Community Healthcare Trust Incorporated

Welcome to the Community Health Care Trust's 2025 first quarter earnings release conference call. On the call today, the company will discuss its 2025 first quarter financial results. It will also discuss progress made in various aspects of its business. Following the remarks, the phone lines will be open for a question and answer session. The company's earnings release was distributed last evening and has also been posted on its website, www.chct.reit. The company wants to emphasize that some of the information that may be discussed on this call will be based on information as of today, April 30, 2025, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the company's disclosures regarding forward-looking statements in its earnings release, as well as its risk factors and MD&A in its SEC filings. The company undertakes no obligation to update forward-licking statements, whether as a result of new information, future developments, or otherwise, except as may be required by law. During this call, the company will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in its earnings release, which is posted on its website. Call participants are advised that this conference call is being recorded for playback purposes. An archive of the call will be made available on the company's investor relations website for approximately 30 days and is property of the company. This call may not be recorded or otherwise reproduced or distributed without the company's prior written permission. Now, I would like to turn the call over to Dave Dupuy, CEO of Community Healthcare Trust. Please go ahead.

Great. Thank you, Alan. And good morning. Thank you for joining us today for our 2025 first quarter conference call. On the call with me today is Bill Monroe, our Chief Financial Officer, Leanne Stack, our Chief Accounting Officer, and Tim Meyer, our EVP of Asset Management. Our earnings announcement and supplemental data report were released last night and furnished on Form 8K, along with our quarterly report on Form 10Q, In addition, an updated investor presentation was posted to our website last night. We had a busy first quarter from an operations perspective and continue to be selective from an acquisition standpoint. Both our occupancy and our weighted average remaining lease term remain flat quarter over quarter at 90.9% and 6.7 years respectively. We continue to see good leasing activity in the portfolio, And our asset management team is doing a great job serving our tenants while continuing to focus on property operating costs. We have four properties or significant portions of them that are undergoing redevelopment or significant renovations with long-term tenants in place when the renovations or redevelopment is complete. One of these projects commenced its lease during the first quarter. Due to healthcare licensure requirements as well as renovatement built into the lease, We expect this property to contribute NOI during the fourth quarter of 2025. During the first quarter, we acquired a behavioral residential treatment facility consisting of five buildings with a total of approximately 38,000 square feet for a purchase price of approximately $9.7 million and anticipated tenant improvements of $1.4 million. We entered into a new lease with a lease expiration of 2040 and anticipated annual return of 9.5%. This represents a new client relationship for CHCT, and we are evaluating other projects to work on with this operator. We also have signed definitive purchase and sale agreements for seven properties to be acquired after completion and occupancy for an aggregate expected investment of $169.5 million. The expected return on these investments should range from 9.1 to 9.75%. We expect to close on one of these properties in the third quarter, with the remaining six properties closing throughout 2025, 26, and 27. In April, we sold one building in Ohio with a net book value of approximately $400,000 and received net proceeds of approximately $600,000, resulting in a gain on the property sale. As for an update on our geriatric psychiatric hospital operator, which is a tenant in six of our properties, representing a total of approximately 79,000 square feet and annual base rent of $3.2 million, we continue to see incremental operating improvements and received rent and interest payments of $165,000 in the first quarter. In addition, the operator is evaluating strategic alternatives, including the potential sale of all or selected hospitals within its portfolio. We remain in active dialogue with the operator and its consultants and will continue evaluating all options available under our leases and notes. Due to the company's low share price, we did not issue any shares under our ATM last quarter. However, we continue to evaluate capital recycling opportunities and we would anticipate having sufficient capital from selected asset sales, coupled with our increased revolver capacity, to fund near-term acquisitions. Going forward, we will evaluate the best uses of our capital, all while maintaining modest leverage levels. To wrap up, we declared our dividend for the first quarter and raised it to 47 cents per common share. This equates to an annualized dividend of $1.88 per share. We are proud to have raised our dividend every quarter since our IPO. That takes care of the items I wanted to cover, so I will hand things off to Bill to discuss the numbers. Thank you, Dave. I will now provide more details on our first quarter financial performance. I'm pleased to report that total revenue grew from $29.3 million in the first quarter of 2024 to $30.1 million in the first quarter of 2025, representing 2.5% annual growth over the same period last year. When compared to our total revenue in the fourth quarter of 2024, which was also $29.3 million, we achieved 2.7% total revenue growth quarter over quarter as a result of incremental revenue from fourth quarter acquisitions made late in the quarter last year, seasonal increases in operating expense reimbursements, and the $165,000 of rent and interest payments received in the first quarter from our geriatric psychiatric hospital operator that Dave mentioned earlier. From an expense perspective, property operating expenses increased by approximately $600,000 quarter over quarter to $6.1 million in the first quarter of 2025, primarily as a result of higher seasonal utility and snowplow expenses at several properties in January and February in particular. General and administrative expenses increased by approximately $300,000 quarter over quarter to $5.1 million in the first quarter of 2025, primarily as a result of higher non-cash amortization of deferred compensation and our typical first quarter seasonal adjustments due to the timing of annual employee salary increases, employer HSA and 401k contributions, and employer tax payments. Interest expense remained flat quarter over quarter at $6.4 million in the first quarter of 2025 due to the lower acquisition volumes over the last quarter, as well as two less days in the first quarter compared to the fourth quarter. Moving to funds from operations, FFO decreased slightly quarter over quarter by $77,000, but remained at $12.7 million in the first quarter of 2025. On a per diluted common share basis, SFO was 47 cents in the first quarter of 2025, down slightly from 48 cents in the fourth quarter of 2024. Adjusted funds from operations, or ASFO, which adjusts for straight-line rent and stock-based compensation, totaled $14.7 million in the first quarter of 2025, which was approximately $100,000 higher than the fourth quarter of 2024, but on a diluted common share basis remained the same quarter over quarter at 55 cents. That concludes our prepared remarks. Alan, we are now ready to begin the question and answer session.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw it, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Connor Mitchell of Piper Sandler. Please go ahead.

Hey, good morning. Thanks for taking my question. I guess first, I appreciate some of the information, Dave, you provided on the geriatric psychiatric hospital operator. Just wondering if there's any more color you could also provide maybe on timing of when they might consider the sales that you discussed or maybe it gets to a point where you guys decide that it's time to fully replace them and release the space. Just any more color on kind of the ongoing process on their side, your considerations with the process, and then maybe the timing of any of those options as well.

Sure, Conor. Thanks for the question. You know, so as we've talked about, they are in an active sale process, and they have potential buyers doing work to evaluate the purchase of all or selected hospitals. And, of course, we do have levers that we can pull from a lease perspective that could make that acquisition more attractive to potential buyers. You know, it's difficult in a sales process to put a precise time related to ultimately where things shift out. But, you know, from our perspective, you know, we're looking – we feel like that we should have some additional certainty toward the end of the second quarter, beginning of the third quarter – to better understand kind of where the status is of interested buyers in terms. And I think that'll give us a better sense of what our intended next steps will be.

Okay. All right. I appreciate the additional information. And then maybe turning towards the acquisition outlook and capital allocation, it looks like you still have a pretty healthy pipeline, but just a little less activity in the first quarter and maybe not expecting a ton in the near term. Is this kind of a read through what we're expected to see for the remainder of the year, really into the end of the year or even into the beginning of next year, unless the conditions better significantly, you know, maybe the cost of capital, your stock price comes back and you guys can utilize the ATM again? Or is this kind of just how you're looking at it for the near term with the current conditions?

Yeah, no, listen, so just to provide some additional color on what is in the pipeline and where we think things are going to end, so two inpatient rehab facilities that we are expecting to close one of those in the third quarter, probably early third quarter, and we're still looking to close another one of those in the fourth quarter. We've got a $4 million property under term sheet that if we get to terms through the purchase and sale agreement could be a third quarter acquisition. I will say that we're seeing some attractive property acquisitions. and we're evaluating those. But, you know, Connor, as you point out, we're not excited raising equity at these prices. So you should expect us to look at other methods. You know, we've mentioned before selected asset sales to help us because, you know, from a leverage perspective, we do not want to put meaningful additional leverage on the business. And so you should expect us to use selected asset sales as well as some draws on the revolver to fund acquisitions. But yes, we are absolutely going to be opportunistic. You know, as our share price, to the extent our share price increases and gets to a better level to raise capital, we would look to the ATM. But certainly at these levels, we're not interested in doing that. So we would look at selected capital recycling as well as draws on the revolver, but not doing either of those in a way that would meaningfully increase leverage.

Right. Okay. And then maybe just kind of going along the same line, um, you know, you're, you're focused on the depressed stock price, I guess. Um, how do you consider maybe the opportunity to even buy back stock versus looking at, um, the potential to use capital and allocate capital for, for growth and, uh, acquire new properties?

Well, listen, I think, um that's certainly something that we have talked about at the board level and we'll continue to look at and discuss at the board level we do have a pipeline of deals that that we are focused on and and that we will make sure that we execute on those deals by you know using uh some capital recycling what we don't want to do is we don't want to put leverage on our balance sheet to do a share purchase so So, look, we'll be opportunistic. And, of course, we and the board will look at all options. And, you know, depending on the timing of the selected capital recycling and how those opportunities look, there may be an opportunity for us to do a share buyback. But, you know, given our pipeline, I wouldn't expect that that would be our first choice.

Okay. That's all for me. Thank you very much for all the color.

Thanks, Connor.

The next question comes from Rob Stevenson of Jani. Please go ahead.

Just for clarification, is the $3.2 million of contractual payments with your troubled psychiatric hospital operator just the rent or is that inclusive of the notes as well? That's just the rent. How much more is the payment on the notes?

Um, the notes would, um, comprise, um, you know, another, you know, two and a half million dollars kind of approximately is, is kind of the run rate that they were paying, um, you know, before middle of last year.

Okay. So it's in total, it's, it's a, you know, just under $6 million annual payment is what they contractually owe you.

Correct. Okay.

And then, um, Was the $1.4 million of TIs expected to be completed and the rent on the Georgia asset starting? When is that supposed to – what's the timeframe for that?

You know, we would expect that to complete and the lease to commence early in the third quarter.

Okay. Okay. And Bill, the $9.7 million Georgia acquisition listed in the release reflects $9.5 million on page 13 of the supplemental. What's the difference there? And are those numbers inclusive of this $1.4 million of TIs? Or is this really essentially like an $11 million asset?

It's essentially the latter, kind of an $11 million asset by the time you include the TI, which, again, is being done on an expedited basis. Okay. Yeah, it's essentially purchase price versus cash consideration.

Okay, that's helpful. And then last one for me, Dave, your predecessor wasn't very fond of preferred stock, but given the question, the previous question about capital, etc., How are you guys feeling today and the board feeling about potentially doing a preferred stock depending on where a deal would wind up pricing to give you a little bit of capital for growth here?

You know, Rob, what I would say is we're looking at all of the capital options that we have, and we will evaluate those. I do agree that, you know, our bias in general is to keep the capital structure simple. And I think that has always served us well. And look, I think there's some issues with preferred stock issuance. You know, it has its pros and cons, but we will evaluate, you know, various capital alternatives. But, you know, I would say that it's not a near consideration for us.

Okay. Thanks, guys. Appreciate the time this morning.

Thanks, Rob.

The next question comes from Barry Oxford of Collier. Please go ahead.

Great, thanks guys. Just pulling two questions, but first one is just pulling back on the geriatric tenant. Let's say this becomes more and more of an elongated process. How much patience do you have until you say, look, you're in default of your lease and we're going to take action?

Well, you know, Barry, the way I would characterize it is when I was talking earlier in the call, you know, we want to see kind of where the buyers come in, and we think we'll have better visibility in terms of, you know, those potential opportunities by the end of the second quarter, early third quarter. And once we have a sense of buyer interest and you know, specifics associated with that, I think we'll be making some decisions. And, you know, if there isn't sufficient buyer interest, then we're going to look at all the alternatives under our leases and notes. And so, you know, we've got patience, but it's not unlimited patience. And you should expect that we will be looking at trying to get this resolved sooner rather than later.

Great, great. And my next question, when you look at some of your other smaller tenants in the portfolio, are you concerned about any tenants? Did any problems kind of arise in the first quarter with some of the smaller tenants or is everybody kind of continuing to pay and continuing to have strong cash flows? And then how would you, from the macro side, describe the environment as far as your tenant's ability to make money and pay rents going forward?

Yeah, so we are continuing to monitor our tenants, and we have an active watch list, which we've talked about, and we'll have tenants come on that watch list, and we'll have tenants then come off of that watch list. But there hasn't been anything, you know, you've seen some relative stability in the portfolio. And so there hasn't been anything that we've seen this quarter that would indicate otherwise. And so, you know, seeing some stability, but, you know, across the board, whether it's small tenants or larger tenants. And so that's obviously a positive. And I would say from a macro perspective, obviously, we're hearing a lot of noise on on tariffs and impacts to the economy. I think, you know, for once, we're not, healthcare providers aren't necessarily in the crosshairs of what we're seeing from a government perspective. And so our tenants seem to be doing well, and I don't have any, you know, I don't have anything that I can identify short-term that would have a negative impact overall from a macro perspective. on our tenants or their ability to pay rent.

Okay. Thanks for the color, guys.

Thank you, Barry. Yep. The next question comes from Jim Kamert of Evercore.

Please go ahead.

Good morning. Thank you. Could you remind me, I apologize, on the $169 million pipeline, under what conditions or circumstances could CHCT not have to proceed and not have to acquire? I'm just trying to understand, you know, are they absolute obligations or, you know, depending on how the company evolves, what you could do?

They are obligations for us to acquire. Now, we certainly have a relationship with the developer and, you know, there have been times if it's a development project that either he or us or both of us have decided it's not the right opportunity, then we would move on. But I think you should expect that this $170 million pipeline, which again, Jim, is we're going to do over the next three years. I think everybody should consider that pipeline as a solid pipeline and one that we expect to close on.

Fair enough. And as regards the geriatric psychiatric tenant, I think it's about $22 million where the original loan advanced to them. In the event that they were to sell their assets or sell the business, where do your notes kind of stand vis-a-vis other creditors? Because I know you wrote off about half of them are reserved for half. I'm just trying to think about what happens in that circumstance where you stand, please.

Yeah, so really the only creditors, certainly you've got trade creditors that you have to be cognizant of, and that's part of the overall working capital of the business. But there is a $4 million accounts receivable line of credit that a commercial bank currently has, and they have a first priority security interest on the AR. We have a second lien on the AR as well as a first lien on all the other assets of the borrower. Those borrowers are co-borrowers on our notes, as well as we have all the stock of those subsidiaries pledged to our notes.

Okay. I appreciate that detail. Thank you. That's all for me. Thanks, Jim.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Dupuy for any closing remarks.

Well, I appreciate everyone joining us for the call and look forward to hopefully seeing many of you at NAREIT coming up in June.

Thank you very much.

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