Good morning and welcome to Sila Realty Trust Third Quarter 2024 Earnings Conference Call and Webcast. [Operator Instructions] I will now turn the conference over to your host, Miles Callahan, Senior Vice President of Capital Markets and Investor Relations for Sila. You may begin.

Good morning and thank you for joining us today to discuss Sila Realty Trust's financial results for the third quarter of 2024. This morning, we issued our third quarter earnings release and earnings supplement, which are available on the Investor Relations section of our website at investors.silarealtytrust.com. With me today are Michael Seton, President and Chief Executive Officer; Kay Neely, Executive Vice President and Chief Financial Officer; and Chris Flouhouse, Executive Vice President and Chief Investment Officer. We will begin with prepared remarks and then open the call to questions. Before we begin, I would like to remind you that today's comments will include forward-looking statements under Federal Securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate, or other comparable words and phrases. Statements that are not historical facts such as statements about expected financial performance are also forward-looking statements. Actual results may differ materially from those contemplated by such forward-looking statements. A discussion of the factors that could cause a material difference in our results compared to these forward-looking statements is contained in our SEC filings. Please note that, on today's call, we will be referring to non-GAAP measures. You can find the reconciliation of these historical non-GAAP measures to the most directly comparable GAAP measures in our third quarter earnings release and in our earnings supplement, both of which can be found on the Investor Relations section of our website and in the Form 8-K we filed with the SEC this morning. With that, I will now turn the call over to our President and Chief Executive Officer, Michael Seton.

Thank you, Miles. Good morning and welcome to Sila Realty Trust third quarter 2024 earnings call. I would like to thank our shareholders and analysts and all others interested in the company for taking the time to join us today. I would first like to thank everyone for your well wishes during and after Hurricane Helene and Hurricane Milton. All of our employees remained safe during the storms and Sila's properties in the affected areas in Florida and Georgia experienced no material damage. Our thoughts remain with those who are less fortunate as many communities continue their efforts of cleaning up and rebuilding after the devastation that these storms left behind. I will begin with market observations and highlights for the third quarter. I will then turn the call over to Chris Flouhouse, our Chief Investment Officer, to discuss our acquisitions, dispositions, and portfolio performance and have him share some observations on what we are seeing in the acquisition market. Kay Neely, our Chief Financial Officer, will then discuss our third quarter financial performance. I will wrap up our prepared remarks with a few closing comments before opening the call to questions. We are very excited about the prospects of Sila's investment thesis of investing in high-quality healthcare properties over the continuum of care for years to come. The Silver Tsunami is upon us as all baby boomers will be 65 years or older by the year 2030. 5,000 people are hitting the 80-year milestone every single day in the United States. These demographics mean higher volumes of patients and higher acuity cases for healthcare facilities, which we believe translates into higher revenues for healthcare operators and consequently more durable income streams for the healthcare properties which Sila owns and endeavors to acquire. Construction has been very limited in the…

Thank you, Michael. At Sila, we leverage our robust investment management and property management teams to maintain ongoing dialogue with our tenants both through active communication and site visits of each one of our properties. This proactive approach allows us to evaluate the health of our tenants, assess property conditions and performance, obtain superior market intelligence, and better understand our tenants need for future growth. Our partnership approach with our tenants positions us well for future opportunities with existing and new tenants. Furthermore, our investment management team renewed or extended leases on approximately 134,000 square feet which was set to expire during the first nine months of the year, representing an approximately 97% renewal rate. Our top five markets via ABR, Dallas, Oklahoma City, San Antonio, Akron and Tucson were consistent with last quarter. At the end of the third quarter, our robust and diversified portfolio consisted of approximately 5.3 million rentable square feet with an attractive weighted average remaining lease term of 8.3 years, up from 8.2 years last quarter. At the end of the third quarter, our portfolio weighted average lease rate decreased by 2% to 95.5% from 97.5% due to the reduction of approximately 181,000 lease square feet related to the company's sole property formerly leased to Steward that Michael mentioned at the outset of the call. We collected rents from Steward during the third quarter for the months of July, August and prorated through September 19, 2024, the date the bankruptcy courts rejected the lease. The rejection was welcomed as it allows us to move forward in disposing or re-letting of this asset. The loss of lease square feet from this property was partially offset by the sale of two vacant former GenesisCare assets located in Fort Myers, Florida which totaled approximately 79,000 square feet. 99.9%…

Thank you, Chris. Our GAAP net income for the third quarter was $11.9 million or $0.21 per diluted share, compared to $15 million or $0.26 per diluted share in the third quarter of last year. Our GAAP net income for the first nine months of 2024 was $31.5 million or $0.55 per diluted share, compared to $33 million or $0.58 per diluted share for the first nine months of 2023. Our cash NOI for the third quarter was $40.8 million as compared to $44.2 million in the third quarter of 2023, or a 7.6% decrease. This cash NOI reduction results from a combination of dispositions exceeding cash NOI gained from acquisitions, the reduced and lost rent associated with the amended master lease with GenesisCare, the Steward event previously described, and a decrease in lease termination fee income received. These decreases were partially offset by the third quarter 2024 increases at our other same-store properties of 2.2% or approximately $765,000 when compared to the third quarter of 2023. Cash NOI was $127.6 million for the first nine months of 2024 as compared to $132.1 million for the same period last year or 3.4% decrease. This is the result of the net effect of an increase in same-store cash NOI of approximately $850,000 and a decrease of non-same-store cash NOI of approximately $5.4 million. The increase in same-store cash NOI is primarily due to a one-time severance payment from GenesisCare paid to Sila as consideration of approximately $875,000 for the removal of certain properties from the master lease. In addition, there was a 2.3% increase or approximately $2.4 million in other same-store property cash in NOI in the first nine months of 2024 when compared to the same period in 2023, particularly attributable to annual contractual rent escalations. This was partially offset…

Thank you, Kay. On behalf of the entire Sila team, I would like to welcome our new coverage analysts and any new investors to the company. We are grateful for your interest in Sila. We have had many meetings since we listed the company on the New York Stock Exchange in June, and we sincerely appreciate the chance to tell our story. We're looking forward to meeting many more of you at future conferences. That concludes our prepared remarks. Operator, please begin the Q&A.

[Operator Instructions] We'll take our first question from Nate Crossett with BNP. Your line is open.

Hi, good morning. I was wondering if you can maybe just talk about the acquisition pipeline. Currently, I don't know if you can try and size it maybe a bit for us and what are you seeing in terms of pricing and then what's your view, I guess, on the buyback if potential acquisition activity is light.

Nate, great to hear from you today. Thank you for joining the call. Let me speak first to the overall picture on the acquisition front. We're very excited about the opportunities that we're seeing from a volume perspective. I definitely think from a positioning standpoint, taking the company public on the New York Stock Exchange, getting that visibility to the market, also telegraphing to the market the leverage of the company and the liquidity that we have has been beneficial for folks, brokers, developers, and sellers in the marketplace to be a go-to capital provider in the space. What I will do is I'll let Chris address some more specifics that we're seeing around the acquisition market. And then, Chris, I'll address the aspect as it relates to buyback shares.

Yes. Thank you, Michael. Yes. As it relates to the acquisition market, we have seen an increasing pickup of volume of just a number of potential transactions that we're able to underwrite. This, as we mentioned on the prepared remarks, is both on and off market transactions, I would say, really since the Fed cut rates and actually pivoted, while rates have not moved, it has gotten sellers to really think about monetizing of an asset. We are looking at acquisitions again across the continuum of care, really looking at outpatient medical, inpatient rehab, et cetera. And I would say with a bit of a weighting towards outpatient medical in the markets where we currently invest in, looking at the Sunbelt purely in addition to other markets, but with some emphasis on the Sunbelt. But we do feel encouraged about what we see out there as it sets up really for 2025.

Thank you, Chris. And Nate, in respect of your question about share buybacks and when it might make sense, I think where we sit today is we see greater opportunity on the acquisition front, especially going into 2025, where the stock's trading today. Although we're trading at what we believe is a pretty significant discount to our intrinsic value, we obviously executed our modified Dutch tender at a significantly lower rate. So the Board did approve a share buyback up to $25 million. And it's something we have as a tool in our back pocket. I would say from a trading perspective, really, Sila has just made its debut and is really just starting to get traction. So as particularly as we get more visibility in front of generalists and re-dedicated investors, we expect to get more traction. We obviously have been added to some indices and expect further ads coming up. So we think this is probably not the right time for it, particularly also in light of the acquisition opportunities that we're seeing.

Okay, that's helpful. I had another question just on the new disclosure, the EBITDARM coverages, I was wondering maybe you can just help us unpack what's in that under one times bucket and if there's any potential rent resets there, like, how should we be thinking about that piece?

Sure. Let me give you color. We did disclose in the supplemental that we filed this morning some more detail as it relates to what percent of ABR figures into these various EBITDARM coverage buckets. And you're obviously asking specifically to those that fall within under one times. There are 10 properties that fall into that bucket and that percent of ABR under one times. And what I would tell you is at least 50% of those properties are owned or affiliated with large national, some of the largest national healthcare systems in the country. And much of their use in those facilities is for primary care. So primary care is often a loss leader. I would also mention to you, by the way, that 9 of those 10 properties are medical office buildings. So we feel good about despite those at the property level, those assets covering at lower than one times. All of those tenants, by the way, are current on rent. So the paying of rent does not seem to be an issue. They're obviously being otherwise supported, or it just may be a timing based upon the most recent reporting period. Hopefully that provides you a little bit more color.

Yes. I mean, you said that five of them were attached to someone -- like what about the other five, I guess?

Approximately 50% of the ABR in that bucket, based on ABR is affiliated or owned by large healthcare systems. By the way, of the other 50%, a good portion of that is just simply MOBs, primary care offerings. And the primary care business is, again, oftentimes a referral source to other facilities. So serving obviously really the entry point for patient care. So I would tell you, overall, as we look at the detail around these tenants, we still feel very good about our ability to receive rent from these tenants.

Okay, that's helpful. I'll leave it there.

Thank you, Nate.

[Operator Instructions] We'll take our next question from Rob Stevenson with Janney. Your line is open.

Good morning, guys. At this point, what are you guys thinking is the primary use of the Staunton facility going to be? Is that still as a healthcare asset? Is that going to be for some sort of alternative use at this point?

Rob, great to hear from you today. Thank you for joining. The Stoughton facility, I would say, we're agnostic as to if there is a buyer, what the buyer uses it for. The buyer that we had fall out of contract was going to fashion it into some kind of a residential site. And we have been advised by various folks. And by the way, I will mention that we did engage a broker already, even though that contract was just most recently terminated last week. We've already hired a broker, national broker to market that property. And that broker has already had conversations with folks and is anticipating very short order giving tours of that property. I would say that it sets itself up to be a continued healthcare site. It's a large building. However, we've also gotten a lot of feedback as the other buyer was also interested in it being some kind of a residential site because it's a rather large tract of land. So clearly if we're leasing it and we're going to own it longer-term, we're interested in it being a healthcare user. That being said, we're agnostic, of course, as it relates to a buyer buying it and using it for whatever they deem most appropriate. So I would tell you also, I'm fairly optimistic about that being executed on because we received, even without the hiring of a broker earlier this year, a number of interested parties who reached out to us proactively. This prior buyer came to us along with these other buyers without a broker involved. Now we've hired a broker obviously, since that has fallen out of contract and we're going to hit the market pretty hard in terms of blanketing it to determine who will pay us, of course, the most for that property should it be a sale.

Was there any issues in the re-zoning of this residential and can a new buyer leverage any of the work that the former buyer had done over the couple of months that they had it under contract?

I won't speak specifically to the zoning, Rob. What I would say the prior buyer was in conversations with the relevant municipal authorities regarding it being residential and based upon the feedback that we got, there was a very strong reception to that.

Okay, that's helpful. Chris, what was the interest or what's the interest rate going to be on the Lynchburg mez loans? And when do you expect that entire $17.5 million will be out the door by?

Yes good question. So it's a -- I would characterize it as a mid-teens return for both of the mezzanine loans. Again to, a developer that has significant development around development experience around healthcare assets and a nationally recognized general contractor. Those draws will begin likely later this month and would continue into the first quarter, really next year.

Okay, and when are those two facilities expected to be completed and occupied? I guess you need to have them occupied before you would acquire them. And I guess the other question --

Correct. Oh, go ahead.

No, one. So I guess the first question is, is that a '25, '26 completion? How far out into the future are those completions expected?

Yes, it would be the first quarter of 2026.

Okay, and is your ability to purchase that, is that based on a fixed price or an appraisal at that time? What's the mechanism there?

Yes, we've pre negotiated a cap rate based on the next 12 months of the NOI, at the time of purchase.

Okay, that's very helpful, thank you. And I guess in your mind, given your ability to do stuff like this, what's the relative attractiveness between making loans and buying assets?

Yes, I think this is really a means to, obviously with an operator that in system, that we have confidence in and a developer we have confidence in, it's really a way to build our pipeline in the future while having very good risk-adjusted returns along the way. It would not be our expectation that this would be the overwhelming majority part of our, portfolio or capital allocation strategy. And again, this is a creative way to really get to new assets that we have confidence in the markets around it.

All right, that's helpful. And, Kay, am I doing the math correctly and that Steward was about $500,000 of revenue in the third quarter that we need to strip out of the run rate going forward?

Yes. Rob, let me -- on a NOI -- cash NOI basis, it was about $275,000 for the quarter.

Okay. All right. And then lastly for me, how should we be thinking about pricing today on any swaps that you put in place to replace the ones that are expiring at year end? How significant is the gap today versus what you really want to do?

What we have really seen in the past couple of months is that kind of midterm rates really kind of rising. And so when we look at swap rates today, we see something close to 300 bps increase on the swaps we have in place for the ones that are maturing at the end of this year. We still have some time to see if those can move, but they have moved up.

Okay, that's very helpful. Thanks, guys. Appreciate the time this morning.

Thank you, Rob.

Thank you. We'll take our next question from Michael Lewis with Truist Securities. Your line is open.

Thank you. So most of my questions were addressed there, but I have one about kind of details back to the mez loan investments. I'm just curious if you could talk about the size of these acquisition amounts. Is it a large dollar amount? And then it sounds like on the pricing you talked about tying it to a cap rate. Is that a fixed cap rate that you already negotiated and is it at market or below market or just kind of a sense on that?

Michael, great to hear from you today. Thank you for joining. In terms of the overall transaction. And I want to clarify something Chris said as well. Chris was referring to mid-teens pricing. For each of these two loans. There are two independent loans for the development. One of an inpatient rehab, the second of a behavioral health care facility. So these will be brand new built, subject to very long-term leases with sponsorship from one of the leading operators in the country in each of those respective types of assets along with the dominant healthcare system in this market that's investment grade rated. Those mid-teens returns, by the way are unlevered. So that's essentially the fees associated with the coupon on the deal, in each case paid on the outstandings. So we consider those to be very accretive to the company. In terms of future purchase price sizes of these assets, roughly speaking, they're each in about the $50 million to $60 million range, roughly speaking. So as Chris talked about building pipeline, these would be really, call it 2026, call it first half 2026 type purchases, if they're executed at that time. In respect of the structure of the transaction, I'll also note we've done different types of development financing and provided capital for transactions in the past. And we've done transactions where there are obligations to purchase and options to purchase. In each of these two transactions, these are options to purchase, not obligations by us. So the way we look at that is the loans themselves stand on their own in terms of structure, in terms of security, in terms of returns. Moving then to the pricing of the acquisitions, to the extent we decide to exercise those are -- were negotiated what we think are slightly better than what we would -- I would call retail cap rate. So we're getting a little bit better pricing than we would otherwise get as a result of providing part of the capital structure for the development of these transactions. So the option really gives us a chance to look at these opportunities in 2026 and say, hey, we like the pricing. We don't like the pricing relative to where market pricing is at that time. I would like to think that it's going to be attractive pricing at that time. As we see, maybe rates settle by that point in time. It's attractive pricing today, I would tell you for us, and we would execute at those rates today. But it's hard to predict, of course, what would occur in the future in a year and a half, two years. Does that answer your question?

That's perfect. Yes, that's perfect. Thank you. And then I'm going to come back to another question that was asked about the Steward property. You kind of alluded to a lot of the details about exploring multifamily use and all of that. Could you maybe just be specific about why did that sale fall through? And are you owed any compensation for that, or was that the right under the agreement? And then, I don't -- can you share what it was under contract for, what the price was?

Michael, we can't share what it's under -- what was under contract for. I can only tell you why the buyer told us if fell through, people may have other objectives, but the buyer was in their due diligence period, so they had a refundable deposit up, so it was within their right to terminate that contract during that period of time. They didn't notify us within that period of time. So Sila does not do any compensation -- other compensation. What I would tell you is that it was our understanding that property was going to be some kind of lower income type housing of some kind. And we don't know exactly the programming for their facility that they were putting there. We're not entirely sure if it was a renovation and expansion of the existing building because they had spent 60 days or whatever the period of time was on it, 60 to 90 days or so on it. So I don't know how far they got. They obviously had taken their architects through and their engineers and the like. But we did have different types of buyers interested before from the residential spectrum. And we've also had some interest from the healthcare spectrum based upon the initial broker feedback and the outreach that our broker that we've just hired has made so far. So our impression, if the site is valuable, that's going to be an opportunity, of course, for someone. If it's us to lease it, great. If it's for somebody else to do something else with it, so be it.

Okay, great. And then lastly from me, are you able to share the cap rate on the Arkansas acquisition?

We don't disclose cap rates on our acquisitions, but it does fit within the range of what we just described.

All right, fair. Thank you.

Great. Thank you for joining, Michael.

And it appears that we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

Thank you, operator. Once again, thank you to our shareholders and members of the research community. We appreciate your interest in Sila and look forward to speaking with you again. Have a great rest of the day.

That concludes today's teleconference. Thank you for your participation. You may now disconnect.