Community Healthcare Trust - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 was a clean rebound quarter: revenue rose to $31.086M (+4.9% YoY; +6.9% vs Q2 reported) and FFO/AFFO per share improved to $0.50/$0.56, respectively, driven by a Florida IRF acquisition and normalized operations after Q2 one-time charges.
• Results modestly beat S&P Global consensus on normalized EPS and revenue; Primary EPS was $0.094 vs $0.08 and revenue $31.086M vs $30.781M; GAAP diluted EPS was $0.03 (difference reflects normalization vs GAAP).
• Dividend raised to $0.4750 per share (+0.5% QoQ), continuing a multi-year cadence of quarterly increases and implying $1.90 annualized.
• Capital recycling is the funding priority: management expects a 1031 sale with ~$11.5M gain to fully fund the next acquisition, plus two additional Q4 dispositions (~$6.1M net proceeds), targeting leverage-neutral growth.
• Near-term catalysts: potential resolution of the geriatric behavioral hospital tenant via sale/new leases (timing most likely Q1 2026), year-end occupancy uplift of 50–100 bps, and interest expense tailwinds from recent Fed cuts on revolver exposure.

What Went Well and What Went Wrong

What Went Well

• AFFO/FFO stability and YoY growth: AFFO per diluted share rose to $0.56 (+$0.01 YoY), FFO per diluted share to $0.50 (+$0.02 YoY), underscoring core portfolio durability post Q2 disruptions.
• Accretive acquisition execution: Closed a 100% leased Florida IRF at a ~$26.5M price with ~9.4% expected return; WALT increased to 6.7 years.
• Clear capital plan: Management guided to a leverage-neutral funding model via 1031 exchanges and dispositions; “we do not expect to meaningfully increase leverage”.

What Went Wrong

• GAAP profitability remains thin: Net income was $1.640M and diluted EPS $0.03; interest expense rose to $7.075M due to revolver borrowings for acquisitions.
• Residual tenant exposure: The geriatric behavioral hospital operator paid only ~$0.2M in rent/interest in Q3 versus prior ~$0.8M rent run-rate, and management assigns low odds to collecting back rents/interest.
• Elevated financing costs: Interest expense increased ~$0.5M QoQ; although management expects rate-cut benefits in Q4, floating-rate exposure (~$180M) still creates sensitivity.

Transcript

Operator (participant)

Welcome to Community Healthcare 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 29th, 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-looking statements, whether as the 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.

Dave Dupuy (CEO)

Great. Thank you, Danielle. 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, Leigh Ann Stach, 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 8-K, along with our quarterly report on Form 10-Q. 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 17th, 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. 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 basis points-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 rehabilitation 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%-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 rehabilitation facility 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 $0.4750 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 will hand things off to Bill to discuss the numbers.

Bill Monroe (CFO)

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, FFO in the third quarter of 2025 was $13.5 million, a 5.7% increase year over year compared to the $12.8 million of FFO in the third quarter of 2024. On the diluted common share basis, FFO increased from $0.48 in the third quarter of 2024 to $0.50 in the third quarter of 2025. Adjusted funds from operations, or AFFO, 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 AFFO in the third quarter of 2024. AFFO on a diluted common share basis was $0.56 in the third quarter of 2025, or $0.01 higher than the $0.55 of AFFO in the third quarter of 2024. I'll note that our third quarter 2025 AFFO dividend payout ratio remains strong at 85%. That concludes our prepared remarks.

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

Operator (participant)

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 speakerphone, 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.

Alexander Goldfarb (Managing Director and Senior REIT Equity Research Analyst)

Hey, morning down there. Two questions, Dave. The first one, the acquisition pipeline, I guess they're related. The first one is just on the acquisition pipeline, and we'll discuss the funding part on my second question. Is it the same now that it was in the second quarter? Obviously, you guys are balancing where the stock is and your funding needs. 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 unchanged, in which case, even if you had a better cost of capital, that acquisition pipeline would not have changed?

Dave Dupuy (CEO)

Yeah, what I would say is if we are being highly selective, and hey, Alex, good to talk to you. I appreciate the question. We're being highly selective. We know we have this pipeline of very good quality assets at great returns. We want to make sure that we have 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. That's why we're doing the capital recycling to pay for them. Yes, I would say we are seeing opportunities that are generally attractive in this market in that 9%-10% cap rate range that if 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 risk return. 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. Yes, you're reading that right.

Alexander Goldfarb (Managing Director and Senior REIT Equity Research Analyst)

Okay. 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 bps, maybe 200 bps of positive spread between what you're selling and what you're buying. 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 more debt? You know, because you're swapping one asset for another and then you're incrementally taking on more debt, your leverage is naturally going to rise. 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 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?

Dave Dupuy (CEO)

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. 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. Future acquisitions, we are very focused on matching up dispositions with acquisitions that are accretive to the company. We do not expect to meaningfully increase leverage. Bill, I don't know if you want to jump in.

Bill Monroe (CFO)

Yeah, Alex, just to clarify, the property that we have held for sale and will recognize $11.5 million capital gain, 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 paid for with the proceeds of this larger upcoming disposition.

Alexander Goldfarb (Managing Director and Senior REIT Equity Research Analyst)

Okay, great. Thank you very much.

Dave Dupuy (CEO)

Thanks, Alex.

Operator (participant)

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

Rob Stevenson (Managing Director and Head of Real Estate Research)

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

Dave Dupuy (CEO)

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

Rob Stevenson (Managing Director and Head of Real Estate Research)

Okay, that's helpful. You know, what's the expectations for our 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?

Dave Dupuy (CEO)

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. It's probably more realistic to expect something to close in the first quarter. 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. We certainly would love to provide additional detail as soon as we have that.

Rob Stevenson (Managing Director and Head of Real Estate Research)

Okay. To what extent are you guys actively pursuing plan B just in case the deal falls through?

Dave Dupuy (CEO)

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

Rob Stevenson (Managing Director and Head of Real Estate Research)

Okay. Last one on this topic, when you sit there and think about where they are in their life cycle, etc., 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?

Dave Dupuy (CEO)

I would call that, you know, that's probably consistent with where we're headed and part of the reason, you know, we did the additional note write-off that we did is because we did not deem that it was likely to be collected. I think we're operating under 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. We do not put a high likelihood on that.

Rob Stevenson (Managing Director and Head of Real Estate Research)

Okay. Just switching topics here, the three properties that are under redevelopment, how material is that? When do those leases expect it to kick in and impact earnings?

Dave Dupuy (CEO)

Yeah, so I think one is very significant in a lease that was signed a while ago for a behavioral residential treatment facility. That's 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. That's a meaningful one. We don't provide specifics as to what those numbers are, but wouldn't start seeing any tailwind associated with the rent until after, probably after second quarter. The other one is probably a late 2026 opportunity as well. There's one smaller one that will happen first part of 2026, again, that should start contributing additional rent. These vary in terms of their impact, and we haven't provided details relative to that, but it's just an example of how we're reinvesting in buildings and with strong tenants based on signed leases. Anyway.

Rob Stevenson (Managing Director and Head of Real Estate Research)

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 basis points-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.

Dave Dupuy (CEO)

Yeah, as far as the 50 basis points-100 basis points, we're seeing great leasing activity across the portfolio. There's always a delay between signing leases and having those leases commence, but 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.

Rob Stevenson (Managing Director and Head of Real Estate Research)

Okay, thanks. Appreciate the time, guys.

Dave Dupuy (CEO)

Thank you. Thanks, Rob.

Operator (participant)

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

Jim Kammert (Managing Director and REIT Analyst)

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

Dave Dupuy (CEO)

Hey, Jim. Thanks for the question. Yeah, as you sort of hit on, you would, you know, think about it around tenant concentration, weighted average lease term, size profile, markets. We're looking at all of those criteria as we evaluate what we want to do from a capital recycling perspective. Obviously, with the key components associated with that of paying for this pipeline in a way that's accretive. Those are all the areas that we're focused on. What I'd also remind everybody of is, 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 better buildings and better markets.

You're seeing a few of those sales occur, and those sales we expect to conclude at the end of the fourth quarter. The larger opportunities are where we can have a very accretive cap rate sale to then reinvest in new very attractive buildings. Yeah, you're thinking about it in the right way. We're looking at tenant concentration, weighted average lease term, size profile, etc., as we look to push forward with our capital recycling.

Jim Kammert (Managing Director and REIT Analyst)

That's helpful. 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. There is a depth of buyers presumably for, you know, stand-up, just traditional sales as well.

Dave Dupuy (CEO)

Yeah, good question, Jim. The 1031 is more, you know, on our side than on the potential buyer's side as far as, you know, we don't want, you know, we're deferring that capital gain associated with that sale by putting it into a 1031. 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 like-kind exchange transaction. 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.

Jim Kammert (Managing Director and REIT Analyst)

Okay, great clarification. Thank you, guys.

Dave Dupuy (CEO)

Thanks, Jim.

Operator (participant)

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

Dave Dupuy (CEO)

Thanks, Danielle. 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.

Operator (participant)

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