Welcome to Community Healthcare Trust's 2023 Third Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2023 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 at 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 1, 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 a discussion of the 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 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 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 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.

Thank you. Good morning, and thank you for joining us today for our 2023 third quarter conference call. On the call with me today is Bill Monroe, our Chief Financial Officer; Leigh Ann Stach, 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 8-K, and our quarterly report on 10-Q was filed last night. In addition, an updated investor presentation was posted to our website last night. The third quarter was busy, both from an operations -- both, I'm sorry, from an acquisition standpoint and also from an operations standpoint. During the quarter, we acquired 7 properties with a total of approximately 177,000 square feet for a purchase price of approximately $51.7 million. The properties were 99.8% leased, with leases running through 2038, and anticipated annual returns of approximately 9.1% to 10.37%. Subsequent to September 30, we acquired 2 medical office buildings in a single transaction for a purchase price of $7.1 million. The properties were 96.8% leased, with leases running through 2031. From an operations perspective, our weighted average remaining lease term remained stable at 7.1 years. Occupancy decreased from 91.7% to 91%. That decrease can be attributed to GenesisCare lease rejection occurring in the quarter. As it relates to GenesisCare, we had 1 lease rejection during the quarter at 46,000 square feet, square foot building in Fort Myers, Florida, in which GenesisCare was the sole tenant. When coupled with the lease in Asheville rejected in the prior quarter, the 2 leases have been rejected representing 57,000 square feet and have seen good leasing activity at both locations. As of September 30, 2023, GenesisCare was the sole tenant in 5 of our properties and a tenant in 2 of our multi-tenanted properties,…

Thank you, Dave. I will now provide more details on our third quarter financial performance. I'm pleased to report that total revenue grew from $24.8 million in the third quarter of 2022 to $28.7 million in the third quarter of 2023, representing 15.8% annual growth over the same period last year. When compared to our $27.8 million of total revenue in the second quarter of 2023, we achieved 3.3% total revenue growth quarter-over-quarter. And on a pro forma basis, if the acquisitions we completed during the third quarter of 2023 had occurred on the first day of the third quarter, our total revenue would have increased by an additional $757,000 to a pro forma total of $29.5 million in the third quarter. From an expense perspective, property operating expenses increased by approximately $670,000 quarter-over-quarter to $5.5 million, primarily as a result of properties acquired during the period, but also due to seasonal increases in HVAC repairs and utilities expense caused by the hot summer months. General and administrative expenses decreased from $3.8 million in the second quarter of 2023 to $3.6 million in the third quarter of 2023. This decrease was driven by the onetime 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 $4.1 million in the second quarter of 2023 to $4.6 million in the third quarter of 2023 due to the increase in borrowings under our revolving credit facility to fund acquisitions as well as slightly higher interest rates under our revolving credit facility during the quarter. Moving to funds from operations. FFO increased from $13.8 million in the third quarter of 2022 to $15 million in the third quarter of 2023, or 8.9% growth year-over-year. FFO decreased from $15.9 million in…

[Operator Instructions]. At this time we will take our first question, which will come from Connor Mitchell with Piper Sandler.

So you guys have done a great job of finding your compensation with all stock. But just thinking about as you hire new talent for the company going forward, can you provide any updated thoughts on how the mix of cash versus stock compensation would look? And then how might that impact G&A given the all stock was, I believe, a 2x multiplier versus cash without the multiplier?

Connor, thanks for the question. I hope all is well. So as it relates to cash versus stock mix, we are in the process now of working with the -- as everyone may recall, ISS provided a -- unfortunately, a vote against say-on-pay despite our strong alignment with shareholders that we believe. And -- but as part of that, we knew that we were going to work with the Compensation Committee and the Board to look at -- along with our compensation consultant to look at the need of compensation. And that process is ongoing. So I can't give you any guidance on that yet, Connor. I think it's safe to say that there will be some mix of cash and stock going forward. But again, we're in the early stages of evaluating how that's going to work and what that's going to look like. And we're just, at this point, not prepared to disclose any details on that. And my guess is, at some point in the next, I don't know, 6 months or so, that will be disclosed.

Yes, of course, of course. And then maybe looking at a different topic. The build-to-suit opportunity, given what's going on in construction lending and banks pulling back, do you see maybe some weakening from the core group of developers and the merchant and entrepreneurial developers? And then along with that, would you guys be comfortable stepping in to maybe fund some developments? Or would you rather let the developments take place and then acquire once it is leased up and stabilized?

So what I would say is, we have a core group of banks that we've worked with for years that actually like to go in, fund these development projects with our takeout upon certificate of occupancy. And even though there's some level of pressure we've seen broadly within the banking community, those types of deals continue to work for the banks that have done business with us in the past. As far as your second question, would we be open to doing some of those development projects or funding some of those development projects ourselves, we would certainly take a look. I think our preferred vehicle is have our bank partners fund those projects, and then have us take those projects out. There's no question just given the overall cost of debt those projects have become a little bit more expensive for our development partners. And I think they're working with their lenders and, frankly, their construction budgets to make sure that they can develop projects more quickly and more efficiently to help counteract the increase in debt. But with the folks that we're working with now, we haven't seen a significant change. Obviously, we're looking at that very closely. And if things evolve or change, we can adapt as well. But our preferred method is to work with our partner banks, and that's kind of what we intend to do going forward.

And our next question will come from Rob Stevenson with Janney.

Dave, where was the coverage on the 2 rejected GenesisCare assets versus the remaining assets? Just trying to get a feel for if there was a major difference between the profitability of those 2 centers and the others?

Yes. So it's actually -- that gives me an opportunity to take a step back and sort of describe those 2 facilities. So Asheville, I think we mentioned on our last call, the first lease rejection, that lease was actually we were working through a termination with the tenant there because they had decided not to continue to provide services at that location. So we were not at all surprised that, that lease was going to get rejected as part of this process. Obviously, we were disappointed that our termination was not resolved, and our settlement was not resolved before that. So that is the Asheville situation. So they were not providing care in that facility at the time. The other location in Fort Myers is essentially an office use, a back-office space, administrative space that GenesisCare was using. And so, again, disappointed that, that lease was rejected, but not all together surprising given the dynamics. The remaining leases that we have in place are all for clinics, health care providers that are providing cancer care to patients. And so we think those are obviously more stable than the other ones. We do not get financial statements on a center-by-center basis to answer your question from a coverage standpoint, so can't give you coverage levels here.

Okay. And then how are you -- if you were -- those 2 assets and any others that you were to get back, how is your confidence level in re-tenanting those versus selling vacant and just moving on, how are you guys sort of juggling those balls?

Well, as I said in the prepared remarks, we're getting good leasing activity at both the Asheville and Fort Myers locations. So we're actively looking to re-lease those spaces. So we feel good about those. We have also done market studies at the other locations just to determine kind of what the market rents are. And I think our teams feel very good about being able to move quickly to re-lease those spaces to the extent we need to. But we also have done some views and made sure that those tenants are actually providing health care in those locations, and they are. And so our hope and our expectation is whoever the next buyer is for these assets, those leases would continue to move forward under the new ownership.

Is there anything in particular about the Fort Myers asset that lends itself to medical back office? Or could that just as easily be tenanted to a law firm or a financials firm or some other sort of non-medical tenant that then would not probably fit with your portfolio longer term?

Yes. I mean, look, it's -- we're looking at all options as it relates to that. So ultimately, based on the final user, we may decide that, that isn't the right fit for the portfolio, but we're certainly talking to all different kinds of users there. There's nothing magical about that being a health care space, although we're talking to both potential health care tenants as well as other tenants.

Okay. That's helpful. And then while we're on the subject, any other sort of watch list tenants of note that you're focused on that is becoming more delinquent or that you're worried may not meet its rent obligations over the next quarter or 2?

Rob -- and we've mentioned this on the last call, too. We have a watch list. We manage that watch list. I would tell you that it's consistent. The names are different, but it's usually 8 to 10 folks that we're working with at any 1 time that could be issues that we're working through. But there's nothing that I would say we're seeing that is concerning or relates to a specific sector or anything along those lines. It's sort of a, kind of a normal process when you're in the real estate business that you've got to manage your some delinquent tenants. But in general, our receivables are in really good shape, and we feel good about where we are vis-a-vis our tenants. And so nothing meaningful has changed or is different today than it was a quarter or 2 ago.

Okay. And then last 1 for me. Bill, how are you thinking about debt financing over the next 6 months? Is it just fund on the line and leave it there? Is there some other debt, be it term loans or some floating to fixed swaps that's attractive to you today that you would put in place over the next quarter or 2 to push the term out and replenish the line? How should we be thinking about that?

With our revolver balance currently outstanding at the end of the quarter at $48 million, we have $102 million of availability under that revolver. And so I think, certainly, over the next 6 months, we will look to continue to use our revolver as our primary debt financing mechanism and certainly appreciate the support of all of our banks in that facility. So nothing on the near-term horizon. But certainly, we continue to monitor the debt markets. Our next maturity isn't until 2026, and so feel fortunate that there's no near-term maturities. But certainly, we will continue to monitor the markets. And if there is an opportunistic opportunity to further extend maturities, we certainly will look at that.

Our next question will come from Wes Golladay with Baird.

I just wanted to follow up on the plan for Genesis. It looks like you have some action to re-lease the space, but maybe talk about your long-term plans for this asset? Would it be to lease it up and sell it? And just curious if this was part of a bigger deal, and if that's how you got the back-office space in the first place?

Wes, thanks for the question. Yes, it is. So we -- this was a portfolio acquisition that the company made, I think, in the December timeframe of 2020. And so, as part of a portfolio, sometimes you get an asset that you wouldn't ordinarily go after if it was a single asset, and that is the case related to the asset in Fort Myers. And so yes, I mean, look, we're not -- our focus as a firm is going after health care-related provision of health care assets. I think everyone knows that, that's the focus of our business. And so, ultimately, if Fort Myers doesn't fit that, long term, we might look to sell that property. All options are on the table. We're -- like I said, we're experiencing some good activity at both locations, and although good activity doesn't necessarily translate into a lease right away, we feel good that both are attractive in their respective markets. And so, ultimately, we hope to get those re-leased right away. But yes, I mean, back-office space for health care providers is not a focus for the firm, and we wouldn't have done that acquisition if it wasn't a part of a larger transaction.

Got it. Yes, that all makes sense. The -- I guess, how have your conversations changed with potential sellers with the recent rise in interest rates? Have they changed at all?

Yes, listen, from an activity standpoint, it's been great. I mean, we're seeing a lot more activity in the marketplace. Capital is precious, as everybody knows on this call, and so it's very precious for us, too. We feel good about the dialogue and the activity that we're having with potential sellers. We think that, that activity is going to translate into some good acquisition opportunities, but yes, I think we're seeing really solid activity on both sides of our business. As most people know, we're looking both at assets that are represented in the brokerage market, but we're also having good dialogue with potential client companies. And even though those conversations haven't resulted in specific purchase and sale agreements today, we feel like that good dialogue bodes well going forward for us from an acquisition standpoint. So even though -- and really because rates are so high, to the extent we had competition from smaller buyers, whether they be 1031 exchange buyers or other smaller real estate funds, obviously, it's tougher for those funds and for those buyers to get financing in this environment. And as an all-cash buyer, we feel like we've got a pretty nice advantage in the marketplace right now, and it's allowed us to be choosy, and we're seeing a lot of good opportunities.

Got it. And can you give a clarification. When you set the cap rates, they always have a typical range, is this due to nondisclosure reasons, or is there something that can actually change the actual cap rate at the time of the deal is finally closed?

Yes. I mean, I think that's -- what are you referring to specifically, Wes?

Would you give a range on cap rates? You kind of give, we have this many deals, $166 million at this range for the cap rate instead of like a pinpoint -- like if the deal not -- or the term is not officially set? Or is there a reason you can't disclose? Maybe the seller doesn't want you to give the official cap rate? Just trying to see what kind of can cause the variation between the range you give?

That is a range of cap rates based on purchase and sale agreements we have on the books. And so that's -- they range between 9.1% in what you're referring to and 9.75%. So some are at the higher rate and some are at the lower rate. We just don't break out which are which.

[Operator Instructions]. Our next question will come from Jim Kammert with Evercore.

Just to double check, the remaining leases with Genesis, talking between the second and third quarter supplements, it's about 2.8% of ABR. Does that sound about right?

I think -- so the remaining leases, we've got 7 leases representing 1.9% of our gross real estate properties. Is that your question?

No, I was ABR average base rent is about 2.8% of rents.

I'm not sure we've disclosed that amount. I have to look. Yes.

All right. Because I thought...

But you could obviously go back into our supplemental, and you could calculate it. I mean, I think we have that disclosed there.

That's fine. No, I will do that. And then thinking about, you talked companies on the watch list, et cetera. How much of the ABR is covered where you get either unit level and/or a combination of parent or guarantor financial report? I'm just kind of curious how do you really assess how that watch list -- how do you maintain -- how do you identify which tenants are potential problems?

Well, I mean, the watch list is identified based on folks that maybe are delaying payments or asking for special requests as part of their -- paying their lease or whatever. And so it really varies. I mean, we've got 260-plus tenants, Jim. And so I can't give you a broad-brush on what the specific issues are related to that. It's a variety of situations. And what I would tell you is, if it's -- and most of these tenants tend to be tenants in our multi-tenanted buildings. And so it represents very small amount of square footage, but we're very, very focused on having dialogue and working through any and all of those issues. And so if they're the smaller tenants in our multi-tenanted buildings, we're not getting XYZ physician group's financial statements. And so -- but if it's a larger -- if we're having issues with a larger tenant, then we may have financial statements that we can talk to them about, but it just -- it really varies. And so it's hard for me to give you a broad-brush on what that's related to. What I would tell you is, most of the dialogue we're having with these tenants that are watch list tenants don't represent large amounts of square footage. And so they're not "client tenants," and so we're not getting financial information on those. They tend to be smaller tenants that are in the MOBs that we operate.

No, that's fair. I appreciate it. I wasn't . But what percentage of ABR is covered where you actually do get reported financials? I mean is 50% of the tenant ABR, do you receive financials for that amount or less or more?

I've never calculated that amount. We can -- I don't have a good answer for you.

Okay. I was just curious you may know.

I would just be guessing. Yes. I mean if you think about it, the makeup of our tenants, we've got a significant amount of physician clinics and MOBs, and that's 50-plus percent of our overall assets. And so in those assets, we're not going to be getting individual financial statements. And so you can kind of look at it that way. The remaining larger single tenants, we're going to give financial statements on those. So my guess is, it's something less than 50%, but I can't give you a specific number.

And with no remaining questions, we will conclude the question-and-answer session. I would now like to turn the conference back over to Dave Dupuy for any closing remarks.

We really appreciate the questions. We appreciate everybody on the phone and look forward to talking to everybody again in the new year. Thank you.

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