Community Healthcare Trust Inc Q2 FY2025 Earnings Call

Good day, everyone, and welcome to Community Healthcare Trust 2025 Second Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2025 second quarter financial results. We'll 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, July 30, 2025, and may contain forward-looking statements that involve risks 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 and 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 the 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 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'd like to turn the conference call over to Dave Dupuy, CEO of Community Healthcare Trust. Please go ahead.

Great. Thanks, Jamie, and good morning. Thank you for joining us today for our 2025 second quarter conference call. On the call with me today is Bill Monroe, our Chief Financial Officer; Leigh Ann Stach, Chief Accounting Officer; and our new Senior Vice President of Asset Management, Mark Kearns. 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. As previously announced, Tim Meyer departed the company effective May 31st. We are excited to have Mark on board as our new Senior Vice President of Asset Management. He has over 25 years of healthcare real estate experience, including leasing and managing medical outpatient properties, most recently in leadership positions with Welltower and Healthpeak. Bill will review the financial details in his comments, but I wanted to provide an update on the status of our geriatric behavioral hospital tenant. Although their performance has stabilized over the last couple of quarters, they have been unable to pay us full rent and interest. As discussed on previous calls, the tenant has been exploring strategic alternatives, including a potential sale of its business. On July 17, 2025, the tenant signed a letter of intent for the sale of the operations of all six of its hospitals to an experienced behavioral health care 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 hospitals owned by CHCT. The tenant and CHCT are in active negotiations with the buyer, so we can't share more details at this time. And while we can't provide certainty that the transaction will close, we hope to share more information over the next couple of quarters as we move through the process. As disclosed in our filings, we determined that the collectibility of the remaining interest balance and unreserved notes related to this tenant were not reasonably assured. Our notes and interest are now fully reserved for this tenant and rent continues to be recognized on a cash basis. During the quarter, we received $260,000 from the tenant that is included in revenue compared with $165,000 in the prior quarter. As for other components of the business, our occupancy decreased slightly from 90.9% to 90.7% during the quarter, but we continue to see good leasing activity in the portfolio. We have three 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 those projects commenced its lease on July 1st. Due to some free rent built into the lease, we expect this property to contribute AFFO later in the fourth quarter of 2025 and into the first quarter of 2026. Though we did not acquire any properties during the second quarter of 2025, on July 9, we acquired an 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 an 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. Considering the company's current share price, we did not issue any shares under our ATM last quarter. However, we are actively working on capital recycling opportunities and would anticipate having sufficient capital from selected asset sales, coupled with our revolver capacity to fund near-term acquisitions. We had one very small disposition in the second quarter, providing approximately $600,000 of proceeds and generating a small capital gain. 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 second quarter and raised it to $0.4725 per common share. This equates to an annualized dividend of $1.89 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'll hand things off to Bill to discuss the numbers.

Thank you, Dave. I will now provide more details on our second quarter financial performance. Let me start by detailing the impacts to our financials related to the geriatric behavioral hospital tenant that Dave described earlier. Other operating interest revenue in the second quarter was negatively impacted by the reversal of $1.7 million of interest receivables from this tenant. In addition, we recorded an $8.7 million credit loss reserve on the notes receivable from this tenant, which utilized the signed letter of intent valuation of the tenant's operations. Next, let me detail the impact related to the departure of our former Executive Vice President of Asset Management. Within general and administrative expense, we recorded a charge of $5.9 million for severance and transition-related expenses. Combining the reversal of the interest receivable with the severance charges reduced second quarter FFO by $0.28 and AFFO by $0.06 per diluted common share. Moving back to the top of our income statement, total revenue for the second quarter of 2025 was $29.1 million. But if you exclude the $1.7 million reversal of interest receivable I just mentioned from the geriatric behavioral hospital tenant, total revenues would have been approximately $30.7 million. When comparing this $30.7 million to our total revenue in the first quarter of 2025, which was $30.1 million, our core portfolio would have achieved 2.2% total revenue growth quarter-over-quarter. Moving to expenses. Property operating expenses decreased by approximately $500,000 quarter-over-quarter to $5.6 million for the second quarter of 2025. This reduction was primarily related to the higher seasonal expenses in the first quarter, including snow removal and utilities expense at several properties. Total general and administrative expense was $10.6 million in the second quarter of 2025. But if you exclude the $5.9 million of severance and transition-related payments I mentioned earlier, G&A expense was $4.7 million, a reduction of approximately $400,000 quarter-over-quarter. This reduction was primarily related to the higher seasonal G&A expenses in the first quarter from our annual employer HSA funding, higher 401(k) contributions and employer tax payments from stock vestings during the first quarter. Interest expense increased by $240,000 quarter-over-quarter to $6.6 million in the second quarter of 2025 because of increased borrowings under our revolving credit facility late in the first quarter to fund the $10 million property acquisition as well as one extra day of interest in the second quarter compared to the first quarter. Moving to funds from operations. FFO on a diluted common share basis was $0.23 in the second quarter of 2025, but remember that this was reduced by the $0.28 of one-time items I discussed earlier. Adjusted funds from operations, or AFFO, which adjusts for straight-line rent and stock-based compensation, totaled $13.6 million in the second quarter of 2025, which on a diluted common share basis was $0.50, but also remember that this was reduced by the $0.06 of one-time items I discussed earlier. That concludes our prepared remarks. Jamie, we are now ready to begin the question-and-answer session.

Our first question today comes from Rob Stevenson from Janney.

Dave, the acquisition that you did, was that out of the $100-and-some million pipeline? Because I think it was seven assets before and now down to six. Is that accounting for that?

Correct, yes, that's right.

And then how are you guys thinking at this point about funding the remaining 25 acquisitions out of that pipeline given where the stock price is now?

Yes, we are very focused on not continuing to just fund those under the revolver. We are making good progress on our capital recycling efforts. We don't have any details to disclose today, but our goal is to use the capital recycling that is underway to fund the upcoming pipeline we expect late this year and into next year. That's why we are focused on completing those capital recycling projects, and we believe, based on the activity so far, that we will be able to achieve that.

Are you still exploring other options with the geriatric facilities in case that deal doesn't go through? Or do you think the chances of that deal going through are strong enough that you can focus on other things for now?

Until the transaction is finalized, we will remain very involved. We have a strong interest in ensuring that this deal goes through, and we believe we have what it takes to close it, including a motivated buyer, a willing seller, and our significant position as a debt holder. We are confident that this is the right buyer, which makes us excited about the potential. Their portfolio has very similar properties, and they possess the financial resources and competent management needed. We did have other interested buyers in the mix. Therefore, if for any reason they decide to pull out during the additional diligence phase or if we doubt their ability to finalize the deal, we have other potential bidders we can engage. We're pleased with our current position but are fully focused on ensuring the transaction closes, ideally by the end of the year.

All right. The other question would be whether, given the financial challenges of the current tenant, there is any deferred maintenance or areas where significant investment would be necessary to bring them up to a certain standard before a new lease is signed by either that company’s buyer or another tenant. Or do you expect that any further investment in those assets in the near term will be relatively minor to facilitate leasing?

Yes. No, it's a fair question, but we do think that any sort of work on the buildings would be relatively minor. I don't think, in general, we make sure that we look at those buildings on a regular basis, and we think the buildings are in good shape. So we wouldn't anticipate significant capital required in order to make those buildings ready for the next buyer.

Okay. And then last one for me, Bill, if I remove the $5.9 million of severance and transition-related charges from G&A, is that a reasonable run rate for the last couple of quarters of 2025 for G&A? Or are there other factors that could affect that, which we should consider as we revise our models?

Yes. As you know, we don't get into guidance, but you're right to be thinking about what were the one-time items that affected this quarter to look at what would have a more normalized second quarter look like.

Our next question comes from Connor Mitchell from Piper Sandler. Yes. As you know, we don't provide guidance, but you're correct to consider the one-time items that affected this quarter to better understand what a more normalized second quarter could look like.

I guess, first, just going back to the transaction environment and funding possibilities. You guys have used the revolver recently and focusing on capital recycling instead. But I'm just curious, is there kind of a top of the range or a threshold that you're keeping an eye on for either the dollar amount used on the revolver or a leverage metric?

Yes. I would say where we are now, obviously, is a level that we're comfortable with. But as Dave discussed, as we look at our acquisition pipeline, trying to time that with dispositions and capital recycling is how we're looking at the remainder of our pipeline. And so we obviously have availability under revolver and significant availability and cushion to our covenant levels within our revolver. So we certainly could take the revolver higher, but our plan is to kind of keep leverage at levels that we're at currently as we kind of look forward over the next few quarters.

Okay. So in essence, it's almost using the capital recycling approach instead of the ATM in the current environment, if I'm understanding correctly.

That's correct.

Okay. Turning to the geriatric tenant, I would like to focus on the credit loss and the notes receivable related to that tenant. Are there any other outstanding notes receivable with other tenants? Additionally, how are you approaching this process moving forward? Will it remain a potential transaction process with other tenants in your portfolio or with potential tenants in the future?

I believe we have two notes left with an outstanding balance of about $4.1 million. After accounting for the reserve against these notes related to the geriatric site tenant, I acknowledge the challenges this business faced during COVID, particularly with the opening of two new hospitals serving an older population. Their borrowings were substantial to get those facilities operational, leading to leverage levels that became unsustainable based on the business's performance over the last year. It is important to note that we do not plan to pursue similar leverage with a tenant, as that is not part of our core strategy nor a direction we aim to take in the future. Our priority is to resolve assurance issues and ensure we have a strong operator managing leases in our current properties. As we have stated previously, we do not intend to leverage with another tenant moving forward, and our track record reflects this, as this was an exceptional situation during an unprecedented time.

Yes, of course. No. And then so the two notes that are remaining on the balance sheet for $4 million, just an update on those tenants, they're in good standing and then maybe just the watch list overall as well, if there's any other new tenants that might be popping up or if you're seeing the trend kind of go more positive instead and seeing tenants fall off the watch list.

Yes, the tenants are paying and performing as expected, and we have no issues with the notes. Our watch list remains fairly stable, consisting of 15 to 20 tenants that fluctuate as we manage various tenant issues. With over 300 tenants in our portfolio, this is a normal process for us. I also want to note that there are no new top 10 tenants on our watch list this quarter, which has been a question in the past. Overall, our portfolio is functioning as intended; it's diversified without major concentrations, and our tenants are performing well. We will continue to manage the tenants on our watch list closely to ensure they meet our expectations.

Our next question comes from Michael Lewis from Truist Securities.

Is there anything more you could say regarding the strength of this new operator since they're presumably set to become one of your largest tenants? And in this agreement, was the rent level set and the term of the lease and all that? Or is that still to be negotiated?

So Michael, it's good to get your question. We feel very good about the operator. This is an operator with a great deal of experience broadly within the behavioral health care space. But also specifically in geriatric psych, which was appealing to the seller and appealing to us. They have a strong large platform and good financial resources and a very good team. And I think most folks that are in the behavioral space would recognize the name if we told you who the name was. So we feel very good about the operator. We think it is a very qualified operator. And then your second question, remind me what your second question was?

Yes. I was just wondering if the rent level and the terms of the lease were part of this agreement or if that's still to be negotiated.

Those aspects are still in negotiation. We're negotiating that part with the new prospective tenant and buyer, and they're continuing to do their due diligence with the platform. We are currently working through that.

Okay. Got it. And then as far as the notes, the assurance notes, you talked about that, you took the reserve. Maybe to just put a point on this, I mean, what's the chance of collecting all or part of the interest and the principal on those notes?

We are reserving the remaining balance of the notes because we don't anticipate a significant pickup. Our goal is to maximize what we can achieve in this transaction. However, we believe there won't be a substantial recovery, and for everyone's forecasting, we shouldn't count on recovering $5 million or $10 million. While the situation may change, we are not expecting it to happen.

Okay. Back to this question, you asked a couple of times about how you'll pay for the pipeline of acquisitions. How much can be bought in 2025? And is there flexibility as far as the timing, something stabilizes and you have kind of a window. And I'm also wondering, is there any chance maybe it's early to answer this. Is there any chance you could pass on one or more of these? Is that an option?

These are under purchase and sale agreement, so we would not anticipate passing on these. We view this as very attractive real estate in great markets, and we want to move forward with these acquisitions. There are other options available to us, but we believe the best approach is to use some of the capital recycling we've discussed to fund this because we do not want to over-leverage the balance sheet. We are committed to that. These are attractive assets, and while we have several options, our goal is to close these deals without significantly increasing our leverage.

Okay. How do the disposition cap rates compare with the acquisition yields?

So it's still early. We've got to bring these things into closing. But I would say somewhere between the 7.5% and 8% range is kind of where we're thinking these things would close and could be even better than that, but I think 7.5% to 8% is what we're looking at.

Okay. Great. And then last one for me. Looking at your lease expirations coming up 5% of the portfolio in the second half of this year, 12% in 2026, what's your expectation for core occupancy? Do you think that goes up or down over the next four to six quarters?

We have significant embedded value in our portfolio, and we believe we can do more to increase occupancy. Mark has been with us for just over two months, and he's gaining his footing. His experience and the team's focus are aimed at enhancing the performance of our core portfolio. We had already made good progress before Mark joined, and we expect to continue that momentum. Looking ahead to 2026, we believe there's an opportunity to increase our occupancy by 100 basis points or more, although achieving this will take time and effort. It's not an overnight process, but everyone in the company is dedicated to improving our portfolio's performance, with leasing being a crucial aspect. We recognize there's work to be done, but we are confident we have the right team to accomplish it.

And ladies and gentlemen, at this time, we will be ending today's question-and-answer session. I'd like to turn the floor back over to Dave Dupuy for any closing comments.

Jamie, thank you very much, and thank you, everybody, for joining the call today. I look forward to talking to you later this fall.

And with that, ladies and gentlemen, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.