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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 liquidity. MD&A is provided as a supplement to, and should be read in conjunction with, the Company's Consolidated Financial Statements and accompanying notes.

Overview

We were organized in the State of Maryland in March 2014 and began operations upon the completion of our initial public offering in May 2015. We are a self-administered, self-managed healthcare 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 investments

During the year ended December 31, 2020, the Company acquired 23 real estate properties and 2 land parcels. Upon acquisition, the properties were 99.5% leased in the aggregate with lease expirations through 2039.

2021 Real estate acquisitions

Subsequent to December 31, 2020, the Company acquired four real estate properties totaling approximately 80,000 square feet for an aggregate purchase price of approximately $17.8 million and cash consideration of approximately $17.9 million, and entered into a $6.0 million term loan and a revolver loan up to $4.0 million with the tenant on two of the properties. Upon acquisition, the properties were 100.0% leased in the aggregate with lease expirations through 2036. These acquisitions were funded with cash on hand and proceeds from the Company's Revolving Credit Facility.

Acquisition pipeline

The Company has two properties under definitive purchase agreements, to be acquired after completion and occupancy, for an aggregate expected purchase price of approximately $42.0 million. The Company's expected aggregate returns on these investments is approximately 9.1%. The Company expects to close on these properties in the first quarter of 2021; however, the Company cannot provide assurance as to the timing of when, or whether, these transactions will actually close.

The Company has one property under a definitive purchase agreement for an expected purchase price of approximately $4.4 million. The Company is currently performing due diligence procedures customary for this type of transaction. The Company expects to close this property in the second quarter of 2021; however, the Company cannot provide assurance as to the timing of when, or whether, this transaction will actually close.

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.

COVID-19 Pandemic

During 2020, the world was, and continues to be, impacted by the novel coronavirus (COVID-19) pandemic. COVID-19 and measures to prevent its spread impacted many healthcare providers, including some of our tenants. Some of them are not seeing patients, 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 a result of the pandemic, the Company entered into deferral agreements with eighteen tenants. These represented less than one percent of our annualized rent in the aggregate. Sixteen of these agreements required the tenants to repay the deferred amounts during the last half of 2020, while two of the agreements extended repayment beyond the end of 2020. The Company has remaining payments due under these agreements of less than $100,000 as of December 31, 2020.

The impact of these disruptions and the extent of their adverse impact on our financial and operating results will be dictated by the length of time that such disruptions continue, which will, in turn, depend on the currently unknowable duration and severity of the impacts of COVID-19, and among other things, the impact of governmental actions imposed in response to COVID-19 and individuals’ and companies’ risk tolerance regarding health matters going forward. The reopening or closure of our tenants' businesses is dependent on applicable government requirements, which vary by location, and are subject to ongoing changes, which could result from increasing COVID-19 cases.

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 require 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 December 31, 2020, the Company had gross investments of approximately $13.9 million in 7 real estate properties with purchase options exercisable at December 31, 2020. An additional 4 real estate properties in which the Company had an aggregate gross investment of approximately $29.5 million at December 31, 2020 have purchase options that will become exercisable during 2021.

ATM Program

On November 3, 2020, the Company entered into Amendment No. 1 (the “Amendment”), to the Amended and Restated Sales Agency Agreement, dated November 5, 2019 (as amended, the “Sales Agreement”) for its at-the-market offering program ("ATM Program"), by and among the Company and Piper Sandler & Co. (f/k/a Sandler O’Neill & Partners, L.P.), Evercore Group L.L.C., Truist Securities, Inc. (f/k/a SunTrust Robinson Humphrey, Inc.), Regions Securities LLC, Robert W. Baird & Co. Incorporated, Fifth Third Securities, Inc. and Janney Montgomery Scott LLC., as sales agents (collectively, the “Agents”). Pursuant to the Amendment, Regions Securities LLC and Robert W. Baird & Co. Incorporated were added as additional sales agents under the Sales Agreement. Under the ATM Program, 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.

During 2020, the Company issued, through its ATM Program, 2,206,976 shares of common stock at an average gross sales price of $45.29 per share and received net proceeds of approximately $98.0 million after deducting commissions and offering expenses paid by the Company. As of December 31, 2020, the Company had approximately $140.2 million remaining that may be issued under the ATM Program. The proceeds were used to repay outstanding balances under the Company's Credit Facility, to fund investments, and for general corporate purposes.

Credit Facility

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 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.

The Company had $33.0 million outstanding under the Revolving Credit Facility with a borrowing capacity remaining of approximately $117.0 million and a weighted average interest rate of approximately 1.55% at December 31, 2020. Also, at December 31, 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 3.88%. See Note 5 to the Consolidated Financial Statements for more details on the Credit Facility.

Lease Expirations

Approximately 5.0% to 10.5% of our leases will expire in each of the next 5 years. Management expects that many of the tenants will renew their leases, but in cases where they do not renew, the Company believes it will generally be able to re-lease the space to existing or new tenants without significant loss of rental income. See "Properties" in Item 2 for a schedule of the Company's lease expirations.

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.

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 CPI 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 Consolidated Financial Statements accompanying this report for information on new accounting standards not yet adopted.

Results of Operations

Our results of operations are most significantly impacted each year by our acquisitions in and funding of our real estate investments, as well as expenses related to our employees, professional fees and other costs related to operating the REIT and its related subsidiaries.

As of December 31, 2020, we had invested approximately $738.8 million in 141 real estate properties, which are located in 33 states and total approximately 3.1 million square feet. During 2020, we acquired 23 real estate properties and 2 land parcels which in the aggregate were 99.5% leased for cash consideration of approximately $126.8 million. During 2019, we acquired 15 real estate properties for cash consideration of approximately $150.0 million.

Year Ended December 31, 2020 Compared to December 31, 2019

The table below shows our results of operations for the year ended December 31, 2020 compared to the same period in 2019 and the effect of changes in those results from period to period on our net income.

REVENUES

EXPENSES

Loss on sale of real estate (313) — (313) n/m

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n/m-not meaningful.

Revenues

Revenues increased approximately $14.8 million or 24.4%, for the year ended December 31, 2020 compared to the same period in 2019 due mainly to the following:

•Acquisitions during 2020 contributed revenues of approximately $6.3 million in 2020;

•Acquisitions during 2019 contributed an increase in revenues of approximately $8.7 million in 2020.

Expenses

Property operating expenses increased approximately $1.4 million, or 11.3%, for the year ended December 31, 2020 compared to the same period in 2019 mainly due to the following:

•Acquisitions during 2020 accounted for an increase of approximately $0.5 million in 2020;

•Acquisitions during 2019 accounted for an increase of approximately $0.6 million in 2020.

General and administrative expenses increased approximately $1.0 million, or 13.6%, for the year ended December 31, 2020 compared to the same period in 2019 due mainly to compensation-related expenses and occupancy costs related to our employees and corporate office, including the amortization of non-vested restricted common shares issued under the 2014 Incentive Plan totaling approximately $1.7 million. Also, professional fees decreased approximately $0.5 million related mainly to additional costs incurred in 2019 relating to compliance requirements of moving from an emerging growth company status to a large accelerated filer status totaling approximately $0.3 million, as well as a reduction in legal fees from 2019 to 2020. The remaining decrease of approximately $0.1 million resulted from a reduction in state income and other taxes from 2019 to 2020.

Depreciation and amortization expense increased approximately $3.2 million, or 14.2%, for the year ended December 31, 2020 compared to the same period in 2019 due mainly to the following:

•Depreciation and amortization related to properties acquired during 2020 accounted for an increase of approximately $2.5 million in 2020;

•Depreciation and amortization related to properties acquired during 2019 accounted for an increase of approximately $2.5 million in 2020;

•Real estate intangible assets acquired prior to 2019 that became fully depreciated resulted in a decrease of approximately $2.1 million in 2020; and

•Depreciation related to tenant and other improvements accounted for an increase of approximately $0.3 million in 2019.

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 $0.7 million, or 7.3%, for the year ended December 31, 2020 compared to the same period in 2019 due mainly to the decrease in weighted average interest rates on the Credit Facility from 2019 to 2020.

Income tax expense

The Company recorded income tax expense in 2019 related to adjustments to the valuation allowance on a deferred tax asset recognized in 2018 due to the impairment of a mezzanine note and deferred compensation in both 2020 and 2019.

Year Ended December 31, 2019 Compared to December 31, 2018

See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations” in our 2019 Annual Report on Form 10-K for a comparison of the year ended December 31, 2019

compared to December 31, 2018, which is incorporated by reference.

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, collecting rental income and operating expense reimbursements based on contractual arrangements with its tenants. These sources of revenue represent 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 and investing in additional properties. To the extent additional resources are needed, the Company will fund its investment activity generally through equity or debt issuances, including our at-the-market equity offering program, 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.

Operating Activities

Cash flows provided by operating activities for the years ended December 31, 2020, 2019 and 2018 were approximately $48.4 million, $32.4 million, and $24.4 million, respectively. Cash flows provided by operating activities for the years ended December 31, 2020, 2019 and 2018 were generally provided by contractual rents and interest on notes receivables, 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 years ended December 31, 2020, 2019 and 2018 were approximately $125.1 million, $153.2 million, and $53.5 million, respectively. During 2020, the Company invested in 23 real estate

properties and 2 land parcels for an aggregate cash consideration of approximately $126.8 million. During 2019, the Company invested in 15 real estate properties for an aggregate cash consideration of approximately $150.0 million. During 2018, the Company invested in 19 real estate properties for cash consideration of approximately $45.2 million. In addition, during 2020 and 2018, the Company acquired or funded notes receivable of approximately $1.8 million and $7.0 million, respectively, and received payments in 2020, 2019 and 2018 on notes of approximately $10.3 million, $1.2 million, and $0.1 million, respectively. Also, the Company funded capital expenditures, including tenant improvements, during 2020, 2019 and 2018 totaling $7.0 million, $4.4 million, and $4.6 million, respectively.

Financing Activities

Cash flows provided by financing activities for the years ended December 31, 2020, 2019 and 2018 were approximately $77.6 million, $120.4 million, and $29.3 million, respectively. During 2020, 2019 and 2018, the Company paid dividends totaling $38.0 million, $31.9 million and $29.4 million, respectively. During 2020, 2019 and 2018, the Company completed equity offerings, including offerings under its at-the-market program, resulting in net proceeds, net of underwriters' discount and offering costs, of approximately $97.7 million, $106.8 million and $10.0 million, respectively. During 2020 and 2018, the Company borrowed, on a net basis, approximately $18.0 million and $9.0 million, respectively, on its Revolving Credit Facility, and in 2019, the Company repaid, on a net basis, approximately $28.0 million on its Revolving Credit Facility. During 2019 and 2018, the Company also borrowed $75.0 million, and $40.0 million, respectively, in Term Loans under its Credit Facility. The net proceeds from these equity offerings and borrowings under its Credit Facility were used to invest in the Company's real estate assets and were used for general corporate purposes.

Credit Facility

The Company’s ability to borrow under the Credit Facility is subject to its ongoing compliance with 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 December 31, 2020, our debt to total capitalization ratio (debt plus stockholders' equity plus accumulated depreciation) was approximately 28.5%. The Company was in compliance with its financial covenants under its Credit Facility as of December 31, 2020.

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.

2021 Real estate acquisitions

Acquisition pipeline

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.

Security Deposits

As of December 31, 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 Company may, at its discretion and upon notification to the tenant, draw upon the security deposits if there are any defaults under the leases.

Contractual Obligations

The Company’s material contractual obligations at December 31, 2020 are included in the table below. At December 31, 2020, the Company had no long-term capital lease or purchase obligations.

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(1)The amounts shown include interest at the weighted average interest rate at December 31, 2020 and the unused fee interest assuming the credit facility remains at $33.0 million through its maturity.

(2)The amounts shown include interest at the current fixed rates through the in-place cash flow hedges assuming the term loans remain at $175.0 million outstanding through maturity.

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.

During 2020, 2019 and 2018, the Company paid cash dividends in the amounts of $1.685 per share, $1.645 per share and $1.605 per share, respectively.

On February 11, 2021, the Company’s Board of Directors declared a quarterly common stock dividend in the amount of $0.4275 per share. The dividend is payable on March 5, 2021 to stockholders of record on February 25, 2021.

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

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.

Year Ended December 31,

(Amounts in thousands, except per share amounts) 2020 2019 2018

Impairment of note receivable (1) — — 5,000

Income tax expense (benefit) (1) — 1,321 (1,321)

Loss (gain) from sales of real estate 313 — (295)

Funds from Operations per Common Share-Basic $ 2.09 $ 1.72 $ 1.55

Funds from Operations per Common Share-Diluted $ 2.03 $ 1.67 $ 1.53

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(1) In the fourth quarter of 2018, the Company recorded a $5.0 million impairment related to its mezzanine loan with Highland Hospital and recorded a related tax benefit and deferred tax asset of approximately $1.3 million. This deferred tax asset was impaired in the fourth quarter of 2019 and the tax benefit was reversed resulting in tax expense of $1.3 million. The Company believes that the mezzanine loan is incidental to the main operations of the Company. As such, the Company has excluded the impairment of the note receivable and the related tax impact from its calculation of FFO.

(2) Diluted weighted average common shares outstanding for FFO are calculated based on the treasury method, rather than the 2-class method.

Critical Accounting Policies

Our Consolidated Financial Statements are prepared in conformity with GAAP and the rules and regulations of the SEC. In preparing the Consolidated Financial Statements, management is required to exercise judgment and make assumptions and estimates that may impact the carrying value of assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Set forth below is a summary of our accounting policies that we believe are critical to the preparation of our Consolidated Financial Statements. Our accounting policies are more fully discussed in Note 1 to the Consolidated Financial Statements.

Principles of Consolidation

Our Consolidated Financial Statements may include the accounts of the Company, its wholly owned subsidiaries, joint ventures, partnerships and variable interest entities, or VIEs, where the Company controls the operating activities. All material intercompany accounts, transactions, and balances have been eliminated.

Management must make judgments regarding the Company's level of influence or control over an entity and whether or not the Company is the primary beneficiary of a variable interest entity. Consideration of various factors include, but is not limited to, the Company's ability to direct the activities that most significantly impact the entity's governing body, the size and seniority of the Company's investment, the Company's ability and the rights of other

investors to participate in policy making decisions, the Company's ability to replace the manager and/or liquidate the entity. Management's ability to correctly assess its influence or control over an entity when determining the primary beneficiary of a VIE affects the presentation of these entities in the Company's Consolidated Financial Statements. If it is determined that the Company is the primary beneficiary of a VIE, the Company's Consolidated Financial Statements would consolidate the VIE rather than the results of the variable interest in the VIE. The Company would depend on the VIE to provide timely financial information and would rely on the interest control of the VIE to provide accurate financial information. Untimely or inaccurate financial information provided to the Company or deficiencies in the VIE's internal controls over financial reporting could impact the Company's Consolidated Financial Statements and its internal control over financial reporting.

Accounting for Acquisitions of Real Estate Properties

Real estate property acquisitions are accounted for as a business combination or an asset acquisition. An acquisition accounted for as a business combination is recorded at fair value and related closing costs are expensed as incurred. An acquisition accounted for as an asset acquisition is recorded at its purchase price, inclusive of acquisition costs, which is allocated among the acquired assets and assumed liabilities based upon their relative fair values at the date of acquisition. The Company adopted Accounting Standards Update ("ASU") No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, on January 1, 2017, and the Company expects that substantially all of its acquisitions will be accounted for as asset acquisitions.

The allocation of real estate property acquisitions may include land and land improvements, building and building improvements, and identified intangible assets and liabilities (consisting of above- and below-market leases, in-place leases, and tenant relationships) based on the evaluation of information and estimates available at that date, and the allocation of the purchase price is based on these assessments. The acquisition date fair values of the tangible and intangible assets and acquired liabilities are estimated based on information obtained from multiple sources as a result of pre-acquisition due diligence, tax records, and other sources. Based on these estimates, we recognize the acquired assets and liabilities based on their estimated fair values. We expense transaction costs associated with business combinations in the period incurred. The fair value of tangible property assets acquired considers the value of the property as if vacant determined by comparable sales and other relevant data. The determination of fair value involves the use of significant judgment and estimation. We value land based on various inputs, which may include internal analysis of recently acquired properties, existing comparable properties within our portfolio, or third party appraisals or valuations based on comparable sales.

In recognizing identified intangible assets and liabilities of an acquired property, the value of above- or below-market leases is estimated based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between contractual amounts to be received pursuant to the leases and management’s estimate of market lease rates measured over a period equal to the estimated remaining term of the lease. In the case of a below-market lease, we also evaluate any renewal options associated with that lease to determine if the intangible should include those periods. The capitalized above-market or below-market lease intangibles are amortized as a reduction from or an addition to rental income over the estimated remaining term of the respective leases.

In determining the value of in-place leases and tenant relationships, we consider current market conditions and costs to execute similar leases in arriving at an estimate of the carrying costs during the expected lease-up period from vacant to existing occupancy. In estimating carrying costs, we include real estate taxes, insurance, other property operating expenses, estimates of lost rental revenue during the expected lease-up periods, and costs to execute similar leases, including leasing commissions. The values assigned to in-place leases and tenant relationships are amortized over the estimated remaining term of the lease. If a lease terminates prior to its scheduled expiration, all unamortized costs related to that lease are written off.

Long-lived Asset Impairments

The Company may need to assess the potential for impairment of identifiable, definite-lived, intangible assets and long-lived assets, including real estate properties, whenever events occur or a change in circumstances indicates that the carrying value might not be fully recoverable. Indicators of impairment may include significant under-performance of an asset relative to historical or expected operating results; significant changes in the Company’s use of assets or the strategy for its overall business; plans to sell an asset before its depreciable life has ended; the expiration of a significant portion of leases in a property; or significant negative economic trends or negative industry trends for the Company or its operators. In addition, the Company’s review for possible impairment may include those assets subject to purchase options and those impacted by casualties, such as tornadoes and hurricanes. If management determines that the carrying value of the Company’s assets may not be fully recoverable based on the existence of any of the factors above, or others, management would measure and record an impairment charge based on the estimated fair value of the property or the estimated fair value less costs to sell the property.

Revenue Recognition

Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), also referred to as Topic 606, establishes a comprehensive model to account for revenues arising from contracts with customers. ASU 2014-09 applies to all contracts with customers, except those that are within the scope of other guidance, such as real estate leases and financial instruments. ASU 2014-09 requires companies to perform a five-step analysis of transactions to determine when and how revenue is recognized. The Company adopted ASU 2014-09 using the "modified retrospective" method effective January 1, 2018; as such, the Company has applied this guidance to the consolidated financial statements.

On January 1, 2019, the Company adopted the new leasing standard, Accounting Standards Codification Topic 842 ("ASC Topic 842"). The primary source of revenue for the Company is generated through its leasing arrangements with its tenants which is accounted for under ASC Topic 842, or through notes with its borrowers which is covered under the other accounting guidance. The Company's rental income and interest income are recognized based on contractual arrangements with its tenants and borrowers. From the inception of a lease, if collection of substantially all of the lease payments is probable for a tenant, then rental income is recognized as earned over the life of the lease agreement on a straight-line basis. Recognizing rental revenue on a straight-line basis for leases may result in recognizing revenue in amounts more or less than amounts currently due from tenants. If management determines that collection of substantially all of a lease’s payments is not probable, it will revert to recognizing such lease payments on a cash basis and will reverse any recorded receivables related to that lease. In the event that management subsequently determines collection of substantially all of that lease’s receivable is probable, management will reinstate and record all such receivables for the lease in accordance with the lease.

The Company recognizes operating expense recoveries in the period that applicable expenses are incurred. Other variable payments, such as late fees and sales tax are recognized based on the contractual terms of its leases. Income received but not yet earned is deferred until such time it is earned. Deferred revenue is included in other liabilities on the Consolidated Balance Sheets.

Allowance for Credit Losses

Upon adoption of ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments on January 1, 2020, the Company uses an expected credit loss ("CECL") model in evaluating the collectability of its notes receivable and other financial instruments from time to time. The CECL impairment model requires an estimate of expected credit losses, measured over the contractual life of an instrument, that considers forecasts of future economic conditions in addition to information about past events and current conditions. Under the CECL model, the Company will estimate credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument and is required to record a credit loss expense (or reversal) in each reporting period. At December 31, 2020, the Company did not have any material expected credit losses and, therefore, did not record any credit losses.

Use of Estimates in the Consolidated Financial Statements

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk in the form of changing interest rates on its debt and mortgage note receivable. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Management uses regular monitoring of market conditions and analysis techniques to manage this risk.

As of December 31, 2020, the Company's Revolving Credit Facility and Term Loans were based on variable interest rates while its notes receivable and mortgage note payable bore interest at fixed rates. The Company has entered into interest rate swaps to fix the interest rates on its Term Loans.

The following table provides information regarding the sensitivity of certain of the Company’s financial instruments, as described above, to market conditions and changes resulting from changes in interest rates. For purposes of this analysis, sensitivity is demonstrated based on hypothetical 10% changes in the underlying market interest rates.

Impact on Earnings and Cash Flows

Variable Rate Debt:

___________

Fair Value

Fixed Rate Receivables/Payable:

___________

In July 2017, Financial Conduct Authority (the authority that regulates LIBOR) previously announced its intent to stop compelling banks to submit rates for the calculation of LIBOR after 2021, and the administrator of LIBOR announced its intention to cease the publication of the one week and two month USD LIBOR settings immediately following December 31, 2021, and the remaining USD LIBOR settings immediately following the LIBOR publication on June 30, 2023. Accordingly, there is considerable uncertainty regarding the publication of such rates

beyond these dates. The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. The Company has material contracts that are indexed to USD-LIBOR and is monitoring this activity and evaluating the related risks.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and Board of Directors

Community Healthcare Trust Incorporated

Franklin, Tennessee

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Community Healthcare Trust Incorporated (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedules listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 16, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Real Estate Acquisitions - Sale and Leaseback Transactions

As described in Note 4 to the Company’s consolidated financial statements, the Company acquired real estate properties for a total purchase price of approximately $127 million during the year ended December 31, 2020. As discussed in Note 1 to the Company's consolidated financial statements, certain of these acquisitions included a leaseback of the property to the seller or affiliates of the seller. The Company determined that the transactions which included a leaseback of the property to the seller or affiliates of the seller qualified as sale and leaseback transactions in accordance with Accounting Standards Codification (“ASC”) Topic 842, Leases. Management evaluates various inputs and assumptions including lease terms, renewal options, discount rates, and repurchase rights to determine whether control of the underlying real estate property has transferred to the Company. If management determines that the control of the underlying real estate property has not transferred, the transaction is accounted for as a financing transaction rather than an acquisition of the real estate property.

We identified management’s evaluation of whether control of the underlying real estate property for sale and leaseback transactions was transferred from the seller/lessee to the Company as a critical audit matter. Management applies significant judgment in assessing relevant lease terms, provisions and other conditions, including potential or implicit repurchase rights, included in the Company’s lease and purchase agreements to determine whether or not the control of the real estate property has transferred to the Company. Auditing these assessments made by management involved especially challenging auditor judgment due to the extent of specialized skills or knowledge required.

The primary procedures we performed to address this critical audit matter included:

•Testing the design and operating effectiveness of controls related to management’s assessment of relevant lease terms, provisions or other conditions included in the Company’s lease and purchase agreements to determine whether control of the real estate property has transferred to the Company.

•Evaluating management’s assessment of whether potential or implicit repurchase rights, that would preclude control of the real estate property transferring to the Company, are present in the lease and purchase agreements.

•Utilizing professionals with specialized skills and knowledge to assist in: (i) assessing management’s application of ASC Topic 842 and (ii) evaluating relevant lease terms, provisions and other conditions included in the Company’s lease and purchase agreements to assess the appropriateness of the conclusion that a transfer of control has occurred.

•Utilizing professionals with specialized skills and knowledge in valuation to assist, for certain transactions, with assessing whether the overall transaction was at fair value.

Asset Impairment – Identification of Triggering Events and Assessment of Recoverability for Real Estate Properties

The Company recorded total real estate properties, net of accumulated depreciation of approximately $632 million as of December 31, 2020. As described in Note 1 to the Consolidated financial statements, the Company assesses the potential for impairment of long-lived assets, including real estate properties, whenever events occur, or circumstances change, that indicate that the carrying value might not be fully recoverable ("triggering events"). A property value is impaired when management’s estimate of current and projected, undiscounted and unleveraged, operating cash flows of the property is less than the net carrying value of the property.

We identified management's evaluation of triggering events and the assessment of recoverability for properties as a critical audit matter due to the subjectivity required in evaluating the existence of impairment indicators including market conditions, occupancy, nature of the property, and property performance. Additionally, auditing the assumptions utilized by management in performing the recoverability test, including market rent and terminal capitalization rate assumptions, involved especially challenging auditor judgment including requiring the use of a specialist.

The primary procedures we performed to address this critical audit matter included:

•Testing the design and operating effectiveness of the control related to management's assessment of the potential impairment of real estate assets which included management's judgment regarding impairment triggers, as well as the assumptions management used in performing the recoverability tests for certain properties.

•Evaluating management's identification and assessment of potential triggering events, including changes in occupancy, nature of the property and property performance against historical operating results.

•Testing the assumptions used by management in determining which properties require a recoverability test and evaluating management's assumptions, including market rent assumptions, terminal capitalization rates and other inputs used in performing the recoverability tests.

•Utilizing professionals with specialized knowledge and skills in valuation to assist in testing specific market-based assumptions used by the Company in performing its recoverability tests.

/s/ BDO USA, LLP

We have served as the Company's auditor since 2015.

Nashville, Tennessee

February 16, 2021

COMMUNITY HEALTHCARE TRUST INCORPORATED

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share amounts)

December 31,

ASSETS

Real estate properties

Buildings, improvements, and lease intangibles 651,398 534,503

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities

Accounts payable and accrued liabilities 5,743 3,606

Commitments and contingencies

Stockholders' Equity

Accumulated other comprehensive loss (11,846) (4,808)

Total liabilities and stockholders' equity $ 668,402 $ 562,531

See accompanying notes to the consolidated financial statements.

COMMUNITY HEALTHCARE TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except share and per share amounts)

Year Ended December 31,

REVENUES

EXPENSES

(Loss) gain on sales of real estate (313) — 295

Impairment of note receivable — — (5,000)

Deferred income tax (expense) benefit (80) (1,430) 1,547

INCOME PER COMMON SHARE

Net income per common share – Basic $ 0.80 $ 0.37 $ 0.19

Net income per common share – Diluted $ 0.80 $ 0.37 $ 0.19

See accompanying notes to the consolidated financial statements.

COMMUNITY HEALTHCARE TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

Year Ended December 31,

Other comprehensive (loss) income:

(Decrease) increase in fair value of cash flow hedges (9,945) (5,472) 182

Reclassification of amounts recognized as interest expense 2,907 31 193

Total other comprehensive (loss) income (7,038) (5,441) 375

See accompanying notes to the consolidated financial statements.

COMMUNITY HEALTHCARE TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands, except per share amounts)

Preferred Stock Common Stock

Unrecognized gain on cash flow hedges — — — — — — 182 — 182

Unrecognized loss on cash flow hedges — — — — — — (5,472) — (5,472)

Unrecognized loss on cash flow hedges — — — — — — (9,945) — (9,945)

See accompanying notes to the consolidated financial statements.

COMMUNITY HEALTHCARE TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

For the Year Ended December 31,

OPERATING ACTIVITIES

Loss (gain) on sales of real estate property 313 — (295)

Impairment of note receivable — — 5,000

Deferred income tax expense (benefit) 80 1,430 (1,547)

Changes in operating assets and liabilities:

Accounts payable and accrued liabilities 1,015 (95) (1,251)

INVESTING ACTIVITIES

Dispositions of real estate 248 — 3,176

Acquisition and funding of mortgage and other notes receivable (1,750) — (2,201)

Funding of notes receivable — — (4,833)

Proceeds from repayments on notes receivable 10,253 1,195 92

Capital expenditures on existing real estate properties (6,995) (4,372) (4,557)

FINANCING ACTIVITIES

Net borrowings (repayments) on revolving credit facility 18,000 (28,000) 9,000

Mortgage note repayments (108) (103) —

For the Year Ended December 31,

Supplemental Cash Flow Information:

Reclassification between accounts and notes receivable $ 13 $ 47 $ 861

(Decrease) increase in fair value of cash flow hedges $ (9,945) $ (5,472) $ 182

Fair value of property received in foreclosure $ — $ — $ 4,541

Interest accrued to notes receivable $ 15 $ 29 $ 235

Assumption of mortgage note payable $ — $ — $ 5,391

See accompanying notes to the consolidated financial statements.

COMMUNITY HEALTHCARE TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020

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 December 31, 2020, we had investments of approximately $738.8 million in 141 real estate properties (including a portion of one property accounted for as a financing lease included in Other Assets). The properties are located in 33 states, totaling approximately 3.1 million square feet in the aggregate and were approximately 88.8% leased at December 31, 2020 with a weighted average remaining lease term of approximately 8.1 years. Square footage, property count, and occupancy percentage disclosures in the consolidated financial statements are unaudited.

COVID-19 Pandemic

Principles of Consolidation

Our Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiaries, and may also include joint ventures, partnerships and variable interest entities, or VIEs, where the Company controls the operating activities. Management must make judgments regarding the Company's level of influence or control over an entity and whether or not the Company is the primary beneficiary of a VIE. Consideration of various factors include, but is not limited to, the Company's ability to direct the activities that most significantly impact the entity's governing body, the size and seniority of the Company's investment, and the Company's ability to replace the manager and/or liquidate the entity. Management's ability to correctly assess its influence or control over an entity when determining the primary beneficiary of a VIE affects the presentation of these entities in the Company's Consolidated Financial Statements. If it is determined that the Company is the primary beneficiary of a VIE, the Company's Consolidated Financial Statements would consolidate the VIE rather than the results of the variable interest in the VIE. Untimely or inaccurate financial information provided to the Company or deficiencies in the VIE's internal control over financial reporting could impact the Company's Consolidated Financial Statements and

Notes to Consolidated Financial Statements - Continued

its own internal control over financial reporting. See Note 10 regarding VIEs identified by the Company related to its notes receivable.

All material intercompany accounts, transactions, and balances have been eliminated in the presentation of the Company's Consolidated Financial Statements.

Use of Estimates in the Consolidated Financial Statements

Segment Reporting

The Company acquires and owns, or finances, healthcare-related real estate properties that are leased to hospitals, doctors, healthcare systems or other healthcare service providers. The Company is managed as one reporting unit, rather than multiple reporting units, for internal reporting purposes and for internal decision-making. Therefore, the Company discloses its operating results in a single segment.

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 reported within the Company's Consolidated Balance Sheets and Consolidated Statements of Cash Flows:

December 31,

Cash and cash equivalents $ 2,483 $ 1,730

Cash, cash equivalents and restricted cash $ 2,892 $ 2,023

Real Estate Properties

Real estate property acquisitions are accounted for as a business combination or an asset acquisition. An acquisition accounted for as a business combination is recorded at fair value and related closing costs are expensed as incurred. An acquisition accounted for as an asset acquisition is recorded at its purchase price, inclusive of acquisition costs, which is allocated among the acquired assets and assumed liabilities based upon their relative fair values at the date of acquisition. The Company expects that substantially all of its acquisitions will be accounted for as asset acquisitions.

The allocation of real estate property acquisitions may include land and land improvements, building and building improvements, and identified intangible assets and liabilities (consisting of above- and below-market leases, in-place leases, and tenant relationships) based on the evaluation of information and estimates available at that date, and we allocate the purchase price based on these assessments. We make estimates of the acquisition date fair value of the tangible and intangible assets and acquired liabilities using information obtained from multiple sources as a result of pre-acquisition due diligence, tax records, and other sources. Based on these estimates, we recognize the acquired assets and liabilities at their relative fair values for asset acquisitions. The fair value of tangible property assets acquired considers the value of the property as if vacant determined by comparable sales and other relevant data. The determination of fair value involves the use of significant judgment and estimation. We value land based on

Notes to Consolidated Financial Statements - Continued

various inputs, which may include internal analysis of recently acquired properties, existing comparable properties within our portfolio, or third party appraisals or valuations based on comparable sales.

In recognizing identified intangible assets and liabilities of an acquired property, the value of above- or below-market leases is estimated based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between contractual amounts to be received pursuant to the leases and an estimate of market lease rates measured over the remaining term of the lease. In the case of a below-market lease, renewal options associated with that lease are evaluated to determine if the intangible should include those periods. The capitalized above-market or below-market lease intangibles are amortized as a reduction from or an addition to rental income over the estimated remaining term of the respective leases.

In determining the value of in-place leases and tenant improvements, current market conditions and costs to execute similar leases to arrive at an estimate of the carrying costs during the expected lease-up period from vacant to existing occupancy are considered. Estimated carrying costs include real estate taxes, insurance, other property operating expenses, estimates of lost rental revenue during the expected lease-up periods, and costs to execute similar leases, including leasing commissions. The values assigned to in-place leases and tenant relationships are amortized over the estimated remaining term of the lease. If a lease terminates prior to its scheduled expiration, all unamortized costs related to that lease are written off.

Long-lived Asset Impairments

The Company assesses the potential for impairment of identifiable, definite-lived, intangible assets and long-lived assets, including real estate properties, whenever events occur or a change in circumstances indicates that the carrying value might not be fully recoverable. Indicators of impairment may include significant under-performance of an asset relative to historical or expected operating results; significant changes in the Company’s use of assets or the strategy for its overall business; plans to sell an asset before its depreciable life has ended; the expiration of a significant portion of leases in a property; or significant negative economic trends or negative industry trends for the Company or its operators. In addition, the Company’s review for possible impairment may include those assets subject to purchase options and those impacted by casualties, such as tornadoes and hurricanes. A long-lived asset is impaired when management's estimate of current and projected, undiscounted and unleveraged, operating cash flows of the property is less than the net carrying value of the property. In determining these cash flows, the Company estimates market rent, capitalization rates, and other relevant inputs. If management determines that the carrying value of the Company’s assets may not be fully recoverable based on the existence of any of the factors above, or others, management would measure and record an impairment charge based on the estimated fair value of the property or the estimated fair value less costs to sell the property.No impairments on long-lived assets were recorded during the years ended December 31, 2020, 2019 or 2018.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. In calculating fair value, a company must maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements.

A hierarchy of valuation techniques is defined to determine whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These inputs have created the following fair value hierarchy:

•Level 1 – quoted prices for identical instruments in active markets.

Notes to Consolidated Financial Statements - Continued

•Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

•Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Our interest rate swaps are valued in the market using discounted cash flow techniques. These techniques incorporate Level 1 and 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.

Lease Accounting

As a lessor, we make a determination with respect to each of our leases whether they should be accounted for as sales-type, direct-financing, or operating lease. Additionally, for each of our real estate transactions involving the leaseback of the related property to the seller or affiliates of the seller, we determine whether these transactions qualify as sale and leaseback transactions under the accounting guidance in Accounting Standards Codification ("ASC") 842, Leases. For these transactions, we consider various inputs and assumptions including, but not necessarily limited to, lease terms, renewal options, discount rates, and other rights and provisions in the purchase and sale agreement, lease and other documentation to determine whether control has been transferred to the Company or remains with the lessee. A transaction involving a sale leaseback will be treated as a purchase of a real estate property if it is considered to transfer control of the underlying asset from the lessee to the Company. A lease will be classified as direct-financing if risks and rewards are conveyed without the transfer of control. Otherwise, the lease is treated as an operating lease. Criteria in determining the lease classification also includes estimates and assumptions regarding the fair value of the leased facilities, minimum lease payments, effective cost of funds, the economic useful life of the facilities, the existence of a purchase option, and certain other terms in the lease agreements. The lease accounting guidance requires accounting for a transaction as a financing in a sale leaseback when the seller-lessee is provided an option to purchase the property from the landlord at the tenant's option. We expect that most of our leases will be accounted for as operating leases. The Company has a portion of one property accounted for as a sales-type lease at December 31, 2020 included in Other Assets.

Payments received under operating leases are accounted for in the Consolidated Statements of Income as rental income for actual cash rent collected plus or minus straight-line adjustments, such as lease escalators. The Company has elected not to separate lease and nonlease components, such as common area maintenance, unless certain conditions are not met. As such, tenant reimbursements are combined with rental income on the Consolidated Statements of Income.

The Company is the lessee under 4 ground leases and has recorded operating lease right-of-use assets totaling approximately $0.8 million and $0.1 million, respectively, and related operating lease liabilities, as appropriate, totaling approximately $0.8 million and $0.1 million, respectively, at December 31, 2020 and 2019. The operating right-of-use lease assets are included in other assets and the operating lease liabilities are included in other liabilities on the Company's Consolidated Balance Sheets.

Revenue Recognition

Notes to Consolidated Financial Statements - Continued

Allowance for Credit Losses

Stock-Based Compensation

The Company's 2014 Incentive Plan, as amended (the "2014 Incentive Plan") is intended to attract and retain qualified persons upon whom, in large measure, our sustained progress, growth and profitability depend, to motivate the participants to achieve long-term company goals and to more closely align the participants’ interests with those of our other stockholders by providing them with a proprietary interest in our growth and performance. The three distinct programs under the 2014 Incentive Plan are the Amended and Restated Alignment of Interest Program, the Amended and Restated Executive Officer Incentive Program and the Non-Executive Officer Incentive Program. Our executive officers, officers, employees, consultants and non-employee directors are eligible to participate in the 2014 Incentive Plan. The 2014 Incentive Plan increases, on an annual basis, the number of shares of common stock available for issuance to an amount equal to 7% of the total number of shares of the Company’s common stock outstanding on December 31 of the immediately preceding year. The 2014 Incentive Plan is administered by the Company’s compensation committee, which interprets the 2014 Incentive Plan and has broad discretion to select the eligible persons to whom awards will be granted, as well as the type, size and terms and conditions of each award, including the number of shares subject to awards and the expiration date of, and the vesting schedule or other restrictions (including, without limitation, restrictive covenants) applicable to, awards. The Company recognizes share-based payments to its directors and employees in its Consolidated Statements of Income on a straight-line basis over the shorter of the requisite service period, retirement eligibility date, or other period as deemed appropriate based on the fair value of the award on the measurement date. In the event of a forfeiture, the previously recognized expense would be reversed.

Notes to Consolidated Financial Statements - Continued

Intangible Assets

Intangible assets with finite lives are amortized over their respective lives to their estimated residual values and are reviewed for impairment only when impairment indicators are present. Identifiable intangible assets of the Company are generally comprised of in-place and above-market lease intangible assets and below-market lease intangible liabilities, as well as deferred financing costs. In-place lease intangible assets are amortized to depreciation expense on a straight-line basis over the applicable lives of the leases. Above- and below-market lease intangibles are amortized to rental income on a straight-line basis over the applicable lives of the leases. Deferred financing costs are amortized to interest expense over the term of the related credit facility or other debt instrument using the straight-line method, which approximates amortization under the effective interest method.

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. See further discussion in Note 15.

The Company classifies interest and penalties related to uncertain tax positions, if any, in the Consolidated Statements of Income as a component of general and administrative expenses. No such amounts were recognized during 2020, 2019 or 2018.

The Company is subject to audit by the Internal Revenue Service and by state taxing authorities for the years ended December 31, 2019, 2018, and 2017.

Sales and Use Taxes

The Company must pay sales and use taxes to certain state tax authorities based on rental income collected from tenants in properties located in those states. The Company is generally reimbursed for those taxes by those tenants. The Company accounts for the payments to the taxing authority and subsequent reimbursement from the tenant on a net basis, included in rental income on the Company’s Consolidated Statements of Income.

Concentration of Credit Risks

Our credit risks primarily relate to cash and cash equivalents, mortgage notes, if any, other notes receivable and our interest rate swaps, which are discussed below. Cash and cash equivalents are primarily held in bank accounts and overnight investments. We maintain our bank deposit accounts with large financial institutions in amounts that often exceed federally-insured limits. We have not experienced any losses in such accounts.

Derivative Financial Instruments

In the normal course of business, we are subject to risk from adverse fluctuations in interest rates. We have chosen to manage this risk through the use of derivative financial instruments, primarily with interest rate swaps. Counterparties to these contracts are major financial institutions. We are exposed to credit loss in the event of nonperformance by these counterparties. We do not use derivative instruments for trading or speculative purposes. Our objective in managing exposure to market risk is to limit the impact on cash flows. To qualify for hedge accounting, our interest rate swaps must effectively reduce the risk exposure that they are designed to hedge. In

Notes to Consolidated Financial Statements - Continued

addition, at inception of a qualifying cash flow hedging relationship, the underlying transaction or transactions must be, and are expected to remain, probable of occurring in accordance with our related assertions. All of our hedges are cash flow hedges and are recognized at their fair value in the Consolidated Balance Sheets. Changes in the fair value of the derivatives are recognized in accumulated other comprehensive loss.

Earnings per Share

Basic earnings per common share is computed by dividing net income by the weighted average common shares outstanding less issued and outstanding non-vested shares of common stock. Diluted earnings per common share is calculated by including the effect of dilutive securities.

Our unvested restricted common stock outstanding contains non-forfeitable rights to dividends, and accordingly, these awards are deemed to be participating securities. These participating securities, under the 2-class method, are included in the earnings allocation in computing both basic and diluted earnings per common share.

New 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 Investments

As of December 31, 2020, we had investments of approximately $738.8 million in 141 real estate properties (including a portion of one property accounted for as a financing lease included in Other Assets). The Company's investments are diversified by property type, geographic location, and tenant as shown in the following tables:

Property Type # of Properties Gross Investment(in thousands)

Acute Inpatient Behavioral 5 130,237

Inpatient Rehabilitation Facilities 4 85,617

Surgical Centers and Hospitals 10 53,536

Behavioral Specialty Facilities 6 21,160

Long-term Acute Care Hospitals 1 14,937

Notes to Consolidated Financial Statements - Continued

State # of Properties Gross Investment(in thousands)

Primary Tenant # of Properties Gross Investment(in thousands)

Everest Rehabilitation 3 57,100

Summit Behavioral Healthcare 1 25,135

Depreciation and amortization expense was $25.4 million, $22.2 million and $19.5 million, respectively, for the years ended December 31, 2020, 2019 and 2018, which is included in depreciation and amortization expense on the Company's Consolidated Statements of Income. Depreciation and amortization of real estate assets and liabilities in place as of December 31, 2020, is recognized on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives at December 31, 2020 are as follows:

Land improvements 3 - 20 years

Buildings 13 - 50 years

Building improvements 3 - 39.8 years

Tenant improvements 2.9 - 14.4 years

Lease intangibles 1.2 - 18.6 years

Personal property 3 -10 years

Note 3—Real Estate Leases

The Company’s properties are generally leased pursuant to non-cancelable, fixed-term operating leases with expiration dates through 2039. 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. The real estate properties were 88.8% leased at December 31, 2020 with a weighted average remaining lease term of approximately 8.1 years.

Notes to Consolidated Financial Statements - Continued

Future Minimum Lease Payments

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

Customer Concentrations

The Company's real estate portfolio is leased to a diverse tenant base. See Note 2. For the years ended December 31, 2020, 2019 and 2018, the Company had no customers that accounted for more than 10% of its consolidated revenues.

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. Since the Company's initial public offering, only one of the Company's tenants has exercised a purchase option. The purchase option was exercised, and the property was sold during the year ended December 31, 2018. At December 31, 2020, the Company had an aggregate gross investment of approximately $13.9 million in 7 real estate properties with purchase options exercisable at December 31, 2020. An additional 4 real estate properties in which the Company had an aggregate gross investment of approximately $29.5 million at December 31, 2020 have purchase options that will become exercisable during 2021.

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 $3.2 million, $2.1 million, and $1.3 million, respectively, for the years ended December 31, 2020, 2019 and 2018.

Deferred revenue

Income received but not yet earned is deferred until such time it is earned. Deferred revenue, included in other liabilities on the Consolidated Balance Sheets, was approximately $2.6 million and $2.0 million, respectively, at December 31, 2020 and 2019.

Notes to Consolidated Financial Statements - Continued

Note 4—Real Estate Acquisitions and Dispositions

2020 Real Estate Acquisitions

During the year ended December 31, 2020, the Company acquired 23 real estate properties and 2 land parcels as detailed in the table below. Upon acquisition, the properties were 99.5% leased in the aggregate with lease expirations through 2039. Amounts recorded in revenues and net income for these properties were approximately $6.3 million and $3.3 million, respectively, and transaction costs totaling approximately $1.0 million were capitalized for the year ended December 31, 2020 relating to these property acquisitions.

Notes to Consolidated Financial Statements - Continued

The following table summarizes the estimated relative fair values of the assets acquired and liabilities assumed in the property acquisitions for the year ended December 31, 2020.

Estimated Fair Value Weighted AverageUseful Life

(In thousands) (In years)

Building and building improvements 97,773 37.7

Intangibles:

At-market lease intangibles 11,602 7.2

Above-market lease intangibles 550 5.5

Below-market lease intangibles (504) 8.5

Accounts receivable and other assets assumed (1) 3,708

Accounts payable, accrued liabilities and other liabilities assumed (2) (1,413)

Total cash consideration $ 126,818

____________

(1) Includes a portion of a property accounted for as a financing lease.

(2) Includes security deposits received.

2019 Real Estate Acquisitions

During the year ended December 31, 2019, the Company acquired 15 real estate properties as detailed in the table below. Upon acquisition, the properties were 99.5% leased in the aggregate with lease expirations through 2034. Amounts reflected in revenues and net income for these properties were approximately $8.5 million and $6.1 million, respectively, and transaction costs totaling approximately $1.2 million were capitalized for the year ended December 31, 2019 relating to these property acquisitions.

Notes to Consolidated Financial Statements - Continued

The following table summarizes the estimated relative fair values of the assets acquired and liabilities assumed in the property acquisitions for the year ended December 31, 2019.

Estimated Fair Value Weighted AverageUseful Life

(In thousands) (In years)

Building and building improvements 131,519 41.5

Intangibles:

At-market lease intangibles 4,120 5.8

Below-market lease intangibles (121) 6.7

Total intangibles 3,999

Accounts receivable and other assets assumed 52

Accounts payable, accrued liabilities and other liabilities assumed (1) (2,975)

Total cash consideration $ 150,001

____________

(1) Includes security deposits received.

Note 5—Debt, net

The table below details the Company's debt, net as of December 31, 2020 and December 31, 2019.

Balance as of

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 one12-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 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

Notes to Consolidated Financial Statements - Continued

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 $33.0 million outstanding under the Revolving Credit Facility with a borrowing capacity remaining of approximately $117.0 million at December 31, 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. The Company has entered into interest rate swaps to fix the interest rates on the Term Loans. See Note 6 for more details on the interest rate swaps. At December 31, 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 3.881%.

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 December 31, 2020.

In 2018, we acquired a building and assumed a $5.4 million mortgage note payable, secured by the building. The building had a $7.5 million carrying value at December 31, 2020. The mortgage note amortizes monthly at a fixed interest rate of 4.98% and matures May 1, 2024. The Company's unamortized loan costs related to the mortgage note was approximately $0.1 million at December 31, 2020 and 2019.

Note 6—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 this objective, 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.

Notes to Consolidated Financial Statements - Continued

As of December 31, 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 the Company's derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of December 31, 2020 and 2019.

Interest rate swaps $ — $ — Other assets $ 11,846 $ 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) income ("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 other accumulated comprehensive income ("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 for the year ended December 31, 2020 and 2019.

For the Year Ended December 31,

Amount of unrealized loss recognized in OCI on derivative $ (9,945) $ (5,472)

Amount of loss reclassified from AOCI into interest expense $ 2,907 $ 31

Credit-risk-related Contingent Features

As of December 31, 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 $12.3 million. As of December 31, 2020, the Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company terminated these interest rate swaps, it would pay or receive the approximate aggregate termination value of the swaps at the time of the termination, which was approximately $12.3 million at December 31, 2020.

Note 7—Stockholders’ Equity

Common Stock

The following table provides a reconciliation of the beginning and ending common stock balances for the years ended December 31, 2020, 2019 and 2018:

For the Year Ended December 31,

Notes to Consolidated Financial Statements - Continued

ATM Program

The Company's activity under the ATM Program for the years ended December 31, 2020, 2019, and 2018 is detailed in the table below. As of December 31, 2020, the Company had approximately $140.2 million remaining that may be issued under the ATM Program.

For the Year Ended December 31,

Net proceeds received (in millions) $98.0 $107.3 $10.2

Subsequent to December 31, 2020, the Company issued 29,161 shares for an average gross sales price per share of approximately $47.13 under the ATM Program and received approximately $1.3 million in net proceeds.

Automatic Shelf Registration Statement

Dividends Declared

During 2020, the Company declared and paid dividends totaling $1.685 per common share.

Declaration Date Record Date Date Paid Amount Per Share

During 2019, the Company declared and paid dividends totaling $1.645 per common share.

Declaration Date Record Date Date Paid Amount Per Share

Notes to Consolidated Financial Statements - Continued

Note 8—Income Per Common Share

The following table sets forth the computation of basic and diluted income per common share.

Year Ended December 31,

(In thousands, except per share data)

Participating securities' share in earnings (1,842) (1,411) (1,061)

Weighted Average Common Shares Outstanding

Dilutive potential common shares 0 0 0

Basic Income per Common Share $ 0.80 $ 0.37 $ 0.19

Diluted Income per Common Share $ 0.80 $ 0.37 $ 0.19

Note 9—Incentive Plan

2014 Incentive Plan

The 2014 Incentive Plan authorizes the Company to award shares equal to 7% of the total number of shares of the Company’s common stock outstanding on December 31 of the immediately preceding year, or 1,498,740 shares of common stock (the "Plan Pool"), for 2020, to its employees and directors. The 2014 Incentive Plan will continue until terminated by the Company's Board of Directors or March 31, 2024. As of December 31, 2020, the Company had issued a total of 903,642 restricted shares under the Incentive Pool for compensation-related awards to its employees and directors, with 595,098 authorized shares remaining which had not been issued. Shares issued under the 2014 Incentive Plan are generally subject to long-term, fixed vesting periods of 3 to 8 years. If an employee or director voluntarily terminates his or her relationship with the Company or is terminated for cause before the end of the vesting period, the shares are forfeited, at no cost to the Company. Once the shares have been granted, the recipient of the shares has the right to receive dividends and the right to vote the shares.

Alignment of Interest Program

The Amended and Restated Alignment of Interest Program (the “Alignment of Interest Program”), amended in late 2016 by the Company's Board of Directors, authorizes the Company to issue 500,000 shares of the Company’s common stock to its employees and directors in lieu of the employee's or director's cash compensation (the "Program Pool"), at their election. As of December 31, 2020, the Company had issued a total of 314,842 restricted shares under the Program Pool in lieu of cash compensation to its employees and directors, with 185,158 authorized shares remaining which had not been issued.

The Company's Alignment of Interest Program is designed to provide the Company's employees and directors with an incentive to remain with the Company and to incentivize long-term growth and profitability. Under the Alignment of Interest Program, employees may elect to defer up to 100% of their base salary and other compensation and directors may elect to defer up to 100% of their director fees, subject to the 2014 Incentive Plan's long-term, fixed vesting periods. The number of shares granted will be increased through a Company match depending on the length of the vesting period selected by the employee or director. Employees may select vesting

Notes to Consolidated Financial Statements - Continued

periods of 3 years, 5 years, or 8 years, with a 30%, 50%, and 100% Company match, respectively. Directors may select vesting periods of 1 year, 2 years, or 3 years, with a 20%, 40%, or 60% Company match, respectively.

Officer Incentive Programs

The Company has an Amended and Restated Executive Officer Incentive Program and a Non-Executive Officer Incentive Program (the "Officer Incentive Programs") under the Incentive Plan which are designed to provide incentives to the Company's officers that are designed to reward its officers for individual, as well as Company performance in the form of cash or restricted stock. Company performance will be based on performance targets, which may include targets such as funds from operations ("FFO"), dividend payout percentages, as well as the Company's relative total stockholder return performance over one-year and three-year periods, measured against the Company's peer group, as determined by the Company's Board of Directors each year. The officers may elect, in the year prior to an award, to receive awards under the Officer Incentive Programs in cash or restricted stock, as allowed within the applicable Officer Incentive Programs, as well as a vesting period as discussed under the Alignment of Interest Program above. Shares of common stock issued under the Officer Incentive Programs are issued under either the Plan Pool or Program Pool.

Summary

A summary of the activity under the Incentive Plan and related information for the years ended December 31, 2020, 2019, and 2018 is included in the table below.

Year Ended December 31,

(dollars in thousands, except per share amounts) 2020 2019 2018

Weighted average grant date fair value, per share, of:

Stock-based awards, beginning of year $ 26.75 $ 23.50 $ 21.20

Stock-based awards granted during the year $ 45.83 $ 37.14 $ 28.70

Stock-based awards vested during the year $ 25.13 $ 19.00 $ 19.65

Grant date fair value of shares granted during the year $ 12,398 $ 8,240 $ 6,142

The Company had nonvested stock-based compensation that had not yet been recognized of approximately $24.2 million and $16.6 million, respectively, at December 31, 2020 and 2019. The vesting periods for the non-vested shares granted during 2020 ranged from 3 to 8 years with a weighted-average amortization period remaining as of December 31, 2020 of approximately 5.4 years. Compensation expense recognized during the years ended December 31, 2020, 2019, and 2018 from the amortization of the value of shares over the vesting period was approximately $4.8 million, $3.8 million and $2.9 million, respectively, which are included in general and administrative expenses on the consolidated statements of income.

Notes to Consolidated Financial Statements - Continued

Note 10—Other Assets

Other assets on the Company's Consolidated Balance Sheets as of December 31, 2020 and 2019 are detailed in the table below.

December 31,

Accounts and interest receivable 1,675 3,021

Straight-line rent receivables 8,682 5,267

Deferred financing costs, net 479 693

Deferred tax assets, net 515 595

Above-market lease intangible assets, net 617 144

Sales-type lease receivable 3,016 —

Operating lease right-of-use assets 821 139

The Company's notes receivable include the following notes receivable. Interest on these notes is included in Other operating interest on the Company's Consolidated Statements of Income.

•At December 31, 2020, the Company held a $15.0 million term loan, secured by all assets and ownership interests in seven long-term acute care hospitals and one inpatient rehabilitation hospital owned by the borrower. The note will be repaid in equal monthly installments of $250,000 through the maturity date of December 31, 2025 and bears interest at 9% per annum. Previously, the Company had a $20.0 million term loan and a $3.5 million revolving line of credit with the borrower. During 2020, the $20.0 million term loan was paid down to $15.0 million and the $3.5 million revolving line of credit was repaid in full. In December 2020, the $20.0 million term loan was replaced with the $15.0 million term loan and the revolving line of credit was terminated.

At December 31, 2020, the Company identified the borrower and guarantor of the $15.0 million note as a VIE, but management determined that the Company was not the primary beneficiary of the VIE because we lack the ability, either directly or through related parties, to have any material impact in the activities that impact the borrower's or guarantor's economic performance. We are not obligated to provide support beyond our stated commitment to the borrower, and accordingly our maximum exposure to loss as a result of this relationship is limited to the amount of our outstanding notes receivable as noted above.

Notes to Consolidated Financial Statements - Continued

Note 11—Other Liabilities

Other liabilities on the Company's Consolidated Balance Sheets as of December 31, 2020 and 2019 are detailed in the table below.

December 31,

Below-market lease intangibles, net 613 771

At December 31, 2020, the Company was obligated, as the lessee, under operating lease agreements consisting of the Company’s ground leases. As of December 31, 2020, the Company had 4 properties totaling 48,574 square feet that were held under ground leases. These ground leases have expiration dates through 2076, including renewal options. Any rental increases related to the Company’s ground leases are generally either stated or based on the Consumer Price Index. The Company had no prepaid ground leases as of December 31, 2020.

The Company’s future lease payments for its ground leases as of December 31, 2020 were as follows:

(In thousands) Future Lease Payments

Total undiscounted lease payments 1,465

Lease liabilities $ 793

Note 12—Intangible Assets and Liabilities

The Company has deferred financing costs and various real estate acquisition lease intangibles included in its Consolidated Balance Sheets as of December 31, 2020 and 2019 as detailed in the table below. The Company did not have any indefinite lived intangible assets or liabilities as of December 31, 2020 and 2019.

Deferred financing costs-Mortgage Note Payable 108 108 41 22 3.3 Debt, net

Notes to Consolidated Financial Statements - Continued

For the years ended December 31, 2020, 2019 and 2018, the Company recognized approximately $8.1 million, $9.2 million, and $9.9 million, respectively, of net intangible amortization expense, which is included in rental income, interest expense and depreciation and amortization on the Company's Consolidated Statements of Income.

Expected future amortization, net, for the next five years of the Company's intangible assets and liabilities, in place as of December 31, 2020 are included in the table below.

(in thousands) Amortization, net

Note 13—Commitments and Contingencies

Tenant Improvements

The Company may provide tenant improvement allowances in new or renewal leases for the purpose of refurbishing or renovating tenant space. The Company may also assume tenant improvement obligations included in leases acquired in its real estate acquisitions. As of December 31, 2020 and 2019, the Company had approximately $2.3 million and $3.6 million, respectively, in commitments for tenant improvements.

Capital Improvements

The Company has entered into contracts with various vendors for various capital improvement projects related to its portfolio. As of December 31, 2020 and 2019, the Company had commitments of approximately $1.5 million and $1.7 million, respectively, in commitments for capital improvement projects.

Legal Proceedings

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 Statements.

Note 14—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 which are based on an assumed market rate of interest 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.

Notes to Consolidated Financial Statements - Continued

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 mortgage note and notes receivable and interest rate swaps at December 31, 2020 and 2019 using Level 2 inputs.

(Dollars in thousands) Carrying Value Fair Value Carrying Value Fair Value

Note 15—Other Data

Taxable Income

The Company has elected to be taxed as a REIT, as defined under the Code. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its taxable income to its stockholders. The Company has also elected that one of its subsidiaries be treated as a TRS, which is subject to federal and state income taxes. All entities other than the TRS are collectively referred to as "the REIT" within this Note 15.

The Tax Cuts and Jobs Act ("TCJA") was enacted on December 22, 2017. The TCJA reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. The REIT generally will not be subject to federal income tax on taxable income it distributes currently to its stockholders. Accordingly, no provision for federal income taxes for the REIT has been made in the accompanying Consolidated Financial Statements; however, the Company may record income tax expense or benefit for the TRS to the extent applicable. If the REIT fails to qualify as a REIT for any taxable year, then it will be subject to federal income taxes at regular corporate rates, including any applicable alternative minimum tax, and may not be able to qualify as a REIT for four subsequent taxable years. Even if the REIT continues to qualify as a REIT, it may be subject to certain state and local taxes on its income and property and to federal income and excise tax on its undistributed taxable income.

Income tax expense (benefit) and state income tax payments, net of refunds, are as follows for the years ended December 31, 2020, 2019, and 2018.

Year Ended December 31,

Total income tax expense (benefit) $ 179 $ 1,492 $ (1,483)

Income tax payments, net of refunds $ 78 $ 77 $ 166

Income tax expense (benefit) primarily relates to permanent differences between federal, state and local taxable income resulting from certain state and local jurisdictions wholly or partially disallowing the deduction for dividends paid allowed at the federal level and temporary differences resulting from the bases of assets and liabilities of the Company's TRS for financial reporting purposes and the bases of those assets and liabilities for income tax purposes.

Notes to Consolidated Financial Statements - Continued

The tax effect of temporary differences included in the net deferred tax assets at December 31, 2020 and 2019 are as follows:

December 31,

Deferred tax assets (liabilities):

Impairment of note receivable — 1,321

Total net deferred tax assets $ 515 $ 595

We believe that it is more likely than not that the benefit from the net operating losses and certain other deductible temporary differences will not be fully realized. In recognition of this assessment, we have provided a valuation allowance of $1.3 million on the deferred tax assets related to these deductions. If our assumptions change and we determine that it is more likely than not that we will be able to realize these deductions, the tax benefits related to any reversal of the valuation allowance on deferred tax assets as of December 31, 2020, will be accounted for as a reduction of income tax expense.

On a tax-basis, the Company’s gross real estate assets totaled approximately $735.3 million and $599.9 million, respectively, as of December 31, 2020 and 2019 (unaudited).

CHCT US Equity

CHCT · 10-K · period ended 2020-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CHCT US Equity☆

CHCT · 10-K · period ended 2020-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CHCT US Equity