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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO
Commission file number: 001-37401
 
Community Healthcare Trust Incorporated
(Exact Name of Registrant as Specified in Its Charter)
 
Maryland
 
46-5212033
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
3326 Aspen Grove Drive
Suite 150
Franklin, Tennessee 37067
(Address of Principal Executive Offices) (Zip Code)
(615771-3052
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each Class
Trading Symbol
Name of each exchange on which registered
 
 
Common stock, $0.01 par value per share
CHCT
New York Stock Exchange
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes      No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated Filer
Accelerated Filer
Emerging-growth company
Non-accelerated filer
Smaller reporting 
company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes       No
The Registrant had 22,726,373 shares of Common Stock, $0.01 par value per share, outstanding as of July 31, 2020.

1


COMMUNITY HEALTHCARE TRUST INCORPORATED
FORM 10-Q
June 30, 2020
TABLE OF CONTENTS

 
 
Page
 
3
 
3
 
4
 
5
 
6
 
8
 
9
 
 
 
 
 

2


PART I. FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 
(Unaudited)
 
 
 
June 30, 2020
 
December 31, 2019
ASSETS
 
 
 
Real estate properties
 
 
 
Land and land improvements
$
78,999

 
$
68,129

Buildings, improvements, and lease intangibles
585,454

 
534,503

Personal property
234

 
220

Total real estate properties
664,687

 
602,852

Less accumulated depreciation
(89,698
)
 
(77,523
)
Total real estate properties, net
574,989

 
525,329

Cash and cash equivalents
4,896

 
1,730

Restricted cash
351

 
293

Other assets, net
32,068

 
35,179

Total assets
$
612,304

 
$
562,531

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities
 
 
 
Debt, net
$
197,309

 
$
194,243

Accounts payable and accrued liabilities
5,497

 
3,606

Other liabilities
22,395

 
11,271

Total liabilities
225,201

 
209,120

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders' Equity
 
 
 
Preferred stock, $0.01 par value; 50,000,000 shares authorized; none issued and outstanding

 

Common stock, $0.01 par value; 450,000,000 shares authorized; 22,726,141 and 21,410,578 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
227

 
214

Additional paid-in capital
500,477

 
447,916

Cumulative net income
26,180

 
17,554

Accumulated other comprehensive loss
(13,969
)
 
(4,808
)
Cumulative dividends
(125,812
)
 
(107,465
)
Total stockholders’ equity
387,103

 
353,411

Total liabilities and stockholders' equity
$
612,304

 
$
562,531


See accompanying notes to the condensed consolidated financial statements.

3


COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019
(Unaudited; Dollars in thousands, except per share amounts)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
REVENUES
 
 
 
 
 
 
 
Rental income
$
17,830

 
$
13,361

 
$
35,258

 
$
26,259

Other operating interest
450

 
955

 
958

 
1,498

 
18,280

 
14,316

 
36,216

 
27,757

 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
Property operating
3,223

 
2,993

 
6,566

 
6,068

General and administrative
1,919

 
1,776

 
4,111

 
3,561

Depreciation and amortization
6,119

 
5,299

 
12,178

 
10,545

 
11,261

 
10,068

 
22,855

 
20,174

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
Loss on sale of real estate
(313
)
 

 
(313
)
 

Interest expense
(2,183
)
 
(2,251
)
 
(4,432
)
 
(4,305
)
Interest and other income, net
3

 
69

 
10

 
238

 
(2,493
)
 
(2,182
)
 
(4,735
)
 
(4,067
)
NET INCOME
$
4,526

 
$
2,066

 
$
8,626

 
$
3,516

 
 
 
 
 
 
 
 
NET INCOME PER COMMON SHARE:
 
 
 
 
 
 
 
Net income per common share – Basic
$
0.19

 
$
0.09

 
$
0.37

 
$
0.16

Net income per common share – Diluted
$
0.19

 
$
0.09

 
$
0.37

 
$
0.16

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-BASIC
21,263,575

 
18,245,668

 
20,999,097

 
18,100,973

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-DILUTED
21,263,575

 
18,245,668

 
20,999,097

 
18,100,973


See accompanying notes to the condensed consolidated financial statements.

4


COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019
(Unaudited; Dollars in thousands)

 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
 
2020
 
2019
 
2020
 
2019
 
 
 
 
 
 
 
 
 
 
NET INCOME
$
4,526

 
$
2,066

 
$
8,626

 
$
3,516

 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
Decrease in fair value of cash flow hedges
(1,317
)
 
(4,032
)
 
(10,193
)
 
(5,245
)
 
 
Reclassification for amounts recognized as interest expense
774

 
(95
)
 
1,032

 
(157
)
 
Total other comprehensive loss
(543
)
 
(4,127
)
 
(9,161
)
 
(5,402
)
COMPREHENSIVE INCOME (LOSS)
$
3,983

 
$
(2,061
)
 
$
(535
)
 
$
(1,886
)

See accompanying notes to the condensed consolidated financial statements.


5


COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020
(Unaudited; Dollars in thousands, except per share amounts)

 
Preferred Stock
 
Common Stock
 
Additional Paid in Capital
 
Cumulative Net
Income
 
Accumulated Other Comprehensive (Loss) Income
 
Cumulative Dividends
 
Total Stockholders' Equity
 
Shares
Amount
 
Shares
Amount
 
Balance at March 31, 2020

$

 
22,125,269

$
221

 
$
475,824

 
$
21,654

 
$
(13,426
)
 
$
(116,498
)
 
$
367,775

Issuance of common stock, net of issuance costs


 
578,759

6

 
23,584

 

 

 

 
23,590

Stock-based compensation


 
22,113


 
1,069

 

 

 

 
1,069

Unrecognized loss on cash flow hedges


 


 

 

 
(1,317
)
 

 
(1,317
)
Reclassification adjustment for losses included in net income (interest expense)


 


 

 

 
774

 

 
774

Net income


 


 

 
4,526

 

 

 
4,526

Dividends to common stockholders ($0.42 per share)


 


 

 

 

 
(9,314
)
 
(9,314
)
Balance at June 30, 2020

$

 
22,726,141

$
227

 
$
500,477

 
$
26,180

 
$
(13,969
)
 
$
(125,812
)
 
$
387,103

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2019

$

 
21,410,578

$
214

 
$
447,916

 
$
17,554

 
$
(4,808
)
 
$
(107,465
)
 
$
353,411

Issuance of common stock, net of issuance costs


 
1,189,545

12

 
50,480

 

 

 

 
50,492

Stock-based compensation


 
126,018

1

 
2,081

 

 

 

 
2,082

Unrecognized loss on cash flow hedges


 


 

 

 
(10,193
)
 

 
(10,193
)
Reclassification adjustment for losses included in net income (interest expense)


 


 

 

 
1,032

 

 
1,032

Net income


 


 

 
8,626

 

 

 
8,626

Dividends to common stockholders ($0.8375 per share)


 


 

 

 

 
(18,347
)
 
(18,347
)
Balance at June 30, 2020

$

 
22,726,141

$
227

 
$
500,477

 
$
26,180

 
$
(13,969
)
 
$
(125,812
)
 
$
387,103



See accompanying notes to the condensed consolidated financial statements.














6



COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019
(Unaudited; Dollars in thousands, except per share amounts)

 
Preferred Stock
 
Common Stock
 
Additional Paid in Capital
 
Cumulative Net
Income
 
Accumulated Other Comprehensive (Loss) Income
 
Cumulative Dividends
 
Total Stockholders' Equity
 
Shares
Amount
 
Shares
Amount
 
Balance at March 31, 2019


 
18,862,792

$
189

 
$
342,654

 
$
10,628

 
$
(642
)
 
$
(83,146
)
 
$
269,683

Issuance of common stock, net of issuance costs


 
497,453

5

 
18,363

 

 

 

 
18,368

Stock-based compensation


 
40,999


 
896

 

 

 

 
896

Unrecognized loss on cash flow hedges


 


 

 

 
(4,032
)
 

 
(4,032
)
Reclassification adjustment for losses included in net income (interest expense)


 


 

 

 
(95
)
 

 
(95
)
Net income


 


 

 
2,066

 

 

 
2,066

Dividends to common stockholders ($0.41 per share)


 


 

 

 

 
(7,766
)
 
(7,766
)
Balance at June 30, 2019

$

 
19,401,244

$
194

 
$
361,913

 
$
12,694

 
$
(4,769
)
 
$
(90,912
)
 
$
279,120

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018

$

 
18,634,502

$
186

 
$
337,180

 
$
9,178

 
$
633

 
$
(75,518
)
 
$
271,659

Issuance of common stock, net of issuance costs


 
641,053

7

 
22,985

 

 

 

 
22,992

Stock-based compensation


 
125,689

1

 
1,748

 

 

 

 
1,749

Unrecognized loss on cash flow hedges


 


 

 

 
(5,245
)
 

 
(5,245
)
Reclassification adjustment for losses included in net income (interest expense)


 


 

 

 
(157
)
 

 
(157
)
Net income


 


 

 
3,516

 

 

 
3,516

Dividends to common stockholders ($0.8175 per share)


 


 

 

 

 
(15,394
)
 
(15,394
)
Balance at June 30, 2019

$

 
19,401,244

$
194

 
$
361,913

 
$
12,694

 
$
(4,769
)
 
$
(90,912
)
 
$
279,120



See accompanying notes to the condensed consolidated financial statements.

7


COMMUNITY HEALTHCARE TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in thousands)
 
Six Months Ended June 30,
 
2020
 
2019
OPERATING ACTIVITIES
 
 
 
Net income
$
8,626

 
$
3,516

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
12,178

 
10,545

Other amortization
(224
)
 
294

Stock-based compensation
2,082

 
1,749

Straight-line rent receivable
(1,604
)
 
(749
)
Loss on sale of real estate
313

 

Deferred income tax expense
20

 
27

Changes in operating assets and liabilities:
 
 
 
Other assets
(119
)
 
(1,087
)
Accounts payable and accrued liabilities
1,089

 
114

Other liabilities
1,386

 
(26
)
Net cash provided by operating activities
23,747

 
14,383

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Acquisitions of real estate
(57,890
)
 
(63,449
)
        Proceeds from sale of real estate
248

 

        Acquisition of note receivable
(1,750
)
 

Proceeds from the repayment of notes receivable
6,910

 
320

Capital expenditures on existing real estate properties
(3,081
)
 
(1,654
)
Net cash used in investing activities
(55,563
)
 
(64,783
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Net borrowings (repayments) on revolving credit facility
3,000

 
(24,000
)
Term loan borrowings

 
75,000

Mortgage note repayments
(53
)
 
(52
)
Dividends paid
(18,347
)
 
(15,394
)
Proceeds from issuance of common stock
50,579

 
23,172

Equity issuance costs
(139
)
 
(180
)
Debt issuance costs

 
(1,273
)
Net cash provided by financing activities
35,040

 
57,273

Increase in cash and cash equivalents and restricted cash
3,224

 
6,873

Cash and cash equivalents and restricted cash, beginning of period
2,023

 
2,392

Cash and cash equivalents and restricted cash, end of period
$
5,247

 
$
9,265

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Interest paid
$
3,110

 
$
2,781

Invoices accrued for construction, tenant improvement and other capitalized costs
$
707

 
$
29

Reclassification between accounts and notes receivable
$

 
$
45

Reclassification of registration statement costs incurred in prior year to equity issuance costs
$
95

 
$
187

Decrease in fair value of cash flow hedges
$
(10,193
)
 
$
(5,245
)
Income taxes paid
$
31

 
$

See accompanying notes to the condensed consolidated financial statements.

8


COMMUNITY HEALTHCARE TRUST INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

Note 1. Summary of Significant Accounting Policies

Business Overview
Community Healthcare Trust Incorporated (the ‘‘Company’’, ‘‘we’’, ‘‘our’’) was organized in the State of Maryland on March 28, 2014. The Company is a fully-integrated healthcare real estate company that owns and acquires real estate properties that are leased to hospitals, doctors, healthcare systems or other healthcare service providers. As of June 30, 2020, the Company had investments of approximately $664.7 million in 131 real estate properties, located in 33 states, totaling approximately 2.8 million square feet in the aggregate. Any references to square footage or occupancy percentages, and any amounts derived from these values in these notes to the condensed consolidated financial statements, are outside the scope of our independent registered public accounting firm's review.

Basis of Presentation
The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. This interim financial information should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Management believes that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2020. All material intercompany accounts and transactions have been eliminated.

A novel strain of coronavirus (SARS-CoV-2) was first identified in late 2019, and subsequently declared a global pandemic by the World Health Organization ("COVID-19"). The Company considered the impact of the COVID-19 on the assumptions and estimates used for the three and six months ended June 30, 2020. The full extent of the future impacts of COVID-19 on the Company's operations is uncertain. A prolonged outbreak could have a material adverse impact on the financial results and business operations of the Company.

During the second quarter of 2020, the Company has provided lease concessions to certain tenants in response to the impact of COVID-19, in the form of rent deferrals. The Company has made an election to account for such lease concessions consistent with how those concessions would be accounted for under the current leasing guidance if enforceable rights and obligations for those concessions had already existed in the leases. This election is available for concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in our rights as lessor, including concessions that result in the total payments required by the modified lease being substantially the same as or less than total payments required by the original lease.

All of the Company’s concessions to date provide for a deferral of payments with no substantive changes to the consideration in the original lease. These deferrals affect the timing, but not the amount, of the lease payments. The Company is accounting for these deferrals as if no changes to the lease were made. Under this accounting, the Company increases its lease receivable as tenant payments accrue and continues to recognize rental income. As of July 31, 2020, the Company has entered into, or anticipates entering into, deferral agreements with up to approximately 20 tenants representing less than one percent of our annualized rent. Pursuant to these agreements, the tenants are generally required to repay the deferred amounts in equal monthly installments during the third and fourth quarters of 2020.


9

Notes to Condensed Consolidated Financial Statements - Continued

Use of Estimates in the Condensed Consolidated Financial Statements
Preparation of the Condensed Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results may materially differ from those estimates.

Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents includes short-term investments with original maturities of three months or less when purchased. Restricted cash consists of amounts held by the lender of our mortgage note payable to provide for future real estate tax, insurance expenditures and tenant improvements related to one property. The carrying amount approximates fair value due to the short term maturity of these investments. The following table provides a reconciliation of cash and cash equivalents and restricted cash:
 
 Balance as of June 30,
(Dollars in thousands)
2020
 
2019
Cash and cash equivalents
$
4,896

 
$
9,031

Restricted cash
351

 
234

Cash, cash equivalents and restricted cash
$
5,247

 
$
9,265



Income Taxes
The Company has elected to be taxed as a real estate investment trust ("REIT"), as defined under the Internal Revenue Code of 1986, as amended (the "Code"). The Company and one subsidiary have also elected for that subsidiary to be treated as a taxable REIT subsidiary ("TRS"), which is subject to federal and state income taxes. No provision has been made for federal income taxes for the REIT; however, the Company has recorded income tax expense or benefit for the TRS to the extent applicable. The Company also evaluates the realizability of its deferred tax assets and will record valuation allowances if it is determined that more likely than not the asset will not be recovered. The Company intends at all times to qualify as a REIT under the Code. The Company must distribute at least 90% per annum of its REIT taxable income to its stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with generally accepted accounting principles) and meet other requirements to continue to qualify as a REIT.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES" Act) was enacted into law and was immediately effective. The CARES Act includes several tax provisions that allow for the carryback of net operating losses, provides relief from the taxable income limitation on the use of net operating losses carried forward, increases the business interest limitation from 30% to 50%, makes technical corrections to tax depreciation methods for qualified improvement property, and provides payroll tax credits and for the deferral of employer social security payments. The Company does not believe that there have been or will be material impacts to its income taxes related to the CARES Act. The Company will continue to evaluate the tax impact of the CARES Act and any guidance provided by the U.S. Treasury and Internal Revenue Service.

New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Financial Instruments-Credit Losses
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, companies are required to use a new current expected credit loss ("CECL") model that generally results in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, companies are required to measure credit losses in a manner similar to prior guidance, except that the losses are recognized as allowances rather than as reductions in the amortized cost of the securities. In November 2018, the FASB amended the ASU to clarify that receivables arising from leases would not be within the scope of

10

Notes to Condensed Consolidated Financial Statements - Continued

the ASU but rather would be accounted for under the leasing standard. Companies have to disclose significantly more information, including information they use to track credit quality by year of origination for most financing receivables. Companies must apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company adopted ASU No. 2016-13 on January 1, 2020. The Company did not record an adjustment upon adoption as the impact was determined to be immaterial. However, this standard could impact the Company's financial statements and results of operations in future periods.

Recently Issued Accounting Pronouncements
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

Note 2. Real Estate Leases

The Company’s properties are generally leased pursuant to non-cancelable, fixed-term operating leases with expiration dates through 2035. The Company’s leases generally require the lessee to pay minimum rent, with fixed rent renewal terms or increases based on a Consumer Price Index and may also include additional rent, which may include taxes (including property taxes), insurance, maintenance and other operating costs associated with the leased property.

Some leases provide the lessee, during the term of the lease, with an option or right of first refusal to purchase the leased property. Some leases also allow the lessee to renew or extend their lease term or in some cases terminate their lease, based on conditions provided in the lease.

Future minimum lease payments under the non-cancelable operating leases due the Company for the years ending December 31, as of June 30, 2020, are as follows (in thousands):
2020 (six months ending December 31)
$
30,417

2021
58,659

2022
55,024

2023
49,996

2024
46,867

2025 and thereafter
299,485

 
$
540,448



Straight-line rental income
Rental income is recognized as earned over the life of the lease agreement on a straight-line basis when collection of rental payments over the term of the lease is probable. Straight-line rent included in rental income was approximately $0.7 million and $0.4 million, respectively, for the three months ended June 30, 2020 and 2019. Straight-line rent included in rental income was approximately $1.6 million and $0.7 million, respectively, for the six months ended June 30, 2020 and 2019.


11

Notes to Condensed Consolidated Financial Statements - Continued

Deferred revenue
Income received but not yet earned is deferred until such time it is earned. Deferred revenue, included in other liabilities on the Condensed Consolidated Balance Sheet, was approximately $2.1 million and $2.0 million, respectively, at June 30, 2020 and December 31, 2019.

Security Deposits
As of June 30, 2020 and December 31, 2019, the Company held approximately $4.1 million and $3.5 million, respectively, 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.

Note 3. Real Estate Acquisitions and Dispositions

2020 Real Estate Acquisitions
During the second quarter of 2020, the Company acquired seven real estate properties and a land parcel adjacent to one of our existing properties to be used for additional parking. Upon acquisition, the real estate properties were 100% leased in the aggregate with lease expirations through 2035. Amounts reflected in revenues and net income for these properties for the three months ended June 30, 2020 were approximately $0.1 million and four thousand dollars, respectively, and transaction costs totaling approximately $0.4 million were capitalized relating to these property acquisitions.

During the first quarter of 2020, the Company acquired six real estate properties. Upon acquisition, the properties were 98.2% leased in the aggregate with lease expirations through 2035. Amounts reflected in revenues and net income for these properties for the six months ended June 30, 2020 were approximately $1.4 million and $0.8 million, respectively, and transaction costs totaling approximately $0.2 million were capitalized relating to these property acquisitions.
Location
Property
Type (1)
Date
Acquired
Purchase
Price
Cash
Consideration
Real Estate
Other (2)
Square Footage
 
 
 
(000's)
(000's)
(000's)
(000's)
 
San Antonio, TX
MOB
01/27/20
$
4,003

$
4,022

$
4,036

$
(14
)
13,500

San Antonio, TX
MOB
01/27/20
1,931

1,955

1,961

(6
)
6,500

Decatur, AL
MOB
02/18/20
5,784

5,792

5,777

15

35,943

Ramona, CA
SC
03/13/20
4,100

4,124

4,143

(19
)
11,300

Cuero, TX
SC
03/18/20
2,153

2,174

2,207

(33
)
15,515

Rogers, AR
IRF
03/27/20
19,000

18,317

19,042

(725
)
38,817

Oak Lawn, IL (land)
MOB
04/20/20
400

403

421

(18
)

Germantown, TN
SC
04/29/20
3,900

3,949

3,949


10,600

Westlake, OH
SC
06/05/20
2,443

2,456

2,487

(31
)
15,057

Columbus, IN (3)
SC
06/05/20
1,813

1,828

1,787

41

13,969

Niceville, FL
MOB
06/15/20
2,294

2,340

2,344

(4
)
10,250

Greensburg, PA
MOB
06/16/20
3,389

3,484

3,497

(13
)
15,650

Gardendale, AL
MOB
06/24/20
2,948

2,935

2,878

57

12,956

Prattville, AL
MOB
06/24/20
4,091

4,111

4,078

33

13,319

 
 
 
$
58,249

$
57,890

$
58,607

$
(717
)
213,376

 
 
 
 
 
 
 
 
(1) MOB - Medical Office Building; SC - Specialty Center; IRF - Inpatient Rehabilitation Facility
(2) Includes, but is not limited to, above- and below-market lease intangibles, liabilities assumed, and security deposits.
(3) The Company assumed a ground lease in connection with this acquisition that is classified as an operating lease. The present value of future lease payments and the right-of-use asset, each totaling approximately $0.2 million, are included in other liabilities and other assets, respectively, on the Company's Condensed Consolidated Balance Sheets.


12

Notes to Condensed Consolidated Financial Statements - Continued

The following table summarizes the relative fair values of the assets acquired and liabilities assumed in the property acquisitions for the six months ended June 30, 2020.
 
 
 
Relative
Fair Value
Estimated
Useful Life
 
 
 
(in thousands)
(in years)
Land and land improvements
$
11,323

8.5
Building and building improvements
41,709

30.2
Intangibles:
 
 
 
At-market lease intangibles
5,575

5.4
 
Above-market lease intangibles
292

4.8
 
Below-market lease intangibles
(111
)
3.1
 
 
Total intangibles
5,756

 
Accounts receivable and other assets assumed
247

 
Accounts payable, accrued liabilities and other liabilities assumed
(807
)
 
Prorated rent, interest and operating expense reimbursement amounts collected
(338
)
 
 
Total cash consideration
$
57,890

 


2020 Real Estate Disposition
During the second quarter of 2020, the Company sold a land parcel related to one of its properties for approximately $0.3 million and recognized a loss on sale of approximately $0.3 million.

Note 4. Debt, net

The table below details the Company's debt as of June 30, 2020 and December 31, 2019.
 
Balance as of
 
(Dollars in thousands)
June 30, 2020
December 31, 2019
Maturity Dates
 
 
 
 
Revolving Credit Facility
$
18,000

$
15,000

3/23
A-1 Term Loan, net
49,871

49,833

3/22
A-2 Term Loan, net
49,801

49,775

3/24
A-3 Term Loan, net
74,479

74,433

3/26
Mortgage Note Payable, net
5,158

5,202

5/24
 
$
197,309

$
194,243

 


The Company's second amended and restated credit facility (the "Credit Facility") is by and among Community Healthcare OP, LP, the Company, and a syndicate of lenders with Truist Bank (formerly SunTrust Bank) serving as Administrative Agent. The Company’s material subsidiaries are guarantors of the obligations under the Credit Facility.

The Credit Facility, as amended, provides for a $150.0 million Revolving Credit Facility and $175.0 million in term loans (the "Term Loans"). The Credit Facility, through the accordion feature, allows borrowings up to a total of $525.0 million including the ability to add and fund additional term loans. The Revolving Credit Facility matures on March 29, 2023 and includes one 12-month option to extend the maturity date of the Revolving Credit Facility, subject to the satisfaction of certain conditions. The Term Loans include a five-year term loan facility in the aggregate principal amount of $50.0 million (the "A-1 Term Loan"), which matures on March 29, 2022, a seven-year

13

Notes to Condensed Consolidated Financial Statements - Continued

term loan facility in the aggregate principal amount of $50.0 million (the "A-2 Term Loan"), which matures on March 29, 2024, and a seven-year, term loan facility in the aggregate principal amount of $75.0 million (the "A-3 Term Loan"), which matures on March 29, 2026.

Amounts outstanding under the Revolving Credit Facility, as amended, bear annual interest at a floating rate that is based, at the Company’s option, on either: (i) LIBOR plus 1.25% to 1.90% or (ii) a base rate plus 0.25% to 0.90% in each case, depending upon the Company’s leverage ratio. In addition, the Company is obligated to pay an annual fee equal to 0.25% of the amount of the unused portion of the Revolving Credit Facility if amounts borrowed are greater than 33.3% of the borrowing capacity under the Revolving Credit Facility and 0.35% of the unused portion of the Revolving Credit Facility if amounts borrowed are less than or equal to 33.3% of the borrowing capacity under the Revolving Credit Facility. The Company had $18.0 million outstanding under the Revolving Credit Facility with a 2.06% weighted average interest rate at June 30, 2020, and a borrowing capacity remaining of approximately $132.0 million at June 30, 2020.

Amounts outstanding under the Term Loans, as amended, bear annual interest at a floating rate that is based, at the Company’s option, on either: (i) LIBOR plus 1.25% to 2.30% or (ii) a base rate plus 0.25% to 1.30%, in each case, depending upon the Company’s leverage ratio. In addition, the Company is obligated to pay an annual fee equal to 0.35% of the amount of the unused portion of the Term Loans. The Company has entered into interest rate swaps to fix the interest rates on the Term Loans. See Note 5 for more details on the interest rate swaps. At June 30, 2020, the Company had drawn the full $175.0 million under the Term Loans which had a fixed weighted average interest rate under the swaps of approximately 4.569%.

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 June 30, 2020.

Note 5. Derivative Financial Instruments

Risk Management Objective of Using Derivatives
The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations.

Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates rise above the cap strike rate on the contract.

As of June 30, 2020, the Company had seven outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk for notional amounts totaling $175.0 million. The table below presents the fair value of

14

Notes to Condensed Consolidated Financial Statements - Continued

the Company’s derivative financial instruments as well as their classification on the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019.
 
Asset Derivatives Fair Value at
 
Liability Derivatives Fair Value at
 
June 30, 2020
December 31, 2019
Balance Sheet Classification
 
June 30, 2020
December 31, 2019
Balance Sheet Classification
Interest rate swaps
$

$

Other assets
 
$
13,969

$
4,808

Other Liabilities


The changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive loss ("AOCI") and are subsequently reclassified to interest expense in the period that the hedged forecasted transaction affects earnings.

Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s Term Loans. During the next twelve months, the Company estimates that an additional $3.7 million will be reclassified from AOCI as an increase to interest expense.

The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three and six months ended June 30, 2020 and 2019.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(Dollars in thousands)
2020
2019
 
2020
2019
Amount of unrealized loss recognized in OCI on derivative
$
(1,317
)
$
(4,032
)
 
$
(10,193
)
$
(5,245
)
Amount of loss (gain) reclassified from AOCI into interest expense
$
774

$
(95
)
 
$
1,032

$
(157
)
Total interest expense presented in the Condensed Consolidated Statements of Income in which the effects of the cash flow hedges are recorded
$
2,183

$
2,251

 
$
4,432

$
4,305



Credit-risk-related Contingent Features
As of June 30, 2020, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $14.5 million. As of June 30, 2020, the Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value of approximately $14.5 million at June 30, 2020.

Note 6. Stockholders’ Equity

Common Stock
The following table provides a reconciliation of the beginning and ending common stock balances for the six months ended June 30, 2020 and for the year ended December 31, 2019:
 
Six Months Ended
June 30, 2020
Year Ended
December 31, 2019
Balance, beginning of period
21,410,578

18,634,502

Issuance of common stock
1,189,545

2,554,247

Restricted stock-based awards
126,018

221,829

Balance, end of period
22,726,141

21,410,578



ATM Program
On November 5, 2019, the Company entered into an Amended and Restated Sales Agency Agreement ("Amended and Restated Sales Agreement") for its at-the-market offering program ("ATM Program") with Sandler O’Neill & Partners, L.P., Evercore Group L.L.C., SunTrust Robinson Humphrey, Inc., BB&T Capital Markets, a division of

15

Notes to Condensed Consolidated Financial Statements - Continued

BB&T Securities, LLC, Fifth Third Securities, Inc. and Janney Montgomery Scott LLC, as sales agents (collectively, the “Agents”), under which the Company may issue and sell shares of its common stock, having an aggregate gross sales price of up to $360.0 million. The shares of common stock may be sold from time to time through or to one or more of the Agents, as may be determined by the Company in its sole discretion, subject to the terms and conditions of the agreement and applicable law.

The Company's activity under the ATM Program for the three and six months ended June 30, 2020 is detailed in the table below. As of June 30, 2020, the Company had approximately $251.6 million remaining that may be issued under the ATM Program.
 
Three Months Ended
June 30, 2020
 
Six Months Ended
June 30, 2020
Shares issued
578,759

 
1,189,545

Net proceeds received (in millions)
$
23.7

 
$
50.6

Average gross sales price per share
$
41.70

 
$
43.39



Note 7. Net Income Per Common Share

The following table sets forth the computation of basic and diluted net income per common share for the three and six months ended June 30, 2020 and 2019, respectively.


Three Months Ended
June 30,
 
Six Months Ended
June 30,
(Dollars in thousands, except per share data)
2020
 
2019
 
2020
 
2019
Net income
$
4,526

 
$
2,066

 
$
8,626

 
$
3,516

          Participating securities' share in earnings
(432
)
 
(351
)
 
(855
)
 
(652
)
Net income, less participating securities' share in earnings
$
4,094

 
$
1,715

 
$
7,771

 
$
2,864

 
 
 
 
 
 
 
 
Weighted average Common Shares outstanding
 
 
 
 
 
 
 
Weighted average Common Shares outstanding
22,285,565

 
19,055,110

 
22,008,998

 
18,896,274

Unvested restricted shares
(1,021,990
)
 
(809,442
)
 
(1,009,901
)
 
(795,301
)
Weighted average Common Shares outstanding–Basic
21,263,575

 
18,245,668

 
20,999,097

 
18,100,973

Dilutive potential common shares

 

 

 

Weighted average Common Shares outstanding –Diluted
21,263,575

 
18,245,668

 
20,999,097

 
18,100,973

 
 
 
 
 
 
 
 
Basic Net Income per Common Share
$
0.19

 
$
0.09

 
$
0.37

 
$
0.16

 
 
 
 
 
 
 
 
Diluted Net Income per Common Share
$
0.19

 
$
0.09

 
$
0.37

 
$
0.16





16


Note 8. Incentive Plan

A summary of the activity under the Company's 2014 Incentive Plan, as amended, for the three and six months ended June 30, 2020 and 2019 is included in the table below, as well as compensation expense recognized from the amortization of the value of shares over the applicable vesting periods.
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(Dollars in thousands)
2020
2019
 
2020
2019
Stock-based awards, beginning of period
1,013,797

794,177

 
909,892

709,487

 
Stock in lieu of compensation
5,510

15,004

 
55,755

57,529

 
Stock awards
16,603

25,995

 
70,263

68,160

 
   Total stock granted
22,113

40,999

 
126,018

125,689

 
Vested shares
(15,910
)
(21,424
)
 
(15,910
)
(21,424
)
Stock-based awards, end of period
1,020,000

813,752

 
1,020,000

813,752

Amortization expense
$
1,070

$
899

 
$
2,090

$
1,752



Note 9. Other Assets, net

Other assets, net on the Company's Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 are detailed in the table below.
 
Balance as of
(Dollars in thousands)
June 30, 2020
December 31, 2019
Notes receivable
$
18,340

$
23,500

Lease and interest receivables
2,821

3,021

Straight-line rent receivables
6,885

5,267

Prepaid assets
602

488

Deferred financing costs, net
586

693

Leasing commissions, net
980

875

Deferred tax asset
575

595

Above-market intangible assets, net
414

144

Right-of-use leased asset
385

139

Other
480

457

 
$
32,068

$
35,179



The Company's notes receivable at June 30, 2020 included:

a loan with a borrower totaling $17.8 million which is secured by all assets and ownership interests in the operations of seven long-term acute care hospitals and one inpatient rehabilitation hospital owned by the borrower. The note matures on December 31, 2025 and bear interest at 9% per annum. The Company also has a $3.0 million revolving credit facility with the borrower that they can draw on which matures on January 1, 2026.

a $2.5 million loan, acquired by the Company for $1.75 million, to help facilitate the bankruptcy filing of a borrower. The Company subsequently received a payment of $1.2 million on the note and had a carrying balance of $0.6 million at June 30, 2020 which is secured by all assets and personal property of the borrower. The note is due on demand and bears interest at 10% per annum.

17



The Company identified the borrowers of these notes as variable interest entities ("VIEs"), but management determined that the Company was not the primary beneficiary of the VIEs because we lack either directly or through related parties any material impact in the activities that impact the borrowers' economic performance. We are not obligated to provide support beyond our stated commitment to the borrowers, and accordingly our maximum exposure to loss as a result of this relationship is limited to the amount of our outstanding notes receivable. The VIEs that we have identified at June 30, 2020 are summarized in the table below.
Classification
Carrying Amount
(in millions)
Maximum Exposure to Loss
(in millions)
Note receivable
$
17.8

$
17.8

Note receivable
$
0.6

$
0.6



Note 10. Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate the fair value.

Cash and cash equivalents and restricted cash - The carrying amount approximates the fair value.

Notes receivable - The fair value is estimated using cash flow analyses, based on an assumed market rate of interest or at a rate consistent with the rates on notes carried by the Company and are classified as level 2 in the hierarchy.

Borrowings under our Credit Facility - The carrying amount approximates the fair value because the borrowings are based on variable market interest rates.

Derivative financial instruments - The fair value is estimated using discounted cash flow techniques. These techniques incorporate primarily level 2 inputs. The market inputs are utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation model for interest rate swaps are observable in active markets and are classified as level 2 in the hierarchy.

Mortgage note payable - The fair value is estimated using cash flow analyses which are based on an assumed market rate of interest or at a rate consistent with the rates on mortgage notes assumed by the Company and are classified as level 2 in the hierarchy.

The table below details the fair values and carrying values for our notes receivable, interest rate swaps, and mortgage note payable at June 30, 2020 and December 31, 2019, using level 2 inputs.
 
June 30, 2020
 
December 31, 2019
(Dollars in thousands)
Carrying Value
Fair Value
 
Carrying Value
Fair Value
Notes receivable
$
18,340

$
17,940

 
$
23,500

$
23,399

Interest rate swap liability
$
13,969

$
13,969

 
$
4,808

$
4,808

Mortgage note payable
$
5,235

$
5,524

 
$
5,288

$
5,351



Note 11. Subsequent Events

Dividend Declared
On August 3, 2020, the Company’s Board of Directors declared a quarterly common stock dividend in the amount of $0.4225 per share. The dividend is payable on August 28, 2020 to stockholders of record on August 17, 2020.


18

Notes to Condensed Consolidated Financial Statements - Continued

Highland Update
On July 1, 2020, the bankruptcy sale of Highland Hospital was completed and the operator who had been managing the facility acquired its operations and entered into a lease with the Company.
The Company provided debtor in possession financing (the “DIP”) to facilitate the sale and, as of the closing of the sale, had an approximately $1.2 million net payable. In addition, the Company continued to have a net investment of $550,000 in a separate note (the “Note”), secured by all assets of Highland Hospital.
As of the date of this filing, the DIP and the Note have been combined into a single net receivable balance of approximately $1.4 million.

19


ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, contains 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”, “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, the degree and nature of the Company’s competition, the ability to consummate acquisitions under contract, effects on global and national markets as well as businesses resulting from the COVID-19 pandemic, 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, 2019, in Item 1A of this Quarterly Report on Form 10-Q, 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.


20


COVID-19 pandemic
Many healthcare providers have been impacted by the COVID-19 pandemic. Some of them were unable to see patients for a period of time; others have seen a reduced number of elective procedures and/or patient visits; while others have experienced limited impact, or have even seen improved cash flows from either increases in census or from government funding.
As of July 31, 2020, the Company has entered into, or anticipates entering into, deferral agreements with up to approximately 20 tenants representing less than one percent of our annualized rent. Pursuant to these agreements, the tenants are generally required to repay the deferred amounts in equal monthly installments during the third and fourth quarters of 2020.

Real estate acquisitions
During the first six months of 2020, the Company acquired 13 real estate properties totaling approximately 213,000 square feet and acquired a land parcel adjacent to one of our existing properties to be used for additional parking for an aggregate purchase price of approximately $58.2 million and cash consideration of approximately $57.9 million. Upon acquisition, the properties were 99.0% leased in the aggregate with lease expirations through 2035. See Note 3 to the Condensed Consolidated Financial Statements for more details on these acquisitions.

Acquisition Pipeline
The Company has two properties under definitive purchase agreements for an aggregate expected purchase price of approximately $2.6 million and expected aggregate returns of approximately 9.3%. The Company expects to close on these properties in the third quarter of 2020; however, the Company cannot provide assurance as to the timing of when, or whether, these transactions will actually close.

The Company has three properties under definitive purchase agreements, to be acquired after completion and occupancy, for an aggregate expected purchase price of approximately $68.0 million. The Company's expected aggregate returns on these investments range from approximately 9.5% to 11.0%. The Company expects to close on one of these properties in the fourth quarter and the other two through the middle of 2021; however, the Company cannot provide assurance as to the timing of when, or whether, these transactions will actually close.

Leased square footage
As of June 30, 2020, our real estate portfolio was approximately 89.5% leased. During the first six months of 2020, we had expiring or terminated leases related to approximately 74,000 square feet, and we leased or renewed leases relating to approximately 107,000 square feet.

Highland Update
On July 1, 2020, the bankruptcy sale of Highland Hospital was completed and the operator who had been managing the facility acquired its operations and entered into a lease with the Company.
The Company provided debtor in possession financing (the “DIP”) to facilitate the sale and, as of the closing of the sale, had an approximately $1.2 million net payable. In addition, the Company continued to have a net investment of $550,000 in a separate note (the “Note”), secured by all assets of Highland Hospital.
As of the date of this filing, the DIP and the Note have been combined into a single net receivable balance of approximately $1.4 million.
The Company expects this receivable to be repaid in the next few months, as well as other amounts previously owed to the Company. However, the Company cannot provide assurance as to the timing or whether the receivable and other amounts will be received.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that are reasonably likely to have a material effect on the Company's consolidated financial condition, results of operations or liquidity.

21



Inflation
We believe inflation will have a minimal impact on the operating performance of our properties. Many of our lease agreements contain provisions designed to mitigate the adverse impact of inflation. These provisions include clauses that enable us to receive payment of increased rent pursuant to escalation clauses which generally increase rental rates during the terms of the leases. These escalation clauses often provide for fixed rent increases or indexed escalations (based upon the Consumer Price Index or other measures). However, some of these contractual rent increases may be less than the actual rate of inflation. Generally, our lease agreements require the tenant to pay property operating expenses, including maintenance costs, real estate taxes and insurance. This requirement reduces our exposure to increases in these costs and property operating expenses resulting from inflation.

Seasonality
We do not expect our business to be subject to material seasonal fluctuations.

New Accounting Pronouncements
See Note 1 to the Company’s Condensed Consolidated Financial Statements accompanying this report for information on new accounting standards recently adopted and not yet adopted.

Results of Operations
The Company's results of operations for the three and six months ended June 30, 2020 compared to the same period in 2019 have most significantly been impacted by its real estate acquisitions. As of June 30, 2020 and 2019, the Company had investments in real estate properties totaling approximately $664.7 million and $511.6 million, respectively.

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
The table below shows our results of operations for the three months ended June 30, 2020 compared to the same period in 2019 and the effect of changes in those results from period to period on our net income.
 
Three Months Ended June 30,
 
Increase (decrease) to
Net income
(dollars in thousands)
2020
 
2019
 
$
%
REVENUES
 
 
 
 
 
 
Rental income
$
17,830

 
$
13,361

 
$
4,469

33.4
 %
Other operating interest
450

 
955

 
(505
)
(52.9
)%
 
18,280

 
14,316

 
3,964

27.7
 %
EXPENSES
 
 
 
 
 
 
Property operating
3,223

 
2,993

 
(230
)
(7.7
)%
General and administrative
1,919

 
1,776

 
(143
)
(8.1
)%
Depreciation and amortization
6,119

 
5,299

 
(820
)
(15.5
)%
 
11,261

 
10,068

 
(1,193
)
(11.8
)%
OTHER INCOME (EXPENSE)
 
 
 
 



Loss on sale of real estate
(313
)
 

 
(313
)
n/m

Interest expense
(2,183
)
 
(2,251
)
 
68

3.0
 %
Other income
3

 
69

 
(66
)
(95.7
)%
 
(2,493
)
 
(2,182
)
 
(311
)
(14.3
)%
NET INCOME
$
4,526

 
$
2,066

 
$
2,460

119.1
 %
n/m - not meaningful


22


Revenues
Revenues increased approximately $4.0 million, or 27.7%, for the three months ended June 30, 2020 compared to the same period in 2019 mainly due to acquisitions of real estate, offset partially by reduced interest income from repayments on certain notes receivable.

Expenses
Property operating expenses increased approximately $0.2 million, or 7.7%, for the three months ended June 30, 2020 compared to the same period in 2019 mainly due to acquisitions of real estate.

General and administrative expenses increased approximately $0.1 million, or 8.1%, for the three months ended June 30, 2020 compared to the same period in 2019 due mainly to compensation-related expenses related to the addition of employees, including the non-cash amortization of non-vested restricted common shares, of approximately $0.4 million. These increases were offset partially by a reduction in professional fees, including the reduction in and reimbursement of legal fees related to the Highland Hospital bankruptcy, of approximately $0.2 million and a reduction in state income and other taxes of approximately $0.1 million.

Depreciation and amortization expense increased approximately $0.8 million, or 15.5%, for the three months ended June 30, 2020 compared to the same period in 2019. Acquisitions accounted for an increase of approximately $1.3 million, offset by a decrease of approximately $0.5 million in amortization due to fully amortized real estate lease intangibles which generally have a shorter depreciable life than a building.

Loss on sale of real estate
During the second quarter of 2020, the Company sold a land parcel related to one of its properties for approximately $0.3 million and recognized a loss on sale of approximately $0.3 million.

Interest expense
Interest expense decreased approximately $0.1 million, or 3.0%, for the three months ended June 30, 2020 compared to the same period in 2019 due mainly to a lower weighted average interest rate on the Revolving Credit Facility in the second quarter of 2020, offset partially by a higher weighted average debt balance in the second quarter of 2020 compared to the same period in 2019.


23


Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
The table below shows our results of operations for the six months ended June 30, 2020 compared to the same period in 2019 and the effect of changes in those results from period to period on our net income.
 
Six Months Ended June 30,
 
Increase (decrease) to
Net income
(dollars in thousands)
2020
 
2019
 
$
%
REVENUES
 
 
 
 
 
 
Rental income
$
35,258

 
$
26,259

 
$
8,999

34.3
 %
Other operating interest
958

 
1,498

 
(540
)
(36.0
)%
 
36,216

 
27,757

 
8,459

30.5
 %
EXPENSES
 
 
 
 
 
 
Property operating
6,566

 
6,068

 
(498
)
(8.2
)%
General and administrative
4,111

 
3,561

 
(550
)
(15.4
)%
Depreciation and amortization
12,178

 
10,545

 
(1,633
)
(15.5
)%
 
22,855

 
20,174

 
(2,681
)
(13.3
)%
OTHER INCOME (EXPENSE)
 
 
 
 



Loss on sale of real estate
(313
)
 

 
(313
)
n/m

Interest expense
(4,432
)
 
(4,305
)
 
(127
)
(3.0
)%
Other income
10

 
238

 
(228
)
(95.8
)%
 
(4,735
)
 
(4,067
)
 
(668
)
(16.4
)%
NET INCOME
$
8,626

 
$
3,516

 
$
5,110

145.3
 %
n/m - not meaningful

Revenues
Revenues increased approximately $8.5 million, or 30.5%, for the six months ended June 30, 2020 compared to the same period in 2019 mainly due to acquisitions of real estate, offset partially by reduced interest income from repayments on certain notes receivable.

Expenses
Property operating expenses increased approximately $0.5 million, or 8.2%, for the six months ended June 30, 2020 compared to the same period in 2019 mainly due to acquisitions of real estate.

General and administrative expenses increased approximately $0.6 million, or 15.4%, for the six months ended June 30, 2020 compared to the same period in 2019 due mainly to compensation-related expenses and occupancy costs related to the addition of employees, including the non-cash amortization of non-vested restricted common shares, of approximately $0.9 million. These increases were offset partially by a reduction in professional fees, including the reduction in and reimbursement of legal fees related to the Highland Hospital bankruptcy, of approximately $0.1 million and a reduction in state income and other taxes of approximately $0.2 million.

Depreciation and amortization expense increased approximately $1.6 million, or 15.5%, for the six months ended June 30, 2020 compared to the same period in 2019. Acquisitions accounted for an increase of approximately $2.5 million, offset by a decrease of approximately $1.0 million in amortization due to fully amortized real estate lease intangibles which generally have a shorter depreciable life than a building.

Loss on sale of real estate
During the second quarter of 2020, the Company sold a land parcel related to one of its properties for approximately $0.3 million and recognized a loss on sale of approximately $0.3 million.


24


Interest expense
Interest expense increased approximately $0.1 million, or 3.0%, for the six months ended June 30, 2020 compared to the same period in 2019 due mainly to a higher weighted average debt balance in the first six months of 2020 compared to the same period in 2019, offset partially by a lower weighted average interest rate on the Revolving Credit Facility in the first six months of 2020 compared to the same period in 2019.

Funds from Operations
Funds from operations (“FFO”) and FFO per share are operating performance measures 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 (computed in accordance with GAAP), excluding gains (or losses) from sales of property and impairments of real estate, 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.

Management believes that net income, as defined by GAAP, is the most appropriate earnings measurement. However, management believes FFO and FFO per share to be supplemental measures of a REIT’s performance because they 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, gains or losses from sales of real estate, impairment of real estate, and gains, 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 and FFO per share can facilitate comparisons of operating performance between periods. The Company reports FFO and FFO per share because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs and because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and publications about REITs. For these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per share. However, FFO does not represent cash generated from operating activities determined in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income attributable to common stockholders as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure of liquidity. The table below reconciles net income to FFO.

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(Dollars in thousands, excepts per share amounts)
2020
 
2019
 
2020
 
2019
Net income
$
4,526

 
$
2,066

 
$
8,626

 
$
3,516

Real estate depreciation and amortization
6,168

 
5,340

 
12,277

 
10,622

Loss on sale of real estate
313

 

 
313

 

Total adjustments
6,481

 
5,340

 
12,590

 
10,622

Funds from Operations
$
11,007

 
$
7,406

 
$
21,216

 
$
14,138

Funds from Operations per Common Share-Basic
$
0.52

 
$
0.41

 
$
1.01

 
$
0.78

Funds from Operations per Common Share-Diluted
$
0.51

 
$
0.40

 
$
0.98

 
$
0.76

Weighted Average Common Shares Outstanding-Basic
21,263,575

 
18,245,668

 
20,999,097

 
18,100,973

Weighted Average Common Shares Outstanding-Diluted (1)
21,749,994

 
18,684,916

 
21,557,798

 
18,530,138

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



25


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.

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, 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.

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.

The Company's Credit Facility, as amended, provides for a $150.0 million Revolving Credit Facility and $175.0 million in Term Loans, as well as an accordion feature which allows borrowings up to a total of $525.0 million, including the ability to add and fund additional term loans. Note 4 to the Condensed Consolidated Financial Statements provides more details on the Company's Credit Facility. At June 30, 2020, the Company had borrowed $175.0 million in Term Loans and had borrowing capacity remaining under the Revolving Credit Facility of approximately $132.0 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. Also, the Company’s current financing policy prohibits aggregate debt (secured or unsecured) in excess of 40% of the Company's total capitalization, except for short-term, transitory periods. At June 30, 2020, our debt to total capitalization ratio (debt plus stockholders' equity plus accumulated depreciation) was approximately 29.3%. The Company was in compliance with its financial covenants under its Credit Facility as of June 30, 2020.

Acquisition Pipeline
The Company has two properties under definitive purchase agreements for an aggregate expected purchase price of approximately $2.6 million and expected aggregate returns of approximately 9.3%. The Company expects to close on these properties in the third quarter of 2020; however, the Company cannot provide assurance as to the timing of when, or whether, these transactions will actually close.

The Company has three properties under definitive purchase agreements, to be acquired after completion and occupancy, for an aggregate expected purchase price of approximately $68.0 million. The Company's expected aggregate returns on these investments range from approximately 9.5% to 11.0%. The Company expects to close on one of these properties in the fourth quarter and the other two through the middle of 2021; however, the Company cannot provide assurance as to the timing of when, or whether, these transactions will actually close.


26


The Company anticipates funding these investments with cash from operations, through proceeds from its Credit Facility or from net proceeds from additional debt or equity offerings.

Other Contractual Obligations
Subject to Company approval, we may fund or reimburse tenants for tenant improvements, which are allowed for in certain leases, of up to approximately $3.2 million as of June 30, 2020.

The Company has also entered into contracts regarding certain capital expenditures totaling approximately $1.5 million as of June 30, 2020. Reimbursement of these expenditures by our tenants will be determined by each tenant's lease.

The Company has ground lease obligations relating to two properties, with total obligations of approximately $0.6 million with maturities through 2054.

Automatic Shelf Registration Statement
On November 5, 2019, the Company filed an automatic shelf registration statement on Form S-3 with the SEC. 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 six months ended June 30, 2020 and 2019 were approximately $23.7 million and $14.4 million, respectively. Cash flows provided by operating activities were generally provided by contractual rents, net of expenses, on our real estate property portfolio.

Investing Activities
Cash flows used in investing activities for the six months ended June 30, 2020 and 2019 were approximately $55.6 million and $64.8 million, respectively. During the six months ended June 30, 2020, the Company invested in 13 properties for an aggregate cash consideration of approximately $57.9 million and acquired a $2.5 million note for $1.8 million. Also, during the six months ended June 30, 2020, the Company received payments on its notes receivable totaling $6.9 million and funded capital expenditures on its existing portfolio totaling approximately $3.1 million.

During the six months ended June 30, 2019, the Company invested in five properties for an aggregate cash consideration of approximately $63.4 million, received payments on its notes receivable totaling $0.3 million, and funded capital expenditures on its existing portfolio totaling approximately $1.7 million.

Financing Activities
Cash flows provided by financing activities for the six months ended June 30, 2020 and 2019 were approximately $35.0 million and $57.3 million, respectively. During the six months ended June 30, 2020, the Company borrowed $3.0 million under its Credit Facility, sold shares under its ATM Program and received proceeds of approximately $50.6 million, and paid dividends totaling $18.3 million.

During the six months ended June 30, 2019, the Company amended its Credit Facility which provided an additional $75.0 million Term Loan. The proceeds from the Term Loan were used to pay down the outstanding balance under the Company's Revolving Credit Facility, contributing to the net $24.0 million repayment on the Revolving Credit Facility. The Company also sold shares under its ATM Program and received proceeds of approximately $23.2 million, and paid dividends totaling $15.4 million.

Security Deposits
As of June 30, 2020, the Company held approximately $4.1 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

27


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 August 3, 2020, the Company’s Board of Directors declared a quarterly common stock dividend in the amount of $0.4225 per share. The dividend is payable on August 28, 2020 to stockholders of record on August 17, 2020. This rate equates to an annualized dividend of $1.69 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.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

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 six months ended June 30, 2020, 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, 2019.

ITEM 4. Controls and Procedures

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, Company’s management has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports it files or submits under the Exchange Act.

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 June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



28


PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

The Company may, from time to time, be involved in litigation arising in the ordinary course of business or which may be expected to be covered by insurance. The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

ITEM 1A.    RISK FACTORS

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, 2019, its Quarterly Report on Form 10-Q for the three months ended March 31, 2020, and other reports that may be filed by the Company.

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.   MINE SAFETY DISCLOSURES

None.

ITEM 5.   OTHER INFORMATION

None.

ITEM 6.    EXHIBITS
The exhibits required by Item 601 of Regulation S-X which are filed with this report are listed in the Exhibit Index and are hereby incorporated in by reference.



29


EXHIBIT INDEX
Exhibit
Number
Description
3.1
3.2
31.1 *
31.2 *
32.1 **
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 

(1)
Filed as Exhibit 3.1 to Amendment No. 2 to the Registration Statement on Form S-11 of the Company filed with the Securities and Exchange Commission on May 6, 2015 (Registration No. 333-203210) and incorporated herein by reference.
(2)