Community Healthcare Trust - Earnings Call - Q4 2024

Executive Summary

• Q4 results were stable quarter-over-quarter: revenue $29.30M, GAAP diluted EPS $0.04, FFO/share $0.48, AFFO/share $0.55; year-over-year comparisons were lower primarily due to one challenged geriatric psychiatric hospital tenant moved to cash basis in Q2 2024.
• Portfolio occupancy ticked down to 90.9% with WALT at 6.7 years; management expects occupancy to remain in the 91–93% range as redevelopment projects commence leases in 1H25.
• Liquidity improved materially: revolver upsized to $400M, maturity extended to 2029, with no debt maturities until March 2028, supporting selective acquisitions and potential capital recycling.
• Dividend raised again to $0.4675 (annualized $1.87); management reiterated comfort with coverage and pointed to resolution of the tenant issue and redevelopment tailwinds as supports.

What Went Well and What Went Wrong

• What Went Well

  • FFO/AFFO per share held steady sequentially at $0.48/$0.55; property operating expenses fell q/q on lower seasonal utilities, helping offset modestly higher interest expense.
  • External growth pipeline intact: acquired three physician clinics ($8.2M) at ~9.4% returns; seven additional properties under definitive PSA for ~$169.5M at 9.1%–9.75% returns; two near-term closings expected (~$33M) .
  • Balance sheet flexibility increased: $400M revolver, extended maturity and lower pricing; no maturities until Mar-2028.
  • Quote: “We are proud to have raised our dividend every quarter since our IPO.” – CEO Dave Dupuy.

• What Went Wrong

  • Year-over-year pressure: FFO declined ~14.5% and AFFO ~9% versus Q4 2023, primarily due to lost rent and interest from the geriatric psych operator shifted to cash basis in Q2 2024.
  • Occupancy edged down to 90.9% (from 91.3% in Q3) on late-quarter expirations/terminations; WALT declined to 6.7 years.
  • Interest expense ticked up q/q (to $6.4M) given higher borrowings under the revolver and term loan grid impacts despite lower revolver spread post-upsizing.

Transcript

Operator (participant)

Welcome to Community Healthcare Trust's 2024 Fourth Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2024 Fourth 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, February 19, 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 the 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. 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 the 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.

Dave Dupuy (CEO)

Great. Thank you, Drew, and good morning. Thank you for joining us today for our 2024 Fourth Quarter Conference Call. On the call with me today is Bill Monroe, our Chief Financial Officer, Leigh Ann Stach, 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 8-K, along with our annual report on Form 10-K. In addition, an updated investor presentation was posted to our website last night. We had a busy fourth quarter from an operations perspective and continue to be selective from an acquisition standpoint. At year-end, our occupancy decreased slightly to 90.9%, and our weighted average remaining lease term declined slightly to 6.7 years.

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 completed. We expect two of these projects to commence their leases during the second quarter of 2025. During the fourth quarter, we acquired three physician clinics in two separate transactions with a total of 38,000 sq ft for a purchase price of $8.2 million. The properties are 100% leased, with leases running through 2029 and anticipated annual returns of approximately 9.4%. For the year, we acquired nine properties with a total of 261,000 sq ft for an aggregate purchase price of $72.1 million, which were approximately 99.3% leased, with leases running through 2039 and anticipated annual returns of 9.1% to 9.75%.

The company has two properties, one behavioral residential treatment facility and one inpatient rehab facility under definitive purchase agreements, for an aggregate expected purchase price of $33 million and expected returns of approximately 9.5%-9.75%. The company is currently performing due diligence and expects to close these properties during the first quarter of 2025. 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%, and we anticipate closing on these properties throughout 2025, 2026, and 2027. I wanted to provide an update on the geriatric psychiatric hospital operator, which is a tenant in six of our properties, representing a total of approximately 79,000 sq ft and annual base rent of $3.2 million.

Although we did not receive any rent or interest from the tenant in the fourth quarter, we have received a small payment so far in the first quarter of 2025. 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. As we previously announced, the company increased its revolving credit facility from $150 million to $400 million, extended its maturity date five years, all while achieving lower pricing. As part of the refinancing, we repaid the 2023 term loan due March 2026 and have no debt maturities until March of 2028. 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. And going forward, we will evaluate the best uses of our capital, including if authorized, potential share repurchases, all while maintaining modest leverage levels. On another topic, yesterday, the company filed an amendment to its Form S-3 with the SEC, along with an amended sales agency agreement with various banks. And this morning, the company filed a new automatic shelf registration statement on Form S-3 with the SEC and updated its sales agency agreement with various banks for the sale of common stock, including the issuance of ATM shares. To wrap up, we declared our dividend for the fourth quarter and raised it to $0.4675 per common share. This equates to an annualized dividend of $1.87 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.

Bill Monroe (CFO)

Thank you, Dave. I will now provide more details on our fourth quarter financial performance. Overall, we saw our fourth quarter financial results in line with the prior quarter. Total revenue for the fourth quarter was $29.3 million, which compares closely to the $29.6 million of total revenue in the third quarter. From an expense perspective, property operating expenses decreased by approximately $500,000 quarter-over-quarter to $5.5 million, primarily as a result of lower utility expenses when compared to the third quarter's hot summer months. General and administrative expenses decreased slightly from $4.9 million in the third quarter of 2024 to $4.8 million in the fourth quarter of 2024.

Interest expense increased from $6.3 million in the third quarter of 2024 to $6.4 million in the fourth quarter of 2024 due to a combination of the $12 million increase in borrowings under our credit facility during the fourth quarter to fund acquisitions and CapEx, the 30 basis point lower interest rate spread on our upsize revolver, and the 25 basis point higher interest rate spread on our term loans due to our higher leverage grid point at the end of the third quarter. Moving to Funds From Operations, FFO was $12.7 million in the fourth quarter of 2024, which compares to $14.9 million in the fourth quarter of 2023 for a decline of 14.5% year-over-year, primarily related to the loss of rent and interest from the geriatric psychiatric hospital operator Dave mentioned earlier that we placed on cash basis in the second quarter of 2024.

Quarter-over-quarter, FFO remained at $0.48 per diluted common share. Adjusted Funds From Operations, or AFFO, which adjusts for straight-line rent and stock-based compensation, totaled $14.6 million in the fourth quarter of 2024, which was the same amount as the third quarter of 2024. When compared to the fourth quarter of 2023, AFFO of $16.1 million, the decline year over year was 9%, which again was primarily related to the loss of rent and interest from the geriatric psychiatric hospital operator. Finally, on a quarter over quarter basis, AFFO remained at $0.55 per diluted common share. That concludes our prepared remarks. Drew, we are now ready to begin the question and answer session.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are 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 your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Connor Mitchell with Piper Sandler. Please go ahead.

Connor Mitchell (Analyst)

Hey, good morning. Thanks for taking my question. I guess first, I appreciate the color that you guys provided on the geriatric and inpatient behavioral tenants. But I guess if we could just dig just a little bit deeper, just wondering if there is any potential timeline that is becoming more clear? It sounds like things are still pretty much in flux, and the company is navigating all potential options. But maybe just if you guys were today to receive the spaces back pretty quickly, how soon do you think you could turn those and backfill them, and what kind of CapEx might be required to backfill those spaces as well, if that is maybe the potential route that you guys could see happening down the road?

Dave Dupuy (CEO)

Hey, Connor. Thanks for the question. So let me sort of address it this way. As I mentioned, we did receive a small payment at the end of January. And although it was small, it was an important step. And the tenant has indicated that they can make payments of $100,000-$200,000 per quarter. Now, ultimately, we want them to be in a place where they can pay full rent. And we should have a better sense of consistency in amounts with first quarter numbers. But as far as kind of brainstorming ideas on what we could do, we're looking at a number of different options. And as I mentioned also on the call, more importantly, the tenant is evaluating strategic alternatives, and we should have a sense of what that means, whether all or selected hospitals could be evaluated for potential sales.

So those are kind of the areas that we're focused on is getting the tenant in a place where they either pay us rent consistently and/or sell some of the hospitals. And we think that both of those paths are paths that will evolve over the next couple of quarters, and we'll have a better sense of where that lands as we get further along in that process.

Connor Mitchell (Analyst)

Okay. And if I remember correctly, there was a note receivable tied to this tenant. It sounds like they've made some payments for the rent, but probably not for the interest. Or did you say that they also paid some of the interest in your opening remarks? And what are you guys expecting going forward as well?

Dave Dupuy (CEO)

Yeah. Look, it's important for us to get both rent and interest. We'll be looking at both rent and interest payments, so not just rent. But again, I think we'll have a better idea of their ability. That $100,000-$200,000 I referenced per quarter, that would be payments for both rent and interest. And so we'll evaluate what makes the most sense in terms of payments.

Connor Mitchell (Analyst)

Okay. I appreciate that. And then maybe just one more for me as well. Turning to the acquisitions and the funding side specifically, you guys funded the acquisitions in the fourth quarter with the revolving credit facility. Is that kind of the near-term plan? I know you also mentioned maybe some asset recycling and looking for dispositions to fund some acquisitions. And then the stock buyback, is that kind of playing into some of the capital allocation decisions, or is more of the focus on further acquisitions rather than using funds for stock buyback decisions?

Dave Dupuy (CEO)

Well, I think all of those options are on the table, and we talk about them at the board level at our board meetings and evaluate those with the board. But what I would say is, given the fact that we're looking to close $33 million of acquisitions here late in the first quarter, we're also very focused on the capital recycling lever that we can pull to pay for those. Because look, from our perspective, we don't want to over-lever the balance sheet, and that's very important to us. And so before doing that, we would absolutely look at capital recycling options. And we do have those, and we are evaluating those. And so our sense would be the timing of the capital recycling would be in a way to make sure that we keep leverage at levels that our investors like and that we like.

That's the way I would think about financing these near-term acquisitions. We would use the revolver, but also look to deliver with capital recycling and/or ATM shares should our share price go up in a level where we're comfortable issuing shares.

Connor Mitchell (Analyst)

Okay. That's all for me. Appreciate it. Thank you.

Dave Dupuy (CEO)

Thanks, Connor.

Connor Mitchell (Analyst)

Thank you.

Operator (participant)

Again, if you have a question, please press star then one. The next question comes from Michael Lewis with Truist. Please go ahead.

Michael Lewis (Managing Director)

Thanks. So I think this follows up well with the previous question. So you know that you're going to need to fund the development acquisition soon. Is that kind of the focus now? And you want to be able to be sure you could do that? Maybe you pull back a little on other acquisitions. And you talked about all the stuff that's expected to close in Q1 2025. Could you just add that up for us, everything that you've announced that we should expect to close in the first quarter?

Dave Dupuy (CEO)

Yeah, sure. So it's a behavioral residential treatment facility for approximately $9.5 million. And then it is an inpatient rehab facility, which is that one $23.5 million? So those are the two properties that we're closing or expect to close by the end of the first quarter.

Michael Lewis (Managing Director)

Okay. And is this an outdated target now, this $120 million-$150 million? It'll start to pick up as you start to close some of these agreements. But is that still a fair annual target?

Dave Dupuy (CEO)

Michael, I think it is a fair target. As you can appreciate, our bar has been raised a little bit as far as yield, etc., just given where our share price is trading. This is not because we have a shortage of deals we can do. We want to do more deals and would like to do more deals, but we're highly focused on making sure that those deals are accretive on an AFFO per share basis. And so we recognize that we want to continue to grow AFFO and have multiple opportunities to invest our capital. But we're also mindful of the fact of where our shares are trading. And so I would say the $120-$150 is absolutely still the goal, and we think it's achievable.

Some of that is going to be achieved probably through some capital recycling, and some of that will hopefully be achieved with an improved share price over time so that we can issue ATM shares and continue to grow the way we're accustomed to.

Michael Lewis (Managing Director)

Okay. And then you mentioned AFFO, right? So the dividend was comfortably covered by AFFO. There's no TIs or LCs or maintenance CapEx in that AFFO calc. I was just wondering how you think about the dividend coverage on a pure cash flow basis. I see there's some CapEx on existing real estate properties in the 10-K. We've talked about that in the past, and I think the argument is a lot of that is revenue-producing. But you raised the dividend again. I know I've been fielding questions about the dividend. How do you think about the coverage there versus a real measure of cash flow?

Dave Dupuy (CEO)

We talk about the dividend every quarter at the board level. Obviously, it's a board decision, but we feel comfortable with our dividend coverage where it is. And listen, we feel very confident that at some point, we are going to resolve the geriatric psych issue, which embedded in that, as you know, will be a significant amount of additional AFFO as we resolve that issue. So this is our coverage has been compressed a little bit based on taking that tenant to cash basis. But between the acquisitions that we're doing and some of the redevelopment projects where you alluded to the fact we're investing capital, but that invested capital is going to develop a return for us, we're comfortable that we have very good coverage related to the dividend. And so we don't expect that at least anytime near term to have to change that strategy.

Michael Lewis (Managing Director)

Okay. Great. And then just lastly from me, the core portfolio, 90.8% leased at the end of the quarter. Is there anything in 2025 up or down that you see kind of move in your occupancy materially?

Dave Dupuy (CEO)

Our occupancy, if you look over the last 2.5 years, has ranged anywhere from a low of 90.8% up to 92.3% or 92.6%. And look, I think full occupancy for us is right around that 93% range. We're kind of a little bit lower today than where we'd like to be. But we had a few expirations and terminations that happened late in the fourth quarter. I think in general, being able to stay in that 91% to 93% range is natural for us and doable. And just as important, bringing on these redevelopment projects where we spent money on these properties and now we're going to start collecting rent on them will also be a tailwind to the portfolio. So I don't expect any meaningful change in our occupancy over the next few quarters.

There's going to be some ups, and there's going to be some downs. But I think that 90% range up to 93% is where we should be long term.

Michael Lewis (Managing Director)

Okay. Thank you.

Dave Dupuy (CEO)

Thank you.

Operator (participant)

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

Dave Dupuy (CEO)

Everybody, we appreciate the questions. Snowy day here in Nashville, but I hope everyone is doing well and look forward to talking to everybody. If you have questions, feel free to call on us. Thank you so much.

Operator (participant)

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