Community Healthcare Trust Inc: Form 10-Q for the period ended Sep 30, 2024

Disclosure Regarding Forward-Looking Statements

This report and other materials that Community Healthcare Trust Incorporated (the "Company") has filed or may file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made, or to be made, by management of the Company, contain, or will contain, statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “believes”, “expects”, “may”, "will', “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates”, “anticipates” or other similar words or expressions, including the negative thereof. Forward-looking statements are based on certain assumptions and can include future expectations, future plans and strategies, financial and operating projections or other forward-looking information. Such forward-looking statements reflect management’s current beliefs and are based on information currently available to management. Because forward-looking statements relate to future events, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Company’s control. Thus, the Company’s actual results and financial condition may differ materially from those indicated in such forward-looking statements. Some factors that might cause such a difference include the following: general volatility of the capital markets and the market price of the Company’s common stock, changes in the Company’s business strategy, availability, terms and deployment of capital, the Company’s ability to refinance existing indebtedness at or prior to maturity on favorable terms, or at all, changes in the real estate industry in general, interest rates or the general economy, adverse developments related to the healthcare industry, changes in governmental regulations, the degree and nature of the Company’s competition, the ability to consummate acquisitions under contract, catastrophic or extreme weather and other natural events and the physical effects of climate change, the occurrence of cyber incidents, effects on global and national markets as well as businesses resulting from increased inflation, changes in interest rates, supply chain disruptions, labor conditions, the conflicts in Ukraine and the Middle East, and/or uncertainties related to the 2024 U.S. presidential election, and the other factors described in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, and the Company’s other filings with the Securities and Exchange Commission from time to time. Readers are therefore cautioned not to place undue reliance on the forward-looking statements contained herein which speak only as of the date hereof. The Company intends these forward-looking statements to speak only as of the time of this report and 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.

The purpose of this Management's Discussion and Analysis ("MD&A") is to provide an understanding of the Company's consolidated financial condition, results of operations and cash. MD&A is provided as a supplement to, and should be read in conjunction with, the Company's Condensed Consolidated Financial Statements and accompanying notes.

Overview

References such as "we," "us," "our," and "the Company" mean Community Healthcare Trust Incorporated, a Maryland corporation, and its consolidated subsidiaries.

We were organized in the State of Maryland on March 28, 2014. We are a self-administered, self-managed healthcare real estate investment trust, or REIT, that acquires and owns properties that are leased to hospitals, doctors, healthcare systems or other healthcare service providers.

Trends and Matters Impacting Operating Results

Management monitors factors and trends that it believes are important to the Company and the REIT industry in order to gauge their potential impact on the operations of the Company. Certain of the factors and trends that management believes may impact the operations of the Company are discussed below.

Real Estate Acquisitions

During the first nine months of 2024, the Company acquired six real estate properties totaling approximately 223,000 square feet for an aggregate purchase price of approximately $63.9 million and cash consideration of approximately $64.2 million. Upon acquisition, the properties were 99.3% leased in the aggregate with lease expirations through 2039. These acquisitions were funded with net proceeds from equity sales through the ATM program and the Company's Revolving Credit Facility. See Note 4 – Real Estate Acquisitions, Disposition, and Assets Held for Sale to the Condensed Consolidated Financial Statements for more details on these acquisitions.

Real Estate Dispositions

During the third quarter of 2024, the Company disposed of an 11,200 square foot surgical center in Texas, received net proceeds of approximately $1.0 million, and recognized an immaterial gain on sale.

Acquisition Pipeline

The Company has four properties under definitive purchase agreements for an aggregate expected purchase price of approximately $8.8 million. The Company's expected returns on these investments range from 9.29% to 9.50%. The Company expects to close on these properties in the fourth quarter of 2024; however, the Company cannot provide assurance as to the timing of when, or whether, these transactions will actually close. The Company expects to fund these acquisitions with proceeds from the Company's Revolving Credit Facility.

The Company has seven properties under definitive purchase agreements, to be acquired after completion and occupancy, for an aggregate expected purchase price of approximately $169.5 million. The Company's expected return on these investments will approximate 9.1% to 9.75%. The Company anticipates closing on these properties throughout 2025, 2026 and 2027; however, the Company cannot provide assurance as to the timing of when, or whether, these transactions will actually close.

Leased Square Footage

As of September 30, 2024, our real estate portfolio was approximately 91.3% leased, excluding real estate properties held for sale. During the first nine months of 2024, we had expiring or terminated leases related to approximately 431,000 square feet, and we leased or renewed leases relating to approximately 427,000 square feet.

Purchase Option Provisions

Certain of the Company's leases provide the lessee with a purchase option or a right of first refusal to purchase the leased property. The purchase option provisions generally allow the lessee to purchase the leased property at fair value or at an amount greater than the Company's gross investment in the leased property at the time of the purchase.

At September 30, 2024, the Company had an aggregate gross investment of approximately $32.9 million in 10 real estate properties with purchase options exercisable at September 30, 2024 that had not been exercised.

Inflation

Periods of high and persistent inflation could cause an increase in our expenses, capital expenditures, and cost of our variable-rate borrowings which could have a material impact on our financial position or results of operations. Many of our lease agreements contain provisions designed to mitigate the adverse impact of inflation, including annual rent increases based on stated increases or CPI increases. In response to inflationary pressures, the Federal Reserve began raising interest rates in 2022. Though these higher interest rates have just begun to decline, these higher rates may adversely impact real estate asset values and increase our interest expense on our variable-rate borrowings under our revolving credit facility.

Executive Compensation

During the first quarter of 2024, the Company's Board approved and adopted certain changes to executive compensation. Through the adoption of the Third Amended and Restated Alignment of Interest Program, the Board established a maximum elective deferral percentage amount of 50% (previously 100%) of compensation allowed to be deferred and applied to the acquisition of restricted stock for certain participants in the program, and limited the duration of the restriction period election depending on each individual's retirement eligibility date. These changes were effective beginning January 1, 2024 for salary and other compensation deferrals and are now effective beginning July 1, 2024 for cash bonus deferrals.

Further, the Board approved and adopted a new long-term incentive compensation structure for its executive officers, which includes the issuance of time-based RSUs and performance-based RSUs with three-year forward-looking performance targets. Historically, the Company had granted long-term incentive awards to its executive officers comprised of restricted stock that vested in eight years, based on backward-looking performance metrics. See Note 9 – Stock Incentive Plan for more details.

Results of Operations

The Company's results of operations for the three and nine months ended September 30, 2024 compared to the same period in 2023 were impacted by real estate acquisitions, lease receivable, interest and loan loss reserves recognized in the second quarter of 2024 related to a tenant, the amortization of non-cash compensation, including the accelerated amortization of unvested restricted shares upon the passing of the Company's former CEO and President in the first quarter of 2023, the new executive compensation program implemented in the first quarter of 2024, as well as other items discussed in more detail below.

Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023

The table below shows our results of operations for the three months ended September 30, 2024 compared to the same period in 2023 and the effect of changes in those results from period to period on our net income.

(Dollars in thousands)

n/m-not meaningful

Revenues

Rental income increased approximately $1.6 million, or 5.9%, for the three months ended September 30, 2024 compared to the same period in 2023. Rental income on properties acquired during 2023 and 2024 resulted in additional rental income of approximately $2.7 million in 2024 compared to 2023, offset partially by the impact of moving a tenant to cash basis in 2024 resulting in a reduction of approximately $0.8 million, with the remaining reduction due mainly to lease terminations, including two Genesis Care leases with the Company that they rejected in 2023 as part of their bankruptcy.

Other operating interest decreased approximately $0.7 million for the three months ended September 30, 2024 compared to the same period in 2023 due mainly to placing a tenant note on non-accrual and reversing interest due from that tenant, as well as a reduction in interest on notes due to reduced principal balances from payments received.

Expenses

Property operating expenses increased approximately $0.5 million, or 9.7%, for the three months ended September 30, 2024 compared to the same period in 2023 due mainly to additional expenses on properties acquired during 2023 and 2024.

General and administrative expenses increased approximately $1.3 million, or 36.4%, for the three months ended September 30, 2024 compared to the same period in 2023 due mainly to compensation-related expenses. The non-cash amortization of deferred compensation increased approximately $0.6 million and cash compensation increased approximately $0.7 million for the three months ended September 30, 2024 compared to the same period in 2023 due to the issuance of additional restricted shares and from the impact of adopting the new executive compensation program in January 2024 which included the grant of 3-year forward-looking restricted stock units, as well as limiting the maximum elective deferral percentage amount of salary and bonus to 50% (previously 100%) as described in more detail in Note 9 – Stock Incentive Plan to the Condensed Consolidated Financial Statements.

Depreciation and amortization expense decreased approximately $0.3 million, or 2.5%, for the three months ended September 30, 2024 compared to the same period in 2023. This decrease was due mainly to the following:

• Fully amortized real estate lease intangibles which generally have a shorter depreciable life than a building resulted in a decrease of approximately $1.9 million;
• Depreciation and amortization on the two properties classified as held for sale during the second and fourth quarters of 2023 resulted in a decrease of approximately $1.3 million;
• Accelerated amortization of lease intangibles on the two GenesisCare properties where the leases were rejected resulted in a decrease of approximately $1.5 million;
• Depreciation and amortization on real estate acquired during 2023 and 2024 resulted in an increase of approximately $1.3 million; and
• Depreciation on tenant and other capital improvements resulted in an increase of approximately $3.2 million.

Interest expense

Interest expense increased approximately $1.6 million, or 34.7%, for the three months ended September 30, 2024 compared to the same period in 2023 due mainly to increases in the weighted average balance and interest rates on the revolving credit facility.

Deferred income tax expense

Deferred income tax expense decreased approximately $0.2 million for the three months ended September 30, 2024 compared to the same period in 2023. During the three months ended September 30, 2023, the Company recorded an additional valuation allowance on its deferred tax asset.

Interest and other income, net

Interest and other income, net increased approximately $0.2 million for the three months ended September 30, 2024 compared to the same period in 2023. During the three months ended September 30, 2023, the Company received earnest money on a terminated contract on a property held for sale.

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

The table below shows our results of operations for the nine months ended September 30, 2024 compared to the same period in 2023 and the effect of changes in those results from period to period on our net (loss) income.

(Dollars in thousands)

n/m - not meaningful

Revenues

Rental income increased approximately $5.0 million, or 6.2%, for the nine months ended September 30, 2024 compared to the same period in 2023 due mainly to rental income on properties acquired during 2023 and 2024 resulting in additional rental income of approximately $9.2 million, offset partially by the impact of moving a tenant to cash basis in the second quarter of 2024 totaling approximately $1.9 million (including $0.9 million of straight-line rent) with the remaining reduction due mainly to lease terminations, including two Genesis Care leases with the Company that they rejected in 2023 as part of their bankruptcy.

Other operating interest decreased $2.2 million for the nine months ended September 30, 2024 compared to the same period in 2023 due mainly to placing a tenant note on non-accrual and reversing interest due from that tenant, as well as a reduction in interest on notes due to reduced principal balances from payments received.

Expenses

Property operating expenses increased approximately $2.2 million, or 14.8%, for the nine months ended September 30, 2024 compared to the same period in 2023 due mainly to the following:

• Expenses on properties acquired during 2023 and 2024 increased property operating expenses by approximately $1.5 million;
• Property insurance resulted in an increase of approximately $0.2 million;
• Snow plow and landscaping services resulted in an increase of approximately $0.2 million;
• Repairs and maintenance expenses resulted in an increase of approximately $0.2 million; and
• Amortization of leasing commissions resulted in an increase of approximately $0.1 million.

General and administrative expenses decreased approximately $9.4 million, or 39.6% for the nine months ended September 30, 2024 compared to the same period in 2023 due mainly to the following:

• Non-cash accelerated amortization of deferred compensation in the first quarter of 2023 for non-vested restricted common shares held by former CEO and President Timothy Wallace at the time of his passing in March 2023 accounted for a decrease of approximately $11.8 million; offset partially by
• An increase in the non-cash amortization of other deferred compensation of approximately $1.3 million and cash compensation of approximately $1.4 million for the nine months ended September 30, 2024 compared to the same period in 2023 due to the issuance of additional restricted shares and from the impact of adopting the new executive compensation program in January 2024 which included the grant of 3-year forward-looking restricted stock units, as well as limiting the maximum elective deferral percentage amount of salary and bonus to 50% (previously 100%) as described in more detail in Note 9 – Stock Incentive Plan to the Condensed Consolidated Financial Statements.

Depreciation and amortization expense increased approximately $2.5 million, or 8.6%, for the nine months ended September 30, 2024 compared to the same period in 2023. This increase was comprised mainly of the following:

• Acquisitions of real estate in 2023 and 2024 resulted in an increase of approximately $4.2 million;
• Tenant improvements and other capital expenditures resulted in an increase of approximately $4.2 million; offset against
• Fully amortized real estate lease intangibles which generally have a shorter depreciable life than a building resulted in a decrease of approximately $2.8 million;
• Accelerated amortization of lease intangibles on the two GenesisCare properties in 2023 where the leases were rejected resulted in a decrease of approximately $1.5 million; and
• Depreciation and amortization on the two properties classified as held for sale during the second and fourth quarters of 2023 ceased at that time resulting in a decrease of approximately $1.5 million.

Interest expense

Interest expense increased approximately $4.5 million, or 35.4%, for the nine months ended September 30, 2024 compared to the same period in 2023. Interest due under the Credit Facility increased approximately $4.2 million due mainly to an increase in the revolving credit facility balance and a rise in interest rates (See Note 5 – Debt, net to the Condensed Consolidated Financial Statements), and the maturity of two interest rate swaps, which were replaced with two forward-starting interest swaps (See Note 6 – Derivative Financial Instruments to the Condensed Consolidated Financial Statements). Also, capitalized interest on redevelopment projects decreased approximately $0.4 million for the nine months ended September 30, 2024 compared to the same period in 2023. Mortgage interest decreased approximately $0.1 million for the nine months ended September 30, 2024 compared to the same period in 2023 due to the repayment of the mortgage note at maturity.

Credit loss reserve

Credit loss reserve totaling $11.0 million was recorded during the second quarter of 2024 related to notes receivable with a geriatric inpatient behavioral hospital tenant. See Note 10 – Other Assets, net for more details on the credit loss reserve.

Deferred income tax expense

Deferred income tax expense decreased approximately $0.3 million for the nine months ended September 30, 2024 compared to the same period in 2023. During the nine months ended September 30, 2023, the Company recorded an additional valuation allowance on its deferred tax asset.

Interest and other income, net

Interest and other income, net decreased approximately $0.3 million, or 33.8%, for the nine months ended September 30, 2024 compared to the same period in 2023. During the nine months ended September 30, 2023, the Company recognized a net casualty gain relating to a property totaling $0.7 million. During the second quarter of

2024, the Company recorded into income an undistributed allowance for tenant improvements totaling $0.3 million for a lease that expired on June 30, 2024. Also, during the nine months ended September 30, 2024, the Company recorded into income $0.2 million of earnest money on a terminated contract on a property held for sale.

Non-GAAP Financial Measures and Key Performance Indicators

Management considers certain non-GAAP financial measures and key performance indicators to be useful supplemental measures of the Company's operating performance. A non-GAAP financial measure is generally defined as one that purports to measure financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable measure determined in accordance with GAAP. The Company reports non-GAAP financial measures because these measures are observed by management to also be among the most predominant measures used by the REIT industry and by industry analysts to evaluate REITs. For these reasons, management deems it appropriate to disclose and discuss these non-GAAP financial measures. Set forth below are descriptions of the non-GAAP financial measures management considers relevant to the Company's business and useful to investors, as well as reconciliations of those measures to the most directly comparable GAAP financial measure.

The non-GAAP financial measures and key performance indicators presented herein are not necessarily identical to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. These measures should not be considered as alternatives to net income, as indicators of the Company's financial performance, or as alternatives to cash flow from operating activities as measures of the Company's liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of the Company's needs. Management believes that in order to facilitate a clear understanding of the Company's historical consolidated operating results, these measures should be examined in conjunction with net income and cash flows from operations as presented in the Condensed Consolidated Financial Statements and other financial data included elsewhere in this Quarterly Report on Form 10-Q.

Funds from Operations ("FFO") and Adjusted Funds from Operations ("AFFO")

FFO is an operating performance measure adopted by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to net income (calculated in accordance with GAAP), excluding gains or losses from the sale of certain real estate assets, gains and losses from change in control, impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity, plus depreciation and amortization related to real estate properties, and after adjustments for unconsolidated partnerships and joint ventures. NAREIT also provides REITs with an option to exclude gains, losses and impairments of assets that are incidental to the main business of the REIT from the calculation of FFO.

In addition to FFO, the Company presents AFFO and AFFO per share. The Company defines AFFO as FFO, excluding certain expenses related to closing costs of properties acquired accounted for as business combinations and mortgages funded, excluding straight-line rent and the amortization of stock-based compensation, and including or excluding other non-cash items from time to time. AFFO presented herein may not be comparable to similar measures presented by other real estate companies due to the fact that not all real estate companies use the same definition.

Management believes that net income, as defined by GAAP, is the most appropriate earnings measurement. However, management believes FFO, AFFO, FFO per share and AFFO per share provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. The Company believes that by excluding the effect of depreciation, amortization, impairments and gains or losses from sales of real estate, losses and impairment of incidental assets, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, FFO, AFFO, FFO per share and AFFO per share can facilitate comparisons of operating performance between periods. The table below reconciles net income (loss) to FFO and AFFO for the three and nine months ended September 30, 2024 compared to the same periods in 2023.

(In thousands, except per share amounts)

(1) During the three months ended June 30, 2024, the Company placed leases related to a tenant on cash basis and reversed rent and placed notes related to the tenant on non-accrual and reversed interest totaling approximately $3.2 million, including straight-line rent of approximately $0.9 million.

(2) During the three months ended June 30, 2023, the Company recognized a $0.7 million net casualty gain from insurance proceeds received related to one property. The Company recorded impairments on the property in previous quarters based on contracts to sell, and sold the property during the three months ended September 30, 2024, recording an immaterial gain on sale.

(3) During the three months ended March 31, 2023, the Company accelerated the amortization of stock-based compensation totaling $11.8 million upon the passing of our former CEO and President.

(4) During the three months ended June 30, 2024, the Company recorded an $11.0 million credit loss reserve related to notes receivable that are incidental to the Company's main business with a geriatric inpatient behavioral hospital tenant.

(5) Diluted weighted average common shares outstanding for FFO and AFFO are calculated based on the treasury method, rather than the 2-class method used to calculate earnings per share.

Net Operating Income ("NOI")

NOI is a key performance indicator. NOI is defined as net income or loss, computed in accordance with GAAP, generated from our total portfolio of properties and other investments before general and administrative expenses, depreciation and amortization expense, gains or loss on the sale of real estate properties or other investments, interest expense, and income tax expense. We believe that NOI provides an accurate measure of operating performance of our operating assets because NOI excludes certain items that are not associated with management of the properties. The Company's use of the term NOI may not be comparable to that of other real estate companies as they may have different methodologies for computing NOI.

The table below reconciles net income (loss) to NOI for the three and nine months ended September 30, 2024 compared to the same periods in 2023.

(In thousands)

EBITDAre and Adjusted EBITDAre

The Company uses the NAREIT definition of EBITDAre which is net income or loss plus interest expense, income tax expense, and depreciation and amortization, plus losses or minus gains on the disposition of depreciable property, including losses/gains on change of control, plus impairment write-downs of depreciable property and of investments in unconsolidated affiliates caused by a decrease in value of depreciable property in the affiliate, plus or minus adjustments to reflect the entity's share of EBITDAre of unconsolidated affiliates and consolidated affiliates with non-controlling interest. The Company also presents Adjusted EBITDAre which is EBITDAre before non-cash stock-based compensation expense.

We consider EBITDAre and Adjusted EBITDAre important measures because they provide additional information to allow management, investors, and our current and potential creditors to evaluate and compare our core operating results and our ability to service debt.

The table below reconciles net income (loss) to EBITDAre and Adjusted EBITDAre for the three and nine months ended September 30, 2024 compared to the same periods in 2023.

(In thousands)

Liquidity and Capital Resources

The Company monitors its liquidity and capital resources and relies on several key indicators in its assessment of capital markets for financing acquisitions and other operating activities as needed, including the following:

• Leverage ratios and financial covenants included in our Credit Facility;
• Dividend payout percentage; and
• Interest rates, underlying treasury rates, debt market spreads and equity markets.

The Company uses these indicators and others to compare its operations to its peers and to help identify areas in which the Company may need to focus its attention.

Financing Policy

The Company’s current financing policy limits aggregate debt (secured or unsecured) in excess of 40% of the Company's total capitalization, except for short-term, transitory periods. At September 30, 2024, our debt to total capitalization ratio (debt plus stockholders' equity plus accumulated depreciation) was approximately 40.0%.

Sources and Uses of Cash

The Company derives most of its revenues from its real estate properties. Our rental income represents our primary source of liquidity to fund our dividends, general and administrative expenses, property operating expenses, capital improvements on our properties, interest expense on our Credit Facility, and other expenses incurred related to managing our existing portfolio. To the extent additional resources are needed, the Company will fund its investment activity generally through equity or debt issuances either in the public or private markets or through proceeds from our Credit Facility, which was amended in October 2024 to provide additional financing for acquisitions, capital improvements and other cash needs. See Note 14 – Subsequent Events to the Condensed Consolidated Financial Statements.

The Company expects to meet its liquidity needs through cash on hand, cash flows from operations and cash flows from sources discussed above. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs.

Credit Facility

On October 16, 2024, the Company amended its Credit Facility to increase the Revolving Credit Facility capacity from $150.0 million to $400.0 million and extend the maturity through October 16, 2029. The amended Credit Facility also lowered pricing on the Revolving Credit Facility by 10 to 30 basis points, depending on the Company's leverage ratio. Proceeds from the increased Revolving Credit Facility were used to repay the existing $75.0 million A-3 Term Loan which was scheduled to mature on March 29, 2026. In addition, amounts outstanding under the Revolving Credit Facility prior to this amendment will remain outstanding. Interest rate swaps previously entered into to fix the interest rates on the A-3 Term Loan will remain in place on the Revolving Credit Facility through their maturity on March 29, 2026. See Note 5 – Debt, net and Note 14 – Subsequent Events to the Condensed Consolidated Financial Statements which provide more details on the Company's Credit Facility. At September 30, 2024, prior to the amendment, the Company had borrowing capacity remaining under the Revolving Credit Facility of approximately $25.0 million. At the time of closing on the amendment, on October 16, 2024, the Company had borrowing capacity remaining under the Revolving Credit Facility of approximately $198.0 million.

The Company’s ability to borrow under the Credit Facility is subject to its ongoing compliance with a number of customary affirmative and negative covenants, including limitations with respect to liens, indebtedness, distributions, mergers, consolidations, investments, restricted payments and asset sales, as well as financial maintenance covenants. The Company was in compliance with its financial covenants under its Credit Facility as of September 30, 2024.

Ground Leases

At September 30, 2024, the Company was obligated, as the lessee, under four non-prepaid ground leases accounted for as operating leases with expiration dates, including renewal options, through 2076, and two non-prepaid ground leases accounted for as financing leases with expiration dates through 2109, including renewal options. Any rental increases related to the Company's ground leases are generally either stated or based on the Consumer Price Index. At September 30, 2024, the Company's aggregate obligation under these ground leases was approximately $8.7 million. See Note 3 – Real Estate Leases to the Condensed Consolidated Financial Statements.

Acquisition Pipeline

The Company has four properties under definitive purchase agreements for an aggregate expected purchase price of approximately $8.8 million. The Company's expected returns on these investments range from 9.29% to 9.50%. The Company expects to close on these properties in the fourth quarter of 2024; however, the Company cannot provide assurance as to the timing of when, or whether, these transactions will actually close. The Company expects to fund these acquisitions with proceeds from the Company's Revolving Credit Facility.

The Company has seven properties under definitive purchase agreements, to be acquired after completion and occupancy, for an aggregate expected purchase price of approximately $169.5 million. The Company anticipates closing on these properties throughout 2025, 2026 and 2027; however, the Company cannot provide assurance as to the timing of when, or whether, these transactions will actually close. The Company expects to fund these acquisitions through net proceeds from equity sales through the ATM program and the Company's Revolving Credit Facility.

Tenant Improvements and Capital Improvements

Subject to Company approval, we may fund or reimburse tenants for tenant improvements, which are allowed for in certain leases, of up to approximately $26.0 million as of September 30, 2024. At September 30, 2024, six of these projects, totaling $13.1 million, represented redevelopment projects on buildings with tenants backed by long-term leases.

The Company has also entered into contracts regarding certain capital expenditures with remaining commitments totaling approximately $3.1 million as of September 30, 2024. Six of these projects totaling $0.8 million, represent redevelopment projects of the buildings into different healthcare uses backed by long-term leases. Reimbursement of these expenditures by our tenants will be determined by each tenant's lease.

The Company expects to fund these expenditures through the Company's free cash flow, proceeds from equity sales through the ATM program, and the Company's Revolving Credit Facility.

Notes Receivable

The Company has two notes with a tenant with unfunded commitments remaining totaling $4.2 million at September 30, 2024. See Note 10 – Other Assets, net to the Condensed Consolidated Financial Statements.

Automatic Shelf Registration Statement

On November 2, 2022, the Company filed an automatic shelf registration statement on Form S-3 with the Securities and Exchange Commission. The registration statement is for an indeterminate number of securities and is effective for three years. Under this registration statement, the Company has the capacity to offer and sell from time to time various types of securities, including common stock, preferred stock, depository shares, rights, debt securities, warrants and units.

Operating Activities

Cash flows provided by operating activities for the nine months ended September 30, 2024 and 2023 were approximately $43.2 million and $47.1 million, respectively. Cash flows provided by operating activities were generally provided by contractual rents and interest on our notes receivable, net of property operating expenses not reimbursed by the tenants and general and administrative expenses.

Investing Activities

Cash flows used in investing activities for the nine months ended September 30, 2024 and 2023 were approximately $83.2 million and $100.1 million, respectively. During the nine months ended September 30, 2024, the Company invested in six properties for an aggregate cash consideration of approximately $64.2 million and sold a property for cash consideration of approximately $1.0 million. Also, during the nine months ended September 30, 2024, the Company funded notes totaling $2.9 million, received payments on its notes totaling $2.4 million and funded capital expenditures on its existing portfolio totaling approximately $19.5 million.

During the nine months ended September 30, 2023, the Company invested in 17 properties and one land parcel for an aggregate cash consideration of approximately $92.0 million and funded notes receivable totaling approximately $2.0 million. Also, during the nine months ended September 30, 2023, the Company received payments on its notes receivable totaling $3.0 million, received insurance proceeds from a casualty loss totaling $2.3 million, and funded capital expenditures on its existing portfolio totaling approximately $11.5 million.

Financing Activities

Cash flows provided by financing activities for the nine months ended September 30, 2024 and 2023 were approximately $38.2 million and $45.9 million, respectively. During the nine months ended September 30, 2024, the Company (i) borrowed $75.0 million under its Revolving Credit Facility, (ii) repaid a mortgage note totaling approximately $4.8 million, (iii) paid dividends totaling approximately $38.6 million, (iv) completed equity offerings under its at-the-market program, resulting in net proceeds, net of underwriters' discount and offering costs, of approximately $7.3 million, and (v) upon the vesting of stock-based awards for certain employees, withheld shares and paid taxes totaling approximately $0.8 million on behalf of the employees.

During the nine months ended September 30, 2023, the Company (i) borrowed $48.0 million under its Revolving Credit Facility, (ii) completed equity offerings under its at-the-market program, resulting in net proceeds, net of underwriters' discount and offering costs, of approximately $34.6 million, (iii) upon the vesting of stock-based awards for certain employees, withheld shares and paid taxes totaling approximately $1.0 million on behalf of employees, and (iv) paid dividends totaling approximately $35.6 million.

Security Deposits

As of September 30, 2024, the Company held approximately $2.9 million in security deposits for the benefit of the Company in the event the obligated tenant fails to perform under the terms of its respective lease. Generally, the Company may, at its discretion and upon notification to the tenant, draw upon the security deposits if there are any defaults under the leases.

Dividends

The Company is required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to maintain its qualification as a REIT.

On October 24, 2024, the Company’s Board of Directors declared a quarterly common stock dividend in the amount of $0.465 per share. The dividend is payable on November 22, 2024 to stockholders of record on November 8, 2024. This rate equates to an annualized dividend of $1.86 per share.

The ability of the Company to pay dividends is dependent upon its ability to generate cash flows and to make accretive new investments.

Corporate Responsibility

The Company is committed to conducting its business according to the highest ethical standards and upholding its corporate responsibilities as a public company operating for the benefit of its stockholders. To that end, the Company modified its Governance Committee to be the Environmental, Social, and Governance (“ESG”) Committee with a revised charter included on the Company’s website at www.chct.reit (http://www.chct.reit). Among other duties, the ESG Committee meets at least annually to review and recommend to the Board the general strategy and initiatives regarding ESG matters, including the Company’s internal and external communications and disclosures.

The Company’s Board of Directors has adopted a revised Code of Ethics and Business Conduct that not only applies to its directors, officers, and other employees but also extends the Company's expectations that its vendors, service providers, contractors, and consultants will embrace the Company's commitment to integrity and personal responsibility by complying with this Code at all times. The Code of Ethics and Business Conduct includes the Company’s commitment to promote high standards of integrity by conducting its affairs honestly and ethically and to include in its periodic reports or other publicly available documents information and metrics related to internal monitoring, whistleblower, or reporting systems.

The Company’s whistleblower policy prohibits the Company and its affiliates and their officers, employees and agents from discharging, demoting, suspending, threatening, harassing or in any other manner discriminating against any employee for raising a concern. If an employee desires to raise a concern in a confidential or anonymous manner, the concern may be directed to the whistleblower officer at the Company’s whistleblower hotline. During the quarter ended September 30, 2024, the whistleblower officer received no whistleblower complaints.

The Company’s Information Technology infrastructure is cloud-based, utilizing Software as a Service (“SaaS”) applications for substantially all of its software requirements. Management has formed an IT Committee consisting of the Chief Executive Officer, Chief Financial Officer, and the Vice President of Information Technology to review and discuss information security matters and cyber security risks. The committee meets at least twice a year and reports to the Board of Directors as needed. The Company has adopted the Center of Internet Security (CIS) v8 IG1 cyber security controls including adopting an annual information security training program for its employees. The Company has partnered with a global cyber security leader to continuously and proactively manage and mitigate the ever growing list of cyber threats. As part of the managed monitoring and remediation platform, the Company benefits from a $100,000 breach prevention warranty. Since its inception, the Company has not had a security breach, and has not incurred any resulting expenses, penalties or settlements.

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We may use certain derivative financial instruments to manage, or hedge, interest rate risks related to our borrowings. We will not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based upon their credit rating and other factors. An interest rate swap is a contractual agreement entered into by two counterparties under which each agrees to make periodic payments to the other for an agreed period of time based on a notional amount of principal. Under the most common form of interest rate swap, known from our perspective as a floating-to-fixed interest rate swap, a series of floating, or variable, rate payments on a notional amount of principal is exchanged for a series of fixed interest rate payments on such notional amount. During the nine months ended September 30, 2024, there were no material changes in the quantitative and qualitative disclosures about market risks presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.

Changes In Internal Control Over Financial Reporting

There were no changes in our system of internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, an investor should consider the risk factors included in its Annual Report on Form 10-K for the year ended December 31, 2023 and other reports that may be filed by the Company. There were no material changes in the risk factors presented in the Company's Annual Report on Form 10-K for the year ended December 31, 2023.