Community Healthcare Trust Incorporated

Welcome to Community Health Care Trust 2025 Third Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2025 Third 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 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, October 29, 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 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-looking 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. All 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 the property of the company. The 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.

Great. Thank you, Danielle. And good morning. Thank you for joining us today for our 2025 third quarter conference call. On the call with me today is Bill Monroe, our Chief Financial Officer, Leanne Stack, our Chief Accounting Officer, and Mark Kearns, our Senior Vice President 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. During the third quarter, the Geriatric Behavioral Hospital Operator, a tenant in six of the company's properties, paid rent of approximately $200,000. On July 17, 2025, this tenant signed a letter of intent for the sale of the operations of all six of its hospitals to an experienced behavioral healthcare operator and is under exclusivity with that buyer. Among other terms and conditions of the sale, the buyer would sign new or amended leases for the six geriatric psych hospitals owned by CHCT. The buyer continues to perform legal and business due diligence on the transaction. And while we can't provide certainty that the transaction will close, we will share more information as we move through the process. As it relates to our core business, we had a busy third quarter from an operations perspective and continue to be selective from an acquisition standpoint. Our occupancy decreased from 90.7% to 90.1% during the quarter. However, our leasing team is very busy with a number of new leases signed so far in October. Based on leasing activity across the portfolio, we would expect our leased occupancy to increase by 50 to 100 basis points by year end. Our weighted average lease term increased slightly from 6.6 to 6.7 years. We have three properties that are undergoing redevelopment or significant renovations with long-term tenants in place when the renovations and redevelopment are complete. During the third quarter, we acquired one inpatient rehab facility after completion of construction for a purchase price of $26.5 million. We entered into a new lease with a lease expiration in 2040 and anticipated annual return of approximately 9.4%. Also, we have signed definitive purchase and sale agreements for six properties to be acquired after completion and occupancy for an aggregate expected investment of $146 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 fourth quarter with the remaining five properties closing throughout 2026 and 2027. As it relates to our capital recycling program, we had one disposition in the third quarter providing approximately 700,000 of proceeds and generating a small loss on the sale. In addition, we have two other dispositions in our program that we expect to close in the fourth quarter with anticipated net proceeds of $6.1 million. Also as part of this program, we expect to close on the sale of an inpatient rehab hospital in the fourth quarter with an expected gain of approximately $11.5 million and net proceeds expected to fund our fourth quarter acquisition through a 1031 like-kind exchange. The indicative cap rate associated with the property sale is in the high 7% range. We have other properties with similar expected cap rate ranges both in market and under review as part of our capital recycling program. We would anticipate utilizing a similar 1031 like-kind exchange to accretively reinvest proceeds to fund our pipeline on a leverage neutral basis. We did not issue any shares under our ATM last quarter. However, we anticipate having sufficient capital from selected asset sales coupled with our 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 finish up, we declared our dividend for the third quarter and raised it to 47.5 cents per common share. This equates to an annualized dividend of $1.90 per share, and 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'll hand things off to Bill to discuss the numbers. Thank you, Dave. I will now provide more details on our third quarter financial performance. I'm pleased to report total revenue grew from $29.6 million in the third quarter of 2024 to $31.1 million in the third quarter of 2025, representing 4.9% annual growth over the same period last year. When compared to our $29.1 million of total revenue in the second quarter of 2025, we need to consider that the second quarter was negatively impacted by the reversal of $1.7 million of interest receivables from the geriatric behavioral hospital tenant that Dave discussed earlier. Normalizing the second quarter for this, we achieved 1.1% total revenue growth quarter over quarter. Moving to expenses, Property operating expenses increased by approximately $300,000 quarter over quarter to $5.9 million for the third quarter of 2025. This quarter over quarter increase in the third quarter is typical with a seasonal increase in utility expenses during the summer compared to the milder temperatures in the second quarter. On a year over year basis, property operating expenses decreased by approximately $50,000. Total general and administrative expense was $4.7 million in the third quarter of 2025, which was flat quarter over quarter once you exclude the $5.9 million of severance and transition-related payments incurred within the second quarter's $10.6 million of G&A expense. On a year-over-year basis, G&A expense decreased by approximately $300,000 in the third quarter of 2025. Interest expense increased by approximately $500,000 quarter over quarter to $7.1 million in the third quarter of 2025 due to increased borrowings under our revolving credit facility early in the third quarter to fund the $26.5 million property acquisition, as well as one extra day of interest in the third quarter compared to the second quarter. We benefited late in the quarter from the FOMC's 25 basis point reduction to the federal funds rate in mid-September, but the full benefit of that cut will be realized in our fourth quarter financials based on the approximately $180 million of floating rate exposure we have within our revolver borrowings. If there are any additional rate cuts by the FOMC later today or during their December meeting, we expect those cuts will reduce our interest expense further. Moving to funds from operations, SFO in the third quarter of 2025 was $13.5 million, a 5.7% increase year over year compared to the $12.8 million of SFO in the third quarter of 2024. On the diluted common share basis, SFO increased from 48 cents in the third quarter of 2024 to 50 cents in the third quarter of 2025. Adjusted funds from operations, or ASFO, which adjusts for straight-line rent and stock-based compensation, totaled $15.1 million in the third quarter of 2025, a 3.1% increase year-over-year compared to the $14.6 million of ASFO in the third quarter of 2024. ASFO on a diluted common share basis was 56 cents in the third quarter of 2025, or one cent higher than the 55 cents of ASFO in the third quarter of 2024. I'll note that our third quarter 2025 ASFO dividend payout ratio remains strong at 85%. That concludes our prepared remarks.

Danielle, we are now ready to begin the question and answer session.

Thank you. We will now begin the question and answer session.

To ask a question, you may press star then one on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question comes from Alexander Goldfarb from Piper Sandler. Please go ahead.

Hey, morning down there. Two questions, Dave. Just the first one, uh, the acquisition pipe. Well, I guess they're related. Uh, you know, the first one is just on the acquisition pipeline, you know, and we'll discuss the funding part on my second question, but is, you know, it's the same now that it was in the second quarter, obviously you guys are balancing the stock where the stock is and your funding, uh, needs. Uh, but as you look at the opportunity set, would you say it's growing? Meaning that if you had a more competitive equity source, that pipeline would have increased quarter to quarter? Or is the opportunity set basically this unchanged, in which case, even if you had a better cost of capital, that acquisition pipeline would not have changed?

Yeah, what I would say is if we are being highly selected, and hey, Alex, good to talk to you. I appreciate the question. We're being highly selected. We know we have this pipeline of very good quality assets at great returns. We want to make sure that we have, you know, the ability to pay for those acquisitions that are coming up over the upcoming quarters and We don't want to issue shares at these depressed levels. And so that's why we're doing the capital recycling to pay for them. But yes, I would say we are seeing opportunities that are generally attractive in this market in that 9 to 10% cap rate range that if, you know, our currency was different, if our share price was different, we'd be looking to make those acquisitions And they would be very attractive relative to, you know, risk return. So, yes, we're being highly selective. We're very focused on making sure we get this pipeline of high-quality assets paid for and do that without increasing our leverage. So, yes, you're reading that right.

Okay. And then just the second question when it goes to funding, you know, if you're doing asset sales, I get it that it sounds like there's maybe 150 bips, maybe 200 bips of positive spread between what you're selling and what you're buying. But if you're basically trading one asset for another and taking on additional debt to help fund, isn't that raising leverage just by taking on the more debt? Because you're swapping one asset for another and then you're incrementally taking on more debt. your leverage is naturally going to rise. So my question is, is there a limit to how much debt you'll take on, you know, as long as you're still in this current, uh, you know, depressed equity situation, or your view is you're fine running leverage higher than normal with the hope that once the geriatric situation is resolved, hopefully you have a better currency.

We really feel like based on the pipeline of opportunities from a capital recycling that we have, that we are not going to increase leverage over the upcoming quarters. And so, yes, you know, we did not have any capital recycling to do ahead of the, you know, the current acquisition that we did in the third quarter. But future acquisitions, we are very focused on matching up dispositions with acquisitions that are accretive to the company. And so we do not expect to meaningfully increase leverage. But, Bill, I don't know if you want to jump in. Yeah, Alex, just to clarify, the property that we have, under, you know, held for sale and will recognize $11.5 million capital gain, you know, that will, we expect that will fully pay for the next acquisition such that there will not be any incremental debt associated with that next acquisition. It'll be completely pay for with the proceeds of this, you know, larger upcoming disposition.

Okay, great. Listen, thank you very much.

Thanks, Alex.

As a reminder, if you have a question, please press star one. The next question comes from Rob Stevenson from Janney. Please go ahead.

Good morning, guys. In terms of the behavioral health tenant, so $200,000 paid in the quarter, can you remind us what that tenant was previously paying per quarter before they hit the wall?

Yeah, they were paying in rent approximately $800,000 per quarter.

Okay, that's helpful. And then, you know, what's the expectations for timing in terms of the closing of the acquisition if it occurs? Is that something that occurs before year-end if it happens, given that the deal was signed in July, or could that stretch into 2026 from your understanding at this point?

You know, we're very... We'd love for it, and hey, Rob, good to talk to you, but we'd love for it to close by year end. Some of the due diligence process has taken a little bit longer than we would have expected, so it's probably more realistic to expect something to close in the first quarter. So, yeah, I think there's still a chance that it gets done by the end of the fourth quarter, but it's probably more likely to happen in the first quarter. But we certainly would love to provide additional detail as soon as we have that.

Okay. And, you know, to what extent are you guys actively pursuing plan B just in case the deal falls through?

Yeah, you should expect that we are going down multiple paths simultaneously. And as we always have. And so, you know, yes, we're looking at multiple plans, multiple ways that we can move forward with, you know, the goal of ultimately getting paid more rent associated with this tenant. And so, and look, I think all of this is upside, right, relative to our performance. The portfolio has been stable. We're growing. You know, I think, we're certainly motivated to get this resolved as soon as possible. And we think that it will, but yes, we are looking at all options.

Okay. And then last one on this topic, you know, when you sit there and think about, you know, where they are in their life cycle, et cetera, what's the likelihood today of getting back any of the unpaid interest or rents, back rents going forward, or is a similar couple hundred thousand in the fourth quarter and a new lease with the buyer of these assets the best case scenario for you guys today?

I would call that, you know, that's probably consistent with where we're head is. And part of the reason, you know, we did the additional note write-off that we did because we did not deem that it was likely to be collected. So I think we're operating under that that expectation, but we're certainly very focused on to the extent we do have the ability to get any back rent or back interest, we will, but we do not put a high likelihood on that.

Okay. And then just switching topics here, the three properties that are under redevelopment, how material is that? And then when do those leases expected to kick in and impact earnings?

Yeah. So I think, you know, they're, One is very significant and a lease that was signed a while ago for a behavioral healthcare facility. That's, you know, a large investment by us with a very recognizable operator. My guess is that lease won't commence until sometime after mid-year next year. So but that's a that's a meaningful one. We we don't provide specifics as as to what those numbers are. But but, you know, wouldn't start seeing any any tailwind associated with the rent until after probably after second quarter. The other one is is probably a late 2026 opportunity as well. And then there's one smaller one that will happen first part of 2026. again, that should start contributing additional rent. But these are, you know, they vary in terms of their impact, and we haven't provided details relative to that, but we just, you know, it's just an example of how we're reinvesting in buildings and with strong tenants based on signed leases. So, anyway.

Okay, just trying to figure out just what type of earnings tailwind, because it sounds like you said that you're expecting to see 50 to 100 basis points increase in occupancy in the near term, plus this. Just wanted to figure out when that was going to start all hitting in terms of the earnings. Thanks, guys.

Appreciate the time. Yeah, as far as the 50 to 100 basis points, we're seeing great leasing activity across the portfolio. You know, there's always a delay between signing leases and having those leases commence. And so, but, you know, I think it sort of speaks to the strong activity we're seeing across the portfolio. And I think it will be a tailwind for 2026 in terms of our ability to grow.

Okay. Thanks. Appreciate the time, guys.

Thank you. Thanks, Rob.

The next question comes from Jim Kamert from Evercore. Please go ahead.

Thank you. Good morning. Obviously, I think the capital recycling shift is well received. And I was just curious, how are you sort of identifying which assets you would like or most likely to dispose? Is it a geographic concentration, tenant concentration? Just to understand the mix or how you're alighting upon the candidates.

Hey, Jim. Thanks for the question. Yeah. So as you sort of hit on it, you would think about it. around tenant concentration, weighted average lease term, you know, size profile, markets. You know, we're looking at all of those sort of criteria as we evaluate what we want to do from a capital recycling perspective, obviously with the key components associated with that of, you know, paying for this pipeline in a way that's accretive. So those are all the areas that we're focused on. What I'd also remind everybody of is, you know, we sort of looked at our capital recycling program in two buckets. One is the bucket of smaller properties that are non-core that aren't going to drive a substantial amount of proceeds, but they are going to get us focused on our, you know, better buildings and better markets. And so you're seeing a few of those sales occur, and those sales we expect to conclude at the end of the fourth quarter. And then the larger opportunities where we can have a very accretive cap rate sale to then reinvest in new, very attractive buildings. So, yeah, you're thinking about it in the right way. We're looking at tenant concentration, wall size profile, et cetera, as we look to push forward with our capital recyclings.

That's helpful. And the derivative question, then I'll be done, is you mentioned that one of the large transactions pending is a 1031, but I'm just trying to assess the depth of buyer interest. You're not restricting your capital recycling to just 1031 exchanges. I mean, there is a depth of buyers, presumably, for stand-up, just traditional sales as well.

Yeah, good question, Jim. The 1031 is more on our side than on the potential buyer side as far as we don't want, we're deferring that capital gain associated with that sale by putting it into a 1031. And then we have within our acquisition pipeline, other properties, you know, that we have identified that will then be the replacement property as part of that 1031 transaction. But no, we're going to a very, you know, wide set of potential buyers to make sure that, you know, we're maximizing proceeds to us.

Great clarification. Thank you, guys. Thanks, Jim.

This concludes our question and answer session.

I would like to turn the conference back over to Mr. Dupuy for closing remarks.

Thanks, Danielle, and thank you, everybody, for dialing in. Of course, call if you have any questions. I hope everyone has a good rest of the day.

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