here, but I think as Dave know, I think, as an employee of SunTrust, now Truist, I think we're required to be happy for the Braves as well. My first question is about the term sheet on the $60 million of dialysis centers. I guess it begs the question, what's the typical close rate when you get to term sheet? And -- I know you put the stuff that's under term sheet in the slide deck and not the press release. Is that related to the uncertainty of the transaction or anything else?

That's been our history, Michael, from day 1. We don't -- in term sheets, we don't view as likely as signed purchase and sale agreements. And the closed owned signed purchase and sale agreements, I think there's like 1 in the last 5 years that we haven't closed out. On term sheets, it's not quite that good, but it's pretty good. I mean, if we get to a point where we sign a term sheet, only something on the other side probably is going -- or something that shows up in due diligence that we're not anticipating would keep us from closing. But it is less likely than a signed purchase and sale agreement, which is why, from a historical standpoint, we've included the purchase and sales agreements with things that -- and then looking at land, make sure I get this right, things that we file with the SEC as opposed to things that we provide to the SEC. So the slide deck is something that is provided and the other stuff is stuff that we file with the SEC.

You know Tim, you correctly pointed out that we failed to consider the no investments that you made year-to-date when we suggested that you were a little bit behind your investment pace. Those are included in the supplemental, but not in the property acquisitions table, of course. Could you maybe talk a little bit about no investments, the types of returns and deals, what the potential is to do more of those I think this other operating interest line is running at over $3 million a year now. So could you just talk a little bit about those types of investments?

All right. Well, they're with existing -- those are typically with existing tenants or clients, and we basically have two of those relationships now that we look at and we decide that they are good businesses that we'll do loans to for various reasons. But I guess both of them are like right around $13 million each. So there's a total of $26 million. They generally generate 10% to 12% returns. I'm looking at Dave to make sure I get this right. 10% to 12% returns. And we anticipate that they'll be outstanding for 3 to 5 years, I think. Correct?

Yes, I think that's right.

So do you anticipate any more of those deals? Or that would just be like a one-off as they come up?

It's not something that we market, but it's not something that we shy away from if we think it makes sense on an overall relationship basis and good for them, good for us. I mean

Yes, sir. And then just lastly, on these deals that are set to close upon occupancy between the beginning of '22 and the beginning of '23, they're nice for us, for analysts and investors, I guess, because we have good visibility on the amount and the timing there and you provide yield expectation, which is high. So maybe talk about the risk return of those and if there are similar opportunities to do things like that on kind of a forward basis once they're completed, can that become kind of a programmatic thing? I know these 4 have been kind of out there for a little while. Do you think there's any potential to add to those types of investments?

Well, actually, before it was a client that we had already done 4 with, 3 with?

4.

4 with. And those got finished and they actually sold a couple of them kind of beforehand and made a big profit on it. They are -- basically, what we call them was our serial entrepreneurs. And so it's people that have -- or management teams that have already run a company and sold it to a larger entity. And basically, we're looking at -- once they get them completed, we buy them. And we're anticipating -- I would say -- I used to say we're anticipating that within 5 years, they'll sell the company. But now I almost have to say within a couple of months, they may sell the properties. So in today's environment, it's a very quick thing. But again, it's risk, reward, we're functioning a little bit like a mezzanine piece to them by doing this. It gets them where they want to be a lot quicker because basically, with the one client which we've done for before when we started to do these next 4, is basically just copy the PSA, copy all the documents, change the names and the addresses, and get them done. And so it's a lot easier on them, they have a lot more ability to plan their growth. We have a lot more ability to plan our growth. And we've had good operating people as they operate them, but even better operating people in better credit if they sell the operations. So we view it as a win-win. And yes, we're out trying to do several more of those type of relationships.

Yes, thinking about the potential for types of investments and opportunities, it sounds like potential for all of the above. Appreciate it.

The next question comes from Brian Maher of B. Riley FBR. Please go ahead.

Maybe asked a little bit different way on kind of acquisitions. Can you talk a little bit about what you're seeing in the seller expectations? I mean when we look at the housing market, it's insane where we live, how prices keep going up. Are seller expectations in your world also going up? And is that being impacted at all, to your view, on what's going on with inflation and labor shortages?

And let me ask a question. Are you calling from Florida now?

No, I'm actually calling from Lewes, Delaware. I was shopping for a home for my mother in law and the bidding wars are insane.

Right. Well, the bidding wars are insane for residential housing here in Nashville, also. Yes, it's not that in -- what we're looking for. I mean, we've always been a one-off type of kind of a person -- type of entity, looking for one-off type transactions. And there's different stories behind what different things -- I mean, the dot groups can't get along or there's friction between the ownership dot group and the physician practice dot group or there's issues like that. I mean we haven't seen a lot of pushback on cap rates for what we do. And I know overall, health care cap rates are outrageously low, and we see some of our periods investing in things that the analysts run the numbers and don't basically reduce the numbers for. But our goal is to -- our view is, is that we only invest each dollar once and we try to get the best return on it that we can. So rather than get into bidding more or fight over a property, we just walk away from it, we'd rather not spend our dollar on something with a suboptimal return versus spending our dollar on something with a very good return.

Do you think that -- or are you seeing the potential for the increases in prices generally allowing for you to have better rent roll-ups when you do release your properties over the next couple of years?

What I've always said, and I think I'm going to stick to that, is we don't think that we're significantly over market or significantly under market in any of our in any of our leases. And I would not want anybody to start putting in their model significant increases in our rents as the rent rolls But we do think that as rents roll, we will see some uptick in rents, particularly in certain markets. But it's a market-by-market type of situation. And there are some markets out there that are soft. There are some markets out there that are very strong from a rent standpoint.

The next question comes from Rob Stevenson of Janney. Please go ahead.

Tim, any of the 2022 lease expirations of consequence a known move-out at this point?

I don't think there are of any consequence. I mean, we probably have 10,000 to 20,000 square feet that may be moved out, and we're going to Tim Meyer now to see if he's got any thoughts on that, but -- my gut reaction is -- we've been in contact with most of them -- we've been in contact with all of them, I think, through the third quarter of next year, and they're now starting in the fourth quarter. And we've got a few, but I mean, again, that's kind of real estate. People have to move out so you can lease up. So nothing that we're significantly concerned about.

And then the $3.5 million property you bought here in the fourth quarter is in the low 80s in terms of percentage leased. Is there ability to lease that up the remaining portion? Or is the return just high enough at that 83% leased or whatever that meets or exceeds your hurdle rates? How should we be thinking about a property like that when you buy it? Are you buying it to lease it up? Or are you buying it for what it is today?

I never buy a feature. I mean we bought it, whatever the cap rate was that we quoted on that property, I think it was like 9.3%, is an actual in-place NOI now. And so we're basically buying 17% of the building free. Now the good news is on that building is the reason that it's for sale, there were 6 doctors in the partnership that couldn't get along with each other anymore. And it's sitting not on a hospital campus, but I think adjacent to a hospital campus, and the hospital lease space in it as a physician group related to the hospital. And we believe that if you get the ownership of the way that it will be something that can be leased out.

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

Well, I would like to thank everybody for taking the time to spend with us this morning, and we look forward to talking with you all again in three months for the end of the year. Thanks so much.

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